SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                    For the fiscal year ended June 30, 2000

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

                         Commission File Number 0-27102

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

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

2000 Cabot Boulevard, Suite 110, Langhorne, PA          19047-1811
   (Address of principal executive offices)             (Zip code)

Registrant's telephone number, including area code     215-750-6606

Securities registered pursuant to Section 12(b)of the Act: None
Securities registered pursuant to Section 12(g)of the Act:

     Title of each class            Name of each exchange on which registered
     -------------------            -----------------------------------------
  Common Stock, No Par Value                         NASDAQ

Indicate by check mark 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 ( )

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. (X)

State issuer's revenues for its most recent fiscal year:  $13,640,000

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  price of such  common  equity,  as of a
specified date within the past 60 days: $12,182,000 as of September 11, 2000.

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS:

Check  whether the issuer has filed all  documents  and  reports  required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by a court. Yes ( ) No ( )

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  9,749,975 shares of Common Stock, no
par value per share, as of September 20, 2000.

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

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's  definitive proxy statement for its 2000 Annual Meeting
of Shareholders are incorporated by reference into Part III as set forth herein.
With the  exception  of those  portions,  which are  expressly  incorporated  by
reference, said proxy statement is not deemed filed as a part hereof.


<PAGE>


                                  eGames, Inc.

                                   Form 10-KSB
                     For the Fiscal Year Ended June 30, 2000

                                      INDEX


                                                                            Page
                                                                            ----
                                     PART I

Item  1. Business.......................................................      3

Item  2. Properties.....................................................     15

Item  3. Legal Proceedings..............................................     15

                                     PART II

Item  5. Market for the Registrant's Common Stock and Related
         Stockholder Matters............................................     16

Item  6. Management's Discussion and Analysis of Results of Operations
         and Financial Condition........................................     16

Item  7. Financial Statements ..........................................     22

Item  8. Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure.......................................     40

                                    PART III

Item  9. Directors and Executive Officers of the Registrant.............     41

Item 10. Executive Compensation.........................................     41

Item 11. Security Ownership of Certain Beneficial Owners and Management.     41

Item 12. Certain Relationships and Related Transactions.................     41

                                     PART IV

Item 13. Exhibits, List and Reports on Form 8-K.........................     42


Index of Exhibits.......................................................     42
Signatures..............................................................     45



<PAGE>


                                     PART I

This annual report on Form 10-KSB contains forward-looking  statements regarding
future events or the future  financial  performance  of the Company that involve
certain risks and  uncertainties.  Actual events or the actual future results of
the  Company  may  differ   materially   from  the  results   discussed  in  the
forward-looking  statements due to various factors,  including,  but not limited
to, those discussed in "Factors Affecting Future  Performance" below at pages 10
to 15.

Item 1.   Business

GENERAL

eGames,   Inc.,  formerly  RomTech,   Inc.,  (the  "Company"),   a  Pennsylvania
corporation   incorporated  in  July  1992,  publishes,   markets  and  sells  a
diversified  line  of  personal   computer   software   primarily  for  consumer
entertainment.  The Company also offers personal productivity products for sale,
but the Company  anticipates  minimal future  investment in that category of the
market  and  expects  sales  from  these  products  to be less  than  10% of the
Company's net sales in the  foreseeable  future.  In October  1995,  the Company
completed its initial public offering coincident with its acquisition of Applied
Optical Media  Corporation  ("AOMC"),  a developer of educational  and reference
software   titles.   In  April  1996,  the  Company   acquired  Virtual  Reality
Laboratories, Inc. ("VRLI"), a software developer of landscape generation, space
exploration,  and business  forms  manipulation  programs.  In August 1998,  the
Company acquired Software Partners  Publishing and Distribution Ltd.  ("Software
Partners"), a United Kingdom-based distributor of personal computer software for
consumer  entertainment and small office/home office applications.  On March 31,
1999 Software Partners changed its name to eGames Europe Ltd. ("eGames Europe").

The  Company  believes  that  today's  consumers  base their  software  purchase
decisions on the same criteria as other consumer product  purchases,  relying on
recognized  brands for  consistent  quality,  value and ease of use. The Company
promotes its proprietary brand names, including eGames(TM), Galaxy of Games(TM),
Game  Master  Series(TM),  Multi-Pack  and Galaxy of Home Office  Help(TM)  (the
"eGames  Series"),  in order to  generate  customer  loyalty,  encourage  repeat
purchases  and  differentiate  the  eGames  Series  products  to  retailers  and
consumers.  The Company  targets the growing  market of home  personal  computer
("PC") users who value full-featured, value-priced and easy-to-use entertainment
software.  All eGames Series titles are "Family Friendly",  which means they are
easy-to-use,  non-violent,  and  appeal  to all  ages.  The  Company's  software
packaging  is labeled  with the  distinctive  Family  Friendly(TM)  logo to help
attract consumers towards its software. The Company's products generally sell at
retail  for under  $15,  a price  point that is  intended  to  generate  impulse
purchases in mass market shopping environments. The Company's Game Master Series
titles are boxed software products that generally sell at retail for $14.99, yet
feature  packaging and content usually found in software titles selling for more
than $20 at retail.  The balance of the eGames  software  titles,  including its
Galaxy of Games(R)  collections,  are typically sold in jewel case packaging and
sell at retail for $9.99. The Company also sells its Multi-Pack  software titles
in special retail point-of-sale packages at $4.99.

RECENT DEVELOPMENT

As  described  in the Legal  Proceedings  (Item 3), on  September  8, 2000,  the
Company settled its litigation with Hasbro Interactive, Inc., Atari Interactive,
Inc., Zao Elorg d/b/a Elorg Corporation (collectively, the "Plaintiffs"),  which
had alleged that certain of the  Company's  products  infringed  copyrights  and
trademarks  owned by the  Plaintiffs,  and also  alleged  that the  Company  had
engaged in unfair competition.

INDUSTRY BACKGROUND

It is estimated that there are approximately 180 million PC users and 50 million
PC game players in North America. The worldwide consumer  entertainment software
market is  estimated  to exceed $23 billion in  revenues by 2003  compared to $6
billion in revenues  during 1999.  This dramatic growth in recent years has been
driven by the increasing  number of multimedia  PCs in the home and office,  the
increasing  number of game console  devices in the home,  the  proliferation  of
software titles, and the development of new and expanding distribution channels.
Declining  prices of  microprocessors  and  CD-ROM  drives  have  made  high-end
interactive  computer  entertainment  more affordable,  resulting in low-end PCs
targeted to the mass consumer market costing under $500.

<PAGE>

The worldwide consumer entertainment software industry has undergone a number of
profound  changes over the past few years with the  introduction of new hardware
platforms and new technologies,  such as on-line networks and the Internet.  The
proliferation of on-line networks and the Internet has created new opportunities
for the consumer entertainment software industry, including on-line game playing
by  users in  different  locations  and  direct  on-line  marketing,  sales  and
distribution to end users.

Growth in the  installed  base of  multimedia  PCs has created a mass market for
consumer  entertainment  software products. The development of a mass market for
consumer  entertainment  software products has been characterized by the growing
importance of mass merchant software sales as a distribution channel, increasing
price  pressure  and  competition   for  retail  shelf  space.   This  increased
competition has emphasized the importance of marketing,  merchandising and brand
name recognition. Faced with the challenges of marketing and distribution,  many
independent software developers and content providers are pursuing relationships
with  publishing  companies with broader  distribution  capabilities,  including
better access to mass market retailers and greater merchandising,  marketing and
promotional  support.  At the same time,  retailers with limited shelf space are
faced with the  challenge  of managing  an  increasing  number of new titles.  A
significant  result of these market  pressures is a trend in the industry toward
the consolidation of entertainment software companies and the diversification of
products offered by such companies.

BUSINESS STRATEGY

The Company continues to work towards  implementing a business plan that focuses
on: gaining brand name  recognition of its Family  Friendly  software  products;
developing new top-selling titles within existing brands; developing new brands;
establishing strong distribution and retail relationships; consistently offering
a  diversified  high-quality,  high-value  software  portfolio of products  that
provide significant sell-through and return-on-investment  opportunities for all
types of retailers; and implementing a sound Internet strategy and comprehensive
web site.  The intended  result of the  Company's  business  strategy is to be a
leading   publisher  of  high   quality,   value-priced   interactive   consumer
entertainment software in the consumer entertainment category of the market.

The eGames  Business  Model.  An  important  element of our strategy is bringing
familiar,  fun,  Family  Friendly  games to PC users of all ages and  levels  of
experience at affordable prices.  Therefore,  our business model is based on the
premise that the under $15 retail segment,  the value-priced  segment, of the PC
game software  market will be the fastest  growing segment of the market for the
foreseeable  future.  Since 1996  that's  been the  situation  in North  America
according to PC Data as unit sales in this segment have  increased 106% compared
to an increase of 73% for the overall PC game software market.  During this same
period  of time,  dollar  sales for the  value-priced  PC game  software  market
increased by 111%,  compared to 32% for the overall PC game software market. The
business model we have created  focuses on this growing segment of the market in
an effort to gain market share and increase sales.

Rely On Consumer  Research and  Marketplace  Data.  The Company  primarily  uses
marketplace sales data to determine which products are achieving favorable sales
results in the interactive consumer  entertainment  software categories that the
Company serves. The Company then focuses on developing top-selling products that
have a  sustainable  product  life and also appeal to the  broadest age group of
consumers  regardless of gender.  This involves  either  developing or obtaining
rights to  products  that the Company  expects  will meet these  criteria  while
complementing and supporting the Company's branding strategy.

Deliver Products To Market Quickly To Maximize Sales Opportunities.  The Company
believes  that the best method of bringing  successful  products to market is to
identify  products  that  consumers  are buying and will  continue  to buy.  The
Company then focuses on quickly developing or procuring product content that the
Company  believes will achieve  favorable sales results in its category when the
product is combined with the Company's  attractive,  distinctive and informative
packaging that is designed to encourage impulse purchases in retail stores.  The
Company's  development  efforts focus primarily on product  design,  consistent,
user-friendly  interfaces,  ease of use,  product quality and  consistency.  The
Company's internal product development  activities are supplemented by utilizing
existing  technologies  and externally  developed  programming and content.  The
Company maintains control over the creative and market-driven aspects of product
development while utilizing  outside  resources to reduce  development costs and
minimize risks.

<PAGE>

Develop  Products That Are Easy To Use.  Based on  information  from  registered
users  of the  Company's  products,  most  of the  Company's  customers  are new
computer owners. Therefore, the Company's products are designed to be simple and
easy to install and use, requiring little or no technical expertise. The Company
provides  technical  support  for all of its  products  and  revises or upgrades
products in response to consumer feedback gained from customer's registration of
products they have purchased.

Gaining  Distribution.  Gaining  widespread retail and Internet  distribution is
another  important  element of the Company's  strategy.  The Company's  flexible
distribution  strategy enables retailers to buy eGames products directly from us
or from a distributor  that may already be  effectively  serving the  retailer's
software  needs.  Our  challenge is to make every  retailer  aware of the eGames
business  proposition  and to make sure they have access to our  products in the
manner best suited or matched to their operations. The Company's goal is to make
our products available to more consumers as they find our products in the stores
that they shop most frequently or on the Internet.

Growing The PC Interactive  Entertainment  Software Category.  Another aspect of
the Company's  strategy is to grow the size of the market that eGames serves. It
is estimated that there are approximately 180 million PC users and 50 million PC
game  players  in North  America.  One of the  Company's  key  objectives  is to
introduce  PC game-play to more and more of the millions of PC users that do not
currently  play PC games on a regular  basis.  To accomplish  this objective the
Company offers  "samplers" of familiar,  fun,  Family Friendly games to these PC
users at price points that are  irresistible  ($4.99  Multi-Packs) in the stores
where they shop most  frequently  - drug  stores and  supermarkets.  The goal of
these  programs  is to  increase  the  number of PC game  players in the PC game
player category who will ultimately seek to buy the Company's other great games.

Providing A Managed  Solution For  Consumer  Entertainment  Software.  Providing
today's  national  retailers  with  a  managed  solution  for  the  value-priced
interactive  entertainment software category is another element of the Company's
strategy.  Getting  retailers to commit to dedicated  shelf space or promotional
displays is very  challenging.  But because of the unique  advantages eGames can
offer  retailers--including  excellent rates of return on inventory  investment,
product co-branding opportunities, and Internet enabling features--the Company's
retail partners are responding enthusiastically to the wide variety of permanent
and temporary  display  programs that we have developed for their stores.  These
displays not only make it easier for  consumers to find the products  they want,
they also continually reinforce the eGames brand.

Establishing the "Store in a Store" Program.  Another  important  element of the
Company's  strategy is the concept of a "Store in a Store". The Company's "Store
in a Store" concept is to provide a category-managed solution for retailers that
will give them a one-stop  solution to place an attractively  displayed,  Family
Friendly  collection of value priced software products in their stores. The idea
is to give  consumers an  opportunity  to choose from a wide variety of quality,
safe,  family-oriented  software  titles  for their PC or console in one easy to
find display  section.  The Company's  goal is to provide the  leadership and to
create the  partnerships  necessary to make the safe,  Family Friendly  software
entertainment  section a reality.  Certain  major food and drug  retailers  have
already committed to establishing  such Family Friendly  software  entertainment
sections within their retail stores during fiscal 2001.

Market  Brand Names That Deliver  Consistent  Quality.  The Company  focuses its
marketing resources on developing brands that represent consistency, quality and
value to the consumer. The Company believes that to the consumer, brands offer a
safe and  secure  choice in an  otherwise  confusing,  fast  changing  and often
intimidating  software  marketplace.  Consumers view  successful  brand logos as
friendly marks of quality  assurance.  Once a consumer  becomes highly satisfied
with a brand in any  given  product  category,  the  Company  believes  that the
consumer will  typically  tend to actively seek out that brand versus  competing
brands.  The Company  believes that  successful  brands can lead to consistently
successful sell-through results, which is one of the Company's long-term goals.

<PAGE>


INTERNET STRATEGY

The  Company's  Internet  strategy  is based upon three  underlying  principles:
providing  exceptional customer service,  building customer equity, and creating
mutually  beneficial  relationships with advertisers and business  partners.  By
focusing on these three fundamentals,  the Company is working towards creating a
powerful  Internet  presence  that  not only  reinforces  the  Company's  retail
strengths,  but also  provides  innovative  and unique  methods for building new
business opportunities and generating additional revenue streams.

The Company's web site,  www.egames.com,  is a comprehensive Family Friendly web
site where visitors can: try out great demos;  play fun games for free; join and
participate in game clubs; buy all of the Company's  products (both tangible and
downloadable  versions);  register software purchases;  access the Company's SEC
filings and press releases;  link to the Company's  international  partners' web
sites;  download  software  updates;  visit  the  eGames  superstore;  or access
technical  support.  The Company seeks to maintain  www.egames.com  as a leading
edge web site in the services and  information  that are  presented to visitors.
While the Company  strives for a visually  appealing  web site,  it is important
that it be intuitive in its  functionality.  The  Company's  goal is to maintain
this level of service so that the Company's Internet presentation represents its
commitment to providing fun, easy-to-use products and services.

The cornerstone of the Company's  Internet strategy is the "eGames browser." The
eGames browser was developed in 1998 as a standard,  user-friendly interface for
presenting the Company's games to consumers on their personal  computers  (PCs).
The Company  designed a browser  interface since  marketplace data revealed that
consumers  were  buying  PCs for their  homes in order to get  connected  to the
Internet - a trend or buying behavior that management  believes will continue to
drive PC purchases  for the  foreseeable  future.  Since  consumers  are already
familiar  with  "Internet  browsers,"  the  Company's  management  believes that
providing the same functionality and connectivity in the eGames browser provides
added  value and ease of use for  consumers.  The browser is also an easy way to
access the eGames website to enable  consumers to purchase  additional  games on
the  Internet  and  access  the  trend  towards  increased   software  purchases
online-marketplace  data forecasts that consumers will, over time, purchase more
and more of their software on the Internet.

Creating New Revenue Streams.  A primary  objective in fiscal 2001 is to combine
the features and competitive advantages of the eGames browser and the compelling
nature of the eGames game content to create a product  offering that will enable
the  Company  to create  revenue  streams  from  advertising,  direct  marketing
services, and the sale of special promotional product offerings for the premiums
and promotions industry.  The Company also believes that many of today's leading
"bricks and mortar"  retailers  will become the leading  Internet  retailers  of
tomorrow.  Today's leading  retailers know what their customers want and possess
the  resources to develop and implement the systems and services to provide what
their  customers  want - whether  it's on the  Internet or in their local store.
Additionally,  these  retailers  possess the brand equity and the store  traffic
that can be converted to traffic on their websites.  The Company  believes there
are ways that the eGames  browser can help  retailers  create  store and website
traffic and demonstrating this to some of our large national retail customers is
another of the Company's primary objectives in fiscal 2001.

MARKETING

The Company's  marketing  efforts include:  participating in retail trade shows;
developing  the  Company's  website,   (www.egames.com);   working  with  public
relations  and  investor   relations   firms  in  issuing  press   releases  and
establishing  media  contact;  coordinating  in-store  and  industry  promotions
including  merchandising  and  point  of  purchase  displays;  participating  in
cooperative   advertising  programs  with  specific  retailers;   and  utilizing
demonstration software distributed through the Internet or on compact discs. The
Company's marketing department is responsible for creating marketing programs to
generate  product  sell-in  (sales  to  retailers)  and  sell-through  (sales to
end-user customers).  These programs generally are based on established consumer
product  marketing  techniques  that the  Company  believes  are  becoming  more
important  as software  becomes  more of a consumer  product.  The Company  uses
consumer product graphic  designers and copywriters to create effective  package
designs,  catalogs,   brochures,   advertisements  and  related  materials.  The
Company's marketing and sales personnel and outside contractors work together to
coordinate  retail and  publicity  programs so that those  programs are in place
when products are initially shipped to retailers and consumers.  Public relation
campaigns,  in-store  advertising,   catalog  mailings  and  advertisements  are
designed in advance of product availability.

<PAGE>

SALES AND DISTRIBUTION

North American Sales and Distribution. The Company has determined that there are
a number of  strategic  advantages  to selling its products on a direct basis to
major  computer and software  retailing  organizations,  mass market  retailers,
consumer  electronic  stores,  discount  warehouses  and mail  order  companies.
Management of the Company believes that direct sales  relationships  with retail
accounts can result in more effective  inventory  management,  merchandising and
communications  than are possible through indirect sales  relationships.  Direct
sales to  retailers  also  diminish  the  Company's  dependence  on  third-party
distributors  for sales of the Company's  products and  potentially can increase
the  Company's  gross  profit  margin  that can be  realized  on the sale of its
products.  Accordingly,  the Company has established direct sales  relationships
with  several  traditional  national  software  retailers  such as:  Electronics
Boutique,  CompUSA and Toys-R-Us, as well as non-traditional  software retailers
such as Rite Aid Corporation, Walgreen Company and Eckerd Corporation.

The Company has invested in its own electronic data interchange ("EDI") hardware
and software  systems in order to provide this  capability with its direct sales
retailers  that prefer to transact  business this way.  This  capability in turn
facilitates the placement,  control and shipment of orders and the processing of
payments  and credits.  The Company  seeks to continue to increase the number of
retail outlets served directly through its internal sales force.  However,  to a
larger extent,  the Company sells its products through  wholesale  distributors,
such as Infogrames,  Inc.  (formerly GT Value  Products),  Navarre  Corporation,
Merisel Americas,  Inc. and Beamscope  Canada.  Infogrames,  Inc.  accounted for
approximately  18% and 65% of the  Company's  net sales  during  fiscal 2000 and
1999,  respectively.  From May  1997 to April  1999,  Infogrames,  Inc.  was the
exclusive distributor of the Company's products in North America. In April 1999,
the Company terminated its exclusive distribution  relationship with Infogrames,
Inc. and entered into a non-exclusive  distribution relationship with them. (See
"Dependence on Distributors and Retailers",  page 11).  Internet sales currently
account for approximately 1% of the Company's net sales.

International  Sales and  Distribution.  The Company  currently  distributes its
products in Australia, Austria, Belgium, Brazil, the Caribbean, Central America,
Chile, Colombia,  Cyprus, Czech Republic,  Denmark,  France,  Germany,  Hungary,
Iceland,   India,   Ireland,   Israel,  Italy,  Mexico,  the  Middle  East,  the
Netherlands, New Zealand, Panama, the Philippines,  Portugal, Puerto Rico, Saudi
Arabia,  Singapore,  South Africa, Spain Sweden,  Sweden, Uruguay and the United
Kingdom.  The Company  seeks to maximize  its  worldwide  sales and  earnings by
releasing high quality localized foreign language titles,  whenever practicable,
and by  continuing  to expand  the  number of direct  selling  and  distribution
relationships  it  maintains  with  key  retailers  and  distributors  in  major
territories.  The  Company  currently  publishes  localized  products in French,
German,  Italian,  Spanish  and  Portuguese,  and the Company  offers  localized
product  packaging  for all of these  languages as well as in Hebrew,  Dutch and
Brazilian Portuguese.

Distribution  Procedures.  The Company's product line focuses on branded content
for  the  value-priced  category  of  the  consumer   entertainment  market.  By
maintaining a branded  product  category  focus,  the Company  believes that its
advertising,  promotion,  merchandising  and packaging  expenditures  will build
long-term benefits for all the products in each category.

The Company's  internal sales staff calls on retail accounts  directly and works
with each distributor's sales personnel in order to maximize the sales potential
with retail  accounts.  The Company's  sales staff works closely with the retail
buyers and their  distributors to ensure that  appropriate  Company products are
inventoried for each retail outlet, stocking levels are adequate, promotions and
advertising are coordinated with product availability and in-store merchandising
plans are properly implemented.

<PAGE>

The Company's  agreements with its distributors and retailers  generally provide
for rights to return the  Company's  products if the  Company's  products do not
sell through at satisfactory  levels to the retailers.  The Company sells to its
distributors and retailers on credit,  with varying  discounts and credit terms.
(See "Dependence on Distributors and Retailers",  page 11). The Company also has
some  limited  exposure  to  returns  by  consumers.  Reserves  for  returns  by
distributors, retailers and consumers are established at levels that the Company
believes  are  adequate  based on  product  sell-through,  inventory  levels and
historic  return  rates  (See  Note  1  to  Financial  Statements,  "Summary  of
Significant  Accounting Policies,  Revenue Recognition" and Item 6 "Management's
Discussion  and Analysis of Results of  Operations  and  Financial  Condition").
However,  there can be no assurance  that the actual returns will not exceed the
established reserves. The Company typically accepts returns from customers, even
when not legally required to do so, in order to maintain good customer relations
to enhance repeat purchasing by consumers.

COMPETITION

The consumer  entertainment software industry is intensely competitive and is in
the process of substantial change and consolidation. The market for value-priced
consumer entertainment software is especially competitive.  The Company believes
that the principal  competitive  factors  include  content  quality,  brand name
recognition, ease-of-use, merchandising, product features, quality, reliability,
on-line  technology,  distribution  channels and price. Based on its current and
anticipated future product  offerings,  the Company believes that it competes or
will compete  effectively  in these  areas,  particularly  in price,  brand name
recognition, quality, ease of use and product features.

The Company  competes  primarily with other software  publishers.  The Company's
competitors  vary in size from very small  companies  with limited  resources to
very  large  corporations  with  greater  financial,  marketing,   distribution,
technical and other resources than the Company.  Although there are a variety of
consumer  and business  software  publishers,  based on product  lines and price
points,  Electronic  Arts,  Havas,  Activision,  Infogrames,  Inc.  (formerly GT
Interactive),  Hasbro Interactive, Mattel Media, Cosmi, Microsoft, and Interplay
are the Company's primary competitors.  In addition, it is possible that certain
large  software   companies,   hardware   companies  and  media   companies  may
increasingly   target  the   value-priced   segment  of  the  software   market,
particularly in on-line Internet gaming and other Internet-based  gaming models,
resulting in additional competition.

The Company believes that increasing  competition in the consumer  entertainment
software  market has already caused retail price erosion,  which could adversely
affect the Company's business, operating results and financial condition. To the
extent that competitors achieve performance,  price or other selling advantages,
the Company could be adversely affected.  In addition,  commercial acceptance of
new gaming technologies,  such as the Internet,  cable modem and DSL, may reduce
demand for the Company's existing PC-based products.  Intense price competition,
reduced  demand,  or distribution  channel  changes may have a material  adverse
effect on the Company's business,  financial condition,  liquidity and operating
results.

The market is also extremely  competitive  with respect to access to third-party
developers and content providers. The Company may not be successful in competing
for  the  most  sought-after  content  for  its  products  to  the  extent  that
competitors  achieve  better  access  to  distribution  channels,  have  greater
financial resources to pay for development fees or royalties,  or have developed
a  widely-recognized  reputation.  (See "Factors  Affecting Future  Performance,
Rapid Technological Change; Product Development" beginning on page 13.)

PRODUCT DEVELOPMENT

The Company seeks to develop a broad line of branded products in rapidly growing
and sustainable  market categories.  The Company primarily utilizes  marketplace
sales data (including  reported  industry  sales,  computer trade show sales and
retail  sell-through  results) to determine  which  products are  achieving  top
ranked sales results in the consumer  entertainment software categories that the
Company  serves.  New product ideas are evaluated  based upon market research in
the subject area,  the type and  demographics  of the target  consumer,  and the
existence and characteristics of competitive  products.  The Company then either
develops or procures  products that the Company expects will meet these criteria
while complementing and supporting the Company's branding strategy.  The Company
believes that its development process has certain material advantages over other
software  companies,  including  consistent  product quality,  reliable delivery
schedules and predictable cost estimates. The Company has also acquired products
through the  acquisition  of other  software  companies  or the  acquisition  or
licensing of software  products or technologies and will most likely continue to
acquire products this way in the future.

<PAGE>

The Company's Vice President of Product Development  oversees the development of
a product from conception through  completion,  and controls the scope,  design,
content and management of the project. The Company seeks to publish new products
that  incorporate  all of the  important  functions  and features of the leading
competitive  products and to add  innovative,  helpful  concepts and upgrades to
achieve a "better than" positioning relative to directly  competitive  products.
Once a product is approved for  development,  a design  specification is created
that  includes the  product's  features,  estimated  development  time and cost,
projected  delivery date and projected  selling price.  Whenever  possible,  the
software is designed to  incorporate  technology  used in the Company's  current
products in an effort to shorten the  development  cycle and improve quality and
consistency.  The overall product,  including  packaging and  documentation,  is
designed  to  comply  with a  manufacturing  specification  that  will  meet the
Company's margin requirements at the intended consumer price points.

The  Vice  President  of  Product  Development   executes  the  project  with  a
development team that typically may include programmers,  designers, artists and
testers.  The development team members are usually  employees of the Company but
may be  independent  contractors  depending  on  the  scheduling  of and  skills
required for each project.

The Company's internal development efforts focus primarily on product design and
features,  consistent user interfaces, and product quality and consistency.  The
Company  supplements  its internal  product  development  resources by utilizing
existing technologies and externally developed programming and content when such
utilization  results in a more  efficient  method of  creating a higher  quality
product.  Using this method,  the Company  maintains  internal  control over the
creative and market-driven  aspects of product  development while using external
resources to shorten  development  time and lower  development  costs and risks.
Development costs associated with externally  licensed  technology are generally
paid through a nominal one-time  customization fee and royalties based on actual
sales of the  product,  thereby  reducing  the  Company's  investment  risk in a
product.

Developed  products are tested for quality  assurance  before being released for
production.   Products  are  typically  tested  for  functionality  performance,
compatibility  with  numerous  popular  PC brands  and  configurations,  typical
installation  issues,  functionality  and ease-of-use.  Marketing or development
employees, under a manager's supervision, are responsible for reviewing customer
feedback,  competitive  products,  product performance and market positioning in
order to  introduce  upgrades  that keep  abreast of consumer  tastes and trends
while satisfying the Company's business strategy.

BACKLOG

The Company  typically ships its products within one to two days after accepting
a  customer's  order,  which is common in the  consumer  entertainment  software
industry.  Consequently,  the  Company  does not  usually  generate a backlog of
orders that would be a significant or important  indicator of future revenues or
earnings.

CUSTOMER AND TECHNICAL SUPPORT

Customer  and  technical  support  standards  are  very  high  in  the  consumer
entertainment  software  market.  In order to remain  competitive,  the  Company
provides  telephone  and  Internet  technical  support  to its  customers  at no
additional  charge.  The  Company  believes  that  high-quality,   user-friendly
technical  support  provides  valuable  feedback to the Company's  marketing and
software development personnel for use in the product development process.

OPERATIONS

The Company's  accounting,  purchasing,  inventory  control,  scheduling,  order
processing and development activities are conducted at its headquarters location
in  Langhorne,  Pennsylvania.  The Company  maintains  a sales and  distribution
operation in St. Ives, England, which it obtained through its acquisition of its
United Kingdom distributor, Software Partners Distribution Ltd., in August 1998.
Most product  shipments to the Company's  customers are performed by independent
contractors at their  warehousing  and production  facilities  working under the
Company's direction.  The Company's information  management system handles order

<PAGE>

entry,  order  processing,   picking,  billing,  accounts  receivable,  accounts
payable, general ledger, inventory control, and mailing list management. Subject
to credit terms and product availability,  orders are typically shipped from the
Company's  facilities within one to two days after accepting a customer's order.
Third party  contractors  replicate  the  Company's  software  and  assemble the
Company's  jewel case and box  products,  along with any  corrugated  or in-line
displays that are required by its  customers.  The Company has multiple  sources
for all components of its products,  and has not experienced any material delays
in production or assembly.

EMPLOYEES

As of June 30, 2000, the Company had 45 full-time equivalent employees, of which
11 were employed in software  development,  19 in sales,  marketing and customer
support,  and 15 in operations,  finance and  administration.  In addition,  the
Company  regularly   utilizes   approximately  20  independent   contractors  in
connection with its product development activities. No employees are represented
by labor unions, and the Company has never experienced a work stoppage.

INTELLECTUAL PROPERTY RIGHTS

The Company  relies  primarily on a combination of trademark,  copyright,  trade
secret  and other  proprietary  rights  laws,  license  agreements,  third-party
nondisclosure  agreements and other methods to protect its  proprietary  rights.
United  States  copyright  law,  international   conventions  and  international
treaties,  however,  may not provide meaningful  protection against unauthorized
duplication or infringement  of the Company's  software.  The Company  generally
sells its published software under licenses from independent  developers and, in
such cases, does not acquire the copyrights for the underlying content.

Policing  unauthorized  use of an easily  duplicated  and  broadly  disseminated
product such as computer software is very difficult. Software piracy is expected
to be a persistent problem for the software industry for the foreseeable future.
Software piracy is a much greater problem in certain  international markets such
as South  America,  the Middle  East,  the  Pacific  Rim and the Far East.  If a
significant  amount of  unauthorized  copying of the Company's  products were to
occur, the Company's  business,  operating results and financial condition could
be adversely affected.

Software developers and publishers are subject to infringement claims, and there
has been substantial  litigation in the industry regarding copyright,  trademark
and other  intellectual  property  rights.  When claims or  litigation,  with or
without merit,  are brought  against the Company,  such claims can and have been
costly and result in a diversion of management's  attention,  which could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  The Company can and has incurred  substantial expenses in
evaluating  and  defending  against such claims,  regardless of the merit of the
claims (see Part I, Item 3, "Legal  Proceedings").  In the event that there is a
determination  that the Company has  infringed on a third  party's  intellectual
property rights,  the Company could incur significant  monetary liability and be
prevented from using these rights in the future.

FACTORS AFFECTING FUTURE PERFORMANCE

This report  contains  certain  forward-looking  statements  involving risks and
uncertainties  that could cause actual results to differ  materially  from those
anticipated,   including,  but  without  limitation:  economic  and  competitive
conditions  in the  software  business  affecting  the demand for the  Company's
products;  the  Company's  need for  additional  funds;  the ability to hire and
retain key management  personnel to manage anticipated  growth; the development,
market acceptance and timing of new products;  access to distribution  channels;
and the  renewal of licenses  for key  software  products.  Those  factors,  the
factors  discussed below, and the factors  identified on page 20 of Management's
Discussion  and Analysis  should be considered by investors in the Company.  All
forward-looking  statements are  necessarily  speculative and there are numerous
risks and  uncertainties  that could  cause  actual  events or results to differ
materially  from  those  referred  to in such  forward-looking  statements.  The
discussion  below  highlights  some of the more  important  risks  identified by
management,  but should not be assumed to be the only  factors that could affect
future performance.

<PAGE>

RISK FACTORS

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

Maintaining  Profitability.  The Company commenced  operations in July 1992. The
Company experienced  significant losses from inception through the end of fiscal
1997.  Fiscal  1998 was the first  year that the  Company  earned a profit.  The
Company has earned  $253,000,  $463,000 and $1,253,000 in fiscal 2000,  1999 and
1998, respectively, and the accumulated deficit for the Company at June 30, 2000
was  approximately  $6,016,000.  Prior to fiscal 1998, the Company's  operations
were  funded  primarily  through  proceeds  from the  Company's  initial  public
offering  of  Common  Stock in  October  1995 and  through  the sale in  private
offerings of preferred  stock and Common Stock  warrants in November 1996 and in
January and April  1997.  Subsequently,  the  Company has funded its  activities
mainly through income from operations.  The Company's operations today are still
subject to all of the risks inherent in the development of a recently profitable
business,  particularly in a highly  competitive  industry,  including,  but not
limited to, development,  distribution and marketing  difficulties,  competition
and unanticipated  costs and expenses.  The Company's future success will depend
upon its  ability to  increase  revenues  from the  development,  marketing  and
distribution of its current and future software products.

Risks Inherent in the Consumer  Entertainment Software Business. The development
of multimedia  software  products,  which can combine text,  sound, high quality
graphics,  images and video,  is difficult  and time  consuming,  requiring  the
coordinated  participation  of various  technical  and  marketing  personnel and
outside  developers.  Some of the factors that could affect the Company's future
success include,  but are not limited to, the ability of the Company to overcome
problems  and delays in product  development,  market  acceptance  of  products,
successful implementation of its sales, distribution and marketing strategy, and
the  outcome  of  the  litigation  discussed  under  Part  II,  Item  1,  "Legal
Proceedings."  There can be no  assurance  the  Company  will be  successful  in
maintaining  and  expanding  a  sustainable  consumer   entertainment   software
business.

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

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

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

<PAGE>

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

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

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

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

<PAGE>

Substantial  Expenses and Resources Can Be Used to Defend  Infringement  Claims;
Effects of  Settlements  are  Uncertain.  The  Company  may from time to time be
notified that it is infringing on the  intellectual  property  rights of others.
Combinations of content acquired through past or future acquisitions and content
licensed  from third party  developers  will create new products and  technology
that may give rise to claims of infringement. In February, 2000, the Company was
sued for trademark and copyright  infringement by Hasbro Interactive,  Inc. (the
"Hasbro Action") (See Part I, Item 3, "Legal  Proceedings").  Although this case
has been settled,  the Company incurred  significant  defense costs and utilized
internal resources to defend this action prior to the settlement.  Additionally,
pursuant to the  settlement of this case,  the Company has agreed to discontinue
selling certain of its software  titles after  September 30, 2000,  which titles
accounted for  $2,100,000  and  $2,000,000 in the Company's net sales for fiscal
2000 and 1999,  respectively,  or 15% and 20% of net sales for those same fiscal
years.  Although  the  Company  is  working  with its  retail  and  distribution
customers  to  replace  these  titles  with  acceptable  alternatives  from  the
Company's  existing  and  newly  released  product  offerings,  there  can be no
assurance  that these  replacement  titles will  generate  similar sales for the
Company.  There can also be no  assurance  that  other  third  parties  will not
initiate  infringement  actions  against the  Company in the future.  Any future
claims could  result in  substantial  cost to and  diversion of resources of the
Company.  If the  Company is found to be  infringing  the  rights of others,  no
assurance can be given that licenses would be obtainable on acceptable  terms or
at all, that significant damages for past infringement would not be assessed, or
that further litigation  relative to any such licenses or usage would not occur.
The failure to obtain necessary licenses or other rights, or the commencement of
litigation arising out of any such claims,  could have a material adverse effect
on the Company's operating results.

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

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

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

Rapid  Technological   Change;   Product   Development.   Frequent  new  product
introductions  and  enhancements,  rapid  technological  developments,  evolving
industry standards and swift changes in customer  requirements  characterize the
market for the Company's products.  The Company's continued success depends upon

<PAGE>

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

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

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 fiscal 2000, international sales represented 21% of net
sales as  compared  to 27% of net sales for fiscal  1999.  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
often been unrelated to the operating  performance of affected  companies.  Such
fluctuations  could  adversely  affect the market price of the Company's  Common
Stock.

<PAGE>

Listing of Securities;  Risk of Low Priced Stocks. The Company's Common Stock is
listed on the Nasdaq SmallCap Market under the symbol EGAM. A listed company may
be de-listed if it fails to maintain minimum levels of Stockholders' equity, bid
price,  shares publicly held,  number of Stockholders or aggregate market value,
or if it violates other aspects of its listing agreement.  At June 30, 2000, the
Company satisfied the minimum level of Stockholders'  equity that is 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.

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

Item 2.   Properties

The Company leases 11,000 square feet of office, development and warehouse space
in  Langhorne,  Pennsylvania,  150 square feet of office space in Coral  Gables,
Florida  and  5,000  square  feet of office  and  warehouse  space in St.  Ives,
England.  The Company believes that its current  facilities will be adequate for
the Company's  anticipated  needs through  fiscal 2001.  The Company  leases its
North American and United Kingdom  operating  facilities  under three  operating
leases, expiring in September 2002, March 2001 and in March 2007,  respectively.
Rent expense for these  facilities was $180,000 and $160,000 for the years ended
June 30,  2000 and  1999,  respectively.  The  Company  anticipates  that it may
require  additional space as its business grows but anticipates no difficulty in
obtaining  such  space  in the  vicinity  of its  current  facilities  on  terms
substantially similar to those of the Company's other current leases.

Item 3.   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 alleged that
certain of the Company's products  infringed  copyrights and trademarks owned by
the  Plaintiffs,  and also  alleged  that the  Company  had  engaged  in  unfair

<PAGE>

competition.   The  suit  had  sought  to  have  the   Company   enjoined   from
manufacturing,  marketing,  distributing  and  selling the  Company's  allegedly
infringing games and from using the allegedly infringing trademarks; to have the
Company recall the allegedly  infringing products and related materials from the
distributors  and retailers  currently  selling these  products;  to require the
Company to pay the Plaintiffs the profits derived from the allegedly  infringing
products;  and to pay Plaintiffs' legal fees and costs. The Company has recently
entered into a settlement  agreement  with the  Plaintiffs  in which the Company
incurred a  non-recurring  expense of $205,000  charged  against  the  Company's
fiscal 2000 fourth quarter,  ended June 30, 2000. This $205,000 charge consisted
of a $160,000  cash  payment to the  plaintiffs,  a $15,000 fee to a third party
consultant and $30,000 in an increased provision for inventory obsolescence.  In
total,  including outside legal costs,  during the year ended June 30, 2000, the
Company incurred  $390,568 in costs relating to this  litigation,  including the
$205,000  charge noted  above.  These costs are  reflected  in the  Statement of
Operations  for the year ended June 30,  2000,  as  follows:  $30,000 in cost of
sales  and  $360,568  in  operating  expenses,  as  detailed  in  note 18 of the
Consolidated Financial Statements. The settlement does not require the recall of
any eGames  products and also does not admit to any  infringement by the Company
of the titles named in the suit. Also, under the terms of the settlement, eGames
may continue to sell certain  games  alleged to infringe on Hasbro's  copyrights
through  September 30, 2000, at which point these products will be discontinued.
The settlement  involves the following titles:  Intergalactic  Exterminator,  3D
Astro  Blaster,  Missile  Launch,  Missile Launch 2000,  TetriMania,  TetriMania
Master,  3D  TetriMania,  3D Maze Man, 3D Chomper,  3D Frogman,  3D Ms. Maze and
Tunnel  Blaster.  The titles that will be  discontinued  on  September  30, 2000
generated  net sales of  $2,100,000  and  $2,000,000  for fiscal  2000 and 1999,
respectively, or 15% and 20% of net sales for those same fiscal years.

                                     PART II

Item 5.   Market for the Registrant's Common Equity and Related Stockholder
          Matters

The  Company's  Common  Stock is traded on the  Nasdaq  SmallCap  Market  System
("Nasdaq")  under the symbol EGAM.  The  following are the range of high and low
bid prices for fiscal 2000 and 1999, as reported by Nasdaq:

                                                High          Low
                                                ----          ---
   Fiscal Year Ended June 30, 2000
   -------------------------------
        First Quarter                         $ 3.813       $ 1.969
        Second Quarter                        $ 4.125       $ 2.125
        Third Quarter                         $ 3.281       $ 1.875
        Fourth Quarter                        $ 2.125       $ 0.500
   Fiscal Year Ended June 30, 1999
   -------------------------------
        First Quarter                         $ 2.125       $ 0.938
        Second Quarter                        $ 1.935       $ 0.938
        Third Quarter                         $ 6.156       $ 1.625
        Fourth Quarter                        $ 4.500       $ 2.375

On September 21, 2000, the Company had approximately 111 shareholders of record.
Shares held by all persons in street name are  considered to be one  shareholder
of record.  The  Company has not paid any  dividends  on its Common  Stock.  The
Company  currently  intends to retain earnings,  if any, for use in its business
and does not anticipate paying cash dividends in the foreseeable future.

Item 6.   Management's Discussion and Analysis of Results of Operations and
          Financial Condition

Results of Operations

The following discussion should be read together with the Company's Consolidated
Financial Statements and Notes thereto beginning on page 24.

<PAGE>

Year Ended June 30, 2000 Compared to the Year Ended June 30, 1999

Net Sales

Net  sales  for the year  ended  June 30,  2000  were  $13,640,000  compared  to
$10,022,000  for the year ended  June 30,  1999,  representing  an  increase  of
$3,618,000  or  36%.  The  $3,618,000   increase  in  net  sales  was  primarily
attributable to the Company's expansion of its distribution channels,  primarily
within the North American retail marketplace. Within this geographical area, the
Company  increased  it  distribution  by  expanding  its  direct  sales  to both
traditional  software retailers and  non-traditional  software retailers such as
food and drug stores. This distribution strategy has allowed the Company to more
widely distribute its software game titles to more retailers, either on a direct
basis or through third party distributors. During fiscal 2000, the Company's net
sales were comprised of sales into the following markets:

o North American Traditional  Retailers - $2,455,000;
o North American Food and Drug Retailers - $1,846,000;
o North American Distributors - $6,528,000; and
o International Markets - $2,811,000.

By  comparison,  during  fiscal 1999, a large portion of the Company's net sales
were through third party distributors, as shown below:

o North  American  Traditional  Retailers - $147,000;
o North American Food and Drug  Retailers - $339,000;
o North American  Distributors - $6,877,000; and
o International Markets - $2,659,000.

The  transition  in the  Company's  distribution  strategy  has  resulted in the
following increases in net sales during fiscal 2000 as compared to fiscal 1999:

o North American Traditional Retailers - $2,308,000 or 1,570%;
o North American Food and Drug Retailers - $1,507,000  or 445%; and
o International  Markets - $152,000 or 6%.

These increases were partially  offset by a $349,000 or 5% decrease in net sales
to  North  American  Distributors,  which  was  largely  due  to  the  Company's
establishment of new direct  relationships  with retailers in the North American
markets  and the  Company's  transition  away  from its  exclusive  distribution
relationship with Infogrames, Inc. (formerly GT Interactive), in April 1999. The
Company's  net  sales  to  Infogrames,  Inc.  accounted  for  18% and 65% of the
Company's  net sales for the years ended June 30,  2000 and 1999,  respectively.
The Company will  continue to work to maintain a balanced  distribution  network
that does not rely on any single distributor or retailer to a material extent.

The Company  believes that the software titles that will no longer be sold after
September 30, 2000 pursuant to the settlement  agreement between the Company and
Hasbro  Interactive (as described in Part I, Item 3, "Legal  Proceedings") , had
reached  maturity  within  their  respective  product life cycles and updates or
replacements  were anticipated for these products during the next twelve months.
These  products  represented  net sales of $2,100,000  and $2,000,000 for fiscal
2000 and 1999,  respectively,  or 15% and 20% of net sales for those same fiscal
years.  The Company is working  with its retail and  distribution  customers  to
replace these titles with acceptable  alternatives  from the Company's  existing
and newly released product offerings.

The Company's  international  sales represented 21% and 27% of the Company's net
sales for the 2000 and 1999 fiscal years, respectively.  The Company anticipates
that international sales will represent approximately the same percentage of net
sales during fiscal 2001 as occurred in fiscal 2000. The Company's international
sales for the year ended June 30, 2000  increased by $152,000 over sales for the
prior  year.  Some of the reasons  that this  increase  was not larger  include:
increased pricing pressures at retail and increased competition for retail shelf
space from the Company's competitors in these foreign markets.

<PAGE>

During  fiscal  2000,  the Company  completed  its  transition  from  publishing
shareware-based PC game software titles to publishing high quality  full-release
PC game software titles.  Sales of  shareware-based  software titles amounted to
only  $106,000 of the Company's net sales for fiscal 2000 compared to $2,421,000
of the Company's net sales for fiscal 1999.

During fiscal 2000, the Company targeted non-traditional software retailers such
as food and drug stores for opportunities to distribute the Company's  products.
As illustrated  above,  these efforts  resulted in net sales of $1,846,000  into
this retail channel in fiscal 2000, or an increase of $1,507,000. In fiscal 2001
the  Company has  targeted  other  non-traditional  software  retailers  such as
convenience  stores,  music stores and  bookstores for the sale of the Company's
products.

During fiscal 2000, the Company  initiated several programs to increase the sale
of its products  over the Internet,  including:  the roll-out of an improved and
expanded  website;  improvement of its electronic  distribution  capabilities by
further  developing and expanding its affiliation  with Digital River, a leading
distributor  of  digital  software  over  the  Internet;  and  incorporation  of
user-friendly  on-line  functionality into its products.  Sales of the Company's
products via the  Internet  for fiscal 2000 and 1999 were  $177,000 and $51,000,
respectively, or approximately 1% of the Company's net sales during both years.

Product returns  experienced by the Company during the years ended June 30, 2000
and  1999  were  $2,546,000  and  $859,000,  respectively,  or 19% and 9% of the
Company's net sales,  respectively.  This $1,687,000 increase in product returns
was caused primarily by the change in the Company's distribution strategy, which
involved  expanding the number of  distribution  partners used to distribute the
Company's products.  All of these  non-exclusive  agreements between the Company
and its distributors  allow for product returns or markdowns.  Additionally,  as
discussed  above,  the Company  experienced a significant  increase in net sales
into the food and drug retail channel.  All of these sales were "promotional" in
nature,  meaning that the products were sold in those retail stores for only six
to  eight  weeks.  As a  result  of  this  short  selling  period,  the  Company
experienced  higher  than  expected  product  returns  when  compared to product
returns from  traditional  software  retail stores where the Company's  products
typically  have a longer  period of time to sell  through to  consumers.  During
fiscal 2001,  the Company  will be working  towards  placing its  products  into
longer-term,  non-promotional  product  displays  in the food  and  drug  retail
channels in order to reduce the  Company's  exposure to product  returns in this
channel.

Cost of Sales

Cost of sales for the year  ended  June 30,  2000 were  $5,302,000  compared  to
$3,597,000  for the year  ended  June 30,  1999,  representing  an  increase  of
$1,705,000 or 47%. This increase was caused primarily by the $1,090,000 increase
in product costs, $535,000 increase in royalty expense and the $234,000 increase
in freight expense,  which were partially  offset by a $154,000  decrease in the
provision for inventory obsolescence. 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 fiscal 2000  decreased to 61.1% of net
sales from 64.1% of net sales for fiscal  1999.  This 3.0%  decrease  was caused
primarily by increases,  as a percentage of net sales,  in royalty,  freight and
reclamation expenses of 2.6%, 0.8% and 1.0%, respectively,  which were partially
offset by a 0.6%  decrease  in  product  cost,  as a  percentage  of net  sales,
achieved from higher volume  discounts  associated  with the 36% increase in net
sales for  Fiscal  2000.  The  increase  in  royalty  expense  was caused by the
Company's transition away from  shareware-based  software titles to full-release
software  titles  that earn,  on  average,  a 10%  royalty  on net sales. The
increase in freight  expense was caused  primarily  by the  Company's  increased
distribution  requirements  and  greater  reclamation  expenses  caused  by  the
increase in product returns experienced from the food and drug retail channel.

<PAGE>

Operating Expenses

Product  development  expenses  for the year ended June 30,  2000 were  $860,000
compared to $937,000  for the year ended June 30, 1999, a decrease of $77,000 or
8%. This  decrease was caused  primarily by a $260,000  decrease in  third-party
development  costs,  which was partially offset by a $185,000 increase in salary
and  related  costs  for  full-time  employees  hired to focus on the  Company's
product development and quality assurance efforts.

Selling,  general and  administrative  expenses for the year ended June 30, 2000
were  $6,772,000  compared to  $4,814,000  for the year ended June 30, 1999,  an
increase  of  $1,958,000  or  41%.  This  increase  was  caused  primarily  by a
$1,189,000  increase in marketing  promotional  expenses associated with the 36%
increase  in net sales.  These  sales have  increasingly  been made  directly to
retailers,  who frequently  require the Company to pay various slotting fees and
to participate in promotional  programs.  Additionally,  increases in employment
costs due to the  establishment  of an internal  direct  sales force and related
support  personnel  were incurred to support the Company's  growth during fiscal
2000.

Legal  settlement  costs  reflected  in the  operating  expense  section  of the
Statement  of  Operation   for  the  year  ended  June  30,  2000   amounted  to
approximately  $361,000 during fiscal 2000 in connection with certain  trademark
and copyright  litigation,  as described in Item 3, "Legal  Proceedings."  These
costs  included  approximately  $186,000 in legal fees incurred  during the 2000
fiscal year to defend the litigation and costs associated with the settlement of
the  litigation,  a cash payment to the plaintiffs of $160,000 and a $15,000 fee
to a third party consultant.

Interest Expense, Net

Net  interest  expense for the year ended June 30, 2000 was $12,000  compared to
$32,000  for the year ended June 30,  1999,  a decrease  of $20,000 or 63%.  The
decrease was primarily due to the reduction of long-term  debt and capital lease
obligations due to normal monthly principal  payments made during the year ended
June 30, 2000,  and the increase in interest  income  earned from the  Company's
higher cash balances during fiscal 2000.

Provision for Income Taxes

Provision for income taxes for the year ended June 30, 2000 was $81,000 compared
to $180,000  for the year ended June 30, 1999, a decrease of $99,000 or 55%. The
decrease in the  provision  for income taxes was  primarily  due to the $309,000
decrease in the Company's  income before income taxes for fiscal 2000 along with
the utilization of certain net operating loss carry-forwards that were available
to offset some of the Company's state and federal taxable income.

Net Income

As a result of the factors discussed above, net income decreased to $253,000 for
the year ended June 30, 2000 from  $463,000  for the year ended June 30, 1999, a
decrease of $210,000 or 45%.

Weighted Average Common Shares

The weighted  average common shares  outstanding on a diluted basis increased by
157,572  during the year ended June 30, 2000 to 9,997,013 from 9,839,441 for the
year ended June 30, 1999.  During the year ended June 30, 2000, 12,300 shares of
Common Stock were issued in connection with a consulting  agreement for services
rendered  during the current  year.  The $30,000  fair value of these shares was
expensed as incurred.  Additionally,  136,235 shares of Common Stock were issued
during fiscal 2000 in  connection  with the exercise of Common Stock options and
warrants.

Liquidity and Capital Resources

As of June 30,  2000,  the  Company's  cash and working  capital  balances  were
$1,139,000 and $3,191,000,  respectively,  and the Company's total stockholders'
equity balance at June 30, 2000 was $3,697,000.

<PAGE>

Cash used in operating  activities was approximately  $36,000 for the year ended
June 30, 2000 versus  $866,000 in cash provided by operating  activities for the
year ended June 30, 1999. This $36,000 in net cash used in operating  activities
resulted primarily from increases in inventory,  accounts receivable and prepaid
expenses,  which were  partially  offset by  increases  in accounts  payable and
accrued expenses. Additionally, the Company's net income for the year ended June
30,  2000 was  $253,000,  inclusive  of  depreciation,  amortization  and  other
non-cash expenses of $484,000.

Net cash used in investing activities for the years ended June 30, 2000 and 1999
were  $215,000 and  $313,000,  respectively.  This  $215,000 in net cash used in
investing  activities  reflects purchases of $200,000 in furniture and equipment
and $17,000 in software  rights,  which were  partially  offset by $2,000 in net
proceeds from the disposal of certain furniture and equipment.

Net cash  provided by financing  activities  was $79,000 for the year ended June
30, 2000  compared to net cash used in financing  activities of $193,000 for the
year  ended  June 30,  1999.  This  $79,000 in net cash  provided  by  financing
activities  reflects net proceeds from the exercise of Common Stock warrants and
options  totaling  approximately   $229,000,   which  was  partially  offset  by
repayments of $126,000 in notes payable and $24,000 in capital leases.

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.  The Company did not  purchase  any shares  under this stock  repurchase
program  during the year ended June 30, 2000.  As of June 30, 2000,  the Company
had  purchased  231,900  shares of its Common  Stock at an  approximate  cost of
$501,000, pursuant to its stock repurchase program.

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  ("prior credit  facility") that it previously had with another
commercial bank. The Company was not in compliance with certain covenants of the
prior  credit  facility at June 30,  2000.  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 and 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 June 30, 2000,  the Company was in compliance  with each
of those covenants.  This new credit facility was established to provide,  among
other things,  additional  working capital to support the Company's  anticipated
growth.  As of September 26, 2000,  the Company had $400,000  outstanding  under
this credit facility.

The Company's United Kingdom operation has a $225,000  revolving credit facility
with a  commercial  bank.  Amounts  outstanding  under this credit  facility are
charged  interest at two and one-half percent above the bank's current base rate
and such interest is due monthly.  As of September 26, 2000, the Company did not
have any  outstanding  balance  under this  credit  facility,  which  expires on
September 30, 2001.

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

<PAGE>

The  Company  believes  that the legal  settlement  described  in Item 3, "Legal
Proceedings",  will not have a  material  impact on the  Company's  cash flow or
financial condition for the year ending June 30, 2001.

At June 30,  2000,  the  Company  continued  to  satisfy  the  minimum  level of
stockholders' equity required and all other aspects of its listing agreement for
the Nasdaq SmallCap Market.  At June 30, 2000, the Company had $3,402,000 in net
tangible assets.

Year 2000

The Company experienced no significant Year 2000 compliance issues and Year 2000
issues did not have a material effect on the Company's  business,  operations or
financial condition.

New Accounting Pronouncements

The  Company  does  not  expect  the  adoption  of  recently  issued  accounting
pronouncements  to have a  significant  impact  on its  results  of  operations,
financial position or cash flows.

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
ability to maintain a balanced  distribution  network  that does not rely on any
single  distributor  or retailer to a material  extent;  the  Company's  ability
during  fiscal  2001 to place its  products  into  longer-term,  non-promotional
product displays with the non-traditional software retailers and the possibility
of such placement  resulting in reduced product  returns in these channels;  the
placement  of  the  Company's  products  in  food  and  drug  retail  stores  in
longer-term display units during the back to school and upcoming holiday selling
seasons;  the sale of sampler packs of the Company's game titles to increase the
number of PC game players;  the Company's  ability to create  products that will
increase revenues; the growth of the consumer entertainment software market; the
Company's   ability   during  fiscal  2001  to  sell  its  products  into  other
non-traditional  software  retailers such convenience  stores,  music stores and
bookstores for the sale of the Company's  products;  and the  sufficiency of the
Company's  cash and working  capital  balances,  in  addition  to the  Company's
revolving  credit  facilities,  to fund the  Company's  operations  for the next
twelve months. 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
Company's ability to sell its products to a number of distributors and retailers
in  quantities  and on terms that are  commercially  acceptable;  the  Company's
ability to  continue  to enter into  additional  distribution  and direct  sales
relationships  on  commercially  acceptable  terms;  the market  acceptance  and
successful  sell-through results for the Company's products at retail stores and
the ability of the Company to accurately  estimate  sell-through  volume when an
order is shipped;  the amount of unsold  product that is returned to the Company
by retail  stores;  the Company's  ability to  accurately  predict the amount of
product returns that will occur and the adequacy of the reserves established for
such   returns;   the   Company's   ability  to   successfully   implement   its
Store-in-a-Store  program on commercially acceptable terms; Company's ability to
negotiate  lower  product  promotional  costs  in its  distribution  and  retail
relationships;  increased selling,  general and administrative costs,  including
increased  legal  expenses;   the  Company's  ability  to  penetrate  additional
non-traditional  retail  channels such as convenience  stores,  music stores and
bookstores for the sale of its products;  the allocation of adequate shelf space
for the Company's  products in retail stores;  the Company's  ability to collect
outstanding   accounts   receivable   and   establish   adequate   reserves  for
un-collectible 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

<PAGE>

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>


Item 7.   Financial Statements

                                  eGames, Inc.
                   Index to Consolidated Financial Statements



                                                                            Page
                                                                            ----

 Independent Auditors' Report...........................................     23

 Consolidated Balance Sheet June 30, 2000...............................     24

 Consolidated Statements of Operations for the years
 ended June 30, 2000 and 1999...........................................     25

 Consolidated Statements of Stockholders' Equity for the years
 ended June 30, 2000 and 1999...........................................     26

 Consolidated Statements of Cash Flows for the years
 ended June 30, 2000 and 1999...........................................     27

 Notes to Consolidated Financial Statements.............................     29




<PAGE>


                          Independent Auditors' Report


The Board of Directors and Stockholders
eGames, Inc.:

We have audited the accompanying  consolidated balance sheet of eGames, Inc. and
subsidiary  as of June 30,  2000,  and the related  consolidated  statements  of
operations,  stockholders'  equity,  and cash flows for the years ended June 30,
2000 and 1999. These consolidated financial statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
the significant estimates made by management,  as well as evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of eGames,  Inc. and
subsidiary  as of June 30,  2000 and the results of their  operations  and their
cash  flows for the years  ended  June 30,  2000 and 1999,  in  conformity  with
accounting principles generally accepted in the United States of America.


/s/ KPMG LLP

Philadelphia, Pennsylvania
July 25, 2000,  except  for  notes 8 and 18,  which are as of August 9, 2000 and
    September 8, 2000, respectively


<PAGE>


                                  eGames, Inc.

                           Consolidated Balance Sheet

<TABLE>
<CAPTION>

                                                                       As of
                                                                      June 30,
ASSETS                                                                  2000
------                                                                  ----
<S>                                                                 <C>
Current assets:
   Cash and cash equivalents                                        $ 1,139,178
   Accounts receivable, net of allowances - $1,329,098                2,742,414
   Inventory                                                          2,145,142
   Prepaid income taxes and other expenses                              263,595
                                                                    -----------
          Total current assets                                        6,290,329

Furniture and equipment, net                                            336,135
Intangibles and other assets, net                                       295,043
                                                                    -----------
          Total assets                                              $ 6,921,507
                                                                    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
   Notes payable                                                    $    59,487
   Accounts payable                                                   2,073,076
   Accrued expenses                                                     798,189
   Convertible subordinated debt                                        150,000
   Capital lease obligations                                             18,971
                                                                    -----------
          Total current liabilities                                   3,099,723

Capital lease obligations, net of current portion                           984
Notes payable, net of current portion                                   124,220
                                                                    -----------
          Total liabilities                                           3,224,927

Commitments and contingencies - Notes 6, 7, 8 and 13

Stockholders' equity:
   Common stock, no par value (40,000,000 shares authorized;
          9,981,875 issued and 9,749,975 outstanding)                 9,134,234
   Additional paid-in capital                                         1,148,550
   Accumulated deficit                                               (6,015,588)
   Treasury stock, at cost - 231,900 shares                            (501,417)
   Accumulated other comprehensive loss                                 (69,199)
                                                                    -----------
          Total stockholders' equity                                  3,696,580
                                                                    -----------
          Total liabilities and stockholders' equity                $ 6,921,507
                                                                    ===========





          See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>


                                  eGames, Inc.
                      Consolidated Statements of Operations
                       Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>

                                                         2000            1999
                                                         ----            ----
<S>                                                  <C>             <C>
Net sales                                            $13,640,160     $10,022,305

Cost of sales                                          5,301,828       3,596,982
                                                     -----------     -----------

Gross profit                                           8,338,332       6,425,323

Operating expenses:
    Product development                                  860,330         936,938
    Selling, general and administrative                6,772,136       4,814,345
    Legal settlement and related costs                   360,568           - 0 -
                                                     -----------     -----------

        Total operating expenses                       7,993,034       5,751,283
                                                     -----------     -----------

Operating income                                         345,298         674,040

Interest expense, net                                     11,967          31,761
                                                     -----------     -----------

Income before income taxes                               333,331         642,279

Provision for income taxes                                80,750         179,724
                                                     -----------     -----------

Net income                                           $   252,581     $   462,555
                                                     ===========     ===========



Net income per common share:
            - Basic                                  $      0.03     $      0.05
                                                     ===========     ===========
            - Diluted                                $      0.03     $      0.05
                                                     ===========     ===========

Weighted average common shares
        outstanding - Basic                            9,706,813       9,494,988

Dilutive effect of common stock equivalents              290,200         344,453
                                                     -----------     -----------
Weighted average common shares
        outstanding - Diluted                          9,997,013       9,839,441
                                                     ===========     ===========



          See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>


                                  eGames, Inc.
                 Consolidated Statements of Stockholders' Equity
                       Years ended June 30, 2000 and 1999

<TABLE>
<CAPTION>


                                             Common Stock            Additional                      Treasury Stock
                                        ------------------------      Paid-in      Accumulated    ----------------------
                                         Shares        Amount         Capital        Deficit       Shares        Amount
                                        ---------   ------------    ------------   ------------   ---------   ----------
<S>                                     <C>         <C>             <C>            <C>            <C>         <C>
Balance as of June 30, 1998             9,371,200   $  8,176,826    $  1,148,550    ($6,730,724)      - 0 -   $   - 0 -

Net income                                                                              462,555

Shares issued in connection with
   exercise of warrants and options       312,140        485,063

Purchase of treasury stock                                                                          231,900     (501,417)

Foreign currency translation
   adjustment

Shares issued in connection with
   acquisition                            150,000        213,000
                                        ---------   ------------    ------------   ------------   ---------   ----------
Balance as of June 30, 1999             9,833,340   $  8,874,889    $  1,148,550   ($ 6,268,169)    231,900   ($ 501,417)
                                        =========   ============    ============   ============   =========   ==========


Net income                                                                              252,581

Shares issued in connection with
   exercise of warrants and options       136,235        229,345

Shares issued in connection with a
   consulting agreement                    12,300         30,000

Foreign currency translation
   adjustment
                                        ---------   ------------    ------------   ------------   ---------   ----------
Balance as of June 30, 2000             9,981,875   $  9,134,234    $  1,148,550   ( $6,015,588)    231,900   ($ 501,417)
                                        =========   ============    ============   ============   =========   ==========
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                         Accumulated
                                            Other
                                        Comprehensive   Stockholders'
                                            Loss           Equity
                                        -------------   -------------
<S>                                     <C>             <C>
Balance as of June 30, 1998             $       - 0 -     $ 2,594,652

Net income                                                    462,555

Shares issued in connection with
   exercise of warrants and options                           485,063

Purchase of treasury stock                                   (501,417)

Foreign currency translation
   adjustment                                 (29,915)        (29,915)

Shares issued in connection with
   acquisition                                                213,000
                                        -------------   -------------
Balance as of June 30, 1999             ($     29,915)  $   3,223,938
                                        =============   =============


Net income                                                    252,581

Shares issued in connection with
   exercise of warrants and options                           229,345

Shares issued in connection with a
   consulting agreement                                        30,000

Foreign currency translation
   adjustment                                 (39,284)        (39,284)
                                        -------------   -------------
Balance as of June 30, 2000             ($     69,199)  $   3,696,580
                                        =============   =============



          See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>




                                  eGames, Inc.
                      Consolidated Statements of Cash Flows
                       Years ended June 30, 2000 and 1999

<TABLE>
<CAPTION>

                                                                          2000           1999
                                                                          ----           ----
<S>                                                                   <C>            <C>
Cash flows from operating activities:
    Net income                                                        $   252,581    $   462,555
    Adjustments to reconcile net income to net cash
       (used in) provided by operating activities:
    Depreciation, amortization and other non-cash items                   483,991        413,605
    Changes in items affecting operations:

             Restricted cash                                               17,560         (1,029)
             Accounts receivable                                         (823,859)       173,007
             Prepaid expenses                                            (156,839)           891
             Inventory                                                   (997,145)      (206,127)
             Accounts payable                                           1,037,896        (95,956)
             Gain on disposal of furniture and equipment                     (769)         - 0 -
             Accrued expenses                                             151,061        118,749
                                                                      -----------    -----------
Net cash (used in) provided by operating activities                       (35,523)       865,695

Cash flows from investing activities:
    Purchase of furniture and equipment                                  (199,726)      (192,685)
    Proceeds from disposal of furniture and equipment                       2,006          - 0 -
    Acquisition, net of cash acquired                                       - 0 -        (12,929)
    Purchase of software rights and other assets                          (17,395)      (107,498)
                                                                          -------    -----------
Net cash used in investing activities                                    (215,115)      (313,112)

Cash flows from financing activities:
    Purchase of treasury stock                                              - 0 -       (501,417)
    Repayments of notes payable                                          (126,460)      (123,851)
    Proceeds from exercise of warrants and stock options                  229,345        485,063
    Repayments of capital lease obligations                               (24,224)       (52,674)
                                                                      -----------    -----------
Net cash provided by (used in) financing activities                        78,661       (192,879)

Effect of exchange rate changes on cash and cash equivalents               (2,698)           501
                                                                      -----------    -----------

Net (decrease) increase in cash and cash equivalents                     (174,675)       360,205

Cash and cash equivalents:
     Beginning of period                                                1,313,853        953,648
                                                                      -----------    -----------
     End of period                                                    $ 1,139,178    $ 1,313,853
                                                                      ===========    ===========






          See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>

                                  eGames, Inc.
                Consolidated Statements of Cash Flows, continued
                       Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>

                                                                        2000        1999
                                                                        ----        ----
<S>                                                                   <C>         <C>
Supplemental cash flow information:

Cash paid for interest                                                $ 40,516    $ 58,409
                                                                      ========    ========

Cash paid for income taxes                                            $236,000    $128,051
                                                                      ========    ========


Non-cash investing and financing activities:

     Capital lease additions                                          $  - 0 -    $ 26,147
                                                                      ========    ========

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

     12,300 shares of Common Stock issued in connection with
       a consulting arrangement                                       $ 30,000    $  - 0 -
                                                                      ========    ========












          See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>


                                  eGames, Inc.
                   Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

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, primarily distributed on CD-ROM media. The
Company's   sales  are  made  through   various   national   distributors  on  a
non-exclusive  basis in  addition  to direct  relationships  with  national  and
regional retailers.

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.

Fair Value of Financial Instruments

The recorded  amounts of cash and cash  equivalents,  accounts  receivable,  and
accounts  payable at June 30, 2000  approximate fair value due to the relatively
short period of time between  origination of the  instruments and their expected
realization.  The Company's  debt is carried at cost,  which  approximates  fair
value,  as the debt bears interest at rates  approximating  current market rates
for similar instruments.

Cash and Cash Equivalents

For purposes of the statements of cash flows,  the Company  considers all highly
liquid  instruments  purchased with an original maturity of three months or less
to be cash equivalents.

Inventory

Inventory,  consisting  primarily of finished  goods,  is valued at the lower of
cost or market. Cost is determined by the first-in, first-out method (FIFO).

Furniture and Equipment

Furniture and equipment  are stated at cost.  Depreciation  is calculated on the
straight-line  method over the estimated useful lives of the assets ranging from
three to five years.

Leasehold  improvements  are  amortized  on the  straight-line  method  over the
shorter of the lease term or  estimated  useful life of the assets.  Maintenance
and repair costs are expensed as incurred.

Foreign Currency Translation

Assets  and  liabilities  of the  Company's  foreign  subsidiary  operation  are
translated  into US dollars  at the  exchange  rate in effect as of the  balance
sheet date.  Revenues  and expenses  are  translated  into US dollars at average
exchange rates in effect during the reporting period. The resultant  translation
adjustment is reflected as "Accumulated other comprehensive income (loss)", as a
separate component of stockholders' equity of the Consolidated Balance Sheet.


<PAGE>

Long-Lived Assets

In accordance with Statement of Financial Standards (SFAS) No. 121,  "Accounting
for  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of", the Company  records  impairment  losses on  long-lived  assets,  including
intangible assets,  used in operations when indicators of impairment are present
and the  undiscounted  cash flows  estimated to be generated by those assets are
less than the assets' carrying amount.

Intangible Assets

The Company has intangible assets resulting  primarily from $308,000 in goodwill
associated with the eGames Europe,  Ltd.  acquisition on August 14, 1998 and the
purchase  of  software  rights.  Accumulated  amortization  at June 30, 2000 was
$745,000. The Company amortizes its goodwill using the straight-line method over
five years and other intangible assets using the straight-line method over three
years.  The Company recorded  amortization  expense of $210,000 and $249,000 for
the years ended June 30, 2000 and 1999, respectively.

Revenue Recognition

Product Sales:
--------------
Revenue  from the sale of  products  is  recognized  when the  product  has been
shipped. Customers generally have the right of return on products purchased from
the  Company.  The  Company  recognizes  product  sales  to  its  customers,  in
accordance  with the  criteria  of FASB 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:
------------------------------
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, all of which allow for product returns.  The Company records
an  allowance  for returns as a reduction  of gross sales at the time of product
shipment. This allowance, which is included in accounts receivable, is estimated
based primarily upon historical experience, analysis of distributor and retailer
inventories of the Company's products and analysis of retail sell-through of the
Company's products. Actual product returns experienced by the Company during the
years ended June 30, 2000 and 1999 were  $2,546,000 and $859,000,  respectively,
or nineteen and nine percent of the Company's net sales, respectively.

Software Development Costs

Software   development  costs  are  expensed  as  incurred  until  technological
feasibility  has been  established.  After  technological  feasibility  has been
established,  any additional  costs are  capitalized in accordance with SFAS No.
86. To date, amounts qualifying for capitalization, net of valuation allowances,
have not been material.

Marketing Promotional Costs

Marketing  promotional  costs  are  charged  to  expense  as  incurred  and were
approximately  $1,659,000  and  $534,000  for the years  ended June 30, 2000 and
1999, respectively.

Income Taxes

The Company uses the asset and liability  method of accounting for income taxes.
Under the asset and liability  method,  deferred tax assets and  liabilities are
recognized for the estimated future tax consequences attributable to differences
between  the  financial  statement  carrying  amounts  of  existing  assets  and
liabilities and their respective tax bases.  Deferred tax assets and liabilities
are  measured  using  enacted  tax rates in effect  for the year in which  those
temporary differences are expected to be recovered or settled.


<PAGE>


Computation of Earnings Per Share

Net  earnings  per common  share is  computed in  accordance  with SFAS No. 128,
"Earnings  per Share".  Basic  earnings  per share is  computed by dividing  net
earnings by the weighted average number of common shares outstanding during each
year.  Diluted  earnings  per share is computed by dividing  net earnings by the
weighted  average  number of common and  common  share  equivalents  outstanding
during each year.  Common share  equivalents  include stock options and warrants
using the treasury stock method.

Accounting for Stock-based Compensation

Stock-based  compensation  is  recognized  using the  intrinsic  value method in
accordance  with  Accounting  Principles  Board Opinion No. 25,  "Accounting for
Stock Issued to  Employees"  (APB 25). For  disclosure  purposes,  pro forma net
income (loss) and income  (loss) per share data are provided in accordance  with
SFAS 123, "Accounting for Stock-Based  Compensation" as if the fair value method
had been applied.

Management's Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

New Accounting Pronouncements

The  Company  does  not  expect  the  adoption  of  recently  issued  accounting
pronouncements  to have a  significant  impact  on its  results  of  operations,
financial position or cash flows.

2.  Inventory

Inventory consists of the following:

     Finished goods                                   $ 1,718,122
     Raw materials                                        550,193
                                                      -----------
                                                        2,268,315

     Provision for obsolescence                          (123,173)
                                                      -----------
     Inventory, net                                   $ 2,145,142
                                                      ===========

3.  Furniture and Equipment

Furniture and equipment consists of the following:

     Equipment                                        $   561,395
     Furniture                                            413,849
     Equipment under capital leases                       154,332
                                                      -----------
                                                        1,129,576
     Accumulated depreciation                            (793,441)
                                                      -----------
     Furniture and equipment, net                      $ 336,135



<PAGE>


4.  Accrued Expenses

Accrued expenses consist of the following:

     Accrued marketing promotions                     $ 256,342
     Accrued settlement costs                           175,000
     Accrued payroll                                    128,281
     Other accrued expenses                             238,566
                                                      ---------
     Accrued expenses                                 $ 798,189
                                                      =========

5.  Notes Payable

Notes payable consists of the following:

     Note payable, bearing interest of 11%.  Matures on June 2, 2002,
     principal and interest of $418 payable monthly.                   $   8,884


     Note payable to bank, bearing interest at the prime rate plus
     2.75%(11.75% at June 30, 2000).  Matures on March 24, 2003,
     principal and interest of $6,120 payable monthly.  The note
     is guaranteed by a former officer of the Company and the Small
     Business Administration.                                            174,823
                                                                       ---------

     Notes payable                                                     $ 183,707
                                                                       =========

     Less current portion                                                 59,487
                                                                       ---------

     Long term portion                                                 $ 124,220
                                                                       =========

6.  Lease Obligations

The Company leases its North American and United  Kingdom  operating  facilities
under three operating  leases,  expiring in September 2002, March 2001 and March
2007,  respectively.  The Company has financed the purchase of office  equipment
and vehicles  through  various  operating  and capital  lease  agreements.  Rent
expense incurred under the Company's  operating leases was $244,000 and $204,000
for the years ended June 30,  2000 and 1999,  respectively.  The  capital  lease
obligations are collaterallized by the leased assets, which had a net book value
of approximately $26,000 and $63,000 at June 30, 2000 and 1999, respectively.

Future payments of leases are as follows:

                                 Operating     Capital
                                   Leases       Leases         Total
                                 ---------     --------      ---------
     2001                        $ 247,860     $ 22,421      $ 270,281
     2002                          237,919          992        238,911
     2003                           91,168        - 0 -         91,168
     2004                           55,521        - 0 -         55,521
     2005                           52,704        - 0 -         52,704
     2006 and thereafter            91,560        - 0 -         91,560
                                 ---------     --------      ---------
                                 $ 776,732     $ 23,413      $ 800,145
                                 =========     --------      =========
     Less interest                               (3,458)
                                               --------
     Present value of future lease payments      19,955
     Less current portion                       (18,971)
                                               --------
     Long term portion                         $    984
                                               ========



<PAGE>


7.  Convertible Subordinated Debt

In connection with a merger in April 1996, the Company  assumed  $150,000 of 10%
convertible   subordinated  debt,   maturing  in  November  2000.  The  note  is
convertible  at any time into 46,685 shares of Common Stock at a price of $3.213
per share (the conversion price established at the time of the merger). Interest
is payable  quarterly.  The convertible debt is subordinated to the note payable
($174,823 at June 30, 2000) guaranteed by the Small Business Administration.

8.  Revolving Credit Facilities

On August 9, 2000,  the  Company  entered  into a  $2,000,000  revolving  credit
facility  ("new credit  facility")  with a  commercial  bank,  which  expires on
October 31, 2001.  This new credit  facility  replaced the $1,500,000  revolving
credit  facility  ("prior credit  facility") that it previously had with another
commercial bank. The Company was not in compliance with certain covenants of the
prior  credit  facility at June 30,  2000.  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 June 30, 2000, the Company was in compliance
with each of those  covenants.  This credit facility was established to provide,
among  other  things,  additional  working  capital  to  support  the  Company's
anticipated  growth.  As  of  September  26,  2000,  the  Company  had  $400,000
outstanding under this credit facility.

The Company's United Kingdom operation has a $225,000  revolving credit facility
with a  commercial  bank.  Amounts  outstanding  under this credit  facility are
charged  interest at two and one-half percent above the bank's current base rate
and such interest is due monthly.  As of September 26, 2000, the Company did not
have any  outstanding  balance  under this  credit  facility,  which  expires on
September 30, 2001.

9.  Acquisition

On August 14,  1998,  the  Company  acquired  all of the  outstanding  shares of
Software  Partners  Publishing and Distribution  Ltd.  ("Software  Partners") in
exchange  for  150,000  shares  of  the  Company's   Common  Stock,   valued  at
approximately  $213,000,  which was the  estimated  fair value of the  Company's
Common  Stock on the  acquisition  date.  This  acquisition  was  accounted 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 Ltd. ("eGames Europe").

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  unaudited  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.



                    Unaudited Pro-Forma Financial Information

                                                                 Year Ended
                                                                  June 30,
                                                                    1999
                                                                ------------
Net sales                                                       $ 10,080,000
Net income                                                      $    354,000
Net income per diluted share                                    $       0.04



<PAGE>


10. Income Taxes

The provision for income taxes is comprised of the following  components for the
years ended June 30, 2000 and 1999:



                                                     2000           1999
                                                     ----           ----
Current
    Federal                                        $ 62,696     $   60,800
    State                                             7,859         85,151
    Foreign                                          10,195         33,773
                                                   --------     ----------
                                                     80,750        179,724

Deferred
    Federal                                        (273,085)    (1,623,400)
    State                                             6,486        (97,299)
                                                   --------     ----------
                                                   (266,599)    (1,720,699)

Valuation allowance                                 266,599      1,720,699
                                                   --------     ----------

Provision for income taxes                         $ 80,750     $  179,724
                                                   ========     ==========



The  reconciliation  between  the  statutory  federal  income  tax  rate and the
Company's  effective  rate for income tax  expense  for the years ended June 30,
2000 and 1999 is as follows:

                                                                  2000     1999
                                                                  ----     ----
Statutory federal income tax rate                                  34%      34%
Increase (decrease) in taxes resulting from:
  Non-deductible goodwill amortization and other permanent items    8        3
  Foreign taxes                                                     2       (7)
  Utilization of net operating loss carry-forwards and other      (20)      (2)
                                                                  ----     ----
Effective rate for income tax expense                              24%      28%
                                                                  ====     ====



The tax effect of temporary  differences that give rise to significant  portions
of the deferred tax assets and  deferred  tax  liabilities  at June 30, 2000 and
1999 is as follows:

                                                            2000        1999
                                                            ----        ----
     Deferred tax assets:
       Accrued expenses and other                       $   70,235   $  112,707
       Reserves for accounts receivable and inventory      308,340      204,442
       Depreciation                                         10,714        6,821
       Tax credits                                           9,152       10,003
       Net operating losses                              1,055,659    1,386,726
                                                        ----------   ----------
           Gross deferred tax assets                     1,454,100    1,720,699
       Less: Valuation allowance                        (1,454,100)  (1,720,699)
                                                        ----------   ----------
       Net deferred tax assets                               - 0 -        - 0 -

     Deferred tax liabilities:                               - 0 -        - 0 -
                                                        ----------   ----------

         Net deferred tax assets (liabilities)          $    - 0 -   $    - 0 -
                                                        ==========   ==========

<PAGE>

The  deferred tax asset is offset by a full  valuation  allowance as of June 30,
2000,  as management  currently  believes that the deferred tax asset may not be
realized.  The  valuation  allowance  for net deferred  tax assets  decreased by
approximately  $267,000  during  fiscal 2000.  The reduction was a result of net
changes in temporary  differences and the reversal of valuation  allowance based
on existing taxable income for fiscal 2000.

As of June 30, 2000, the Company had  approximately  $3,100,000 of net operating
loss carry-forwards ("NOL's") for federal income tax purposes (expiring in years
2011 through  2012),  available to offset future  federal  taxable  income.  The
Company also has alternative minimum tax credit  carry-forwards of approximately
$9,000 to reduce Federal income taxes, which have no expiration date.

Section 382 of the Internal Revenue Code of 1986 subjects the future utilization
of net  operating  losses to an annual  limitation  in the event of an ownership
change,  as defined.  Due to the  Company's  prior year equity  transactions,  a
portion of the net  operating  losses and tax credits of the Company are subject
to an annual  limitation  of  approximately  $1,314,000.  To the extent that any
single-year  limitation  is not  utilized to the full amount of the  limitation,
such unused amounts,  which approximated  $624,000 at June 30, 2000, are carried
over to subsequent  years until the earlier of its utilization or the expiration
of the relevant carry-forward period.

11. Common Stock

On June 30, 1995, the Company amended its articles of incorporation to authorize
the  issuance of  40,000,000  shares of Common  Stock,  without  par value,  and
10,000,000 shares of preferred stock, without par value.

On June 1, 1999, the Board of Directors adopted a Stockholders  Rights Plan (the
"Plan"). The Plan is intended to protect the interests of the Company's existing
stockholders'  in the event that the  Company is  confronted  with  coercive  or
unfair  takeover  tactics.  The Plan contains  provisions to safeguard  existing
stockholders'  in the event of an  unsolicited  offer to  acquire  the  Company,
whether through a gradual  accumulation of shares in the open market,  a partial
or  two-tiered  tender offer that does not treat all  stockholders  equally,  or
other abusive takeover tactics,  which the Company's Board of Directors believes
are not in the best interests of the Company's  stockholders.  These tactics can
unfairly  pressure  stockholders  and  deprive  them of the full  value of their
shares.

The Plan is not intended to prevent a takeover of the Company and will not do so
if the terms are favorable and fair to all stockholders.  The declaration of the
rights dividend (the "Rights") should not affect any prospective offer at a fair
price  to all  stockholders,  and  will not  interfere  with a  merger  or other
business combination transaction approved by the Company's Board of Directors.

The  issuance  of the Rights will not change the way in which  stockholders  can
currently trade the Company's shares.  The Rights were issued to stockholders of
record on June 21, 1999, and will expire on June 1, 2009. Initially,  the Rights
will not be exercisable,  certificates will not be sent to any stockholders, and
the Rights will automatically trade with the Common Stock.

The  Rights  will not be  exercisable  until ten days  after any person or group
becomes the beneficial owner of 15% or more of the Company's Common Stock, or if
any  person or group  commences  a tender or  exchange  offer  which  would,  if
consummated,  result in such person becoming the beneficial owner of 15% or more
of the Company's Common Stock. At that time, separate certificates  representing
the  Rights  will be  distributed,  and the  Rights  could  then  begin to trade
independently  from the  Company's  shares.  At no time will the Rights have any
voting power.

The Rights may be  redeemed  by the Company at $0.01 per Right prior to the time
any person or group has acquired 15% or more of the  Company's  shares or voting
power.  After  any  person or group has  acquired  15% or more of the  Company's
shares or voting  power,  the Rights may be redeemed only with the approval of a
majority of the Continuing Directors.  "Continuing Director" means any member of
the  Board of  Directors  who was a member  of the  Board on June 1, 1999 or any
person who is subsequently elected to the Board if such person is recommended or
approved by a majority of the Continuing Directors.

<PAGE>

If the Rights  become  exercisable,  a holder  will be  entitled to buy from the
Company one  one-hundredth  (1/100) of a share of a new Series A Preferred Stock
of the Company at a purchase  price of $35. If a person  acquires 15% or more of
the  Company's  Common  Stock,  each Right not owned by such person would become
exercisable for Common Stock of the Company (or, in certain circumstances, cash,
property or other  securities of the Company) having a market value equal to two
times the exercise price of the Right.

12. Stock Options and Warrants

Stock Option Plans:

On August 31,  1994 the Company  adopted  its 1994 Stock  Option Plan (the "1994
Plan") under which  options to purchase an  aggregate  of 132,000  shares of the
Company's  Common Stock were  granted to officers,  directors or employees at an
exercise  price of $2.00 and with an  expiration  date of August 31, 1999. As of
August 31, 1999,  99,000 of the options under the 1994 Plan had been  exercised,
at which time the remaining 33,000 options under the 1994 Plan expired. The 1994
Plan has been terminated and no additional options will be granted thereunder.

During  1995,  the Company  adopted,  amended and  restated its 1995 Amended and
Restated  Stock  Option Plan (the "1995  Plan").  At the  Company's  1997 Annual
Meeting of  Stockholders,  the shareholders of the Company approved an amendment
to increase the number of shares available for issuance under the 1995 Plan from
the 950,000  shares of Common Stock  approved  during the 1996 Annual Meeting of
Stockholders  to a total of 1,950,000  shares.  The 1995 Plan is administered by
the Board of Directors and provides for the grant of incentive stock options and
non-qualified stock options to employees and eligible  independent  contractors;
and  non-qualified  stock options to  non-employee  directors at prices not less
than the fair market value of a share of Common Stock on the date of grant.  The
1995  Plan  also  provides  for  automatic  grants of  options  to  non-employee
directors of the Company.  Each  non-employee  director will receive options for
10,000 shares of Common Stock upon  appointment or election to the board and, in
addition, each director receives options for 5,000 shares of Common Stock on the
first  trading day in January of each year that the  Company's  Common  Stock is
available for sale on the Nasdaq  SmallCap stock market system.  On December 14,
1998,  the Company  granted  options for 25,000  shares of Common  Stock to each
non-employee  director in lieu of the  automatic  annual option grants for 5,000
shares to each non-employee director pursuant to the 1995 Plan, which would have
been issued in January 1999.

The  expiration  of an option and the vesting  period will be  determined by the
Board of Directors  at the time of the grant,  but in no event will an option be
exercisable  after  10  years  from  the  date  of  grant,  or in  the  case  of
non-employee  directors,  after 5 years from the date of grant.  In most  cases,
upon termination of employment, vested options must be exercised by the optionee
within 3 months after the  termination  of the  optionee's  employment  with the
Company.

Information regarding the stock option plans is as follows:


                                          Number of      Weighted Average
                                           Options        Exercise Price
                                          ---------       --------------
     Balances, June 30, 1998              1,226,151          $ 2.08
       Granted                              549,400            2.00
       Canceled                             (63,819)           1.95
       Exercised                            (41,832)           1.99
                                          ---------          ------
     Balances, June 30, 1999              1,669,900          $ 2.06
                                          =========          ======
       Granted                              468,000            2.80
       Canceled                            (130,900)           1.97
       Exercised                           (115,000)           1.84
                                          ---------          ------
     Balances, June 30, 2000              1,892,000          $ 2.27
                                          =========          ======


At June 30, 2000,  1,074,382  options  outstanding  under its various Plans were
vested and 50,168  options were  available for issuance  under these plans.  The
following  summarizes  information about the Company's stock options outstanding
at June 30, 2000:


<PAGE>

<TABLE>
<CAPTION>
                                       Options Outstanding                         Options Exercisable
                           ----------------------------------------------       -------------------------

                                              Weighted Avg.      Weighted                        Weighted
                               Number           Remaining          Avg.             Number         Avg.
 Range of Exercise         Outstanding at    Contractual Life    Exercise       Exercisable at   Exercise
        Prices              June 30, 2000       (in years)         Price        June 30, 2000      Price
   ---------------          -------------       ----------         -----        -------------     ------
   <S>                        <C>                  <C>            <C>              <C>            <C>
   $1.063 - $2.000            1,067,500            2.34           $1.783             781,432      $1.856
   $2.130 - $4.094              824,500            3.89           $2.892             292,950      $2.744
   ---------------            ---------            ----           ------           ---------      ------
   $1.063 - $4.094            1,892,000            3.01           $2.266           1,074,382      $2.098
                              =========                                            =========
</TABLE>

The Company  applies APB 25 and related  interpretations  in accounting  for its
stock  option  plans.  Had  compensation  costs  for the  Company's  Plans  been
determined  under  Statement  No. 123, the  Company's  net income (loss) and net
income  (loss) per share  would have been  negatively  impacted by the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                          Years ended June 30,

                                                          2000            1999
                                                          ----            ----

<S>                                                    <C>           <C>
Net income (loss)                        As reported    $  252,581    $ 462,555
                                         Pro forma     ($  576,082)  ($ 280,761)

Net income (loss) per share - basic      As reported      $ 0.03        $ 0.05
                                         Pro forma       ($ 0.06)      ($ 0.03)

Net income (loss) per share - diluted    As reported      $ 0.03        $ 0.05
                                         Pro forma       ($ 0.06)      ($ 0.03)
</TABLE>

The per share  weighted-average  fair values of stock options granted during the
years  ended June 30, 2000 and 1999 were $2.03 and $1.47,  respectively,  on the
date of grant using the  Black-Scholes  option-pricing  model with the following
assumptions:


                                                Years ended June 30,

                                              2000                1999
                                              ----                ----
     Dividend Yield                               0%                0%
     Volatility Factor                       119.52%           119.85%
     Risk-Free Interest Rate           5.86% - 6.54%     4.41% - 5.35%
     Average Expected Option Life         3.00 Years        3.19 Years

On  December  14,  1998,  the Company  granted a total of 75,000  options to its
non-employee Board members.  Each non-employee  director received 25,000 options
at an exercise price of $1.656,  the fair value of the Company's Common Stock on
the date of grant.  These options vest over a three-year period and expire after
a period of five years.  These options were not issued  pursuant to any plan and
were issued in lieu of the  automatic  annual  option grants for 5,000 shares to
each  non-employee  director  pursuant  to the 1995 Plan,  which would have been
issued in  January  1999.  During  the year ended  June 30,  1999,  the  Company
received approximately $83,000 in net proceeds from the exercise of 41,832 stock
options with exercise prices ranging from $1.83 to $2.00.

During  the year ended June 30,  2000,  the  Company  received  $211,550  in net
proceeds from the exercise of 115,000 stock options with exercise prices ranging
from $1.50 to $2.00.  During the year ended June 30, 2000,  the Company  granted
468,000 options with exercise prices ranging from $1.06 to $3.56.

Common Stock Warrants:

In April 1995, the Company received $100,000 in connection with the private sale
of a warrant to acquire 220,662 shares of the Company's Common Stock at any time
on or before April 27, 2002 at an exercise price of $0.45 per share. The warrant
holder  was also  granted  certain  registration  rights  for the  Common  Stock
issuable upon exercise of the warrants, which shares have been registered by the
Company.  No value was  assigned  to these  warrants.  On October 18,  1995,  in
connection  with the Company's  initial  public  offering of Common  Stock,  the

<PAGE>

underwriter  was granted  155,000  warrants.  These warrants are  exercisable at
anytime on or before  October 13, 2002 at an exercise  price of $3.60 per share.
Registration  rights were granted for the Common Stock issuable upon exercise of
the underwriter's warrants, and such Common Stock shares have been registered by
the Company.  In addition,  425,000 warrants were issued to the former owners of
Applied Optical Media Corporation. These warrants are exercisable anytime before
October 16, 2002 at an exercise price of $0.50.

Information regarding the warrants is as follows:


                                                 Number of          Exercise
                                                 Warrants            Price
                                                 --------            -----
     Balances, June 30, 1998                      838,787        $0.50 - $6.00
       Warrants granted                             - 0 -                - 0 -
       Warrants canceled                            - 0 -                - 0 -
       Warrants exercised                        (270,308)        0.50 -  2.81
                                                 --------        -------------
     Balances, June 30, 1999                      568,479        $0.50 - $6.00
                                                 ========        =============
       Warrants granted                             - 0 -                - 0 -
       Warrants canceled                          (15,000)                3.60
       Warrants exercised                         (22,185)        0.50 -  2.81
                                                 --------        -------------
      Balances, June 30, 2000                     531,294        $0.50 - $6.00
                                                 ========        =============

During the year ended June 30,  1999,  the  Company  received  net  proceeds  of
$402,000 from the exercise of 270,308 warrants with exercise prices ranging from
$0.50 to $2.81.

During the year ended June 30,  2000,  the  Company  received  net  proceeds  of
$17,795 from the exercise of 22,185  warrants with exercise  prices ranging from
$0.50 to $2.81. Included in the 22,185 of exercised warrants were 6,000 warrants
that were exercised by a warrant holder using the "net  issuance"  method.  That
warrant holder  received 5,050 shares of the Company's  Common Stock after using
950 shares at $3.158,  that day's  current  market  price,  in exchange  for the
$3,000 in proceeds  that would have been due upon the  warrants  exercise if the
cash method had been used.

13. Commitments and Contingencies

Under various licensing agreements,  the Company is required to pay royalties on
the sales of certain products that incorporate licensed content. Royalty expense
under such  agreements,  which is recorded in cost of sales,  was  approximately
$1,042,000   and   $507,000  for  the  years  ended  June  30,  2000  and  1999,
respectively.

The Company has a retirement  plan  covering  substantially  all of its eligible
employees. The retirement plan is qualified in accordance with Section 401(k) of
the Internal  Revenue  Code.  Under the plan,  employees  may defer up to 15% of
their  pre-tax  salary,   but  not  more  than  statutory  limits.  The  Company
contributes  50% of each dollar  contributed  by a  participant.  The  Company's
matching  contributions  to the plan were $100,000 and $76,000  during the years
ended June 30, 2000 and 1999, respectively. The Company's matching contributions
vest in fifty percent increments over a two-year period.

14.  Related Party Transactions

On June 22, 1998,  the Company  accepted the  resignation of Joseph A. Falsetti,
the  Company's  Chairman  and  Chief  Executive  Officer.  As the  result of the
separation agreement and general release dated June 22, 1998 between the Company
and Mr. Falsetti, the Company expensed approximately $225,000 in severance costs
in the year ended June 30, 1998,  which was paid out over the next twelve months
during the year ended June 30, 1999.

15. Major Customers and Export Sales

During the year ended June 30, 2000, the Company had two major customers,  which
accounted for approximately 18% and 10% of net sales, respectively,  compared to
the year ended June 30,  1999,  when the Company had one major  customer,  which

<PAGE>

accounted for  approximately  65% of net sales.  During April 1999,  the Company
transitioned  its  previously  exclusive  distribution  agreement  with GT Value
Products  Corporation ("GT Value  Products"),  (a division of Infogrames,  Inc.)
covering  distribution of the Company's  products to retailers in North America,
to a non-exclusive  distribution  relationship.  Infogrames,  Inc.  (formerly GT
Interactive,  Inc.) is  currently  one of the largest  distributors  of consumer
entertainment software to mass merchants worldwide.  During the years ended June
30, 2000 and 1999,  Inforgrames,  Inc.  accounted for approximately 18% and 65%,
respectively, of the Company's net sales. The amount of export sales included in
net sales was  approximately  $2,811,000  and  $2,659,000  or 21% and 27% of the
Company's net sales for the years ended June 30, 2000 and 1999, respectively.

16. Operations by Reportable Segments and Geographic Area

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

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

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

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

Geographic  information  for the two years ended June 30, 2000 and 1999 is based
on  the  location  of  the  selling  entity.  Information  about  the  Company's
operations by segmented  geographic  locations for the years ended June 30, 2000
and 1999 is presented below.

<TABLE>
<CAPTION>
                                       North America      United Kingdom        Eliminations      Consolidated
                                       -------------      --------------        ------------      ------------
2000:
<S>                                     <C>                  <C>                <C>               <C>
Sales                                   $ 12,211,417         $ 2,302,587        ($  873,844)      $ 13,640,160
Operating Income                             296,774              48,524              - 0 -            345,298
Assets                                  $  6,782,956         $ 1,245,174        ($1,106,623)      $  6,921,507

1999:
Sales                                   $  8,490,642         $ 2,251,628        ($  719,965)      $ 10,022,305
Operating Income                             444,794             229,246              - 0 -            674,040
Assets                                  $  5,010,286         $   862,219        ($  481,739)      $  5,390,766

</TABLE>

17. 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:

                                                           Years Ended
                                                             June 30,
                                                     --------------------------
                                                        2000             1999
                                                        ----             ----
Net income                                           $ 253,000        $ 463,000
Other comprehensive loss:
   Foreign currency translation adjustment             (39,000)         (30,000)
                                                     ---------        ---------
Comprehensive income                                 $ 214,000        $ 433,000
                                                     =========        =========



<PAGE>


18. Subsequent Event

On  September  8,  2000,  the  Company  and  Hasbro  Interactive,   Inc.,  Atari
Interactive,  Inc.,  and Zao Elorg d/b/a Elorg  Corporation  (collectively,  the
"Plaintiffs")  entered into a settlement agreement with respect to the suit that
the Plaintiffs filed on February 9, 2000 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 alleged that certain of the Company's products
infringed  copyrights and trademarks  owned by the Plaintiffs,  and also alleged
that the  Company  had  engaged  in unfair  competition.  Under the terms of the
settlement,  the Company may continue to sell certain  games alleged to infringe
on Hasbro's copyrights through September 30, 2000, at which point these products
will be  discontinued.  The products that will be  discontinued on September 30,
2000  amounted to net sales of  $2,100,000  and  $2,000,000  for fiscal 2000 and
1999, respectively, or 15% and 20% of net sales for those same fiscal years.

The  following  represents  the  total  cost  to the  Company  relating  to this
litigation  that is reflected in the Statement of Operations  for the year ended
June 30, 2000.

                                                                    Year Ended
Description of cost relating to this litigation                    June 30, 2000
-----------------------------------------------                    -------------

Operating expense:
------------------
Legal fees                                                          $ 185,568
Settlement fee to plaintiffs                                          160,000
Consulting fees                                                        15,000
                                                                    ---------
Total operating expense                                               360,568

Cost of sales:
--------------
Provision for obsolescence                                             30,000
                                                                    ---------

Total cost relating to this litigation                              $ 390,568
                                                                    =========


Item 8.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

None.


<PAGE>


                                    PART III

Item 9.   Directors and Executive Officers of the Registrant

There is hereby incorporated herein by reference the information appearing under
the caption "Election of Directors",  under the caption  "Executive  Officers of
the Company",  and under the caption  "Compliance  with Securities  Laws" of the
Registrant's   definitive  Proxy  Statement  for  its  2000  Annual  Meeting  of
Stockholders to be filed with the Securities and Exchange Commission.

Item 10.  Executive Compensation

There is hereby incorporated herein by reference the information appearing under
the  caption  "Executive  Compensation"  and  under  the  caption  "Election  of
Directors" of the  Registrant's  definitive  Proxy Statement for its 2000 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

There is hereby incorporated herein by reference the information appearing under
the  caption  "Voting   Securities  and  Principal   Holders   Thereof"  of  the
Registrant's   definitive  Proxy  Statement  for  its  2000  Annual  Meeting  of
Stockholders to be filed with the Securities and Exchange Commission.

Item 12.  Certain Relationships and Related Transactions

There is hereby incorporated by reference herein the information appearing under
the  caption  "Certain  Transactions"  of  the  Registrant's   definitive  Proxy
Statement  for its 2000  Annual  Meeting  of  Stockholders  to be filed with the
Securities and Exchange Commission.


<PAGE>


                                     PART IV

Item 13.  Exhibits, List and Reports on Form 8-K

          The  following  is a list  of  exhibits  filed  as part of this
          annual  report on Form  10-KSB.  Where so  indicated,  exhibits
          which were previously filed are incorporated by reference.


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

 (1)    2.1   Form of Amended and Restated  Agreement  and Plan of Merger
              between and among  Applied  Optical Media  Corporation  and the
              Registrant ("AOMC Merger Agreement").

 (2)    2.2   Agreement and Plan of Reorganization dated April 4, 1996 by
              and  among  the  Registrant,   the  Registrant's   wholly-owned
              subsidiary and Virtual Reality Laboratories, Inc.

 (2)    2.3   Agreement  and Plan of Merger  dated  April 4, 1996 by and
              among the Registrant,  the Registrant's wholly-owned subsidiary
              and Virtual Reality Laboratories, Inc.

 (3)    2.4   Sale and Purchase  Agreement between the Registrant and the
              stockholders of Software  Partners  Publishing and Distribution
              Ltd. Dated August 14, 1998.

 (5)    3.1   Amended and Restated Articles of Incorporation of the Registrant.

 (6)  3.2.1   By-Laws of the Registrant.

 (7)    4.1   Promissory Note in the amount of $350,000 from Virtual Reality
              Laboratories, Inc. to Heller First Capital Corporation dated
              March 25, 1996; Commercial Security Agreement dated March 25, 1996
              between Virtual Reality Laboratories, Inc. and Heller First
              Capital Corporation; and U.S. Small Business Administration
              Guaranty dated March 25, 1996.

 (4)    4.2   Rights Agreement, dated as of June 1, 1999, between the Registrant
              and StockTrans, Inc.

 (5)   10.1   Form of Redeemable Warrant for the Purchase of the Registrant's
              Common Shares (Exhibit A to AOMC Merger Agreement).

 (5)   10.2   Form of Underwriter's Warrant Agreement.

 (5)   10.3   1994 Stock Option Plan.

 (3)   10.4   Amended and Restated 1995 Stock Option Plan.

 (8)   10.5   Form of Purchase Agreement for the Class Two Convertible Preferred
              Stock (the "Class Two Preferred") dated as of November 15, 1996.

 (8)   10.6   Form of Warrant Agreement for the Warrants (the "Warrants") issued
              to the holders of the Class Two Preferred dated as of
              November 15, 1996.

 (8)   10.7   Form of Registration Rights Agreement for the Common Stock
              underlying the Class Two Preferred and the Warrants dated as of
              November 15, 1996.

 (8)   10.8   Form of Agreement  amending certain terms of the Class Two
              Preferred Certificate of Designation, Warrants and Registration
              Rights Agreement dated as of November 15, 1996.

 (9)   10.9   Purchase Agreement dated January 30, 1997 between the Registrant
              and Odyssey Capital Group, L.P.


<PAGE>




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


 (9)  10.10   Agreement dated January 30, 1997 between the Registrant and
              Odyssey Capital Group, L.P.

 (9)  10.11   Registration Rights Agreement dated January 30, 1997 between the
              Registrant and Odyssey Capital Group, L.P.

(10)  10.12   Form of Securities Purchase Agreement for the Class Three
              Convertible Preferred Stock (the "Class Three Preferred").

(10)  10.13   Form of Warrant Agreement for the Warrants (the "Class Three
              Warrants") issued to the holders of the Class Three Preferred.

(10)  10.14   Form of Registration Rights Agreement for the Common Stock
              underlying the Class Three Preferred and the Class Three Warrants.

(11)  10.15   Warrant  Agreement  dated  January  30,  1997  by  and  between
              Registrant and PJM Trading Company, Inc.

 (3)  10.16   Separation Agreement and General Release dated June 22, 1998
              between the Registrant and Joseph A. Falsetti.

(12)  10.17   Loan Agreement dated August 9, 2000 by and between Summit Bank
              and the Registrant.

(12)  10.18   Security Agreement dated August 9, 2000 by and between Summit Bank
              and the Registrant.

(12)  10.19   $2,000,000 Secured Line of Credit Note.

      10.20   Stipulation and Consent Judgement by and between plaintiffs Hasbro
              Interactive, Inc., Atari Interactive, Inc., ZAO Elorg, d/b/a Elorg
              Corporation and defendants MVP Software Inc., Webfoot
              Technologies, Inc. and the Registrant, dated August 16, 2000.

      10.21   Description of Registrant's Fiscal 2000 Employee Incentive
              Compensation Plan

       21.1   Subsidiaries.

       23.1   Consent of KPMG LLP.

(13)   24.1   Power of Attorney.

       27.1   Financial Data Schedule.
---------------------------------------

   (1)     Incorporated  by  reference  herein  from  Amendment  No.  3  of  the
           Registrant's  Form SB-2 as filed  with the  Securities  and  Exchange
           Commission on October 4, 1995.
   (2)     Incorporated by reference  herein from the  Registrant's  Form 8-K as
           filed with the Securities and Exchange Commission on April 19, 1996.
   (3)     Incorporated  herein by reference from the  Registrant's  Form 10-KSB
           for the year ended June 30,  1998 as filed  with the  Securities  and
           Exchange Commission on September 10, 1998.
   (4)     Incorporated by reference  herein from the  Registrant's  Form 8-K as
           filed with the Securities and Exchange Commission on June 10, 1999.
   (5)     Incorporated by reference herein from the  Registrant's  Form SB-2 as
           filed with the Securities and Exchange Commission on July 28, 1995.
   (6)     Incorporated by reference  herein from the  Registrant's  Form 10-QSB
           for the quarter ended September 30, 1998 as filed with the Securities
           and Exchange Commission on November 16, 1998.

<PAGE>

   (7)     Incorporated by reference  herein from the  Registrant's  Form 10-QSB
           for the quarter ended March 31, 1996 as filed with the Securities and
           Exchange Commission on May 14, 1996.
   (8)     Incorporated by reference  herein from the  Registrant's  Form 8-K as
           filed with the  Securities  and Exchange  Commission  on November 27,
           1996.
   (9)     Incorporated by reference  herein from the  Registrant's  Form 8-K as
           filed with the  Securities  and  Exchange  Commission  on February 4,
           1997.
  (10)     Incorporated by reference  herein from the  Registrant's  Form 8-K as
           filed with the Securities and Exchange Commission on April 9, 1997.
  (11)     Incorporated  herein by reference from the  Registrant's  Form 10-KSB
           for the year ended June 30,  1997 as filed  with the  Securities  and
           Exchange Commission on September 29, 1997.
  (12)     Incorporated by reference  herein from the  Registrant's  Form 8-K as
           filed with the Securities and Exchange Commission on August 17, 2000.
  (13)     See signature page.


Reports on Form 8-K

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

On  August17,  2000,  the Company  filed a report on Form 8-K  regarding a press
release  announcing that it had entered into an agreement with Summit Bank for a
$2 million  revolving  credit  facility  that  replaces an existing $1.5 million
revolving credit facility with another commercial bank.

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






<PAGE>


                                   SIGNATURES


         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

eGames, Inc.

By:  /s/ Gerald W. Klein
---  -------------------
     Gerald W. Klein,
     President and Chief Executive Officer

Date: September 28, 2000

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

Date: September 28, 2000                  /s/  Gerald W. Klein
      ------------------                  --------------------
                                          Gerald W. Klein,
                                          President and Chief Executive Officer

Date: September 28, 2000                  /s/ Thomas W. Murphy
      ------------------                  --------------------
                                          Thomas W. Murphy,
                                          Chief Financial Officer and
                                          Chief Accounting Officer


         Each person in so signing also makes,  constitutes  and appoints Thomas
D. Parente,  Chairman of the Board of Directors,  and Gerald W. Klein, President
and Chief Executive  Officer,  and each of them  severally,  his true and lawful
attorney-in-fact,  in his name, place and stead to execute and cause to be filed
with the  Securities  and  Exchange  Commission  any or all  amendments  to this
report.


Date: September 28, 2000                   /s/  Thomas D. Parente
      ------------------                   ----------------------
                                           Thomas D. Parente
                                           Chairman of the Board of Directors

Date: September 28, 2000                   /s/  Robert M. Aiken, Jr.
      ------------------                   -------------------------
                                           Robert M. Aiken, Jr.
                                           Director

Date: September 28, 2000                   /s/  Lambert C. Thom
      ------------------                   --------------------
                                           Lambert C. Thom
                                           Director