Entertainment Games, Inc. – ‘10KSB’ for 6/30/01

On:  Friday, 1/25/02   ·   For:  6/30/01   ·   Accession #:  948703-2-1   ·   File #:  0-27102

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Egames, Inc. Form 10KSB 06/30/01                      60    383K 
 2: EX-23       Consent of Independent Auditors                        1      5K 

10KSB   —   Egames, Inc. Form 10KSB 06/30/01
Document Table of Contents

10KSB
1st Page of 60
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
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, 2001

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

Commission File Number 0-27102

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

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

2000 Cabot Boulevard, 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 ( ) No (X)                               

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:  $7,172,000            

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: $1,047,000 as of December 31, 2001.     

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: 9,989,337 shares of Common Stock, no 
par value per share, as of January 23, 2002.                                    

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

 DOCUMENTS INCORPORATED BY REFERENCE
None

10KSB
2nd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 2nd
eGames, Inc.
Form 10-KSB 
 For the Fiscal Year Ended June 30, 2001

 INDEX

                                                                        Page
PART I

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

Item  2.      Properties..............................................     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......................     17

Item  7.      Financial Statements....................................     29   

PART III

Item  9.      Directors and Executive Officers of the Registrant......     51   

Item 10.      Executive Compensation..................................     54   

Item 11.      Security Ownership of Certain Beneficial Owners and               
           Management..............................................     56

 PART IV

Item 13.      Exhibits, List and Reports on Form 8-K..................     58   

Index of Exhibits.....................................................     58   
Signatures............................................................     60   

10KSB
3rd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 3rd
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 9
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 a small number of personal  productivity
products  for sale.  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").  On May 11, 2001 the Company sold
eGames Europe to Greenstreet Software Limited, a United  Kingdom-based  software
publisher and distributor.                                                      

The Company  believes that 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),  Galaxy of Home Office Help(TM) (the "eGames Series") and Outerbound
Games(TM), in order to generate customer loyalty, encourage repeat purchases and
differentiate  the eGames Series and Outerbound  Games products to retailers and
consumers. The Company targets the market of home personal computer ("PC") users
who seek full-featured, value-priced and easy-to-use entertainment software. All
eGames Series titles are Family Friendly(TM),  easy-to-use,  and are rated E for
Everyone by the ESRB  (Entertainment  Software Ratings Board),  which means they
are non-violent and appropriate for 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 eGames Series products  generally
sell at retail for under  $15.00,  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  $20.00 at retail.  The  Company's  Outerbound  Games are
intended  to sell at retail from $9.99 to $14.99.  The balance of the  Company's
software titles,  including its Galaxy of Games collections,  are typically sold
in jewel case packaging and sell at retail for $9.99.                           

INDUSTRY BACKGROUND                                                             

The worldwide consumer  entertainment software market is estimated to exceed $37
billion in revenues by 2003  compared  to an  estimated  $16 billion in revenues
during  2000.  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.                             

Approximately 60% of all Americans,  or about 145 million people,  say they play
computer or video games.  The 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

10KSB
4th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 4th
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  an  industry  trend  toward  the  consolidation  of  entertainment  software
companies and the  diversification  of products  offered by such companies.  The
trend in industry  consolidation  is expected  to continue  for the  foreseeable
future.                                                                         

BUSINESS STRATEGY                                                               

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 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 such as the
Company's new  Outerbound  Games brand;  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 website.               

The eGames Business  Model.  The dominant  element of the Company's  strategy is
bringing familiar, fun, Family Friendly games to PC users of all ages and levels
of experience at affordable prices.  Therefore,  the Company's business model is
primarily  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.  That has been the case in
North  America  since 1996,  according  to NPD Intelect  (formerly PC Data),  an
industry market data firm. The business model the Company has 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,  a standard
user-friendly  interface,  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.                                                                 

Develop Products That Are Easy To Use. 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
also an important  element of the Company's  strategy.  The  Company's  flexible
distribution strategy enables retailers to buy eGames products directly from the
Company or from a  distributor  that may  already  be  effectively  serving  the
retailer's  software  needs.  The Company's  challenge is to make every retailer
aware of the eGames  business  proposition  and to make sure they have access to
the Company's products in the manner best suited or matched to their operations,
as long as this access is profitable to the Company. Due to the additional costs
associated with servicing retail customers directly, the Company intends to seek

10KSB
5th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 5th
either  minimum  order  requirements  for  direct-to-store  shipments  or  price
increases  to  cover  the  additional  costs  associated  with   direct-to-store
shipments.  The  Company's  goal  is to  make  its  products  available  to more
consumers  in the  retail  stores  that  they  shop  most  frequently  or on the
Internet.                                                                       

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 product  sell-through  results at retail stores,  which is one of the
Company's long-term goals.                                                      

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 an
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  websites,   www.egames.com  and   www.outerboundgames.com,   are
comprehensive  websites where visitors can: try out great demos;  play fun games
for free;  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'  websites;  or
access technical support.  The Company seeks to maintain its websites as leading
edge  websites in the services and  information  that are presented to visitors.
While the Company strives for visually appealing websites,  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 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 since marketplace
data forecasts that consumers will,  over time,  purchase more and more of their
software on the Internet.                                                       

Creating New Revenue Streams.  Another  objective is to combine the features and
competitive  advantages  of the eGames  browser and the eGames  game  content to
create a product  offering  that  could  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.         

MARKETING                                                                       

The Company's  marketing  efforts include:  participating in retail trade shows;
developing the Company's websites, (www.egames.com and www.outerboundgames.com);
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

10KSB
6th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 6th
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  design artists 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
relations,  in-store  advertising,   catalog  mailings  and  advertisements  are
designed in advance of product availability.                                    

Sales and Distribution                                                          

North American Sales and Distribution.  The Company sells its products both on a
direct basis to major computer and software retailing organizations, mass market
retailers,  consumer  electronic  stores,  discount  warehouses  and mail  order
companies,  as well as through national software  distributors.  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 Walgreen Company,  Albertsons, 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.                              

While direct sales to retailers  comprised  approximately  54% of the  Company's
business  in fiscal  2001,  the  Company  expects  to sell the  majority  of its
products through wholesale  distributors during fiscal 2002, such as Infogrames,
Inc. (formerly GT Value Products),  United American Video and Triad Distributors
Inc., due to the costs associated with EDI  direct-to-store  shipments and other
costs associated with direct-to-store shipments.  During the year ended June 30,
2001, the Company had three major customers (Walgreen Company,  Infogrames, Inc.
and Rite Aid Corporation), which accounted for approximately 20%, 17% and 10% of
net sales,  respectively,  compared  to the year ended June 30,  2000,  when the
Company had two major  customers  (Infogrames,  Inc.  and Navarre  Corporation),
which accounted for approximately 22% and 13% of net sales,  respectively.  (See
"Dependence  on  Distributors  and  Retailers"  and "A  Significant  Part of the
Company's Sales Come From a Limited Number of Customers",  under "Risk Factors,"
page 11).  Internet sales  accounted for  approximately  2% of the Company's net
sales in fiscal 2001.                                                           

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  publishes  or licenses  the  publishing  of localized
products in French, German, Italian, Spanish and Portuguese.                    

Distribution  Procedures.  The  Company's  product  line is  focused  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 a  distributor's  sales  personnel in order to maximize the sales potential
with specific 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.                                   

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

10KSB
7th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 7th
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 product  returns by  consumers.  Reserves for product
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 product returns
experienced by the Company will not exceed the established reserves. The Company
typically accepts product 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.  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
much 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., Hasbro  Interactive (a subsidiary of Infogrames,
Inc.), Mattel Media, Cosmi, Take-Two Interactive,  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 is likely to cause continued  retail price erosion  particularly
in promotional  campaigns,  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 console  games,  the  Internet,  cable modem and DSL, may
reduce  demand for the  Company's  existing  PC-based  products.  Intense  price
competition,  reduced demand, or increased distribution channel costs 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 "The Consumer Entertainment Software Market
is Highly  Competitive and Changes Rapidly",  and "Rapid  Technological  Change;
Product Development" under "Risk Factors" beginning on page 12.)                

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 help 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 procures
products that the Company  expects will meet these criteria while  complementing
and supporting the Company's  branding  strategy.  The Company has also acquired
products through the acquisition of other software  companies or the acquisition
or licensing of software  products or  technologies  and may continue to acquire
products in these ways in the future.                                           

10KSB
8th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 8th
The Company's  Director 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 profit margin requirements at the intended price points.              

The Director of Product Development executes the project with a development team
that  typically  includes  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  nominal  one-time  customization  fees  reflected in the Company's
operating expenses,  and through royalty fees reflected in the Company's cost of
sales based on the Company's net sales of the licensed products.                

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  several days or weeks 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's information management system handles
order 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 same third party  contractors

10KSB
9th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 9th
ship most of the Company's products direct from their warehousing and production
facilities to the Company's 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 the date this Form 10-KSB was filed,  the Company had 17  full-time  and 2
part-time  employees,  of which 5 were  employed in software  development,  5 in
sales,  marketing  and  customer  support,  and  9 in  operations,  finance  and
administration.  In  addition,  at any  point in  time,  the  Company  regularly
utilizes approximately 15 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.  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 rate of return of the Company's products from its customers;  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  27 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.                                                             

10KSB
10th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 10th
Risk Factors                                                                    
------------                                                                    

The  Company  Sustained  Significant  Losses  During  Fiscal  2001.  The Company
commenced  operations in July 1992. The Company  experienced  significant losses
from  inception  through the end of fiscal 1997.  Fiscal year 1998 was the first
year  that the  Company  earned  a  profit.  The  Company  earned  approximately
$253,000,  $463,000 and $1,253,000 in fiscal 2000, 1999 and 1998,  respectively,
and in fiscal 2001 the Company sustained a net loss of approximately $5,933,000.
The  accumulated  deficit  for the  Company at June 30,  2001 was  approximately
$11,949,000.  Prior  to  fiscal  1998,  the  Company's  operations  were  funded
primarily  through proceeds from the Company's initial public offering of Common
Stock in October  1995 and through the sale in private  offerings  of  preferred
stock and Common Stock  warrants in November 1996 and in January and April 1997.
Subsequently,  the Company has funded its activities  mainly through  operations
and bank  borrowings.  Given  current  market  conditions  in the  entertainment
software  industry  and the  economy in  general,  and the  Company's  financial
performance  in fiscal 2001,  there can be no assurance that the Company will be
able to return to profitability  in fiscal 2002. The Company's  operations today
continue to be subject to all of the risks  inherent in the operation of a small
business which has liquidity problems in a highly competitive industry dominated
by larger competitors, 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  return  to
profitability in the development,  marketing and distribution of its current and
future software products.                                                       

The Company May Not Be Able to Maintain Liquidity. On July 23, 2001, the Company
was notified by its  commercial  lender,  Fleet Bank,  that due to the Company's
default of the financial  covenants  under its $2,000,000  credit facility as of
June 30, 2001, and due to material  adverse  changes in the Company's  financial
condition,  the bank had determined that it would no longer continue to fund the
Company's credit facility.  Subsequently, the Company worked with Fleet Bank and
its advisors on an analysis of Fleet Bank's  collateral  position,  management's
restructuring  and cost  reduction  plans,  and the  results  of an  independent
business assessment of the Company and its business plan. These actions provided
the basis for a turnaround plan that was presented to Fleet Bank  culminating in
an agreement  providing for an amortizing term loan of the existing balance owed
to Fleet Bank.                                                                  

On November 2, 2001, the Company and Fleet Bank entered into an agreement to pay
off the  outstanding  balance of $1,400,000 owed to Fleet Bank over a twenty-two
month period.  The agreement also provides that,  despite the Company's defaults
under the loan  documents,  which had previously  provided the Company with a $2
million  secured  line of  credit,  Fleet Bank will not  enforce  its rights and
remedies under those loan documents as long as the Company remains in compliance
with the terms of the agreement.  The Company's  shareholders would face a total
loss of their  investment if the Company were to default under the agreement and
Fleet  Bank  enforced  its  right to  liquidate  the  Company.  The terms of the
agreement provide,  among other things,  that the remaining  outstanding balance
owed under the credit facility will be repaid in 22 monthly  installments,  with
interest at the prime rate plus three  percent.  Additionally,  the terms of the
agreement  require the Company to achieve  certain  earnings  benchmarks  and to
provide Fleet Bank with periodic  financial and cash flow  reporting.  This loan
has been  classified as a current  liability  ("bank debt"),  as it is uncertain
that the Company will be able to meet this  agreement's  covenants  through June
30, 2002. As part of the agreement,  the Company  issued  warrants to Fleet Bank
for the purchase of 750,000 shares of the Company's  Common Stock.  The warrants
are exercisable  until October 31, 2006 at an exercise price of $0.09 per share,
and a separate  registration  rights agreement  provides that the bank will have
demand  registration  rights  beginning on November 1, 2002.  As of December 31,
2001, the principal balance outstanding on this term loan was $1,240,000.       

Since the  Company  no longer has access to a credit  facility,  its  ability to
continue operations  requires the Company to generate cash from operations,  and
this may not be possible given the  approximately  $5,933,000 net loss sustained
by the Company in fiscal 2001.                                                  

The Company May Need 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  capital  in lieu of the  $2,000,000  credit
facility that is no longer available. If the Company is not able to achieve cash
flow from operations at a level sufficient to support its business,  the Company
may require additional funds to sustain its product  development,  marketing and
sales activities.  The degree to which the Company is indebted to its commercial

10KSB
11th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 11th
lender,  and the  first  lien  that  the bank  has  with  respect  to all of the
Company's  assets,  could  adversely  affect  the  Company's  ability  to obtain
additional  financing  and could make the Company  more  vulnerable  to industry
downturns and competitive pressures.  Additionally, the Company may only be able
to raise  needed  funds on terms that would  result in  significant  dilution or
otherwise be unfavorable to existing  shareholders.  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.                                                                        

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 would adversely affect
the Company's business, operating results and financial condition.              

A  Significant  Part of the  Company's  Sales  Come  From a  Limited  Number  of
Customers.  Sales  to  the  Company's  three  largest  customers  accounted  for
approximately  47% of the  Company's net sales for the year ended June 30, 2001,
or  20%,  17%  and  10%  respectively.   These  customers  may  terminate  their
relationship   with  the  Company  at  any  time.  The  loss  of  the  Company's
relationships  with  its  principal  customers  or a  decline  in  sales  to its
principal customers would harm the Company's operating results.                 

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.  These business failures may increase as
a result of recent economic  conditions in the United States.  The insolvency or
business  failure of any  significant  retailer or  distributor of the Company's
products  would  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.  The  failure  to pay an
outstanding  receivable by a significant  customer or  distributor  would have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.                                                            

Adverse  Effect of Product  Returns  and  Markdown  Allowances.  The  Company is
exposed to product returns and markdown allowances with respect to the Company's
customers.  The Company establishes allowances for future product returns at the
time of sale for its  traditional  software  retail  customers and  distributors
servicing  such  retailers,  based on  historical  return  rates  in the  retail
channels in which the Company's  products are sold, and the Company's  sales are
reported net of returns. The Company may also accept product returns in order to
maintain  its  relationships  with  retailers  and its  access  to  distribution
channels.  Actual  product  returns and  pricing  concessions  could  exceed the
Company's  anticipated  amounts,  which could  impact the  Company's  results of
operations.                                                                     

Customer Advance  Payments.  Payments  received  primarily from certain food and
drug retailers for products  shipped to such retailers  prior to the sale of the
Company's   products  to  the  end  customer  may  exceed  the  actual   product
sell-through  of  the  Company's  products  at  such  retailers.  The  Company's
management  believes  that  it  is  highly  likely  that  the  ultimate  product
sell-through  of the  Company's  products  will be  substantially  less than the
customer  advance payment  balances for these food and drug  retailers.  In such
event,  the Company  would owe these  retailers  such excess  amounts,  and such
obligation would likely result in a serious liquidity issue for the Company.    

10KSB
12th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 12th
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:                      

o   the size and rate of growth of the consumer entertainment software
market;                                                       
o   the demand for the Company's products, particularly value-priced, 
casual PC games;                                              
o   the level of product and price competition;                       
o   the level of product returns;                                     
o   seasonality of customer buying patterns;                          
o   the timing of new product introductions and product enhancements  
by the Company and its competitors;                           
o   the timing of orders from major customers;                        
o   delays in shipment of products;                                   
o   access to distribution channels;                                  
o   product defects and other quality problems;                       
o   product life cycles;                                              
o   levels of international royalty and licensing net revenues; and   
o   the ability of the Company to develop and market new products and 
control costs.                                                

Products  are  usually  shipped  within days  following  the receipt of customer
orders so the Company typically  operates with little or no backlog.  Therefore,
net sales in any quarter are usually  dependent  on orders  booked,  shipped and
received by the  Company's  customers  during that quarter for most  traditional
software customers and on actual product  sell-through to end consumers relating
to product shipments to food and drug retailers.                                

The consumer  entertainment  software  industry is highly  seasonal,  with sales
typically higher during the fourth and first calendar quarters (second and third
fiscal  quarters for the Company),  due primarily to increased  demand for games
during and immediately following the holiday buying season. 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.  

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.                  

Increased competition for quality third-party software content has compelled the
Company  to agree to make  advance  royalty  payments  and,  in some  cases,  to
guarantee minimum royalty payments to content licensors and game developers.  If
the products  subject to these advances and minimums do not generate  sufficient
sales  volumes to recover  these costs,  this could cause  material  harm to the
Company's business and financial results.                                       

Moreover,  the Company's  present or future  competitors  may be able to develop
products which are comparable or superior to those offered by the Company, offer
lower priced products or adapt more quickly than the Company to new technologies
or evolving  customer  requirements.  The Company's  competitors  also have more
financial  resources to spend on marketing  promotions and advertising  efforts.
Competition  is expected to intensify.  In order to be successful in the future,
the  Company  must  be  able  to  respond  to  technological  change,   customer

10KSB
13th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 13th
requirements and competitors' current products and innovations.  There can be no
assurance that the Company will be able to compete  effectively in its market or
that future  competition will not have a material adverse effect on its business
operating results and financial condition.                                      

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

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

Low-Priced Stock Traded on the OTC Bulletin Board Are Subject to Numerous Risks.
On April 2, 2001,  the  Company's  common  stock was  de-listed  from the Nasdaq
SmallCap  Market as a result of the Company's  failure to maintain a minimum bid
price of $1.00 over a period of 30 consecutive  trading days, and its stock then
began trading on the OTC Bulletin Board under its existing  symbol EGAM. The OTC
Bulletin Board has  experienced  extreme price and trading volume  fluctuations.
These  fluctuations  have  often  been  unrelated  or  disproportionate  to  the
operating performance of individual  companies.  These broad market fluctuations
may materially  adversely  affect the Company's  stock price,  regardless of the
Company's  operating  results.  Additionally,  many  stocks  traded  on the  OTC
Bulletin Board, including the Company's,  are thinly traded, which could make it
difficult to sell the Company's stock.                                          

The  Company's  Stock May Not  Continue  to be  Eligible to be Traded on the OTC
Bulletin Board. In order to be traded on the OTC Bulletin Board,  the Company is
required to remain  current with its filing  requirements  under the  Securities
Exchange Act of 1934, as amended. As of the date of filing this Form 10-KSB, the
Company  was not  current in its filing  requirements  with the  Securities  and
Exchange Commission because it had not filed its Form 10-KSB for the fiscal year
ended June 30, 2001 in a timely manner,  nor had it timely filed its Form 10-QSB
for the quarter  ended  September  30,  2001.  The  Company's  failure to become
current in its SEC filings  will result in the  Company's  stock no longer being
eligible for trading on the OTC Bulletin Board.                                 

There are Trading  Restrictions on Low-Priced Stock.  Since the Company's Common
Stock has been  de-listed  from  trading  on the  Nasdaq  SmallCap  Market,  the
Company's  Common Stock trades at a price of less than $5.00 per share,  and the
Company has less than $2 million in net tangible  assets,  trading in the Common
Stock is now  subject to the  requirements  of Rule 15g-9  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

10KSB
14th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 14th
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 may affect the ability of  broker/dealers to sell the
Company's securities and may also affect the ability of purchasers to sell their
shares in the secondary market.  The Securities  Enforcement  Remedies and Penny
Stock  Reform Act of 1990 (the  "Penny  Stock  Rule") also  requires  additional
disclosure  in  connection  with any trades  involving a stock  defined as penny
stock (any non-Nasdaq  equity security that has a market price or exercise price
of less than $5.00 per share and less than $2 million  in net  tangible  assets,
subject to certain  exceptions).  Unless exempt, the rules require the delivery,
prior to any  transaction  involving a penny  stock,  of a  disclosure  schedule
prepared by the SEC  explaining  important  concepts  involving  the penny stock
market,   the  nature  of  such  market,   terms  used  in  such   market,   the
broker/dealer's  duties  to the  customer,  a  toll-free  telephone  number  for
inquiries  about the  broker/dealer's  disciplinary  history and the  customer's
rights and remedies in case of fraud or abuse in the sale.  Disclosure must also
be made about  commissions  payable to both the broker/dealer and the registered
representative,  and current  quotations for the  securities.  Finally,  monthly
statements must be sent disclosing  recent price information for the penny stock
held in the account and information on the limited market in penny stocks.      

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

Difficulty in Protecting the Company's Intellectual Property Rights. The Company
either  owns  or has  obtained  licenses  to the  rights  to  copyrights  on the
products, manuals, advertising and other materials owned by it. The Company also
holds  trademark  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.  These initiatives to
protect the Company's proprietary rights require the Company to utilize internal
resources as well as outside legal  counsel.  There can be no assurance that the
Company will have sufficient  resources to adequately  protect its  intellectual
property rights,  nor can there be any 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. If the
Company is not able to sufficiently  protect its  intellectual  property rights,
this  would  have a  material  adverse  effect  on the  Company's  business  and
operating results.                                                              

Substantial  Expenses and Resources Can Be Used to Defend  Infringement  Claims;
Effects of  Settlements  are  Uncertain.  The  Company  may from time to time be
notified that it is infringing on the  intellectual  property  rights of others.
Combinations of content acquired through past or future acquisitions and content
licensed  from third party  developers  will create new products and  technology
that may give rise to claims of  infringement.  In recent years, the Company has
incurred  significant defense costs and utilized internal resources in defending
trademark and  copyright  claims and  lawsuits.  There can 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.

10KSB
15th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 15th
Risks Inherent in the Consumer  Entertainment Software Business. The development
of multimedia  software  products,  which can combine text,  sound, high quality
graphics,  images and video,  is difficult  and time  consuming,  requiring  the
coordinated  participation  of various  technical  and  marketing  personnel and
outside  developers.  Some of the factors that could affect the Company's future
success include,  but are not limited to, the ability of the Company to generate
sufficient  funds  from  operations  or find other  financing  sources to obtain
quality product content; to overcome problems and delays in product development;
and to successfully  implement the Company's  sales,  distribution and marketing
strategy.  There  can  be  no  assurance  the  Company  will  be  successful  in
maintaining  and  expanding  a  sustainable  consumer   entertainment   software
business.                                                                       

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 highly  skilled  management,  technical,  marketing,  product
development  and  operational  personnel.  Competition  for  such  personnel  is
intense,  and there can be no assurance  that the Company will be  successful in
attracting and retaining such personnel.                                        

International Sales.  International net revenues,  inclusive of both product net
sales and royalty  revenues,  represented  6% of the Company's net sales for the
fiscal year ended June 30, 2001. The Company  anticipates that international net
revenues may account for  approximately 5% to 10% of the Company's net sales for
the year ending June 30, 2002.  For fiscal  2002,  the  Company's  international
business will be transacted  primarily  through  third-party  licensees and will
continue to be subject to risks that its  domestic  business is not,  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.                                                                          

Item 2.       Properties                                                        

As of  June  30,  2001,  the  Company  leased  11,000  square  feet  of  office,
development  and warehouse  space in Langhorne,  Pennsylvania.  During  December
2001,  the  Company  executed  a  sublease  agreement  with  a  third-party  for
approximately  6,000 square feet of its existing  operating  facility  space, in
order to improve the  Company's  cash flow and to more  effectively  realign its
resources.  In  conjunction  with the  Company's  sublease  of a portion  of its
existing  operating  facility,  the Company has extended its operating lease for
the remaining  5,000 square feet office space until  September 2004. The Company
believes that its current operating  facility will be adequate for the Company's
anticipated  needs through at least fiscal 2002.  Rent expense for the Company's
operating  facility  was $134,000 and $136,000 for the years ended June 30, 2001
and 2000, respectively.                                                         

10KSB
16th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 16th
 PART II

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

The  common  stock of the  Registrant  began  trading  on the  Over the  Counter
Bulletin Board ("OTCBB") under the symbol "EGAM" on April 2, 2001. Prior to that
date, the  Registrant's  common stock traded on the Nasdaq SmallCap Market under
the same symbol. The range of closing bid prices shown below for the period from
April 2, 2001 to June 30, 2001 are as reported  by the OTCBB.  These  quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not  necessarily  represent  actual  transactions.  The range of closing bid
prices  shown below for the period prior to April 2, 2001 are as reported by the
Nasdaq SmallCap Market.                                                         

The  following are the range of high and low bid prices for the years ended June
30, 2001 and 2000, as reported by the Nasdaq SmallCap Market and the OTCBB:     

                                 High          Low
                                 ----          ---
Fiscal Year Ended June 30, 2001                                   
-------------------------------                                   
First Quarter                     $ 1.875       $ 0.969 
Second Quarter                    $ 0.969       $ 0.188 
Third Quarter                     $ 0.375       $ 0.130 
Fourth Quarter                    $ 0.270       $ 0.100 
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 

On April 19,  2001,  the  Company  issued  239,362  shares of its Common  Stock,
without par value,  to Grant Heilman  Photography,  Inc.  ("GHP") as part of the
consideration given in exchange for a release from GHP of certain claims made by
GHP against the Company. These shares were issued pursuant to the exemption from
registration under Rule 506 of Regulation D promulgated under the Securities Act
of 1933,  as amended.  The facts  relied upon to make this  exemption  available
were: the Company  reasonably  believed that GHP was an accredited  investor (as
such  term  is  defined  in  Rule  501(a)  under   Regulation   D),  based  upon
representations made by GHP when the shares were issued; GHP was the only entity
to whom shares were issued; the Company complied with the limitations  contained
in Rule  502(c)  and (d);  and a Form D was filed with the U.S.  Securities  and
Exchange  Commission  within  15 days  of the  date of  issuance  reporting  the
issuance of shares to GHP.                                                      

On November 2, 2001, the Company and Fleet National Bank ("Fleet")  entered into
an agreement to pay off the outstanding  balance owed to Fleet over a twenty-two
month period.  In connection  with this  agreement,  the Company has also issued
warrants to Fleet for the  purchase of 750,000  shares of the  Company's  Common
Stock. The warrants are exercisable  until October 31, 2006 at an exercise price
of $0.09 per share, and a separate  registration  rights agreement provides that
the bank will have demand  registration  rights  beginning  on November 1, 2002.
These  warrants were issued  pursuant to the exemption from  registration  under
Rule 506 of  Regulation  D  promulgated  under the  Securities  Act of 1933,  as
amended.  The facts  relied  upon to make this  exemption  available  were:  the
Company reasonably  believed that Fleet was an accredited investor (as such term
is defined in Rule 501(a) under Regulation D), based upon  representations  made
by Fleet when the warrants  were  issued;  Fleet was the only entity to whom the
warrants were issued;  the Company  complied with the  limitations  contained in
Rule  502(c)  and (d);  and a Form D was  filed  with the  U.S.  Securities  and
Exchange  Commission  within  15 days  of the  date of  issuance  reporting  the
issuance of warrants to Fleet.                                                  

On December 26, 2001, the Company had  approximately 123 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.        

10KSB
17th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 17th
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 29.                    

During fiscal 2001, the Company sold its wholly-owned subsidiary, eGames Europe.
The amounts included in this Item and the Consolidated Financial Statements have
been reclassified to give effect to the discontinued operation.                 

Year Ended June 30, 2001 Compared to the Year Ended June 30, 2000               

Net Sales                                                                       
---------                                                                       

During fiscal 2001, the Company  experienced  product returns from food and drug
retailers that were significantly in excess of originally  anticipated  amounts.
Most of these food and drug  retailers  have not  historically  sold consumer PC
software  products.  Accordingly,  the Company  determined  it should  recognize
revenues  for fiscal 2001 and 2000  associated  with  shipments to food and drug
retailers based on the timing of the actual product sell-through activity to the
end consumer of the Company's  products at these retail locations and not at the
time the  Company  ships its  products  to these food and drug  retailers.  This
change is reflected in the consolidated financial statements included under Item
7. The Company's fiscal 2000 financial  statements were not materially  impacted
by this change, and therefore,  were not adjusted.  Revenues associated with the
Company's  product  shipments  to its  customers  that  traditionally  have sold
consumer PC software products (such as mass-merchant  retailers, or distributors
servicing  such  retailers)  are  recognized at the time title to these products
passes to these customers,  less a historically-based  provision for anticipated
product returns.                                                                

Net  sales  for the year  ended  June 30,  2001  were  approximately  $7,172,000
compared  to  approximately  $10,794,000  for the  year  ended  June  30,  2000,
representing  a decrease of  approximately  $3,622,000  or 34%.  The  $3,622,000
decrease in net sales was primarily attributable to a $4,880,000 decrease in net
sales to  retailers  that  traditionally  sell PC software,  or to  distributors
servicing such retailers,  and a $98,000  decrease in  international  net sales.
These decreases were partially  offset by a $1,131,000  increase in net sales to
food and drug retailers and a $225,000  increase in promotional  customer sales.
The  $4,880,000  decrease in net sales to  traditional  software  retailers  and
distributors in fiscal 2001 was comprised of a $4,405,000  decrease in net sales
made through third-party  distribution  customers and a $475,000 decrease in net
sales made on a direct shipment basis to mass-merchant retail customers.        

The  Company's  $4,880,000  decrease  in fiscal  2001 net  sales to  traditional
software  retailers and distributors was attributed,  in part, to the increasing
competition for retail  shelf-space from the Company's  larger  competitors that
have   continued  to  transition   historically   top  selling  and   previously
higher-priced  software titles to the value-priced software category,  where the
Company primarily competes at retail. The Company's larger competitors have used
their greater financial  resources to support the higher promotional spend rates
that are often  required  by  retailers  and have  therefore  continued  to gain
additional retail shelf space.  Additionally,  office  superstore  retailers and
distributors  reduced their  offering of certain  value-priced  software for the
casual gamer during  fiscal 2001,  which  negatively  impacted the Company's net
sales by  approximately  $2,919,000  during this period.  During fiscal 2001, it
became  increasingly  more  difficult  for the  Company to absorb the  increased
promotional spending  requirements of these retailers,  which caused the Company
to reduce its sales to the office superstore retailers. Also during fiscal 2001,
the Company's  mass-merchant  retail  customers  continued to reduce  in-channel
inventory of purchased  product,  which  negatively  impacted the  Company's net
sales.  The  Company's  net sales in  fiscal  2001  were  also  affected  by the
deterioration  of  the  financial   condition  of  certain   mass-market  retail
customers.                                                                      

During fiscal 2001, the Company's  $1,131,000  increase in net sales to food and
drug retailers compared to fiscal 2000 resulted primarily from increases in both
short-term  promotions  merchandised  in  corrugated  displays  and  longer-term
featured programs merchandised in more durable display fixtures such as rotating
display racks and in-line shelving display fixtures. Approximately $1,089,000 of
this  increase  was  attributable  to the  Company's  net  sales of  third-party

10KSB
18th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 18th
software titles within its Store-in-a-Store  ("SIAS") program, which the Company
had believed would increase the overall  success of the Company's  sales efforts
to food and drug  retailers  due to the  historical  success of these  titles in
traditional  software retail stores.  Although the Company recognized  increased
net sales as a result of this SIAS distribution  strategy,  the costs of display
racks,  the higher costs  associated  with  third-party  software titles and the
additional  shipping and return  processing costs strained the Company's working
capital  resources during fiscal 2001 and the SIAS program caused the Company to
recognize  lower  profitability.  As a result,  the Company  has  already  begun
reducing  and will  continue to reduce its sales  efforts  under this program in
fiscal  2002.  During  fiscal  2001,  the  Company's  net sales to food and drug
retailers  represented  approximately  39% of the Company's  net sales  overall,
compared to 15% of the Company's fiscal 2000 overall net sales.                 

During the year ended June 30,  2001,  the  Company  had three  major  customers
(Walgreen Company,  Infogrames, Inc. and Rite Aid Corporation),  which accounted
for approximately 20%, 17% and 10% of net sales,  respectively,  compared to the
year  ended  June 30,  2000,  in  which  the  Company  had two  major  customers
(Infogrames,  Inc. and Navarre  Corporation),  which accounted for approximately
22% and 13% of net sales, respectively.                                         

The Company's  international  net revenues,  inclusive of both product net sales
and royalty revenues,  represented 6% of the Company's net sales for fiscal 2001
compared  to 5% of  the  Company's  net  sales  for  fiscal  2000.  The  Company
anticipates that its international  net revenues may represent  approximately 5%
to  10%  of  the  Company's   net  sales  during  fiscal  2002.   The  Company's
international  net  revenues  for the years  ended  June 30,  2001 and 2000 were
$411,000 and $509,000,  respectively.  During the fourth quarter of fiscal 2001,
the Company sold its wholly-owned  distribution  operation located in the United
Kingdom.  By effecting this sale, the Company  transitioned  the majority of its
international  distribution  efforts to a licensing  revenue model,  whereby the
Company  no  longer  bears  the  working   capital  risk  of  supporting   these
multi-country  sales  efforts,  but will earn a royalty  fee based upon  product
sales covered in various licensing arrangements.                                

During  fiscal  2001,  the Company  recorded  $225,000 in  promotional  customer
revenues as a result of developing and manufacturing a customized  software game
title for a nationally  known  fast-food  restaurant.  This product  enabled the
consumer to both play games  included on the computer disk, as well as to use an
embedded  Internet  link on the  computer  disk to play  additional  games  on a
special  section of the  retailer's  Internet  website.  During fiscal 2002, the
Company will continue to explore other such potential promotional programs,  but
will only  allocate  resources  to such  programs  that  would  add  incremental
profitability to the Company's operating results.                               

During fiscal 2001, the Company  initiated  several programs to increase the net
sales 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. Revenues of the Company's
products  via the  Internet  for the  years  ended  June 30,  2001 and 2000 were
approximately  $171,000 and $177,000,  respectively,  or approximately 2% of the
Company's net sales during both years.  During fiscal 2002, the Company plans to
continue  evaluating  potential new  initiatives  to help increase the operating
profits from its sales efforts over the Internet.                               

As mentioned  above,  because the  Company's  product  returns  associated  with
shipments to food and drug  retailers  became  increasingly  unpredictable,  the
Company's revenues associated with product shipments to such retailers in fiscal
2001 and  fiscal  2000  have  been  recognized  based on the  timing of when the
Company's  products  actually  sold-through to the end consumer,  and not at the
time the  Company had  shipped  its  products to these food and drug  retailers.
Product returns experienced by the Company from food and drug retailers amounted
to $7,419,000  and  $2,073,000,  or 64% and 53%, of related  gross  shipments to
these  food and drug  retailers  for the  years  ended  June 30,  2001 and 2000,
respectively. The Company experienced this increase in product returns from food
and drug retailers  primarily because the majority of product shipments to these
retailers were for short-term  promotional programs for periods ranging from six
to eight weeks,  upon  termination  of which the unsold  products  could then be
returned to the Company.                                                        

The Company experienced product returns during the years ended June 30, 2001 and
2000 from its traditional  software  retail  customers  totaling  $2,040,000 and
$1,643,000,  or 33% and  15% of  related  gross  shipments,  respectively.  This

10KSB
19th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 19th
$397,000 increase in product returns from traditional  software retail customers
was primarily  associated with the Company's  office  superstore  customers that
returned  products in connection with their  transition  away from  value-priced
casual gaming software titles.                                                  

During  fiscal  2002,  the Company  intends to reduce its sales to food and drug
retailers  and to  office  superstore  retailers,  and to focus its  efforts  on
replacing these sales  reductions  with increased sales to traditional  software
retailers,  in order to reduce the Company's product return exposure and related
incremental costs experienced with the higher rate of product returns from these
retailers during fiscal 2001. Due to planned  reductions in product shipments to
food and drug  retailers  during  fiscal  2002,  the  Company  expects  that its
revenues  will either  remain flat or show a moderate  decrease when compared to
net sales for fiscal 2001.  The Company  hopes to improve its  profitability  in
fiscal 2002 by focusing on increasing product shipments to traditional  software
customers,  from  whom  the  Company  has  historically  been  able  to  achieve
profitable  business terms and who have historically sold consumer game software
successfully to the end consumer.                                               

The Company considers its accounting policy for net sales and product returns to
be a critical accounting policy.  This policy requires the Company's  management
to make estimates and assumptions that affect the reported amounts of net sales.
The Company is exposed to product  returns and markdown  allowances with respect
to the  Company's  customers.  The  Company  establishes  allowances  for future
product  returns  at the  time  of  sale  for its  traditional  software  retail
customers and distributors servicing such retailers,  based on historical return
rates in the retail  channels in which the Company's  products are sold, and the
Company's  sales are  reported net of  estimated  returns.  The Company may also
accept product returns in order to maintain its relationships with retailers and
its  access  to  distribution  channels.  Actual  product  returns  and  pricing
concessions could exceed the Company's  anticipated amounts,  which could impact
the Company's results of operations in the future.                              

Cost of Sales                                                                   
-------------                                                                   

Cost of sales for the year  ended  June 30,  2001 were  $6,007,000  compared  to
$4,279,000  for the year  ended  June 30,  2000,  representing  an  increase  of
$1,728,000 or 40%. This increase was caused primarily by increases in: provision
for inventory  obsolescence of $1,273,000,  processing costs for product returns
of $324,000,  freight  costs of  $206,000,  and other cost of sales of $244,000,
which increases were partially  offset by decreases in product costs of $297,000
and royalty costs of $22,000.                                                   

The  $1,273,000  increase in the provision for inventory  obsolescence  resulted
primarily  from the reduced  lifecycle that the Company's  products  experienced
within the food and drug channel due to the  short-term  nature of the recurring
promotional  events in which the Company's  products were placed  throughout the
fiscal year. During fiscal 2001, the Company experienced poorer than anticipated
sell-through  results of its  products by food and drug  retailers.  Much of the
product costs associated with the products  returned from these retailers had to
be scrapped due to a short product life cycle of this inventory  caused by these
retailers'  slowness in returning  these products to the Company.  Additionally,
the  Company  has had to scrap  display  racks  associated  with  the  Company's
previous  "Store-in-a-Store"  program  due  to  the  decision  not  to  continue
expanding  this  program  as a result of its  negative  impact on the  Company's
results of operations  during fiscal 2001. During fiscal 2002, the Company plans
to reduce the Company's net sales  represented by these  short-term  promotional
sales to food and drug  retailers and focus its efforts on increasing  net sales
to traditional  software  retailers,  where the product  lifecycle is longer and
product sell-through has historically been better.                              

The Company considers its accounting policy for the valuation of inventory to be
a critical accounting policy.  This policy requires the Company's  management to
make estimates and assumptions that affect the reported amounts of inventory and
cost of sales. The Company is exposed to product obsolescence due to the product
life cycles of its products.  From time to time, the Company or its  competitors
may introduce new products, capabilities or technologies that have the potential
to replace or shorten the life cycles of the Company's existing products,  which
could impact the Company's results of operations in the future.                 

The $324,000 increase in product return processing costs was caused primarily by
the higher product return rates that the Company  experienced from its shipments
to food and drug  retailers  during  fiscal  2001.  The  Company  incurs  return

10KSB
20th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 20th
processing costs when these food and drug retailers ship the Company's  products
back to the Company and when the Company's third-party warehouse vendors process
the returned products back into the Company's inventory. During fiscal 2002, the
Company  plans to reduce its sales to food and drug  retailers,  reduce the "per
store"  sell-in  quantities  within these  programs  and to  transition a larger
percentage  of food and drug sales to longer  term  "non-promotional"  programs.
Additionally,  the Company plans to transition  any remaining  sales activity to
these food and drug retailers to third-party  distributors  who will be licensed
by the Company to manufacture and distribute the Company's  products to food and
drug  retailers.   While  royalty  revenues   generated  by  these   third-party
distributors  who  manufacture  and  distribute  the Company's  products will be
reduced by the impact of product returns experienced by these distributors,  the
Company  will  have no  direct  involvement  in these  product  returns  and the
associated return processing and inventory obsolescence costs.                  

Freight costs  increased by $206,000  primarily  due to the Company's  increased
direct-to-store  fulfillment of electronic  data  interchange  ("EDI")  purchase
orders for some of its customers in fiscal 2001 and from the additional  freight
costs  associated  with the higher  amount of product  returns  that the Company
experienced  in fiscal 2001.  For fiscal 2002,  the Company  plans to reduce its
direct-to-store  fulfillment of EDI orders, or to require either price increases
or certain  minimum  order levels that would  better  support  these  additional
costs.                                                                          

The  $244,000  increase  in other  costs of sales  was  mainly  attributable  to
increased  warehousing,   handling,  labeling  and  packaging  costs  that  were
primarily  incurred in the  Company's  "Store-in-a-Store"  program with food and
drug retailers and its  direct-to-store  order fulfillment to certain customers.
Also,  during fiscal 2001, the Company  incurred  additional  warehousing  costs
associated  with product  returns and display rack storage that were  associated
with servicing food and drug retailers.                                         

The  $297,000  decrease  in product  costs was caused  primarily  by an $851,000
decrease  in product  costs of  Company-developed  products  resulting  from the
decrease in related net sales, which was partially offset by a $554,000 increase
in product costs related to the increase in net sales of  third-party  publisher
software  products that the Company  distributed  to food and drug  retailers as
part  of  its  "Store-in-a-Store"   program  during  fiscal  2001.  The  Company
experienced higher per-unit product costs due to the higher acquisition costs of
these  third-party  publisher  products  and  due to  the  Company's  sales  and
marketing  strategy  to develop  promotional  software  titles that cost more to
manufacture  than the  Company's  standard  products.  During  fiscal 2002,  the
Company  plans  on  primarily  selling  Company  developed  software  titles  or
third-party  software titles that have been manufactured by the Company pursuant
to licensing arrangements with third-party publishers,  which cost less than the
third-party  software  finished goods products that the Company purchased during
fiscal 2001. Product costs consist mainly of replicated  compact discs,  printed
materials, protective jewel cases and boxes for certain products.               

The  $22,000  decrease  in  royalty  costs  resulted  primarily  from a $129,000
decrease in royalty  costs  associated  with the decrease in sales of the titles
developed by the Company  that was  partially  offset by a $107,000  increase in
royalty costs incurred on the Company's increased sales of third-party publisher
titles that the Company  obtained the rights to  distribute  to certain food and
drug retailers during fiscal 2001.                                              

Gross Profit Margin                                                             
-------------------                                                             

The  Company's  gross  profit  margin for fiscal 2001  decreased to 16.2% of net
sales from  60.4% of net sales for fiscal  2000.  This 44.2%  decrease  in gross
profit margin was caused  primarily by increases,  as a percentage of net sales,
in the following:                                                               

- provision for inventory obsolescence of 18.3%;                      
- product cost of 8.6%;                                               
- processing costs for product returns of 5.2%;                       
- freight costs of 4.8%;                                              
- royalty costs of 3.4%; and                                          
- other cost of sales of 3.9%.                                        

10KSB
21st Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 21st
During fiscal 2001, the provision for inventory obsolescence increased by 18.3%,
as a percentage  of net sales,  primarily  due to the shorter  lifecycle for the
Company's  products within the food and drug retail channels,  combined with the
long length of time it took food and drug retailers to return such products.  In
certain  circumstances,  the Company had  developed or paid for software  titles
that the Company only had the right or  capability  to  distribute to these food
and drug  retailers.  When these  products  were returned from the food and drug
retailers,  the Company's  only viable option was to write-off the value of this
returned inventory.                                                             

During  fiscal 2001,  product cost  increased  by 8.6%,  as a percentage  of net
sales,  primarily due to the increase in net sales of higher costing third-party
publisher  titles  purchased  as finished  goods  inventory  and higher  costing
promotional  software  titles  sold to food  and drug  retailers  as part of the
Company's  Store-in-a-Store  strategy.  During fiscal 2002, the Company plans to
focus  on  distributing   Company  developed   software  titles  and  only  sell
third-party  software  titles  that the  Company  has the  right to  manufacture
pursuant to licensing  arrangements,  which product costs will be similar to the
product costs incurred on Company developed software titles.                    

During fiscal 2001, the processing costs for product returns  increased by 5.2%,
as a percentage of net sales.  This  increase was due to a larger  percentage of
the Company's sales being made within the food and drug retail channel, in which
the  Company   experienced   higher  product  return  rates  than   historically
experienced by the Company.  The Company incurs return processing costs from its
food and drug retailers when these retailers ship the Company's products back to
the Company and when the Company's  third-party  warehouse  vendor processes the
returned products back into the Company's inventory system.  During fiscal 2002,
the  Company  anticipates  reducing  its sales  efforts  to these  food and drug
retailers  and  transitioning  the  majority  of these  sales  to a  third-party
distributor  with  the  licensing  rights  to  manufacture  and  distribute  the
Company's products to these food and drug retailers.                            

During  fiscal 2001,  freight  costs  increased by 4.8%,  as a percentage of net
sales,  mainly due to the  increased  level of  direct-to-store  fulfillment  of
electronic data  interchange  ("EDI")  purchase orders in fiscal 2001 as well as
the increased  freight costs  incurred with the higher level of product  returns
noted above.  Additionally,  the Company  experienced higher freight costs, as a
percentage  of net  sales,  as a  result  of the  freight  costs  expensed  from
shipments  made to food and drug  retailers  on which  the  Company  had not yet
recognized  revenue due to the  product  not yet having sold  through to the end
consumer at retail. In fiscal 2002, the Company intends to seek a price increase
to help reduce the margin impact of fulfilling these direct-to-store  orders and
to reduce its sales to food and drug retail customers.                          

During  fiscal 2001,  royalty  costs  increased by 3.4%,  as a percentage of net
sales,  primarily as a result of the  increased  royalty  rates  required by the
Company's  third-party  developers to secure the distribution rights to recently
developed  software  titles.  The Company  anticipates that the costs associated
with  acquiring  additional  product  content  will  continue to increase as the
competition for high quality consumer PC game software continues to escalate.   

During  fiscal 2001,  other cost of sales  increased by 3.9%, as a percentage of
net sales, due to the increased  warehousing,  handling,  labeling and packaging
costs that were incurred as a result of the direct-to-store order fulfillment to
certain  customers  that the Company ships its products to on a  direct-to-store
basis.  Additionally,  during  fiscal  2001,  the  Company  incurred  additional
warehousing  costs associated with product returns and display rack storage that
were both associated with servicing its food and drug retail customers.         

Operating Expenses                                                              
------------------                                                              

Product  development  expenses  for the year ended June 30,  2001 were  $748,000
compared to $860,000 for the year ended June 30, 2000, a decrease of $112,000 or
13%. This decrease was caused by a $112,000 decrease in  employee-related  costs
associated  with staff  reductions  that were initiated as part of the Company's
efforts to address its significant  liquidity  issues,  discussed in more detail
below under "Liquidity and Capital Resources."                                  

Selling,  general and  administrative  expenses for the year ended June 30, 2001
were  $5,911,000  compared to  $5,156,000  for the year ended June 30, 2000,  an
increase of $755,000 or 15%.  This  $755,000  increase  was caused  primarily by
increases in: marketing  promotional  expenses of $504,000,  bad debt expense of

10KSB
22nd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 22nd
$385,000,  and accounting and auditing fees of $148,000,,  which  increases were
partially  offset by  decreases in public  corporation  expenses of $182,000 and
depreciation and amortization costs of $106,000.                                

The  $504,000  increase in  marketing  promotional  expenses  resulted  from the
Company's  expansion of its  Store-in-a-Store  distribution  strategy within the
food and drug retail channel in fiscal 2001,  combined with an increased  amount
of marketing  promotional  support required by the Company's  traditional retail
software and office superstore customers.  The Company had anticipated that this
$504,000  increase in marketing  promotional costs would help grow the Company's
net sales during  fiscal 2001,  but due to the  unsuccessful  results from these
various  sales  promotional  programs  throughout  fiscal  2001,  they  actually
resulted in a net sales reduction of $3,622,000 described above.                

The $385,000  increase in bad debt  expense was  primarily  attributable  to two
customers that filed for bankruptcy  protection during fiscal 2001, which at the
time  of  their  filing  had a  combined  payable  balance  to  the  Company  of
approximately   $308,000.  The  remaining  increase  in  bad  debt  expense  was
attributable  to a combination  of smaller  accounts that have shown a sustained
slowness in  payments,  possibly as a result of the  overall  economic  slowdown
currently being  experienced.  The $148,000  increase in accounting and auditing
fees resulted  primarily  from the  additional  audit work that was necessary to
complete the fiscal 2001 audit,  largely attributable to the Company's change in
its revenue  recognition  policy for product  shipments  to food and drug retail
customers.                                                                      

The $182,000 decrease in public corporation expense was related to transitioning
these  activities  and   responsibilities  to  internal  resources,   which  was
accomplished by the reallocation of existing employees. The $106,000 decrease in
depreciation and amortization  costs resulted primarily from the Company's older
assets becoming fully  depreciated.  Such assets have not been replaced in order
to conserve  cash and to focus the  Company's  limited  resources on  short-term
working capital improvement strategies.                                         

Legal  settlement  and  related  costs  for the year  ended  June 30,  2001 were
$188,000  compared to $361,000  for the year ended June 30,  2000, a decrease of
$173,000 or 48%. This $173,000  decrease in legal  settlement  and related costs
was  attributable  to the Company's  expenses  incurred in connection with legal
disputes during the years ended June 30, 2001 and 2000 for intellectual property
issues. For additional information,  see note 17, "Legal Settlements and Related
Costs," to the Consolidated Financial Statements in Item 7.                     

Interest Expense, Net                                                           
---------------------                                                           

Net  interest  expense for the year ended June 30, 2001 was $95,000  compared to
$12,000 for the year ended June 30, 2000,  an increase of $83,000.  The increase
was  primarily  due to the  increase in the average  outstanding  balance of the
Company's bank debt, which had previously consisted of a credit facility and has
subsequently been converted to a monthly amortizing term-loan.                  

Provision for (Benefit from) Income Taxes                                       
-----------------------------------------                                       

Benefit  from  income  taxes  for the year  ended  June 30,  2001 was  ($39,000)
compared to a provision  for income taxes of $69,000 for the year ended June 30,
2000, a decrease in the provision for income taxes of $108,000. This decrease in
the provision for income taxes was primarily due to the  $5,903,000  decrease in
the Company's income from continuing  operations  before income taxes for fiscal
2001, compared to fiscal 2000.                                                  

Income (Loss) from Continuing Operations                                        
----------------------------------------                                        

As a result of the various factors  discussed  above,  the Company  recognized a
($5,738,000)  loss from continuing  operations for the year ended June 30, 2001,
compared to income from continuing operations of $57,000 for the year ended June
30, 2000, a decrease of $5,795,000.                                             

10KSB
23rd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 23rd
Income (Loss) from Discontinued Operation                                       
-----------------------------------------                                       

The (loss) from discontinued operation for fiscal 2001 was ($196,000),  net of a
$52,000 income tax benefit,  compared to income from discontinued  operation for
fiscal 2000 of $196,000, net of $11,000 in income tax provision,  which resulted
in a $392,000  decrease in income from  discontinued  operation.  This  $392,000
decrease was caused primarily by a $454,000  decrease in this operation's  gross
profit and the $31,000 loss related to  recognition of the  accumulated  foreign
currency  translation  adjustment,  which  was  partially  offset  by a  $30,000
reduction in operating expenses and a $63,000 reduction in income tax provision.

Net Income (Loss)                                                               
-----------------                                                               

As a result of the factors  discussed  above,  the Company's net loss for fiscal
2001 was ($5,933,000) compared to net income of $253,000 for the year ended June
30, 2000.                                                                       

Weighted Average Common Shares                                                  
------------------------------                                                  

The weighted  average common shares  outstanding on a diluted basis decreased by
199,830 for the year ended June 30, 2001 to  9,797,183  from  9,997,013  for the
year ended June 30, 2000. This decrease resulted primarily from the exclusion of
common  stock  equivalents  ("CSE's) in the diluted  basis  calculation  for the
current  fiscal  year due to their  anti-dilutive  impact  caused by the current
year's net loss.  Additionally,  during the year  ended June 30,  2001,  239,362
shares of Common Stock, with a market valuation of approximately  $46,000,  were
issued in connection  with a settlement  agreement  relating to an  intellectual
property dispute.                                                               

Quarterly Restatement                                                           
---------------------                                                           

The Company is restating its interim  consolidated  financial statements for the
first three quarters of the year ended June 30, 2001 to address  certain revenue
recognition  issues. The Company previously  recognized revenue upon shipment of
its products to its customers and recorded an allowance for product returns. The
Company subsequently  determined that certain of its product sales provided that
title passed to the customer only upon receipt of the  Company's  product by the
customer. In addition, the Company has concluded,  based upon receipt of delayed
reporting of sell-through results from its food and drug retailers, that it does
not have the ability to make reliable estimates of product returns for shipments
to food and drug retailers in accordance with SFAS No. 48, "Revenue  Recognition
When the Right of Return  Exists," and the additional  guidance  provided in the
SEC's Staff  Accounting  Bulletin  No. 101,  "Revenue  Recognition  in Financial
Statements." The restatements  reflect the sale of the Company's products to its
food and drug retailers on a sell-through basis to the end consumer. The related
cost of sales and  certain  operating  costs have also been  restated to reflect
this revenue  recognition  policy.  The  consolidated  financial  statements and
related notes in Item 7 reflect all such restatements for the periods presented.

10KSB
24th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 24th
The impact of the restatement on the unaudited consolidated statement of        
operations for the first three quarters of the year ended June 30, 2001(1) is as
follows:                                                                        

                                                        [Enlarge/Download Table]

                                 Sept. 30,     Sept. 30,      Dec. 31,       Dec. 31,      Mar. 31,       Mar. 31, 
                                    2000         2000           2000           2000          2001           2001   
                                As Reported   As Restated   As Reported    As Restated   As Reported   As Restated 
                                  (2) (4)         (3)           (2)            (3)           (2)                   
                                -----------   -----------   ------------   -----------   -----------   ----------- 
                                                                                                                   
Net sales                       $ 3,333,382   $ 1,144,874    $ 3,099,533   $ 2,590,453   $ 2,513,459   $ 2,691,479 
Cost of sales                     1,609,314       751,004      1,772,120     1,413,188     1,569,995     1,721,775 
                                -----------   -----------   ------------   -----------   -----------   ----------- 
Gross profit                      1,724,068       393,870      1,327,413     1,177,265       943,464       969,704 

Operating expenses:                                                                                                
Product development                 181,147       181,147        176,325       176,325       194,973       194,973 
Selling, general and                                                                                               
administrative                    1,462,125     1,440,125      1,526,259     1,548,259     1,435,967     1,435,967 
                                -----------   -----------   ------------   -----------   -----------   ----------- 

Operating income (loss)              80,796    (1,227,402)      (375,171)     (547,319)     (687,476)     (661,236)

Interest expense, net                 7,353         7,353         23,370        23,370        33,376        33,376 
                                -----------   -----------    -----------   -----------   -----------   ----------- 

Income (loss) from continuing                                                                                      
operations before income taxes       73,443    (1,234,755)      (398,541)     (570,689)     (720,852)     (694,612)

Provision (benefit) for                                                                                            
income taxes                         27,846        27,846        (39,638)      (39,638)      (27,307)      (27,307)
                                -----------   -----------    -----------   -----------   -----------   ----------- 

Income (loss) from continuing                                                                                      
operations                           45,597    (1,262,601)      (358,903)     (531,051)     (693,545)     (667,305)

Income (loss) from                                                                                                 
discontinued operation, net                                                                                        
of income taxes                     (21,416)      (21,416)        89,072        89,072      (100,822)     (100,822)
                                -----------   -----------   -----------    -----------   -----------   ----------- 

Net income (loss)               $    24,181   ($1,284,017)  ($   269,831)  ($  441,979)  ($  794,367)  ($  768,127)
                                ===========   ===========   ============   ===========   ===========   =========== 

Net income (loss) per common                                                                                       
share - basic and diluted       $      0.00   ($     0.13)  ($      0.03)  ($     0.05)  ($     0.08)  ($     0.08)
                                ===========   ===========   ============   ===========   ===========   =========== 

Weighted Average Shares:                                                                                           

Basic                             9,749,975     9,749,975      9,749,975     9,749,975     9,749,975     9,749,975 

Diluted                           9,803,844     9,749,975      9,749,975     9,749,975     9,749,975     9,749,975 


  (1) The  Company's  management  is in the process of  determining  the
          impact of the restatement on the consolidated  statement of operations
          for each of the first three  quarters of the year ended June 30, 2000.
          As such,  amounts  for  comparative  prior  quarterly  periods are not
          currently available.  The Company's full-year fiscal 2000 consolidated
          financial statements were not materially impacted, and therefore, were
not adjusted.                                               
  (2) These amounts have been  reclassified to reflect the  discontinued
operation.                                                  

10KSB
25th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 25th
  (3) "As restated" amounts above reflect approximately  $234,000 in net
          sales  reclassified  from the quarter ended  September 30, 2000 to the
          quarter  ended  December  31,  2000  due to the  Company's  subsequent
          determination  that title did not pass for certain shipments until the
 Company's customers actually received the Company's products.
(4) These   amounts   have  been   reclassified   to   reflect   the
          reclassification  of  consumer  rebates,  from  selling,  general  and
administrative expenses to net sales.                       

Liquidity and Capital Resources                                                 

As of June 30, 2001, the Company had a cash balance of approximately $26,000 and
a working  capital  deficit of  approximately  $2,242,000.  The Company's  total
stockholders' deficit balance at June 30, 2001 was approximately $2,115,000.    

Cash used in operating  activities  was  approximately  $2,535,000  for the year
ended June 30, 2001 and cash provided by operating  activities was approximately
$37,000 for the year ended June 30,  2000.  The  $2,535,000  in net cash used in
operating  activities for fiscal 2001 resulted  primarily from the Company's net
loss of $5,933,000,  a $1,332,000 increase in inventory, and a $609,000 decrease
in accrued  expenses,  which cash uses were partially  offset by cash sources of
$2,752,000  in customer  advance  payments,  a $1,259,000  reduction in accounts
receivable  and a  $977,000  increase  in  accounts  payable.  Additional  items
impacting the  Company's  cash used in operating  activities  for the year ended
June 30, 2001 were $239,000 in  depreciation,  amortization  and other  non-cash
items and the $196,000 loss from its discontinued operation.                    

Net cash provided by investing  activities  for the year ended June 30, 2001 was
approximately  $107,000  compared  to  cash  used  in  investing  activities  of
approximately  $203,000  for the year ended June 30,  2000.  The $107,000 in net
cash provided by investing  activities  for fiscal 2001 resulted  primarily from
$177,000 in net proceeds from the sale of the Company's discontinued  operation,
which was partially  offset by furniture and equipment  purchases of $64,000 and
software rights and other assets purchases of $6,000.                           

Net cash provided by financing  activities  was  approximately  $806,000 for the
year ended June 30,  2001 and  $173,000  for the year ended June 30,  2000.  The
$806,000 in net cash provided by financing  activities  for fiscal 2001 resulted
primarily  from  $4,900,000 in borrowings  under the Company's  previous  credit
facility  and  $10,000  in  net  proceeds  from a note  receivable,  which  were
partially offset by repayments of:  $3,700,000 under the Company's former credit
facility,  $199,000  in  capital  lease  obligations,  $150,000  in  convertible
subordinated debt, and $55,000 in notes payable obligations.                    

Net cash provided by the  Company's  discontinued  operation  was  approximately
$519,000  for the year  ended June 30,  2001 and net cash used in the  Company's
discontinued  operation was  approximately  $179,000 for the year ended June 30,
2000.                                                                           

As  of  June  30,  2001,  the  Company  had  received  approximately  $3,485,000
($2,752,000  during  fiscal 2001 and  $733,000  during  fiscal 2000) in payments
primarily  from certain  food and drug  retailers  for products  shipped to such
retailers prior to the sale of such products to the end consumer. These payments
are recorded as customer advance payments in the Company's  Consolidated Balance
Sheet  until such time as the  products  are  actually  sold  through to the end
consumer.  After the  products are sold through to the end consumer the customer
advance  payment  amount is recorded  as revenue.  In the event that the Company
receives  customer  advance  payments that ultimately  exceed the actual product
sell-through  of the Company's  products to the end consumer at such  retailers,
the  Company  would owe these  retailers  such  excess  amounts.  The  Company's
management  believes  that  it  is  highly  likely  that  the  ultimate  product
sell-through  of the  Company's  products  will be  substantially  less than the
customer  advance payment  balances for these food and drug retailers.  If these
retailers request that the Company repay this liability,  it would likely result
in a serious liquidity issue for the Company.                                   

On August 9, 2000,  the  Company  entered  into a  $2,000,000  revolving  credit
facility  with Fleet Bank  (formerly  Summit  Bank).  This credit  facility  had
replaced a  $1,500,000  revolving  credit  facility  that the  Company  had with
another  commercial bank. The credit facility was established to provide,  among
other  things,  working  capital to support the  Company's  operations.  Amounts

10KSB
26th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 26th
outstanding  under this credit facility were charged interest at one-half of one
percent above the bank's current prime rate, with interest due monthly,  and was
secured by  substantially  all of the  Company's  assets.  The  credit  facility
required 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 credit
facility had a minimum  effective net worth  covenant that started at $3,100,000
at June 30, 2000 and increased by $150,000 quarterly to a $3,700,000 requirement
at June 30, 2001. As of June 30, 2001,  the Company was not in  compliance  with
those covenants.                                                                

On July 23, 2001,  Fleet Bank  notified  the Company  that due to the  Company's
default of the  financial  covenants  under its credit  facility  as of June 30,
2001, and material  adverse changes in the Company's  financial  condition,  the
bank would no longer continue to fund the Company's  $2,000,000 credit facility.
Subsequently, the Company worked with Fleet Bank and its advisors on an analysis
of  Fleet  Bank's  collateral  position,  management's  restructuring  and  cost
reduction  plans, and the results of an independent  business  assessment of the
Company and its business plan. These actions provided the basis for a turnaround
plan that was presented to Fleet Bank culminating in an agreement  providing for
an amortized term loan payout of the existing balance owed to Fleet Bank.       

On November 2, 2001, the Company and Fleet Bank entered into an agreement to pay
off the  outstanding  balance of $1,400,000 owed to Fleet Bank over a twenty-two
month period.  The agreement also provides that,  despite the Company's defaults
under the loan  documents,  which had  previously  provided  the Company  with a
$2,000,000  secured  line of credit,  Fleet Bank will not enforce its rights and
remedies under those loan documents as long as the Company remains in compliance
with the terms of the agreement.  The Company's  shareholders would face a total
loss of their  investment if the Company were to default under the agreement and
Fleet  Bank  enforced  its  right to  liquidate  the  Company.  The terms of the
agreement  include,  among other things, for the remaining  outstanding  balance
owed under the credit facility will be repaid in 22 monthly  installments,  with
interest at the prime rate plus three  percent.  Additionally,  the terms of the
agreement  require the Company to achieve  certain  earnings  benchmarks  and to
provide Fleet Bank with periodic  financial and cash flow  reporting.  This loan
has been  classified as a current  liability  ("bank debt"),  as it is uncertain
that the Company will be able to meet this  agreement's  covenants  through June
30, 2002. As part of the agreement,  the Company  issued  warrants to Fleet Bank
for the purchase of 750,000 shares of the Company's  Common Stock.  The warrants
are exercisable  until October 31, 2006 at an exercise price of $0.09 per share,
and a separate  registration  rights agreement  provides that the bank will have
demand  registration  rights  beginning on November 1, 2002.  As of December 31,
2001, the principal balance outstanding on this term loan was $1,240,000.       

Liquidity Initiatives, since June 30, 2001:                                     

As a result of the Company's poor  financial  condition that is reflected in the
consolidated  financial  statements  for the fiscal  year ended June 30, 2001 in
Item 7, the Company has implemented certain liquidity initiatives, subsequent to
June 30, 2001, in order to attempt to continue supporting its operations.       

The Company has, among other things:                                            

     o   Reduced its workforce to 17 full-time and two part-time employees, from
  45 employees at June 30, 2000. This action has helped reduce the
Company's cash consumption rate.                              

o   Entered into a forbearance agreement with its commercial lender   
       regarding the Company's defaults under its former credit facility and
         converted the outstanding balance under its former credit facility to a
     22 month amortizing term loan. If the Company fails to meet certain
    monthly covenants under this forbearance agreement, its commercial
lender could liquidate the Company's assets.                  

 o   Converted approximately $592,000 of trade accounts payable balances
    outstanding at June 30, 2001 to trade notes payable having monthly
   principal and interest payments ranging from six to 12 months and
     bearing interest at 6.75%. Payment terms for these vendors' ongoing
     services and products range from cash-in-advance to sixty-day terms
with established credit limits.                               

10KSB
27th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 27th
o   Negotiated a cash payment discount with its largest trade vendor  
  relating to the Company's past due balance in a transaction that
    resulted in a $100,000 discount of the Company's payable with this
       vendor. The Company made a lump-sum payment of approximately $433,000
    to this vendor during the first quarter of fiscal 2002 for payment
satisfaction of invoices totaling approximately $533,000.     

  o   During fiscal 2002, the Company is reducing its product shipments to
        certain food and drug retailers, which the Company has determined were
     based upon sales terms that were unprofitable to the Company during
    fiscal 2001, and the Company believes that such terms could not be
  modified in a manner that would be mutually satisfactory to both
parties.                                                      

o   During fiscal 2002, the Company is attempting to improve its      
profitability by focusing on increasing product shipments to  
         traditional software customers, which the Company has historically been
able to achieve profitable business terms with and who have   
  historically sold consumer game software successfully to the end
consumer.                                                     

Liquidity Risk:                                                                 

Since the Company no longer has a credit facility available to it, the Company's
ability to achieve and maintain positive cash flow is essential to the Company's
survival.  The  Company's  ability to do this 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,  many of which are beyond the  Company's
control.  In the  future,  the  Company  expects  its cash and  working  capital
requirements to be affected by each of these factors.  The Company believes that
its projected  cash and working  capital  balances may be sufficient to fund the
Company's  operations  for the next  twelve  months,  but there are  significant
challenges that the Company will need to successfully manage in order to be able
to fund its operations over the next twelve months.  These  challenges  include,
but are not limited to:  agreeing to and  maintaining  acceptable  payment terms
with its vendors;  increasing the speed of its receivable  collections  from its
customers;   maintaining  compliance  under  the  covenants  set  forth  in  the
forbearance  agreement  negotiated  with Fleet Bank;  and  managing its customer
advance payments liability with certain customers. Additionally, there can be no
assurances  that the Company will be able to achieve  and/or  maintain  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.                 

New Accounting Pronouncements                                                   

The Company is currently evaluating the potential impact of Emerging Issues Task
Force  (EITF)  Issue  00-25  "Vendor  Income   Statement   Characterization   of
Consideration Paid to a Reseller of the Vendor's  Products",  which was codified
into Issue 01-9,  "Accounting for Consideration  Given by a Vendor to a Customer
or a Reseller of the Vendor's  Products." Issue 00-25 becomes effective no later
than the  Company's  third  quarter of fiscal 2002.  Upon  adoption of this EITF
Issue,  the Company will be required to  reclassify  certain  expenses,  such as
slotting fees, from selling, general, and administrative expenses to a reduction
of  net  sales.   The  Company  has  not  yet  determined  the  amount  of  this
reclassification.                                                               

The Company does not expect any other 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
scaling back of its  "Store-in-a-Store"  program and resulting  reduced sales of
third-party   software  titles  in  this  program;  the  anticipated  amount  of
international  net sales during  fiscal 2002;  the  transition  of the Company's
international  distribution  to a licensing  revenue model and the  anticipation
that the  Company  will earn a royalty  fee based on product  sales  pursuant to

10KSB
28th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 28th
these arrangements; the Company's intention to reduce its sales to food and drug
retailers and to office superstore retailers, and replace these sales reductions
with  increased  sales  to  traditional   software   retailers;   the  Company's
expectation  that its revenues for fiscal 2002 will either remain flat or show a
moderate  decrease  when  compared to net sales for fiscal 2001;  the  Company's
anticipation  that its  profitability  will  improve  due to  increased  product
shipments to more  profitable  customers  that have  historically  sold consumer
software  successfully;  the Company's  ability  during fiscal 2002 to place its
products into longer-term, non-promotional product displays with non-traditional
software  retailers and the  possibility of such placement  resulting in reduced
product  returns in these channels;  the Company's  plans to reduce  "per-store"
sell-in  quantities of its products to food and drug retailers and to transition
a larger percentage of food and drug sales to non-promotional  sales programs in
such stores; the Company's plan to transition certain sales activity to food and
drug retailers to a third-party  distributor who will manufacture and distribute
the  Company's  products to such  retailers;  the  Company's  plan to reduce its
direct-to-store  fulfillment of electronic data interchange  ("EDI") orders,  or
require price increases or minimum order levels to support the additional  costs
associated with such fulfillment; the Company's plan in fiscal 2002 to primarily
sell its own  software  titles or  third-party  software  titles  that have been
manufactured  by the  Company  pursuant  to  licensing  arrangements  with  such
publishers, in order to reduce product costs; the anticipated continued increase
in costs  associated  with acquiring  future  product  content for the Company's
products  as  competition  for  quality  content  continues  to  increase;   the
sufficiency  of the  Company's  cash and  working  capital  balances to fund the
Company's  operations for the next twelve months;  and the expectation  that the
adoption  of  recently-issued   accounting   pronouncements   will  not  have  a
significant impact on the Company's results of operations, financial position or
cash flows.  All  forward-looking  statements are based on current  expectations
regarding  significant risk factors,  and such statements should not be regarded
as representations 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
successful  sell-through of the Company's products in international  markets and
the ability of third-party international  distributors to pay royalties based on
such sales in a timely  manner;  the Company's  ability to increase sales of its
products into traditional software retail stores, and product returns rates from
such retailers  remaining at or below historical return rates in the future; the
Company's  ability  to sell its  products  into  food and  drug  retailers  on a
non-promotional,  longer-term  basis; the profitability of the Company's product
sales  to  traditional   software  retailers;   the  success  of  the  Company's
third-party  distribution  relationships  for selling product into food and drug
retailers,   which  will  continue  to  be  dependent  on   successful   product
sell-through in such retail stores;  the Company's ability to increase prices or
negotiate minimum order quantities for direct-to-store EDI orders; the Company's
ability to  successfully  sell its own  software  titles  into food and drug and
other alternative retail channels without selling  third-party  software titles;
the  Company's  ability to  continue to make timely  payments of  principal  and
interest to Fleet Bank  pursuant to its  forbearance  agreement;  the  Company's
ability to comply with the  financial  covenants  contained  in the  forbearance
agreement with Fleet Bank;  the Company's  ability to generate  sufficient  cash
flow to fund its operations for the next twelve  months;  the market  acceptance
and successful  sell-through results of the Company's products at retail stores;
the amount of unsold  product that is returned to the Company by retail  stores,
and the timing of such returns;  increased  selling,  general and administrative
costs,  including  increased  legal  expenses;  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 ability to deliver  products in response to
orders within a commercially  acceptable time frame;  downward pricing pressure;
fluctuating costs of developing, producing and marketing the Company's products;
the Company's  ability to license or develop  quality  content for its products;
the 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;  the  Company's  ability  to  retain  its  key
employees;  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.                                                                        

10KSB
29th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 29th
Item 7.       Financial Statements                                            

eGames, Inc.
Index to Consolidated Financial Statements

                                                              Page
                                                              ----

  Independent Auditors' Report...........................     30

  Consolidated Balance Sheet June 30, 2001...............     31

Consolidated Statements of Operations for the years         
  ended June 30, 2001 and 2000...........................     32

Consolidated Statements of Stockholders' Equity             
  (Deficit) for the years ended June 30, 2001 and 2000...     33

Consolidated Statements of Cash Flows for the years         
  ended June 30, 2001 and 2000...........................     34

Notes to Consolidated Financial                             
  Statements.............................................     36

10KSB
30th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 30th
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,  2001,  and the related  consolidated  statements  of
operations,  stockholders' equity (deficit),  and cash flows for the years ended
June  30,  2001  and  2000.  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,  2001 and the results of their  operations  and their
cash  flows for the years  ended  June 30,  2001 and 2000,  in  conformity  with
accounting principles generally accepted in the United States of America.       

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated   financial  statements,   the  Company  has  working  capital  and
stockholders'  deficits at June 30, 2001, suffered a net loss, incurred negative
cash flows from operations for the year ended June 30, 2001, and no longer has a
credit facility available for future borrowings. These matters raise substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans in regards to these matters are also described in Note 1. The consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.                                                    

/s/ KPMG LLP                                                                    

Philadelphia, Pennsylvania                                                      
January 9, 2002                                                                 

10KSB
31st Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 31st
eGames, Inc.
Consolidated Balance Sheet

                                                                [Download Table]


                                                                  As of     
                                                                 June 30,   
ASSETS                                                             2001     
                                                               ------------ 

Current assets:                                                             
                                                                            
   Cash and cash equivalents                                   $     25,737 
   Restricted cash                                                   30,000 
   Accounts receivable, net of allowances of $1,494,183           1,544,877 
   Inventory                                                      3,567,854 
   Note receivable                                                  110,000 
   Prepaid royalties and other expenses                             260,183 
                                                               ------------ 
          Total current assets                                    5,538,651 

Furniture and equipment, net                                        158,114 
Intangibles and other assets, net                                    25,828 
                                                               ------------ 
          Total assets                                         $  5,722,593 
                                                               ============ 

LIABILITIES AND STOCKHOLDERS' DEFICIT                                       

Current liabilities:                                                        
   Note payable                                                $     62,606 
   Accounts payable                                               2,232,855 
   Customer advance payments                                      3,485,413 
   Bank debt                                                      1,200,000 
   Accrued expenses                                                 709,286 
   Capital lease obligations                                         90,184 
                                                               ------------ 
          Total current liabilities                               7,780,344 

Note payable, net of current portion                                 57,095 
                                                               ------------ 
          Total liabilities                                       7,837,439 

Commitments and contingencies - Notes 7, 8, 13 and 17                       

Stockholders' deficit:                                                      
   Common stock, no par value (40,000,000 shares authorized;                
          10,221,237 issued and 9,989,337 outstanding)            9,179,827 
   Additional paid-in capital                                     1,155,479 
   Accumulated deficit                                          (11,948,735)
   Treasury stock, at cost - 231,900 shares                        (501,417)
                                                               ------------ 
          Total stockholders' deficit                            (2,114,846)
                                                               ------------ 
          Total liabilities and stockholders' deficit          $  5,722,593 
                                                               ============ 

See accompanying notes to consolidated financial statements.                    

10KSB
32nd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 32nd
eGames, Inc.
 Consolidated Statements of Operations
Years ended June 30, 2001 and 2000

                                                        [Enlarge/Download Table]

                                                                  2001           2000    
                                                              ------------   ------------
                                                                                         
Net sales                                                     $  7,171,971   $ 10,793,573

Cost of sales                                                    6,006,710      4,279,191
                                                              ------------   ------------
Gross profit                                                     1,165,261      6,514,382

Operating expenses:                                                                      
    Product development                                            747,733        860,330
    Selling, general and administrative                          5,910,841      5,155,565
    Legal settlements and related costs                            188,218        360,568
                                                              ------------   ------------

        Total operating expenses                                 6,846,792      6,376,463
                                                              ------------   ------------

Operating income (loss)                                         (5,681,531)       137,919

Interest expense, net                                               95,166         11,991
                                                              ------------   ------------

Income (loss) from continuing operations before income taxes    (5,776,697)       125,928

Provision (benefit) for income taxes                               (39,098)        69,324
                                                              ------------   ------------

Income (loss) from continuing operations                        (5,737,599)        56,604

Discontinued operations (Note 9):                                                        
Income (loss) from discontinued operation, net of income tax                             
        provision (benefit) of ($51,787) and $11,426              (195,548)       195,977
                                                              ------------   ------------

Net income (loss)                                             ($ 5,933,147)  $    252,581
                                                              ============   ============

Net income (loss) per common share:                                                      
Basic and Diluted:                                                                       
Income (loss) from continuing operations                      ($      0.59)  $       0.01
Income (loss) from discontinued operation                     ($      0.02)  $       0.02
                                                              ------------   ------------
Basic and diluted net income (loss) per common share          (      $0.61)  $       0.03
                                                              ============   ============

Weighted average common shares outstanding - Basic               9,797,183      9,706,813

Dilutive effect of common stock equivalents                          - 0 -        290,200
                                                              ------------   ------------

Weighted average common shares outstanding - Diluted             9,797,183      9,997,013
                                                              ============   ============


See accompanying notes to consolidated financial statements.                    

10KSB
33rd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 33rd
eGames, Inc.
 Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 2001 and 2000

                                                        [Enlarge/Download Table]


                                                             Common Stock          Additional                     Treasury Stock    
                                                       -------------------------    Paid-in     Accumulated    ---------------------
                                                        Shares         Amount       Capital       Deficit       Shares    Amount    
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    
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)
                                                        ==========   ===========   ==========   ============   ========  ========== 

Net loss                                                                                          (5,933,147)                       
Shares issued in connection with a legal settlement        239,362        45,593                                                    
Options issued in connection with a consulting                                                                                      
   agreement                                                                            6,929                                       
Net foreign currency translation adjustment                                                                                         
------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2001                             10,221,237   $ 9,179,827   $1,155,479   ($11,948,735)   231,900  ($ 501,417)
                                                        ==========   ===========   ==========   ============   ========= ========== 

                                                        [Enlarge/Download Table]

                                                       Accumulated                     
                                                          Other                        
                                                      Comprehensive     Stockholders'  
                                                          Loss         Equity (Deficit)
---------------------------------------------------------------------------------------

                                                                                       
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   
                                                        ==========      ============   

Net loss                                                                  (5,933,147)  
Shares issued in connection with a legal settlement                           45,593   
Options issued in connection with a consulting                                         
   agreement                                                                   6,929   
Net foreign currency translation adjustment                 69,199            69,199   
---------------------------------------------------------------------------------------
Balance as of June 30, 2001                             $    - 0 -      ($ 2,114,846)  
                                                        ==========      ============   


See accompanying notes to consolidated financial statements.                    

10KSB
34th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 34th
eGames, Inc.
 Consolidated Statements of Cash Flows
Years ended June 30, 2001 and 2000

                                                        [Enlarge/Download Table]


                                                                  2001          2000    
                                                              -----------   ----------- 
  Cash flows from operating activities:                                                 
                                                                                        
    Net income (loss)                                         ($5,933,147)  $   252,581 
    Adjustments to reconcile net income (loss) to net cash                              
         (used in) provided by operating activities:                                    
    Depreciation, amortization and other non-cash items           238,506       350,816 
    (Income) loss from discontinued operation                     195,548      (195,977)
    Gain on disposal of furniture and equipment                     - 0 -          (769)
    Changes in items affecting operations:                                              

          Restricted cash                                         (30,000)       17,560 
          Accounts receivable                                   1,258,522      (786,083)
          Prepaid royalties and other expenses                    (52,552)     (150,165)
          Inventory                                            (1,332,447)     (784,931)
          Accounts payable                                        977,228       328,619 
          Customer advance payments                             2,752,255       733,158 
          Accrued expenses                                       (609,373)      272,275 
                                                              -----------   ----------- 
Net cash (used in) provided by operating activities            (2,535,460)       37,084 

Cash flows from investing activities:                                                   
     Purchase of furniture and equipment                          (64,028)     (187,890)
     Proceeds from disposal of furniture and equipment              - 0 -         2,006 
     Proceeds from sale of discontinued operation                 176,760         - 0 - 
     Purchase of software rights and other assets                  (6,205)      (17,395)
                                                              -----------   ----------- 
Net cash (used in) provided by investing activities               106,527      (203,279)

Cash flows from financing activities:                                                   
     Proceeds from credit facility/bank debt                    4,900,000       750,000 
     Repayments of credit facility/bank debt                   (3,700,000)     (750,000)
     Repayments of convertible subordinated debt                 (150,000)        - 0 - 
     Repayments of notes payable                                  (55,120)      (50,460)
     Repayments of capital lease obligations                     (198,889)       (5,563)
     Proceeds from note receivable                                 10,000         - 0 - 
     Proceeds from exercise of warrants and stock options           - 0 -       229,345 
                                                              -----------   ----------- 
Net cash (used in) provided by financing activities               805,991       173,322 

Effect of exchange rate changes on cash and cash equivalents       (9,680)       (2,698)

Net cash (used in) provided by discontinued operation             519,181      (179,104)
                                                              -----------   ----------- 

Net (decrease) increase in cash and cash equivalents           (1,113,441)     (174,675)

Cash and cash equivalents:                                                              

   Beginning of period                                          1,139,178     1,313,853 
                                                              -----------   ----------- 
   End of period                                              $    25,737   $ 1,139,178 
                                                              ===========   =========== 


See accompanying notes to consolidated financial statements.                    

10KSB
35th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 35th
eGames, Inc.
Consolidated Statements of Cash Flows, continued
Years ended June 30, 2001 and 2000

                                                        [Enlarge/Download Table]

                                                                                       2001        2000   
                                                                                   -----------  ----------
Supplemental cash flow information:                                                                       
                                                                                                          
   Cash paid for interest                                                          $   109,149  $   40,527
                                                                                   ===========  ==========

   Cash paid (refunded) for income taxes                                           ($  233,677) $  236,000
                                                                                   ===========  ==========

Non-cash investing and financing activities:                                                              

   Note receivable received in sale of wholly-owned subsidiary                     $   120,000  $    - 0 -
                                                                                   ===========  ==========

   Capital lease additions                                                         $   282,520  $    - 0 -
                                                                                   ===========  ==========

   239,362 shares of Common Stock issued in connection with a legal settlement     $    45,593  $    - 0 -
                                                                                   ===========  ==========

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


See accompanying notes to consolidated financial statements.                    

10KSB
36th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 36th
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.                                                             

Liquidity                                                                       

The  Company  has a  stockholders'  deficit of  approximately  $2,115,000  and a
working  capital  deficit  of  approximately  $2,242,000  at June  30,  2001 and
generated a net loss of  approximately  $5,933,000  and negative cash flows from
operations  of  approximately  $2,535,000  for the year ended June 30, 2001.  In
addition,  the Company no longer has a bank credit facility available for future
borrowings. The Company's ability to meet its obligations in the ordinary course
of business is dependent upon its ability to establish profitable  operations or
obtain additional  financing  through public or private equity  financing,  bank
financing,  or other sources of capital. The Company believes that its projected
cash and  working  capital  balances  may be  sufficient  to fund the  Company's
operations through June 30, 2002, but there are significant  challenges that the
Company  will  need to  successfully  manage  in  order  to be able to fund  its
operations over the next twelve months.  These challenges  include,  but are not
limited  to:  agreeing  to and  maintaining  acceptable  payment  terms with its
vendors;  increasing the speed of its receivable collections from its customers;
and  maintaining  compliance  under the covenants  set forth in the  forbearance
agreement  negotiated  with Fleet Bank (see Note 7); and  managing  its customer
advance payments  liability with certain customers.  If financial  resources are
not  sufficient,  management  has the intent and  believes it has the ability to
reduce  expenditures as to not require  additional  financial  resources if such
resources are not available on terms acceptable to the Company.                 

Management's  plans  with  respect to the  Company's  liquidity  issues  include
implementing  certain  liquidity  initiatives,  subsequent  to June 30, 2001, in
order to attempt to continue supporting its operations.                         

The Company has, among other things:                                            

    o   Reduced its workforce to 17 full-time  and two part-time  employees,
          from 45 employees at June 30, 2000.  This action has helped reduce the
Company's cash consumption rate.                            

    o   Entered into a  forbearance  agreement  with its  commercial  lender
          regarding the Company's  defaults under its former credit facility and
          converted the outstanding  balance under its former credit facility to
          a 22 month  amortizing term loan (see Note 7). If the Company fails to
          meet certain monthly covenants under this forbearance  agreement,  its
commercial lender could liquidate the Company's assets.     

    o   Converted  approximately $592,000 of trade accounts payable balances
          outstanding  at June 30, 2001 to trade notes  payable  having  monthly
          principal  and  interest  payments  ranging  from six to 12 months and
          bearing  interest at 6.75%.  Payment terms for these vendors'  ongoing
          services and products range from  cash-in-advance  to sixty-day  terms
with established credit limits.                             

   o   Negotiated a cash payment  discount  with its largest  trade vendor
          relating  to the  Company's  past due  balance in a  transaction  that
          resulted in a $100,000  discount of the  Company's  payable  with this
          vendor. The Company made a lump-sum payment of approximately  $433,000
          to this  vendor  during the first  quarter of fiscal  2002 for payment
satisfaction of invoices totaling approximately $533,000.   

10KSB
37th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 37th
    o   During fiscal 2002, the Company is reducing its product shipments to
          certain food and drug retailers, which the Company has determined were
          based upon sales terms that were  unprofitable  to the Company  during
          fiscal  2001,  and the Company  believes  that such terms could not be
          modified  in a manner  that  would be  mutually  satisfactory  to both
parties.                                                    

    o   During  fiscal  2002,  the  Company is  attempting  to  improve  its
          profitability   by  focusing  on  increasing   product   shipments  to
          traditional  software  customers,  which the Company has  historically
          been  able to  achieve  profitable  business  terms  with and who have
          historically  sold  consumer  game  software  successfully  to the end
consumer.                                                   

The  Company's  ability to continue  as a going  concern is  dependent  upon its
ability to generate  sufficient  cash from  operations and financing  sources to
meet its  obligations  as they become due.  There can be no assurance,  however,
that management's plan will be successful.                                      

Consolidation                                                                   

The Company previously had a wholly-owned  subsidiary  ("eGames Europe"),  which
was sold in May 2001  (see Note 9).  All  inter-company  transactions  have been
eliminated.                                                                     

Fair Value of Financial Instruments                                             

The recorded amounts of cash and cash equivalents, accounts receivable, accounts
payable and customer  advance  payments at June 30, 2001  approximate fair value
due  to  the  relatively  short  period  of  time  between  origination  of  the
instruments  and their expected  realization.  The Company's note receivable and
debt are carried at cost, which  approximates fair value, as the note receivable
and debt bear 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  were
translated  into US dollars  at the  exchange  rate in effect as of the  balance
sheet date.  Revenues and expenses  were  translated  into US dollars at average
exchange rates in effect during the reporting period. The resultant  translation
adjustment was reflected as "Accumulated other comprehensive  income (loss)", as
a  separate  component  of  stockholders'  equity  (deficit)  in  the  Company's
Consolidated Balance Sheet. The Company sold its wholly-owned foreign subsidiary
in May 2001 and recognized the accumulated translation adjustment as of the sale
date as part of the loss from discontinued operation.                           

10KSB
38th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 38th
Long-Lived Assets                                                               

In accordance with Statement of Financial  Accounting  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.  The impairment,  if any, is
measured using discounted cash flows.                                           

Intangible Assets                                                               

The Company has  intangible  assets  resulting  primarily  from the  purchase of
software  rights.  Accumulated  amortization at June 30, 2001 was $738,000.  The
Company  amortizes its  intangible  assets using the  straight-line  method over
three years. The Company recorded  amortization  expense of $80,000 and $148,000
for the years ended June 30, 2001 and 2000, respectively.                       

Revenue Recognition                                                             

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

The Company  previously  recognized revenue upon shipment of its products to its
customers   and  recorded  an  allowance  for  product   returns.   The  Company
subsequently  determined in 2001 that certain of its product sales provided that
title passed to the customer only upon receipt of the  Company's  product by its
customer. In addition, the Company has concluded,  based upon receipt of delayed
reporting of  sell-through  results from its food and drug  retailers  which are
specialty  retailers  that  have not  historically  sold  consumer  PC  software
products,  that it does not have  the  ability  to make  reliable  estimates  of
product returns for shipments to food and drug retailers in accordance with SFAS
No. 48, "Revenue Recognition When the Right of Return Exists" and the additional
guidance  provided  in the SEC's Staff  Accounting  Bulletin  No. 101,  "Revenue
Recognition in Financial Statements" (see Note 18).  Accordingly,  the Company's
revenues  in fiscal 2001 and 2000  associated  with  shipments  to food and drug
retailers are recognized  based on the timing of the actual  sell-through of the
Company's products to the end consumer at the retail location as reported to the
Company from the respective  food and drug retailer.  The Company's  fiscal 2000
financial statements were not materially impacted by this change, and therefore,
were not adjusted.                                                              

Revenues  associated with the Company's  product shipments to its customers that
traditionally  have sold  consumer PC software  products  (i.e.,  mass  merchant
retailers)  are  recognized at the time title to the  inventory  passes to these
customers,  less a historically based provision for anticipated product returns.
Title passes to these  customers  either upon shipment of the product or receipt
of the product by these customers based on the terms of the sale transaction.   

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

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

The Company distributes the majority of its products through several third-party
distributors and directly to national and regional  retailers.  The distribution
of these products is governed by distribution agreements, direct sale agreements
or  purchase  orders,  which  generally  allow  for  product  returns  and price
markdowns.  For shipments to its customers that have traditionally sold consumer
PC software products, the Company records an allowance for returns and markdowns
as a  reduction  of gross  sales at the time title of the  products  pass to the
customer.  This  allowance,  which  is  reflected  as a  reduction  of  accounts
receivable, is estimated based primarily upon historical experience.  During the

10KSB
39th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 39th
years ended June 30, 2001 and 2000, the Company's  provision for product returns
and markdowns for customers  that have  traditionally  sold consumer PC software
products  were  $2,040,000  and  $1,643,000  or 33%  and  15% of  related  gross
shipments, respectively.                                                        

Customer Advance Payments                                                       

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

Prepaid Royalties                                                               

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

Marketing and Sales Incentive Costs                                             

Marketing  costs for which the Company pays its resellers,  such as slotting and
advertising  fees,  are  charged to expense as incurred  and were  approximately
$1,467,000   and   $963,000  for  the  years  ended  June  30,  2001  and  2000,
respectively.                                                                   

Sales incentive costs,  such as rebates and coupons,  that the Company offers to
the retail consumer are recorded as reductions to net sales as incurred and were
approximately  $602,000 and $544,000 for the years ended June 30, 2001 and 2000,
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.                  

Computation of Earnings (Loss) Per Share                                        

Net  earnings  (loss) per common share is computed in  accordance  with SFAS No.
128,  "Earnings  per  Share".  Basic  earnings  (loss) per share is  computed by
dividing net earnings  (loss) by the weighted  average  number of common  shares
outstanding  during each year.  Diluted earnings (loss) per share is computed by
dividing net earnings (loss) by the weighted average number of common and common
share  equivalents  ("CSE's")  outstanding  during  each year  that the  Company
reports net income.  In periods that the Company reports a net loss, these CSE's
are  excluded  from  the  diluted  earnings  (loss)  calculation  because  their
inclusion would be anti-dilutive. CSE's 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 No. 123,  "Accounting  for Stock-Based  Compensation"  as if the fair value
method had been applied.                                                        

10KSB
40th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 40th
Management's Estimates                                                          

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities,  including allowances for inventory  obsolescence,  product returns
and un-collectible accounts receivable,  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                                                   

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

During  fiscal  2001,  the Company  adopted  SFAS No. 144,  "Accounting  for the
Impairment or Disposal of Long-Lived Assets." The Company accounted for the sale
of its  wholly-owned  subsidiary under the provisions of this standard (see Note
9).                                                                             

The Company is currently  evaluating  the potential  impact of EITF Issue 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's  Products",  which was codified,  along with EITF Issue 00-14, into
EITF Issue 01-9,  "Accounting for Consideration  Given by a Vendor to a Customer
or a Reseller of the Vendor's  Products." EITF Issue 00-25 becomes  effective no
later than the  Company's  third  quarter of fiscal 2002.  Upon adoption of this
EITF Issue, the Company will be required to reclassify certain expenses, such as
slotting fees, from selling,  general and administrative expenses to a reduction
of net sales.                                                                   

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

Reclassification                                                                

The  consolidated  financial  statements  for the year ended June 30,  2000 were
reclassified to reflect its discontinued  operation and the  reclassification of
consumer and  retailer  rebate costs from  selling,  general and  administrative
expenses to a reduction of net sales.                                           

2.  Inventory, net                                                              

Inventory consists of the following:                                            

Raw materials in warehouse                        $  720,693          
Finished goods in warehouse                        1,483,510          
Finished goods at customer locations               2,041,756          
                                        ----------
                                         4,245,959

Provision for obsolescence                          (678,105)         
                                        ----------
Inventory, net                                    $3,567,854          
                                        ==========

3.  Prepaid Royalties and Other Expenses                                        

Prepaid royalties and other expenses consists of the following:                 

Prepaid royalties                                  $ 173,450          
Prepaid expenses                                      86,733          
                                         ---------
Prepaid royalties and other expenses               $ 260,183          
                                         =========

10KSB
41st Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 41st
4.  Furniture and Equipment, net                                                

Furniture and equipment consists of the following:                              

Equipment                                       $  483,692            
Furniture                                          394,908            
Equipment under capital leases                     154,332            
                                    ----------
                                     1,032,932
Accumulated depreciation                          (874,818)           
                                    ----------
Furniture and equipment, net                    $  158,114            
                                    ==========

5.  Accrued Expenses                                                            

Accrued expenses consist of the following:                                      

 Accrued reclamation costs of product returns from customers   $ 200,150
 Accrued marketing promotions                                    173,207
 Accrued professional fees                                       154,944
 Other accrued expenses                                          180,985
                                                               ---------
 Accrued expenses                                              $ 709,286
                                                               =========

6.  Note Payable, Convertible Subordinated Debt, and Accounts Payable           

Note payable to bank, bearing interest at the prime                   
rate plus 2.75%(9.75% at June 30, 2001).  Matures on                  
March 24, 2003, principal and interest of $5,961 payable              
monthly.  The note is guaranteed by a former officer of               
 the Company and the Small Business Administration.             $119,701

  Less current portion                                            (62,606)
                                                                --------

 Long term portion                                              $ 57,095
                                                                ========

During  fiscal  2001,  the  Company  repaid  the  $150,000   balance  under  its
convertible subordinated debt that was outstanding at June 30, 2000.            

Subsequent to June 30, 2001,  the Company  converted  $592,499 of trade accounts
payable  balances  to trade notes  payables,  bearing  interest  at 6.75%,  with
monthly  principal  and  interest  payments  scheduled  for six to twelve  month
periods.                                                                        

7.  Bank Debt                                                                   

Bank debt consists of the following:                                            

Principal  amount owed to Fleet Bank at June 30,  2001                
under  prior  credit facility that was subsequently converted         
to an amortizing term loan bearing interest at the prime rate         
plus 3.00% (10.00% at June 30, 2001). Matures on                      
   July  31,  2003,  principal  and  interest  payable  monthly.  $1,200,000
                                                                  ==========

On August 9, 2000,  the  Company  entered  into a  $2,000,000  revolving  credit
facility  with Fleet Bank  (formerly  Summit  Bank).  This credit  facility  had
replaced a  $1,500,000  revolving  credit  facility  that the  Company  had with
another  commercial bank. The credit facility was established to provide,  among
other  things,  working  capital to support the  Company's  operations.  Amounts
outstanding  under this credit facility were charged interest at one-half of one

10KSB
42nd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 42nd
percent above the bank's current prime rate, with interest due monthly,  and was
collateralized by substantially all of the Company's assets. The credit facility
required 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 credit
facility had a minimum  effective net worth  covenant that started at $3,100,000
at June 30, 2000 and increased by $150,000 quarterly to a $3,700,000 requirement
at June 30, 2001. As of June 30, 2001,  the Company was not in  compliance  with
those covenants.                                                                

On July 23, 2001,  Fleet Bank  notified  the Company  that due to the  Company's
default of the  financial  covenants  under its credit  facility  as of June 30,
2001, and material  adverse changes in the Company's  financial  condition,  the
bank would no longer continue to fund the Company's  $2,000,000 credit facility.
Subsequently,  the  Company  worked  with  Fleet  Bank and its  advisors  on its
analysis of Fleet Bank's  collateral  position,  management's  restructuring and
cost reduction plans, and the results of an independent  business  assessment of
the  Company and its  business  plan.  These  actions  provided  the basis for a
turnaround  plan that was presented to Fleet Bank  culminating  in the agreement
providing  for an  amortizing  term loan of the  existing  balance owed to Fleet
Bank.                                                                           

On November 2, 2001 the Company and Fleet Bank, entered into an agreement to pay
off the  outstanding  balance of $1,400,000 owed to Fleet Bank over a twenty-two
month period.  The agreement also provides that,  despite the Company's defaults
under the loan  documents,  which had  previously  provided  the Company  with a
$2,000,000  secured  line of credit,  Fleet Bank will not enforce its rights and
remedies under those loan documents as long as the Company remains in compliance
with the terms of the agreement.  The Company's  shareholders would face a total
loss of their investment if such an  asset-liquidation  were to occur. The terms
of the agreement  include,  among other things,  that the remaining  outstanding
balance  owed  under  the  credit   facility   will  be  repaid  in  22  monthly
installments,  with interest at the prime rate plus three percent. Additionally,
the terms of the  agreement  require  the  Company to achieve  certain  earnings
benchmarks  and to provide  Fleet  Bank with  periodic  financial  and cash flow
reporting.  This loan has been classified as a current  liability ("bank debt"),
as it is  uncertain  that  the  Company  will be able to meet  this  agreement's
covenants  through June 30, 2002. As part of the  agreement,  the Company issued
warrants  to Fleet  Bank for the  purchase  of 750,000  shares of the  Company's
Common Stock. The warrants are exercisable until October 31, 2006 at an exercise
price of $0.09 per share, and a separate  registration rights agreement provides
that the bank will have  demand  registration  rights  beginning  on November 1,
2002. As of December 31, 2001,  the principal  balance  outstanding on this term
loan was $1,240,000.                                                            

8.  Lease Obligations                                                           

During  December  2001,  the Company  extended its operating  lease covering its
operating  facility through  September 2004 and has subleased part of its office
space for the period from  December  2001 through  September  2002.  The Company
anticipates  receiving sublease payments of approximately  $27,000 during fiscal
2002 and approximately  $12,000 during fiscal 2003 relating to this arrangement.
Rent expense  incurred  under the  Company's  operating  leases was $153,000 and
$164,000 for the years ended June 30, 2001 and 2000,  respectively.  The Company
has financed  office  equipment  through  various  operating  and capital  lease
agreements.                                                                     

The Company's future payments for leases are as follows:                        

         Operating   Capital
Fiscal Year                    Leases     Leases      Total           
                     ----------  ---------  ----------
2002                           $ 95,434  $  91,613  $  187,047        
2003                             61,208      - 0 -      61,208        
2004                             48,121      - 0 -      48,121        
2005 and thereafter              10,504      - 0 -      10,504        
                     ----------  ---------  ----------
                       $215,267  $  91,613  $  306,880
                     ==========             ==========
Less interest                               (1,429)                   
                     ---------
Present value of future lease payments      90,184                    
Less current portion                       (90,184)                   
                     ---------
Long term portion                        $   - 0 -                    
                     =========

10KSB
43rd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 43rd
9.  Discontinued Operation                                                      

On May 11, 2001, the Company sold eGames Europe,  located in the United Kingdom,
to a non-related  third-party.  The Company  received  $300,000 in net proceeds,
which  approximated  the  discontinued  operation's  net  book  value,  prior to
recognizing the $31,000  accumulated  translation  adjustment.  The net proceeds
consisted  of:  $150,000  in  cash  provided  at  closing,  $120,000  in a  note
receivable to be payable in twelve monthly payments of $10,000 each, and $30,000
in cash held in escrow to be released  to the  Company,  pending any  unresolved
claims,  six months following the closing of the sale. During December 2001, the
Company received the $30,000 in cash held in escrow.  The income (loss) from the
discontinued  operation was ($196,000) and $196,000 for the years ended June 30,
2001 and 2000,  respectively,  which  amounts  were net of income tax  (benefit)
expense totaling approximately  ($52,000) and $11,000,  respectively.  Net sales
for the  discontinued  operation for the years ended June 30, 2001 and 2000 were
approximately $1,762,000 and $2,303,000, respectively.                          

The amounts in the accompanying  consolidated financial statements and footnotes
have  been  reclassified  for  all  periods  presented  to  give  effect  to the
discontinued operation.                                                         

10. Income Taxes                                                                

The  provision  (benefit)  for  income  taxes  is  comprised  of  the  following
components for the years ended June 30, 2001 and 2000:                          

                                            2001            2000
                                            ----------      ----------
Current                                                                         
Federal                                       ($ 39,098)     $   61,465 
State                                             - 0 -           7,859 
                                            ----------      ----------
                                               (39,098)         69,324

Deferred                                                                        
Federal                                      (1,891,352)       (273,085)
State                                          (547,163)          6,486 
                                            ----------      ----------
                                             (2,438,515)       (266,599)

Valuation allowance                               2,438,515         266,599     
                                            ----------      ----------

Provision (benefit) for income taxes              ($ 39,098)     $   69,324     
                                            ==========      ==========

The  reconciliation  between  the  statutory  Federal  income  tax  rate and the
Company's  effective  rate for income tax expense  (benefit) for the years ended
June 30, 2001 and 2000 is as follows:                                           

                                                  2001      2000
                                                  --------  --------

Statutory Federal income tax rate                          (34%)      34%       
Increase in taxes resulting from:                                               
Non-deductible goodwill amortization and other                          
permanent items                                        - 0 -      10    
State taxes                                            - 0 -       5    
Change in valuation allowance and other                 33         6    
                                                    -----    -----

Effective rate for income tax expense (benefit)             (1%)      55%       
                                                    =====    =====

10KSB
44th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 44th
The tax effect of temporary  differences that give rise to significant  portions
of the deferred tax assets and  deferred  tax  liabilities  at June 30, 2001 and
2000 is as follows:                                                             

                                                                [Download Table]

                                                        2001            2000    
                                                     ----------      ---------- 
                                                                                
Net deferred tax assets:                                                        
  Accrued expenses and other                         $  189,114      $   70,235 
  Reserves for accounts receivable and inventory      2,269,021         308,340 
  Depreciation                                           41,502          10,714 
  Tax credits                                            25,946           9,152 
  Net operating losses and capital losses             1,367,032       1,055,659 
                                                     ----------      ---------- 
      Gross deferred tax assets                       3,892,615       1,454,100 
  Less: Valuation allowance                          (3,892,615)     (1,454,100)
                                                     ----------      ---------- 
Net deferred tax assets                              $    - 0 -      $    - 0 - 
                                                     ==========      ========== 

The  deferred tax asset is offset by a full  valuation  allowance as of June 30,
2001, as management  currently believes that it is more likely than not that the
deferred  tax  asset  will not be  realized.  The  valuation  allowance  for net
deferred tax assets  increased by approximately  $2,439,000  during fiscal 2001.
The  increase  was a result of net  changes  in  temporary  differences  and the
addition of a valuation allowance based on the taxable loss for fiscal 2001.    

As of June 30, 2001, the Company had  approximately  $3,863,000 of net operating
loss  carry-forwards  for federal  income tax  purposes  (expiring in years 2012
through 2021)  available to offset future Federal  taxable  income.  The Company
also has alternative minimum tax credit  carry-forwards of approximately $26,000
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 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  $1,526,000 at June 30, 2001,  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.                      

10KSB
45th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 45th
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.                             

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.                                          

During  fiscal  2001,  the  Company  issued  239,362  shares of Common  Stock in
connection  with a legal  settlement  relating to  intellectual  property  right
issues.  These  shares of the  Company's  Common Stock were valued at their fair
value of $45,593 on the date of the settlement.                                 

12.  Stock Options and Warrants                                                 

Stock Option Plans:                                                             

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.  At the  Company's  2000  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 1,950,000 shares of Common Stock previously approved to a total of 2,950,000
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.                                                           

On  December  14, 1998 and January 25,  2001,  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 and
January  2001,  respectively.  The December  14, 1998 option  grants were issued
outside of the 1995 Plan, whereas the January 25, 2001 option grants were issued
under the 1995 Plan.  During fiscal 2001, the Company  granted options for 3,000
shares of Common Stock in connection with a consulting agreement.               

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.                                                                        

10KSB
46th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 46th
Information regarding the Company's stock options is as follows:                

                        Number of     Weighted Average
                        Options       Exercise Price
                        -------       --------------
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             
                   =========          ======
Granted                         787,500            0.29           
Canceled                       (523,600)           2.18           
Exercised                         - 0 -           - 0 -           
                   ---------          ------
Balances, June 30, 2001         2,155,900          $ 1.56             
                   =========          ======

At June 30, 2001,  1,154,415 stock options  outstanding  were vested and 786,268
stock options were available for issuance.  The following summarizes information
about the Company's stock options outstanding at June 30, 2001:                 

                                                        [Enlarge/Download Table]

                               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, 2001       (in years)         Price    June 30, 2001     Price  
      ------        -------------       ----------         -----    -------------     -----  
                                                                                             
 $0.250 - $1.156       727,500             4.55           $0.294         6,250        $1.150 
 $1.344 - $2.000       829,100             1.51           $1.771       752,865        $1.787 
 $2.130 - $3.500       599,300             3.06           $2.821       395,300        $2.757 
 ---------------     ---------             ----           ------      ---------       ------ 
 $0.250 - $3.500     2,155,900             2.96           $1.565      1,154,415       $2.115 
                     =========                                        =========              

The Company  applies APB 25 and related  interpretations  in accounting  for its
stock  options.  Had  compensation  costs for the  Company's  stock options been
determined  under SFAS No. 123, the  Company's  net income (loss) and net income
(loss) per share would have been negatively impacted as indicated below:        

                                                                [Download Table]

                                                       Years ended June 30,   
                                                        2001           2000   
                                                        ----           ----   
                                                                              
Net income (loss)                      As reported  ($5,933,147)     $252,581 
                                       Pro forma    ($6,391,698)    ($576,082)

Net income (loss) per share - basic    As reported  ($     0.61)     $   0.03 
                                       Pro forma    ($     0.66)    ($   0.06)

Net income (loss) per share - diluted  As reported  ($     0.61)     $   0.03 
                                       Pro forma    ($     0.66)    ($   0.06)


The per share weighted-average fair values of stock options granted during the  
years ended June 30, 2001 and 2000 were $0.27 and $2.03, respectively, on the   
date of grant using the Black-Scholes option-pricing model with the following   
assumptions:                                                                    

                                              Years ended June 30,

                                              2001                2000
                                              ----               -----
Dividend Yield                                  0%                  0%
Volatility Factor                             191%                119%
Risk-Free Interest Rate              4.64% - 6.16%       5.86% - 6.54%
Average Expected Option Life               3 Years             3 Years

10KSB
47th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 47th
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.  During the
year ended June 30, 2001,  the Company  granted  787,500  options with  exercise
prices ranging from $0.25 to $1.50.                                             

Common Stock Warrants:                                                          

On October 18, 1995, in connection with the Company's initial public offering of
its Common Stock, the 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. 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 per share.  In November
1996,  the Company  issued  177,988  warrants at an exercise  price of $6.00 per
share, which expire in November 2001.                                           

Information regarding the warrants is as follows:                               

Number of 
                      Warrants        Exercise Price
                      --------        --------------
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         
                      =======          =============
Warrants granted               - 0 -                  - 0 -       
Warrants canceled            (62,500)                  5.91       
Warrants exercised             - 0 -                  - 0 -       
                      -------          -------------
Balances, June 30, 2001        468,794          $0.50 - $6.00         
                      =======          =============

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.  During the year ended June 30, 2001,  62,500  warrants  with an
exercise price of $5.91 expired per their original terms.                       

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
$766,000 and $787,000 for the years ended June 30, 2001 and 2000, respectively. 

The Company has financed its  Directors and Officers  Liability  and  Employment
Practice  Liability  insurance  policies with a third-party  financing  company.
During the years ended June 30, 2001 and 2000, the Company  recorded $87,000 and
$66,000 in related  insurance  expense and made related  payments of $99,000 and
$55,000 for the same periods,  respectively.  As of June 30, 2001, the Company's
financial  commitment under these financing  arrangements totaled $86,000 and is
payable before June 30, 2002.                                                   

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 matches
50%  of  each  dollar  contributed  by a  participant.  The  Company's  matching
contributions  to the plan were $96,000 and $100,000 during the years ended June
30, 2001 and 2000,  respectively.  The Company's matching  contributions vest in
fifty percent increments over a two-year period.                                

The Company is involved in various legal actions  arising in the ordinary course
of business.  In the opinion of  management,  the ultimate  disposition of these
matters  will most likely not have a material  adverse  impact on the  Company's
financial position.                                                             

10KSB
48th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 48th
14.  Major Customers and International Sales                                    

During the year ended June 30,  2001,  the Company  had three  major  customers,
which accounted for approximately  20%, 17% and 10% of net sales,  respectively,
compared  to the year  ended  June 30,  2000,  when the  Company  had two  major
customers,  which  accounted  for  approximately  22%  and  13%  of  net  sales,
respectively. The amount of export sales included in net sales was approximately
$411,000  and  $509,000  or 6% and 5% of the  Company's  net sales for the years
ended June 30, 2001 and 2000, respectively.                                     

15. Operations by Reportable Segment and Geographic Area                        

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

Based  on its  organizational  structure,  the  Company  operates  in  only  one
geographic  and  one  reportable  segment,   which  is  publishing   interactive
entertainment software for personal computers.                                  

16.  Comprehensive Income (Loss)                                                

SFAS No. 130, "Reporting  Comprehensive Income" requires that all items that are
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial  statements.  Comprehensive income (loss)
is computed as follows:                                                         

                                               Years Ended
                                              June 30,
                                               -----------------------------
                                                 2001             2000
                                                 ----             ----
Net income (loss)                                ($ 5,933,000)      $ 253,000   
Other comprehensive income (loss):                                              
 Foreign currency translation adjustment             38,000         (39,000)
                                              ------------       ---------
Comprehensive income (loss)                      ($ 5,895,000)      $ 214,000   
                                              ============       =========

17. Legal Settlements and Related Costs                                         

On April 5, 2001, the Company and Grant Heilman settled claims alleging that the
Company infringed on copyrights and trademarks owned by Grant Heilman. Under the
terms of the settlement, the Company immediately ceased selling and discontinued
certain games alleged to infringe on Grant Heilman's copyrights.                

The  following  represents  the total cost to the Company  relating to the Grant
Heilman and other litigation  matters and their  classification in the Statement
of Operations for the year ended June 30, 2001.                                 

                                                                [Download Table]

                                                                      Year Ended  
Description of cost relating to Legal Settlements and Related Costs  June 30, 2001
-------------------------------------------------------------------  -------------
                                                                                  
Operating expenses:                                                               
-------------------                                                               
Legal fees                                                             $ 38,218   
Settlement fee - Grant Heilman                                          155,000   
Settlement fee - Other                                                   35,000   
Insurance recovery                                                      (40,000)  
-------------------------------------------------------------------    --------   
Total operating expenses                                                188,218   
                                                                       ========   
Cost of Sales:                                                                    
--------------                                                                    
Provision for obsolescence                                               20,000   
-------------------------------------------------------------------    --------   
Total cost relating to legal settlements                               $208,218   
                                                                       ========   


10KSB
49th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 49th
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 a complaint
that the  Plaintiffs  filed  alleging  that  certain of the  Company's  products
infringed  copyrights and trademarks owned by the Plaintiffs,  and also that the
Company had engaged in unfair competition.  Under the terms of the settlement on
September 30, 2000, the Company ceased  selling and  discontinued  certain games
alleged to  infringe  on  Hasbro's  copyrights.  The  products  discontinued  on
September 30, 2000 accounted for net sales of $2,100,000 for fiscal 2000, or 15%
of net sales for that fiscal year.                                              

The  following  represents  the  total  cost  to the  Company  relating  to this
litigation  and its  classification  in the Statement of Operations for the year
ended June 30, 2000.                                                            

                                                                [Download Table]

                                                                       Year Ended 
Description of costs relating to Legal Settlement and Related Costs  June 30, 2000
-------------------------------------------------------------------  -------------
                                                                                  
Operating expenses:                                                               
-------------------                                                               
Legal fees                                                             $ 185,568  
Settlement fee to plaintiffs                                             160,000  
Consulting fees                                                           15,000  
-------------------------------------------------------------------    ---------  
Total operating expenses                                                 360,568  

Cost of sales:                                                                    
--------------                                                                    
Provision for obsolescence                                                30,000  
-------------------------------------------------------------------    ---------  
Total cost relating to legal settlement                                $ 390,568  
                                                                       =========  

18.   Quarterly Restatement                                                     

The Company is restating its interim  consolidated  financial statements for the
first  three  quarters  of the year  ended  June 30,  2001 for  certain  revenue
recognition  issues. The Company previously  recognized revenue upon shipment of
its products to its customers and recorded an allowance for product returns. The
Company subsequently  determined that certain of its product sales provided that
title passed to the customer only upon receipt of the  Company's  product by the
customer. In addition, the Company has concluded,  based upon receipt of delayed
reporting of sell-through results from its food and drug retailers, that it does
not have the ability to make reliable estimates of product returns for shipments
to food and drug retailers in accordance with SFAS No. 48, "Revenue  Recognition
When the Right of Return  Exists" and the  additional  guidance  provided in the
SEC's Staff  Accounting  Bulletin  No. 101,  "Revenue  Recognition  in Financial
Statements".  Accordingly,  the  restatements  reflect the sale of the Company's
products to its food and drug retailers on a sell-through basis to the consumer.
The related cost of sales and certain operating costs have also been restated to
reflect this revenue recognition policy. The accompanying consolidated financial
statements  and  related  notes  reflect all such  restatements  for the periods
presented.                                                                      

10KSB
50th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 50th
The  impact  of the  restatement  on the  unaudited  consolidated  statement  of
operations for the first three quarters of the year ended June 30, 2001(1) is as
follows:                                                                        

                                                        [Enlarge/Download Table]

                               Sept. 30,     Sept. 30,      Dec. 31,       Dec. 31,      Mar. 31,     Mar. 31,   
                                 2000          2001           2000          2000          2001          2001     
                                  As            As             As            As            As            As      
                               Reported      Restated       Reported      Restated      Reported      Restated   
                                (2) (4)          (3)           (2)           (3)           (2)                   
                              -----------   -----------   ------------   -----------   -----------   ----------- 

                                                                                                                 
Net sales                      $3,333,382    $1,144,874     $3,099,533    $2,590,453    $2,513,459    $2,691,479 
Cost of sales                   1,609,314       751,004      1,772,120     1,413,188     1,569,995     1,721,775 
                              -----------   -----------   ------------   -----------   -----------   ----------- 
Gross profit                    1,724,068       393,870      1,327,413     1,177,265       943,464       969,704 

Operating expenses:                                                                                              
Product development               181,147       181,147        176,325       176,325       194,973       194,973 
Selling, general and                                                                                             
administrative                  1,462,125     1,440,125      1,526,259     1,548,259     1,435,967     1,435,967 
                              -----------   -----------   ------------   -----------   -----------   ----------- 

Operating income (loss)            80,796    (1,227,402)      (375,171)     (547,319)     (687,476)     (661,236)

Interest expense, net               7,353         7,353         23,370        23,370        33,376        33,376 
                              -----------   -----------   ------------   -----------   -----------   ----------- 

Income (loss) from                                                                                               
continuing operations before                                                                                     
income taxes                       73,443    (1,234,755)      (398,541)     (570,689)     (720,852)     (694,612)

Provision (benefit) for                                                                                          
income taxes                       27,846        27,846        (39,638)      (39,638)      (27,307)      (27,307)
                              -----------   -----------   ------------   -----------   -----------   ----------- 

Income (loss) from                                                                                               
continuing operations              45,597    (1,262,601)      (358,903)     (531,051)     (693,545)     (667,305)

Income (loss) from                                                                                               
discontinued operation, net                                                                                      
of income taxes                   (21,416)      (21,416)        89,072        89,072      (100,822)     (100,822)
                              -----------   -----------   ------------   -----------   -----------   ----------- 

Net income (loss)                 $24,181   ($1,284,017)     ($269,831)    ($441,979)    ($794,367)    ($768,127)
                              ===========   ===========   ============   ===========   ===========   =========== 

Net income (loss) per common                                                                                     
share- basic and diluted                                                                                         
                                    $0.00        ($0.13)        ($0.03)       ($0.05)       ($0.08)       ($0.08)
                                    =====        ======         ======        ======        ======        ====== 

Weighted Average Shares:                                                                                         

Basic                           9,749,975     9,749,975      9,749,975     9,749,975     9,749,975     9,749,975 

Diluted                         9,803,844     9,749,975      9,749,975     9,749,975     9,749,975     9,749,975 


  (1) The  Company's  management  is in the process of  determining  the
          impact of the restatement on the consolidated  statement of operations
          for each of the first three  quarters of the year ended June 30, 2000.
          As such,  amounts  for  comparative  prior  quarterly  periods are not
          currently available.  The Company's full-year fiscal 2000 consolidated
          financial statements were not materially impacted, and therefore, were
not adjusted.                                               
  (2) These amounts have been  reclassified to reflect the  discontinued
operation.                                                  

10KSB
51st Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 51st
  (3) "As restated" amounts above reflect approximately  $234,000 in net
          sales  reclassified  from the quarter ended  September 30, 2000 to the
          quarter  ended  December  31,  2000  due to the  Company's  subsequent
          determination  that title did not pass for certain shipments until the
 Company's customers actually received the Company's products.

(4) These   amounts   have  been   reclassified   to   reflect   the
          reclassification  of  consumer  rebates,  from  selling,  general  and
administrative expenses to net sales.                       

PART III

Item 9.           Directors and Executive Officers of the Registrant            

                                                        [Enlarge/Download Table]

Director Name                    Age                  Title                                   
-------------                    ---    -----------------------------------------------  Since
                                                                                         -----
                                                                                              
Robert M. Aiken, Jr. (1)(2)       59    Chairman of the Board of Directors                1998

Gerald W. Klein                   53    Director, President and Chief Executive Officer   1994

Thomas D. Parente (1)(2)          54    Director                                          1995

Lambert C. Thom (1)(2)            56    Director                                          1997
-------                                                                                       
(1)      Member of Audit Committee                                                            
(2)      Member of Compensation Committee                                                     


         The principal occupation of each of the directors of the Company is set
forth below.                                                                    

     Robert M.  Aiken,  Jr.,  who has been a  director  since  January  1998 and
Chairman of the Board since December 2000, has been President of RMA Consulting,
Inc., a management-consulting  firm, since July 1998. From November 1996 to June
1998,  Mr. Aiken was Executive  Vice  President and Chief  Financial  Officer of
Sunoco,  Inc.  (formerly Sun Company,  Inc.), and from September 1990 to October
1996, Mr. Aiken was Senior Vice President and Chief Financial Officer of Sunoco,
Inc. Mr. Aiken is a certified public  accountant.  In addition to serving on the
Company's  board,  Mr.  Aiken  serves  on the  Board of  Trustees  for Bryn Mawr
College.                                                                        

     Gerald W. Klein has served as President and Chief Executive  Officer of the
Company  since June  1998.  He joined the  Company as Vice  President  and Chief
Financial  Officer in February  1996 and has been a Director  since August 1994.
Prior to joining the Company,  Mr. Klein was President,  Chief Executive Officer
and a Director  of  Megamation  Incorporated,  a publicly  traded  company  that
manufactured automation work cells used in various industries.  From August 1991
to October 1994,  Mr. Klein served as President and Chief  Executive  Officer of
PricePoint,  Inc., a start-up  company  engaged in the development of electronic
retail pricing  systems  developed to replace paper shelf labels in supermarkets
and  other  retail  markets.  From  1979 to 1991,  Mr.  Klein  was  employed  by
Checkpoint  Systems,  Inc., a provider of security and access control systems to
retailers,  commercial  businesses,  and  libraries  and was President and Chief
Operating  Officer of that company from April 1986 to July 1991.  Mr. Klein is a
certified public accountant.                                                    

     Thomas D.  Parente  joined the Company as a Director in June 1995,  and was
elected as Chairman of the Board in August  1998,  which  position he held until
December  2000.  Mr.  Parente is Corporate  Secretary  and Director of Corporate
Development for Ole Hansen & Sons,  Inc., a privately owned holding  company,  a
position he has held since December 1996. From May 1995 to November 1996, he was
self-employed  as a financial  consultant to  businesses.  From April 1988 until
April 1995,  he was a Vice  President and the Chief  Financial  Officer of Suvar
Corporation, a manufacturer of specialty chemicals for the printing and coatings
markets.  From June 1970 until April 1988,  Mr. Parente was employed by KPMG LLP
and was a partner with that firm from April 1979 until April 1988.  Mr.  Parente
is a certified public accountant.                                               

10KSB
52nd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 52nd
     Lambert C. Thom joined the Company as a Director in December  1997.  He has
served as Vice President and Managing Director of Bangert, Dawes, Reade, Davis &
Thom,  Incorporated,  a private  investment firm, since 1975. From 1989 to 1995,
Mr. Thom served as Vice  President of John Hancock  Capital  Growth  Management,
Inc., an investment management firm.                                            

 EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:         

Name                    Age               Position                  
----                    ---               --------                  

Gerald W. Klein                53     President and Chief Executive Officer     
William C. Acheson             51     Executive Vice President                  
Lawrence Fanelle               49     Vice President, Operations                
Thomas W. Murphy               42     Vice President, Finance and Chief         
             Financial Officer
Richard Siporin                41     Vice President, Sales                     

     Mr. Klein has been  President  and Chief  Executive  Officer of the Company
since June 1998.  He joined the Company as Vice  President  and Chief  Financial
Officer in February  1996 and has been a Director  since August  1994.  Prior to
joining the Company,  Mr. Klein was  President,  Chief  Executive  Officer and a
Director of Megamation Incorporated, a publicly traded company that manufactured
automation  work cells used in various  industries.  From August 1991 to October
1994, Mr. Klein served as President and Chief  Executive  Officer of PricePoint,
Inc., a start-up company engaged in the development of electronic retail pricing
systems developed to replace paper shelf labels in supermarkets and other retail
markets. Mr. Klein is a certified public accountant.                            

     Mr. Acheson has been the Company's  Executive Vice President since December
1999. He joined the Company in May 1997 as the Company's  Vice President - Sales
and Marketing. Prior to that, Mr. Acheson provided marketing consulting services
to the Company from  January 1997 until April 1997.  From 1992 until April 1996,
Mr. Acheson served as Senior Vice President of Revlon, Inc.                     

     Mr.  Fanelle has been the  Company's  Vice  President of  Operations  since
November 1998. He joined the Company as General Manager in September 1997. Prior
to joining the Company,  Mr.  Fanelle was Vice President of Operations of Besam,
Inc.,  a  manufacturer  of  automatic  doors  primarily  for  retail  stores and
supermarkets.  Mr. Fanelle joined Besam in 1994 as Director of Operations.  From
1979 to 1986, Mr. Fanelle was employed by Checkpoint  Systems,  Inc., a provider
of security and access  control  systems and was Vice President of Operations of
that company from 1987 to 1994.                                                 

     Mr. Murphy has been Chief Financial Officer of the Company since July 1999.
He joined the Company as Controller  in May 1996.  Prior to joining the Company,
Mr. Murphy was Controller of Megamation Incorporated,  a publicly traded company
that manufactured automation work cells used in various industries, from January
1995 until April 1996, and Accounting Manager of Ohmicron, Inc., a biotechnology
company, from January 1993 until December 1994. From September 1985 to May 1992,
Mr. Murphy served as Accounting Manager at Checkpoint Systems,  Inc., a provider
of security and access control  systems.  Mr. Murphy has been a certified public
accountant since 1987.                                                          

     Mr.  Siporin joined the Company in January 2000 as Vice President of Sales.
Prior to joining the  Company,  he served as Senior Vice  President of Sales for
Sunbeam,  Inc.,  Health  Division.  From 1988 to 1998,  Mr.  Siporin served in a
number of  positions at Revlon,  Inc.,  including  serving as Vice  President of
Sales from 1992 to 1998.  From 1982 to 1988,  Mr. Siporin held a number of sales
management positions with Playtex Family Products.                              

10KSB
53rd Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 53rd
COMPLIANCE WITH SECTION 16(a) OF THE
 SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive  officers,  and persons who own more than ten percent of
the Company's Common Stock, to file with the Securities and Exchange  Commission
reports about their beneficial ownership of the Company's Common Stock. All such
persons are required by the Commission to furnish the Company with copies of all
reports that they file.                                                         

     Based solely upon a review of the copies of such  reports  furnished to the
Company, or written representations from certain reporting persons that no other
reports were  required,  the Company  believes that during the fiscal year ended
June 30,  2001,  all of its  officers  and  directors  complied  with all filing
requirements applicable to them.                                                

10KSB
54th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 54th
Item 10.          Executive Compensation                                        

EXECUTIVE COMPENSATION

Summary Compensation Table                                                      

     The  following  table  sets  forth  certain   information   concerning  the
compensation  paid during the fiscal years ended June 30, 2001, 2000 and 1999 to
the Company's Chief Executive Officer and the Company's other executive officers
whose salary and bonus exceeded $100,000 during the 2001 fiscal year.           

                                                        [Enlarge/Download Table]

                                              Annual Compensation               Long-Term Compensation        
                                              -------------------               ----------------------        
                                                                             Securities                       
                                       Fiscal                               Underlying           All Other    
Name & Principal Position               Year      Salary ($)     Bonus ($)  Options (#)       Compensation (1)
-------------------------               ----      ----------     ---------  -----------       ----------------

                                                                                                              
Gerald W. Klein                         2001        176,086         -0-       150,000              $4,964     
President and Chief Executive Officer   2000        175,885         -0-       37,500               $5,000     
                                        1999        165,757         -0-       30,000               $5,581     

William C. Acheson                      2001        165,961         -0-       50,000               $5,250     
Executive Vice President                2000        162,877         -0-       25,000               $5,375     
                                        1999        150,327         -0-       29,000               $6,055     

Nancy M. Simpson (2)                    2001        120,677         -0-       50,000               $5,250     
Former Vice President - Product         2000        120,477         -0-       10,000               $5,375     
Development                             1999        106,404         -0-       25,000               $5,375     

Lawrence Fanelle                        2001        123,012         -0-       50,000               $5,250     
Vice President - Operations             2000        122,812         -0-       10,000               $5,375     
                                        1999        108,135         -0-       25,000               $5,000     

Richard Siporin                         2001        150,825         -0-       50,000               $7,904     
Vice President - Sales                  2000        60,577          -0-       100,000              $2,596     
                                        1999          -0-           -0-         -0-                $ - 0-     
--------------------------                                                                                    

(1)  Represents  amounts  contributed  by the  Company  to each  named
executive officer's 401(k) Plan.                            

 (2)  On August 2, 2001,  Ms.  Simpson's  employment was terminated as a
          result of  reductions  in the  Company's  workforce to reduce  payroll
          expenses.  Pursuant to a separation agreement entered into at the time
          Ms. Simpson's employment was terminated,  the Company paid Ms. Simpson
          the  equivalent of two weeks' base salary,  and also provided her with
          medical and dental insurance through October 31, 2001 at the Company's
          expense.  She also received a personal  computer and a laptop computer
          from the  Company,  valued  at  approximately  $4,000,  as part of her
separation package.                                         

10KSB
55th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 55th
Option Grants During 2001 Fiscal Year                                           
-------------------------------------                                           

The following table provides information related to options granted to the named
executive officers during fiscal 2001. The Company does not have any outstanding
stock appreciation rights.                                                      

                                                        [Enlarge/Download Table]

                            Number of Securities      Percent of Total Options                                       
                             Underlying Options       Granted to Employees in     Exercise Price                     
          Name                     Granted                  Fiscal Year              ($/Share)        Expiration Date
          ----                     -------                  -----------              ---------        ---------------
                                                                                                                     
Gerald W. Klein                  150,000(1)                     19 %                   $0.25              1/25/06    
William C. Acheson                50,000(2)                      6 %                   $0.25              1/25/06    
Nancy M. Simpson                  50,000(2)                      6 %                   $0.25              1/25/06    
Lawrence Fanelle                  50,000(2)                      6 %                   $0.25              1/25/06    
Richard Siporin                   50,000(2)                      6 %                   $0.25              1/25/06    

(1)      75,000 of these options become exercisable on each of January 25, 2002 and January 25, 2003.                
(2)      25,000 of these options become exercisable on each of January 25, 2002 and January 25, 2003.                


Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option      
--------------------------------------------------------------------------      
Values                                                                          
------                                                                          

The following table provides information related to employee options exercised  
by the named executive officers during fiscal 2001 and the value of such options
at year-end.                                                                    

                                                        [Enlarge/Download Table]

                                                             Number of Securities        Value* of Unexercised  
                                                            Underlying Unexercised      In-The-Money Options at 
                    Shares Acquired                         Options at FY End (#)             FY-End ($)        
  Name               on Exercise (#)  Value Realized ($)  Exercisable/Un-exercisable  Exercisable/Un-exercisable
  ----               ---------------  ------------------  --------------------------  --------------------------
                                                                                                                
Gerald W. Klein           -0-                 -0-             132,000 / 185,000                -0- / -0-        
William C. Acheson        -0-                 -0-              247,633 / 76,367                -0- / -0-        
Nancy M. Simpson          -0-                 -0-              119,966 / 65,034                -0- / -0-        
Lawrence Fanelle          -0-                 -0-              129,900 / 65,100                -0- / -0-        
Richard Siporin           -0-                 -0-              33,000 / 117,000                -0- / -0-        


* Value of options based upon a share price of $0.14, the closing price of the  
Common Stock on June 30, 2001.                                                  

Long-Term Incentive Plans                                                       

The Company does not have any long-term incentive plans.          

 COMPENSATION OF DIRECTORS

     The non-employee members of the Board of Directors receive $500 per meeting
attended. Additionally, the members of the Audit Committee receive $500 for each
committee meeting attended and the members of the Compensation Committee receive
$500  for each  committee  meeting  attended.  All  directors  are  entitled  to
reimbursement  for  reasonable  expenses  incurred in the  performance  of their
duties as Board members.  Additionally,  the Company's Amended and Restated 1995
Stock  Option  Plan  provides  that all  non-employee  members  of the  Board of
Directors  receive an initial  grant of options  to  purchase  10,000  shares of
Common Stock upon appointment or election to the Board,  and thereafter  receive
options to purchase  5,000 shares of Common Stock on January 1 of each year that
such person is a non-employee director. The options have terms of five years and
have an exercise  price equal to the fair market value on the date of grant.  On
January 25, 2001, the Company  granted options for 25,000 shares of Common Stock
to each non-employee director in lieu of the automatic annual option grants.    

10KSB
56th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 56th
Item 11.   Security Ownership of Certain Beneficial Owners and Management       

SECURITY OWNERSHIP

     The  following  table sets forth  information  as  supplied  to the Company
regarding  the number and  percentage  of shares of the  Company's  Common Stock
beneficially  owned on November 28, 2001 by: (i) those persons or entities known
by  management to  beneficially  own more than five percent of the Common Stock;
(ii) each nominee for  director  and director of the Company;  (iii) each of the
Company's  executive officers named in the Summary  Compensation Table; and (iv)
all directors and executive officers of the Company as a group.                 

                                                        [Enlarge/Download Table]

                                                   Amount and Nature                    
Name of                                             of Beneficial      Percent of Class 
Beneficial Owner (1)                                Ownership (2)     Beneficially Owned
--------------------                                -------------     ------------------

                                                                                        
Robert M. Aiken, Jr.                                   70,500 (3)             *         
2 Cedar Marsh Retreat                                                                   
Savannah, GA  31411-2922                                                                

William C. Acheson                                    384,900 (4)             3.7%      

Lawrence Fanelle                                      168,675 (5)             1.6%      

Gerald W. Klein                                       475,000 (6)             4.6%      

Odyssey Capital Group, L.P.                           797,500 (7)             7.9%      
950 West Valley Road, Suite 2902                                                        
Wayne, PA 19087                                                                         

Thomas D. Parente                                      90,000 (8)             *         
133 Union Mill Terrace                                                                  
Mt. Laurel, NJ 08054                                                                    

Nancy M. Simpson                                      198,000 (9)             1.9%      

Richard Siporin                                        60,300 (10)            *         

Lambert C. Thom                                       113,624 (11)            1.1%      
Bangert Dawes Reade Davis & Thom                                                        
106 Lyford Drive                                                                        
Tiburon, CA  94920                                                                      

All officers and directors as a group (9 persons)   1,663,541 (12)           14.8%      

-------                                                                                 

*Less than 1%.                                                                  

(1)      Unless otherwise indicated, the address of each named holder is c/o    
     eGames, Inc., 2000 Cabot Boulevard, Suite 110, Langhorne, PA 19047.

(2)      Beneficial ownership is determined in accordance with the rules of the 
       Securities and Exchange Commission (the "SEC") and generally includes
      voting or investment power with respect to securities. In accordance
     with SEC rules, shares which may be acquired upon exercise of stock
     options which are currently exercisable or which become exercisable
      within sixty days of November 28, 2001 are deemed to be beneficially
        owned by the optionee. Except as indicated by footnote, and subject to
         community property laws where applicable, the persons or entities named
       in the table above have sole voting and investment power with respect
    to all shares of Common Stock shown as beneficially owned by them.

10KSB
57th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 57th
(3)      Includes 57,500 shares of Common Stock that may be acquired through the
      exercise of options that were exercisable as of November 28, 2001 or
become exercisable within 60 days of that date.               

(4)      Includes 290,600 shares of Common Stock that may be acquired through   
       the exercise of options that were exercisable as of November 28, 2001
or become exercisable within 60 days of that date.            

(5)      Includes 166,600 shares of Common Stock that may be acquired through   
       the exercise of options that were exercisable as of November 28, 2001
        or become exercisable within 60 days of that date. Also includes 2,075
shares held by Mr. Fanelle's immediate family members.        

(6)      Includes 230,000 shares of Common Stock that may be acquired through   
       the exercise of options that were exercisable as of November 28, 2001
or become exercisable within 60 days of that date.            

(7)      The  information  presented  is as of June  30,  2001  based  upon     
        information  supplied to the Company by Odyssey  Capital  Group,  L.P.
        ("Odyssey").  Includes  28,000  shares of Common Stock  issuable  upon
        exercise of  warrants.  Voting and  investment  power of the shares of
        Common Stock held by Odyssey are shared by Odyssey and John P. Kirwin,
        Bruce E.  Terker and Kirk B.  Griswold,  who are each  officers of the
        corporate  general  partner of Odyssey.  Also includes  250,000 shares
held by a partnership controlled by Mr. Terker.               

(8)      Includes 52,500 shares of Common Stock that may be acquired through the
      exercise of options that were exercisable as of November 28, 2001 or
     become exercisable within 60 days of that date. Also includes 5,550
shares held by Mr. Parente's immediate family members.        

(9)      The information presented is as of June 30, 2001 based upon information
    supplied to the Company by Ms. Simpson. Includes 185,000 shares of
        Common Stock that may be acquired through the exercise of options that
       were exercisable as of November 28, 2001 or become exercisable within
60 days of that date.                                         

(10)     Includes 58,000 shares of Common Stock that may be acquired through the
      exercise of options that were exercisable as of November 28, 2001 or
become exercisable within 60 days of that date.               

(11)     Includes 57,500 of Common Stock that may be acquired through the       
      exercise of options that were exercisable as of November 28, 2001 or
become exercisable within 60 days of that date.               

(12)     Includes 1,191,600 shares of Common Stock that may be acquired by such 
     persons through the exercise of options that were exercisable as of
      November 28, 2001 or become exercisable within 60 days of that date.

10KSB
58th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 58th
 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   Share Purchase Agreement dated May 11, 2001 by and between the
Registrant and Greenstreet Software Limited.  
  (2) 2.2   Sale and Purchase Agreement between the Registrant and the
               stockholders of Software Partners Publishing and Distribution
Ltd. Dated August 14, 1998.                   
(3) 3.1   Amended and Restated Articles of Incorporation of the   
Registrant.                                   
(4) 3.2   By-Laws of the Registrant.                              
(5) 4.1   Rights Agreement, dated as of June 1, 1999, between the 
Registrant and StockTrans, Inc.               
      (6) 4.2   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. 
      (7) 10.1   Form of Redeemable Warrant for the Purchase of the Registrant's
          Common Shares (Exhibit A to Form of Amended and Restated
                Agreement and Plan of Merger between and among Applied Optical
Media Corporation and the Registrant).        
(8) 10.2   Form of Underwriter's Warrant Agreement.                 
(3) 10.3   Amended and Restated 1995 Stock Option Plan.             
(9) 10.4   Form of Purchase Agreement for the Class Two Convertible 
         Preferred Stock (the "Class Two Preferred") dated as of
November 15, 1996.                            
  (9) 10.5   Form of Warrant Agreement for the Warrants (the "Warrants")
              issued to the holders of the Class Two Preferred dated as of
November 15, 1996.                            
 (9) 10.6   Form of Registration Rights Agreement for the Common Stock
                 underlying the Class Two Preferred and the Warrants dated as of
November 15, 1996.                            
(9) 10.7   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.
(10) 10.8   Purchase Agreement dated January 30, 1997 between the     
Registrant and Odyssey Capital Group, L.P.    
 (10) 10.9   Agreement dated January 30, 1997 between the Registrant and
Odyssey Capital Group, L.P.                   
  (10)10.10   Registration Rights Agreement dated January 30, 1997 between
the Registrant and Odyssey Capital Group, L.P.
(11)10.11   Warrant Agreement dated January 30, 1997 by and between   
Registrant and PJM Trading Company, Inc.      
    (12)10.12   Loan Agreement dated August 9, 2000 by and between Summit Bank
(now Fleet Bank) and the Registrant.          
   (12)10.13   Security Agreement dated August 9, 2000 by and between Summit
Bank (now Fleet Bank) and the Registrant.     
(12)10.14   $2,000,000 Secured Line of Credit Note.                   
 (13)10.15   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.                              
(14)10.16   Description of Registrant's Fiscal 2001 Employee Incentive
Compensation Plan                             

10KSB
59th Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 59th
  (15)10.17   Forbearance Agreement by and between Fleet National Bank and
the Registrant dated October 31, 2001.        
(15)10.18   Common Stock Purchase Warrant of the Registrant dated     
October 31, 2001.                             
 (15)10.19   Registration Rights Agreement by and between Fleet National
 Bank and the Registrant dated October 31, 2001.
23.1    Consent of KPMG LLP.                                  
(15)24.1    Power of Attorney.                                        

---------------------------------------                                         

(1)     Incorporated herein by reference from the Registrant's Form 8-K as
        filed with the Securities and Exchange Commission on May 25, 2001.
(2)     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.                
 (3)     Incorporated by reference herein from the Registrant's Form SB-2 as
         filed with the Securities and Exchange Commission on July 28, 1995.
(4)     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              
(5)     Incorporated by reference herein from the Registrant's Form 8-K as
         filed with the Securities and Exchange Commission on June 10, 1999.
(6)     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.                      
(7)     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.
 (8)     Incorporated by reference herein from the Registrant's Form SB-2 as
         filed with the Securities and Exchange Commission on July 28, 1995.
(9)     Incorporated by reference herein from the Registrant's Form 8-K as
       filed with the Securities and Exchange Commission on November 27,
1996.                                                     
(10)     Incorporated by reference herein from the Registrant's Form 8-K as 
      filed with the Securities and Exchange Commission on February 4,
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)     Incorporated herein by reference from the Registrant's Form 10-KSB 
       for the year ended June 30, 2000 as filed with the Securities and
Exchange Commission on September 28, 2000.                
(14)     Incorporated herein by reference from the Registrant's Form 10-QSB 
           for the quarter ended September 30, 2000 as filed with the Securities
and Exchange Commission on November 14, 2000.             
(15)     Incorporated herein by reference with the Registrant's Form 8-K as 
       filed with the Securities and Exchange Commission on November 13,
2001.                                                     
(16)     See signature page.                                                

Reports on Form 8-K                                                             
-------------------                                                             

On May 25, 2001,  the Company filed a report on Form 8-K to announce the May 11,
2001 sale of the Company's United Kingdom  subsidiary,  eGames Europe,  Ltd., to
Greenstreet  Software  Limited,   which  filing  included  Unaudited  Pro  Forma
Consolidated Financial Statements.                                              

On July 26,  2001,  the  Company  filed a report on Form 8-K  regarding  a press
release  announcing the Company's  preliminary  unaudited results for the fiscal
fourth quarter and fiscal year ended June 30, 2001.                             

On November 13, 2001,  the Company  filed a report on Form 8-K regarding a press
release  announcing  that the Company and Fleet National Bank ("Fleet")  entered
into an  agreement  to pay off the  outstanding  balance  owed to  Fleet  over a
twenty-two month period.                                                        

10KSB
Last Page of 60
TOC
1st
Previous
Next
↓Bottom
Just 60th
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: January 25, 2002                                                          

     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: January 25, 2002          /s/  Gerald W. Klein                            
----------------          --------------------                      
                              Gerald W. Klein, President and Chief Executive
Officer         

Date: January 25, 2002          /s/ Thomas W. Murphy                            
----------------          --------------------                      
                             Thomas W. Murphy, Chief Financial Officer and
        Chief Accounting Officer

     Each person in so signing also makes,  constitutes  and appoints  Robert M.
Aiken, Jr., 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: January 25, 2002          /s/  Robert M. Aiken, Jr.                       
----------------          -------------------------                 
    Robert M. Aiken, Jr.
                  Chairman of the Board of Directors

Date: January 25, 2002          /s/  Thomas D. Parente                          
----------------          ----------------------                    
 Thomas D. Parente
Director        

Date: January 25, 2002          /s/  Lambert C. Thom                            
----------------          --------------------                      
Lambert C. Thom 
Director        

Date: January 25, 2002          /s/  Gerald W. Klein                            
----------------          --------------------                      
Gerald W. Klein 
Director        

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10KSB’ Filing		Date		First		Last			Other Filings
		6/1/09		44
		10/31/06		10		42
		7/31/03		41
		3/24/03		41
		1/25/03		55
		11/1/02		10		42
		10/16/02		47
		10/13/02		47
		6/30/02		10		47			10KSB
Filed on:		1/25/02		55		60
		1/23/02		1
		1/9/02		30
		12/31/01		1		42			10QSB
		12/26/01		16
		11/28/01		56		57
		11/13/01		59					8-K
		11/2/01		10		42
		10/31/01		54		59
		9/30/01		13					10QSB
		8/2/01		54
		7/26/01		59					8-K
		7/23/01		10		42
For Period End:		6/30/01		1		59			NT 10-K
		5/25/01		59					8-K
		5/11/01		3		59
		4/19/01		16
		4/5/01		48
		4/2/01		13		16
		1/25/01		45		55			8-K
		12/31/00		25		51			10QSB,  10QSB/A
		11/14/00		59					10QSB
		9/30/00		25		59			10QSB,  10QSB/A
		9/28/00		59					10KSB
		9/8/00		49
		8/17/00		59					8-K
		8/16/00		58
		8/9/00		25		58			8-K
		6/30/00		6		59			10KSB
		6/30/99		33		54			10KSB
		6/21/99		44
		6/10/99		59					8-K
		6/1/99		44		58			8-K
		3/31/99		3					10QSB,  8-K
		12/14/98		45
		11/16/98		59					10QSB
		9/30/98		59					10QSB
		9/10/98		59					10KSB
		8/14/98		58					8-K
		6/30/98		59					10KSB
		9/29/97		59					10KSB
		6/30/97		59					10KSB
		2/4/97		59					8-K
		1/30/97		58					8-K
		11/27/96		59					8-K
		11/15/96		58					8-K
		5/14/96		59					10QSB
		3/31/96		59					10QSB
		3/25/96		58
		10/18/95		47
		10/4/95		59
		7/28/95		59
		6/30/95		44
									List all Filings