Item 1.01 Entry into a Material Definitive Agreement On August 16, 2006, eGames, Inc. (the "Company ") and Lawrence F. Fanelle, the Company's Vice President of Operations, entered into a Separation Agreement and General Release of All Claims (the "Severance Agreement") in connection with the elimination of Mr. Fanelle's position at the Company. Pursuant to the Severance Agreement, the Company agreed to pay Mr. Fanelle a lump sum of $79,180, less taxes required to be withheld by law, and pay $10,100 to an outplacement service for Mr. Fanelle. Additionally, under the terms of the Severance Agreement, 98,000 of Mr. Fanelle's outstanding stock options, with exercise prices ranging from $0.50 to $0.75, will continue to be exercisable in accordance with their terms, and Mr. Fanelle was permitted to keep a Company-owned desktop computer. Mr. Fanelle will also receive payments for his accrued but unpaid vacation. The Severance Agreement also provides for a release of claims by Mr. Fanelle. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. eGames, Inc. By: /s/ Thomas W. Murphy -------------------------------- Thomas W. Murphy, Vice President and Chief Financial Officer Dated: August 18, 2006