Entertainment Games, Inc. – ‘10KSB’ for 6/30/06

On:  Wednesday, 9/27/06, at 4:32pm ET   ·   For:  6/30/06   ·   Accession #:  948703-6-7   ·   File #:  33-95122

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

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Form 10KSB - Egames, Inc. Fiscal 2006                 65    321K 

Document Table of Contents

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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, 2006

|_|          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                          None                      

Check whether the issuer is not required to file reports pursuant to            
Section 13 or 15(d) of the Exchange Act         (  )                            

Check whether the issuer (1) filed all reports required to be filed by Section  
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter  
period that the registrant was required to file such reports), and (2) has been 
subject to such filing requirements for the past 90 days. Yes (X) No ( )        

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

Indicate by check mark whether the registrant is a shell company (as defined    
in Rule 12b-2 of the Exchange Act):      Yes (  )   No ( X )                    

State issuer's revenues for its most recent fiscal year:  $4,756,000            

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: $2,367,000 as of September 13, 2006.    

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: 11,724,193 shares of Common Stock, no
par value per share, as of September 27, 2006.                                  

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  eGames, Inc.
 Form 10-KSB
 For the Fiscal Year Ended June 30, 2006

 INDEX

                                                                          Page
                                                                          ----
PART I

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

Item  2.  Properties......................................................   13 

Item  3.  Legal Proceedings...............................................   13 

Item  4.  Submission of Matters to a Vote of Security Holders ............   13 

 PART II

Item  5.  Market for Common Equity, Related Stockholder Matters and Small       
         Business Issuer Purchases of Equity Securities..................   14

Item  6.  Management's Discussion and Analysis or Plan of Operation.......   15 

Item  7.  Financial Statements ...........................................   28 

Item  8.  Changes in and Disagreements with Accountants on Accounting           
         and Financial Disclosure .......................................   44

Item 8A.  Controls and Procedures ........................................   44 

Item 8B.  Other Information ..............................................   44 

PART III

Item  9.  Directors, Executive Officers, Promoters and Control Persons;         
         Compliance with Section 16(a) of the Exchange Act...............   45

Item 10.  Executive Compensation..........................................   47 

Item 11.  Security Ownership of Certain Beneficial Owners and Management        
         and Related Stockholder Matters.................................   49

Item 12.  Certain Relationships and Related Transactions .................   51 

 PART IV

Item 13.  Exhibits .......................................................   51 

Item 14.  Principal Accountant Fees and Services..........................   53 

Signatures................................................................   54 

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PART I

This annual report on Form 10-KSB contains forward-looking statements about     
future events and our future financial performance that involve risks and       
uncertainties. Actual events and our actual future financial results may differ 
substantially from the events and results discussed in the forward-looking      
statements due to various factors, including, but not limited to, those         
discussed in "Factors Affecting Future Performance" beginning on page 9.        

Item 1.    Business                                                             

GENERAL                                                                         

eGames, Inc. ("eGames", "our", "us", or "we") is a Pennsylvania corporation     
incorporated in July 1992 that publishes, markets and sells PC software games.  
Historically, we have focused on publishing affordable software games for the PC
platform only, and selling the greatest volume of our PC games in mass-market   
retail stores. Our current strategy focuses on publishing higher quality,       
higher-priced PC games, in addition to our value-priced jewel case PC titles,   
and to tap into the growing sales of casual and hardcore PC games via the       
Internet, while achieving a stronger retail presence. In North America, our PC  
games are distributed primarily through third-party software distributors who   
service mass-merchant and major retailers. In territories outside North America,
we license our PC games to third-party software distributors who are responsible
for the manufacture and distribution of our PC games within specific geographic 
territories. We market and sell our game titles under the eGames(TM),           
Cinemaware(R) and Cinemaware Marquee(TM) brands.                                

INDUSTRY BACKGROUND                                                             

The worldwide PC game software market is very competitive. We compete with      
companies having operations varying from small companies with limited resources 
to large companies with much greater resources than we have. The changing       
worldwide PC game software market in recent years has been impacted by many     
factors, such as: an increasing number of technologically advanced PCs with more
powerful operating systems, enhanced graphics and video cards, and expanded     
memory chips, as well as higher capacities and faster speeds for CD, DVD and    
hard drives in the home and office; greater access by consumers to the Internet 
through high-speed access modes (such as cable modems and DSL connections);     
increased interest in online game play; the increasing number of game console   
devices in the home; and the development of increasingly advanced technologies  
supporting game play (such as hand held game devices, mobile phones, and        
personal digital assistants). Market data suggests that one of the results of   
the increased competition in the overall PC game market, driven by this growing 
array of alternative game-playing technologies, is a decrease in the retail     
shelf space offering value-priced PC games in recent years.                     

Additionally, continued growth in the installed base of technologically advanced
yet affordably priced PCs has made PC software games a mass-market commodity.   
The development of this mass market for PC software games has contributed to the
importance of mass merchant PC software sales as a distribution channel, and has
increased the pricing pressure for these types of games and the competition for 
high quality, competitively-priced gaming software content. 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 for PC games are pursuing relationships with    
publishing companies with stronger distribution capabilities than ours,         
including better access to mass market retailers and greater merchandising,     
marketing and promotional resources than we have. At the same time, retailers   
with limited shelf space in their stores are faced with the challenge of        
managing an increasing number of software titles to select from. This factor has
increased the competition for maintaining and/or growing our share of the       
declining amount of retail shelf space allocated to value-priced PC software    
games. A significant result of these market pressures is an industry trend      
toward the consolidation of consumer entertainment PC software publishers and   
distributors. The trends toward industry consolidation and increased competition
for game content and retailer shelf space are expected to continue for the      
foreseeable future.                                                             

BUSINESS STRATEGY                                                               

During fiscal 2006, we began transitioning our business model from one that has 
relied entirely on licensing all of our published PC game software titles from  
independent software developers, to a model that is anticipated to rely         
primarily on using independent developers to develop our titles under agreements
that provide us with ownership rights to these titles, along with publishing    
some third-party licensed titles. The continuing transition of our business     

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model in fiscal 2007 is intended to enable us to better exploit both online and 
retail business opportunities. In the past, our segment of the PC game market   
was restricted to North American retailers, some Internet retail websites, and  
certain international markets where we had limited distribution rights for      
certain licensed properties. Fiscal 2007 will mark the launch of an eGames      
business model designed to adapt to consumers' continually evolving buying      
behavior both on the Internet and at retail.                                    

The goal of our business strategy remains for us to be a leading publisher of   
high quality, affordably priced PC software games for retail and Internet       
distribution. We continue to work towards executing our business plan that      
focuses on:                                                                     

o  Gaining brand name recognition of our titles;                      
    o  Developing new top-selling titles within existing brands and previously
successful core game genres;                                    
 o  Developing top-selling titles within new brands and PC software game
categories;                                                     
o  Strengthening existing distribution and retail relationships and   
continuing to develop new ones;                                 
   o  Expanding our online presence through more attractive and value-adding
      websites such as our new web portal planned for an early calendar 2007
launch; and                                                     
    o  Seeking opportunities to acquire intellectual property, brands or other
    assets that will enable us to broaden our product offering in the PC
game market at retail and on the Internet.                      

The dominant element of our business strategy is to publish familiar, fun,      
family friendly games for PC gamers of all ages and capabilities at affordable  
prices, while maintaining a lean and focused business organization. We focus    
primarily on the under-$20 retail priced segment of the PC game software market.
We evaluate marketplace sales data to determine which products are achieving    
successful consumer acceptance as indicated by strong retail sell-through       
results of titles within various PC game software categories. We then focus on  
publishing successful titles that can have sustainable lifecycles and are       
attractive to a wide range of PC gaming consumers. We believe the best method of
bringing products to market successfully is to identify games consumers are     
currently enjoying and will likely continue buying.                             

We design PC games so they are easy to install and play, requiring little or no 
technical experience or subsequent support. We provide basic product support to 
consumers who purchase our products, and based on consumer feedback we may      
incorporate different or upgraded features within future titles.                

Increasing our North American retail distribution is a very important element of
our business strategy. Our flexible distribution model enables retailers to buy 
our published titles either directly from us or from a distributor they prefer  
to supply their software requirements. Due to the additional costs associated   
with servicing certain retailers directly, we attempt to adjust our pricing     
structure with these retailers to help defray the additional costs associated   
with direct-to-store product shipments. Our aim is to make our titles easily    
available to consumers at the retail stores or Internet websites in which they  
shop frequently.                                                                

We focus our marketing resources on developing or acquiring brands that         
represent value, quality and consistency to the gaming consumer. We believe     
recognizable brands offer a safer choice to consumers in an otherwise confusing,
rapidly changing and often intimidating software marketplace for games. Once a  
consumer becomes highly satisfied with a brand in any given product category, we
believe they will typically tend to actively search for that brand versus       
competing ones. We believe recognizable brands can help drive consistent product
demand by consumers at retail stores, which is our objective.                   

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INTERNET STRATEGY                                                               

Our website, www.egames.com, is a comprehensive website where visitors can      
try game demos, play games for free, buy a wide variety of game products,       
register software purchases, obtain product support, or review investor         
relations information such as regulatory filings, press releases and corporate  
governance documents. We seek to maintain a website that provides value added   
services and information to new and repeat visitors. Our goal is to continually 
improve the quality of our website so that our Internet presentation clearly    
communicates our commitment to providing familiar, fun, and easy-to-use PC games
that are affordably priced.                                                     

The Internet today is a dominant sales and distribution channel for PC titles   
similar to the games we publish. In early calendar 2007, we plan to launch our  
new web portal currently being developed to become a true "destination" website 
for both casual and serious gamers in an effort to increase the distribution and
sale of our products on the Internet. This new web portal will include, among   
other things, several titles developed for us by independent developers that we 
will own and are currently under development for release in early calendar 2007,
as well as a collection of high quality titles licensed from our top independent
software developers.                                                            

MARKETING                                                                       

Our marketing efforts focus on:                                                 

o  Coordinating in-store marketing programs with retailers;           
o  Participating in retail trade shows;                               
     o  Improving our websites (including www.egames.com and www.cinemaware.com,
among others);                                                  
o  Issuing press releases and utilizing public relation firms;        
o  Implementing print and online advertising; and                     
  o  Distributing our PC games on the Internet through third-party and our
own websites.                                                   

Our marketing department is responsible for designing programs intended to      
increase retailer and consumer demand for our software products resulting in    
incremental retailer and distributor purchase orders, and to then achieve       
positive consumer acceptance as indicated by favorable product sell-through     
results to consumers. Our marketing personnel create attractive sales brochures,
advertisements, related promotional materials and various retail displays. Our  
marketing personnel and distributors work together to coordinate retail and     
promotional programs so that they are in place when products are received by    
retailers. Accordingly, in-store advertising, public relations, and             
advertisements are designed and implemented in parallel with product            
availability at retail stores and on Internet websites.                         

SALES AND DISTRIBUTION                                                          

North American Sales and Distribution. We primarily sell our products through   
national software distributors servicing North American mass-merchant and other 
major retailers. Additionally, we have direct sales relationships with certain  
retailers. During the year ended June 30, 2006, Atari, Inc. ("Atari") was our   
largest distributor serving the major North American mass-merchant retailers,   
and represented 31% of our net sales compared to the year ended June 30, 2005,  
when Atari accounted for approximately 45% of our net sales. During fiscal 2006,
we transitioned the majority of our North American distribution to Take Two     
Interactive ("Take Two"), and our net sales to Take Two amounted to 9% and 4%,  
respectively, of net sales for the years ended June 30, 2006 and 2005.          

International Revenues. Our international distribution efforts are managed      
through a series of licensing agreements covering various territories outside of
North America, with the majority of our international revenues originating from 
the United Kingdom, Germany, Australia and Brazil. Our international net        
revenues for the years ended June 30, 2006 and 2005, were $319,000 and $468,000,
respectively, and represented 7% and 9% of net sales, respectively.             

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Distribution Procedures. Our sales organization works with distributors' and    
retailers' sales and purchasing personnel in order to maximize our sales at     
specific retailers. They work with retail buyers and their distributors to      
ensure that an appropriate level of our products are available at each retail   
store, warehouse stock levels are sufficient, promotions and advertising are    
coordinated with product availability, and in-store merchandising plans are     
properly maintained. We also have relationships with certain software           
distributors for product distribution to various retailers based on consignment 
and sell-through agreements.                                                    

COMPETITION                                                                     

The PC game software industry is intensely competitive and is continuing to     
consolidate. The market for affordable PC game software is especially           
competitive. We believe that the principal competitive factors include content  
quality, which is a combination of compelling game play, appealing graphics and 
sounds, technical compatibility and trouble-free operation, brand name          
recognition, price, product packaging, merchandising, ease-of-use, reliability, 
on-line capabilities, and distribution strength.                                

We compete primarily with other PC game publishers. Although there are a variety
of consumer PC software game publishers, based on our product lines and retail  
price points, Electronic Arts, Vivendi, Microsoft, Take-Two Interactive, THQ,   
Activision, Atari, NCSoft, Ubisoft, LucasArts, Cosmi, Mumbo Jumbo, Topics       
Entertainment, SelectSoft, and Interplay are our primary competitors. We are    
facing greater competition as a result of an increase in the number of          
competitors' previously higher-priced titles transitioning down to the $19.99   
and lower retail price points more quickly than in the past, combined with less 
retail shelf space being allocated to value-priced PC game titles. We also face 
additional competition for the consumer's entertainment purchases from other    
evolving gaming platforms, such as game consoles, online game websites, handheld
game devices and mobile phones.                                                 

The market for product content from independent PC software game developers is  
also extremely competitive. We may not be successful in obtaining high-quality  
content to be included in our products if our competitors achieve better access 
to distribution channels, have greater financial resources, or have developed or
acquired a widely recognized brand more attractive to a potential licensor.     

PRODUCT DEVELOPMENT                                                             

Our product development expenses for the years ended June 30, 2006 and 2005 were
$562,000 and $538,000, respectively. Product development expenses consist of    
personnel costs related to product management, content acquisition and          
development, quality assurance testing, packaging design, and website           
administration, along with outside services for product ratings, language       
localization, quality assurance testing and website infrastructure maintenance. 
Product development expenses also include non-recoverable costs related to      
titles that did not achieve distribution into their intended retail channels.   

Our product development team meets regularly to review new product              
opportunities, discuss new competitive products and recent market data, develop 
strategies for new products and to review the status and performance of current 
titles. This product development process, which is managed by the product       
development team by continually evaluating updated product review data, gives   
management valuable visibility into:                                            

 o  Products currently being sold at the major North American retailers;
o  Genres represented by upcoming titles;                             
  o  New product availability for presentation to the major North American
    retailers for upcoming quarters based on retailer shelf reset dates;
and                                                             
o  Timing and scope of financial commitments related to licensing or  
developing content within future titles.                        

We strive to publish new products, whether they are developed by independent    
developers under work-for-hire agreements so that we own the content that is    
developed, or they are published with licensed content developed by independent 
developers. These products are designed to incorporate all of the important     
functions and features of the leading competitive products and to add           
innovative, helpful concepts and improvements to achieve "better than"          
characteristics compared to directly competitive products.                      

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All products are thoroughly tested by our quality assurance personnel before    
they are released for mass production to our third-party CD replication vendor. 
Products are typically tested for performance, compatibility with numerous      
popular PC brands and configurations, typical installation issues,              
functionality, and ease-of-use. Marketing and development employees are         
responsible for reviewing customer feedback, competitive products, product      
performance, and market positioning in order to help introduce additional titles
that reflect current consumer trends while remaining consistent with our        
business strategy.                                                              

In addition to the development of our products' content, considerable effort is 
also spent on seeking ways to continually improve the presentation quality of   
our jewel case and box packaging. Since our products usually have a retail price
of less than $20, our products are considered consumer "impulse buys".          
Therefore, our main opportunity to capture the consumer's attention is through  
attractive packaging that effectively describes the title's best features and   
key attributes relative to competitors' products.                               

BACKLOG                                                                         

We typically ship our products within several days after accepting a retailer or
distributor purchase order, which is common in the PC software game industry.   
Consequently, we do not usually generate a backlog of distributor or retailer   
purchase orders that would be a significant indicator of our future sales or    
earnings.                                                                       

PRODUCT SUPPORT                                                                 

We provide telephone and Internet product support to consumers who purchase our 
products either at a retailer's store or through the Internet at no additional  
charge to them. The cost to provide this service is included in the price we    
charge to our distributors and retailers. We believe high quality user-friendly 
product support can provide valuable feedback to our marketing and software     
development personnel for use in the product development process. Accordingly,  
the support we provide to consumers is typically simple and low-level in nature 
and usually occurs (if at all) shortly after consumers purchase our products.   
These services are rendered by our customer support staff and through the       
frequently asked questions section of our website, and the costs to provide     
these services have historically been minimal (about 1% of net sales).          

OPERATIONS - INTERNAL                                                           

Our accounting, purchasing, inventory control, scheduling, order processing, and
development activities are conducted at our sole physical location, which is    
situated in Langhorne, Pennsylvania. Our information management system supports 
order entry, order (processing, picking, invoicing), accounts receivable,       
accounts payable, general ledger, financial reporting and inventory control. We 
coordinate with our major suppliers through a customized material planning      
system, which provides us with timely, accurate inventory information, on a     
daily basis. This same system also incorporates a synchronized material         
requirements forecasting module that projects product availability, and has     
helped to minimize our product delivery lead times.                             

OPERATIONS - EXTERNAL                                                           

Subject to credit terms and product availability, distributor and retailer      
purchase orders are typically shipped from one of our third-party vendors'      
facilities shortly after we receive them. Based upon specific instructions from 
our internal operations department, third-party vendors:                        

o  Replicate our PC software game titles onto CDs;                    
o  Print our jewel case and box packaging;                            
o  Assemble our completed jewel case and box products;                
o  Apply any customer required stickering at time of shipment;        
o  Process and ship product orders received from retailers and        
distributors; and                                               
o  Process products returned by retailers and distributors.           

We have multiple sources for all components of our products, and have not       
experienced any material delays in production, assembly or delivery.            

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SEASONALITY                                                                     

Our business and the PC game industry in general are highly seasonal primarily  
because there is more store traffic during the period commencing with           
back-to-school shopping beginning in August and continuing through the holiday  
selling season before culminating in January. We typically experience our       
highest sales during our second fiscal quarter, which ends on December 31st,    
compared to the quarter ending in June 30th when we usually experience our      
seasonal lows in sales. Our financial results can also vary based on many       
factors, such as: the timing of retailer decisions to reset their software      
department offerings; changes in consumer demand for our products; and the      
success or failure of our existing titles based on the retailers' evaluation of 
product sell-through results to consumers, which would then impact their        
decisions on replenishment orders for those titles and their willingness to     
place additional orders for our new titles in the future.                       

EMPLOYEES AND INDEPENDENT PC SOFTWARE DEVELOPERS                                

At June 30, 2006, we had 18 full-time and 2 part-time employees, of which 6 were
employed in product development, 5 in sales, marketing and customer support, and
9 in operations, finance and administration. As of the date of this report, we  
have reduced our workforce by 5 employees, so that we currently have 13         
full-time and 2 part-time employees, of which 5 are employed in product         
development, 4 in sales, marketing and customer support, and 6 in operations,   
finance and administration. In addition, we regularly utilize independent PC    
software developers in connection with our product development activities. No   
employees are represented by labor unions, and we have never experienced a work 
stoppage.                                                                       

INTELLECTUAL PROPERTY RIGHTS                                                    

We rely 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 our proprietary rights. United States   
copyright law, international conventions and international treaties, however,   
may not provide meaningful protection against unauthorized duplication or       
infringement of our software. Policing unauthorized use of an easily duplicated 
and broadly disseminated product such as PC software is very difficult. Software
piracy is expected to be a persistent problem for the software industry for the 
foreseeable future. If a significant amount of unauthorized copying of our      
products were to occur, our operating results and financial condition would be  
adversely affected.                                                             

Historically, all of our published software titles have been licensed from      
independent PC software game developers, and in such case we did not acquire the
copyrights for the underlying content. These licenses are typically limited to  
use of the licensed rights in products for specific time periods. While we may  
have renewal rights for most of our content licenses, the publishing of our     
externally developed products is dependent on our ability to continue to obtain 
the intellectual property rights from these third parties on mutually agreeable 
terms and at satisfactory contractual rates. During fiscal 2006, we began using 
independent developers to develop our titles under agreements that provide us   
with ownership rights to these titles.                                          

PC game 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 us, such claims can and have been costly and 
result in a diversion of management's attention and our financial resources,    
which could have a material adverse effect on our business, operating results   
and financial condition. We can and have incurred substantial expenses in       
evaluating and defending such claims, regardless of the merit of the claims. In 
the event that there is a determination that we have infringed on a third       
party's intellectual property rights, we could incur significant monetary       
liability and be prevented from using these rights in the future.               

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FACTORS AFFECTING FUTURE PERFORMANCE                                            

Our business is subject to many risks and uncertainties that could affect our   
future financial performance. If any of the events or circumstances identified  
below occurs, our business and financial performance could be adversely         
impacted, our actual results could differ materially from our expectations and  
the market value of our common stock could further decline. Also, there may be  
additional risks and uncertainties that we are not currently aware of or that we
currently do not believe are material that may negatively impact our future     
business and financial performance.                                             

We have incurred net losses for the last two fiscal years. During this time, we 
have funded our business activities entirely from cash generated from           
operations. If we are unable to return to profitability, we may not be able to  
continue to fund our operations without securing outside financing. Our         
accumulated deficit at June 30, 2006 was $7,957,000. Our operations today are   
subject to all of the risks inherent in the operation of a thinly-capitalized   
small business in a highly competitive industry dominated by much larger and    
financially stronger competitors. These risks include difficulties in licensing 
and developing quality content for our products, distributing and marketing our 
products on terms that are profitable and commercially reasonable to us,        
competition from other products in the same genres and at the price points that 
we sell our products, and unanticipated costs and expenses associated with      
product development, distribution, sales or marketing. Our future success will  
depend on our ability to become profitable in the development, marketing,       
distribution and sales of our current and future software products.             

We may need additional funds, and we may not be able to obtain such funding if  
we need it. In December 2005, we renewed our credit facility agreement with TD  
Banknorth ("TD"), formerly Hudson United Bank, which matures on December 1,     
2006. Our capital requirements are currently funded from the cash flow generated
from product sales and our credit facility. This credit facility is subject to  
limitations based on the value of our net accounts receivable, and therefore    
working capital may not be available to us when we need it. At June 30, 2006 we 
had access to approximately $390,000 under this credit facility, based on the   
prescribed calculation of seventy-five percent of qualified accounts receivable 
as of that date. If we are not able to achieve cash flows from operations at a  
level sufficient to support our business activities, we may require additional  
funds. Our current financial condition and the net losses we have incurred in   
the last two fiscal years could adversely affect our ability to obtain          
additional financing or renew our credit facility, which makes us more          
vulnerable to industry downturns and competitive pressures. Additionally, we may
only be able to raise needed funds on terms that would result in significant    
dilution or otherwise be unfavorable to existing shareholders. Our inability to 
secure additional funding when needed, to access funds from our credit facility 
when needed, or generate adequate funds from operations, would adversely impact 
our operation's long-term viability.                                            

We may not be able to continue to fund our new strategy of developing PC game   
titles that we own. We have started using funds from our operations to pay for  
the development of new PC game titles by independent developers. While we       
believe this use of funds is in our best interests, so that we can fully utilize
the intellectual property created and distribute these titles more broadly,     
there are risks associated with this strategy. For example, the cash we spend on
these development efforts may not be recoverable if the titles developed are not
completed to commercially-acceptable standards, if the titles developed do not  
achieve distribution in retail and Internet channels, or if the costs to develop
these titles exceed the revenues generated from their sales.                    

A significant part of our sales come from a limited number of customers because 
of consolidation in the retail marketplace. The majority of our current sales   
are to software distributors that service the mass-market and other major       
retailers in North America, and therefore our business relies on a concentrated 
group of these large customers. Atari has historically been our primary North   
American software distributor servicing the major mass-merchant retailers in    
North America. However, during fiscal 2006 we transitioned the majority of our  
North American distribution to Take Two Interactive ("Take Two"). During the    
fiscal year ended June 30, 2006, our net sales to Atari were $1.5 million and   
represented 31% of our total net sale, and our net sales to Take Two were       
$433,000 and represented 9% of net sales. Our financial condition, financial    
results and ability to continue as a going concern could be significantly       
affected if: we lost our distribution capability to the major North American    
retailers; if the amount of net sales to Take Two were not to substantially     
increase; or if Take Two was not able or willing to make timely receivable      
payments to us in the normal course of business.                                

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If we cannot continue viable business relationships with our primary software   
distributors and retailers, this would materially harm our business. The terms  
of our business relationships with the primary software distributors and        
retailers of our products do not require them to purchase our products.         
Additionally, software distributors' and retailers purchases of our products are
driven by consumer demand for our titles. If these software distributors and    
retailers were to stop distributing our products, our sales would decline       
substantially and in a brief period of time. In addition, if software           
distributors and retailers were only willing to distribute our products on terms
that were commercially unacceptable to us, our financial condition would be     
materially harmed. We also might not be successful in distributing our products 
directly to key retailers. Even if we were successful in selling our products   
directly to the major software retailers, it might be on terms that are not     
commercially acceptable to us. Our inability to negotiate commercially viable   
software distribution relationships with major software retailers and           
distributors, or the loss of, or significant reduction in sales to, any of our  
primary software distributors or retailers, would adversely affect our business,
operating results and financial condition.                                      

The shelf space retailers are allocating to value-priced PC software games is   
shrinking, which has negatively impacted our business. The reduced amount of    
shelf space being allocated to our category of products in retail stores during 
this fiscal year has continued to cause our net sales to decrease significantly 
compared to prior fiscal years. We continue to see indications that the amount  
of retail shelf space being allocated to PC software games at the $9.99 retail  
price point is decreasing, and we expect this trend to continue negatively      
impacting our results for the foreseeable future unless we are able to          
capitalize on one of more of our other strategies, including our attempt to     
offset the reduction in the value-priced retail PC department with higher-priced
box title offerings, Internet sales, licensing opportunities, alternative retail
channels and launching a new game portal on the Internet designed to increase   
consumer traffic to our new website. We cannot predict whether any of these new 
opportunities or strategies will be effective in increasing net sales or in     
improving our Company's financial condition or financial performance.           

We depend on the market acceptance of our software products, which typically    
have relatively short product life cycles. Our profitability depends on our     
ability to publish new PC software titles that are distributed into retail      
stores and then ultimately sell through to consumers. Our success is also       
dependent on increasing sales of our products via the Internet, to keep pace    
with the growing number of sales of casual games through this medium. During    
fiscal 2006, we experienced a decrease in consumer demand for our titles as     
indicated by reduced product sell-through rates of our titles to consumers at   
retail. Although in fiscal 2007 we will continue to evaluate various product and
marketing strategies to increase consumer demand for our products, both at      
retail and on the Internet, there is no assurance that any of these initiatives 
will be effective, particularly because consumer preferences for PC games are   
difficult to predict and only a few products achieve sustained market           
acceptance. Typical product lifecycles are no more than six to twelve months,   
and have recently been trending towards even shorter retail lifecycles. New     
products we introduce may not achieve any significant degree of market          
acceptance, or the product lifecycles may not be long enough for us to recover  
advance royalty, development, inventory, marketing and promotional costs. If a  
product does not sell through to consumers at a rate satisfactory to our        
retailers or distributors, we could be forced to accept substantial product     
returns or be required to issue significant price markdowns to maintain our     
distribution relationships with these distributors and retailers. We may also   
lose further retail shelf space if our products do not sell through to consumers
at rates that satisfy retailers. The failure of new products to achieve or      
sustain market acceptance can materially and adversely impact our business,     
operating results and financial condition.                                      

The consumer entertainment PC software market is highly competitive and changes 
rapidly. A constantly increasing number of software titles are competing for    
consumer's entertainment spending dollars. Retailer changes to shelf space      
allocations, such as the reductions in retail shelf space for value-priced PC   
games that occurred during the past two fiscal years, can negatively affect our 
future sales and operating results. Additionally, as sales of PC games increase 
on the Internet, we must be able to sell more of our products in that market in 
order to continue to compete in this industry. The competition for retail shelf 
space, as well as product placement on key Internet game portals, continues to  
intensify. We continue to see shifts in the market for PC software games that   
are likely to continue to negatively affect our operating results. Competition  
also results in greater leverage for software retailers, distributors and       
Internet game sites in negotiating terms of sale, including price markdowns,    
product return policies and purchase prices, and our larger competitors may have
more leverage than we do to negotiate better terms than we do. Our retail and   
distribution customers have no long-term obligations to purchase our products,  
and may discontinue purchasing our products at any time. If our competitors     

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develop more successful products than ours, offer competitive products at lower 
price points than ours, or if we are unable to develop consistently high-quality
and well-received products, then our net sales, operating results, and financial
condition will most likely continue to decline.                                 

If our major software distributors or retailers are not able or willing to      
pay us within the normal course of business, this would materially harm our     
financial condition. Software distributors and retailers in the consumer        
entertainment PC software industry and in mass-market retail channels can and   
have experienced significant fluctuations in their businesses and some of these 
companies have ceased operations. If any significant software retailer or       
distributor of our products experienced financial difficulties, became          
insolvent, or went out of business, this would significantly harm our business, 
operating results and financial condition. Our sales are typically made on      
credit, with terms that vary depending upon the customer and the nature of the  
product. We do not hold collateral to secure payment. We maintain an allowance  
for bad debts for uncollectible accounts receivable, if any, which we believe to
be adequate. The actual allowance for bad debts required for any one customer's 
account or on all of the accounts receivable in total, may ultimately be greater
than our allowance for bad debts at any point in time. If any of our major      
software distributors, retailers, or licensees failed to pay an outstanding     
receivable, particularly Take Two, Ditan-Synergex or Microgistix, our business, 
operating results and financial condition would be significantly harmed.        

Price markdowns and product returns could materially reduce our net sales and   
results of operations. Most of our distribution and retail relationships allow  
for product returns and price markdowns. We generally establish allowances for  
future product returns and price markdowns at the time net sales associated with
retail product shipments are recognized. These allowances are based on many     
factors, including historical product returns and price markdowns, product      
sell-through results at retail store locations, field inventory at distributors'
warehouses and at retail stores, the length of time that products have been     
released at retail along with their estimated remaining retail life, outstanding
return material and price markdown authorizations, the introduction of new      
and/or competing software products that could negatively impact the sales of our
products, and the extent to which our newer products with higher retail prices  
or unproven genres remain in the retail channel. Our sales to these customers   
are reported net of product return and price markdown provisions made at time of
product shipment. Since the allowances we establish for product returns and     
price markdowns are estimates, actual product returns and price markdowns could 
ultimately exceed our established allowances for these anticipated amounts,     
which would negatively impact our results of operations.                        

Our operating results fluctuate from quarter to quarter, which makes our future 
operating results uncertain and difficult to predict. Our 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 our    
control. Comparative sequential and year-to-year quarterly operating results may
provide little meaningful information or guidance because of our relatively     
small size and the impact on our net sales resulting from the timing of purchase
orders from software retailers and distributors and other changes in market     
forces. Fluctuations in quarterly operating results will depend upon many       
factors including, but not limited to:                                          

-  Seasonality of consumer demand for PC software games;              
-  Shelf space allocations for value-priced PC software games by major
retailers;                                                      
    -  Number of competitor titles being offered within the core gaming genres
in which we compete and at the same price points;               
  -  Timing of product releases to coincide with shelf resets of the major
North American retailers;                                       
    -  Timing and the amount of product development and marketing expenditures
required to bring future products to market;                    
  -  Timing of receiving and fulfillment of major software distributor and
retailer purchase orders;                                       
   -  Amount and timing of software retailer and distributor product returns
and price markdown requests; and                                
-  Timing of our competitors' new product introductions and product   
enhancements.                                                   

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The seasonal nature of the PC software market can result in harm to our         
financial results if our product releases and shipments do not maximize sales   
during key selling periods. The PC game software industry is highly seasonal    
with sales tending to be higher during the quarter ending December 31st. Delays 
in product development or manufacturing can affect the timing of the release of 
our products, causing us to miss out on key selling periods, such as the        
year-end holiday season. If retailers decide not to sell our products, or       
substantially reduce the number of our titles that they sell, during this key   
holiday selling season, our net sales would decline substantially and our       
operating results would be adversely affected. If we miss product deliveries    
during these key selling periods, or if our products are not ready for shipment 
to meet these critical selling periods, our net sales and operating results     
would also be adversely affected. Additionally, if our products do not get      
adequate distribution into the major North American software retailers' stores  
or do not sell-through to consumers during these key selling periods, our       
financial results for the entire fiscal year would be adversely affected.       

Our business is dependent on commercially viable licensing and product          
development arrangements with independent software developers. Independent      
software developers develop all of the content for our software titles. Our     
success in introducing new higher quality PC software titles depends on our     
ability to maintain relationships and enter into new product development and    
licensing agreements on favorable terms with skilled independent software       
developers. Increased competition for skilled software developers and quality PC
software game content has compelled us to agree to increasingly higher          
contractual royalty rates and larger advance royalty payments and, in some      
cases, to guarantee minimum royalty payments to content licensors. If the       
products subject to these advance and minimum payments do not generate          
sufficient sales volumes to recover these upfront costs, this would have a      
negative impact on our financial results and financial condition. Additionally, 
if we are not able to obtain quality content on commercially viable terms from  
independent software developers, this would also adversely affect our business. 

Our present or future competitors may develop products that are comparable or   
superior to ours. Our competitors may offer higher quality products, lower      
priced products or adapt more quickly than we do to new technologies or evolving
customer requirements. Our competitors typically have more financial resources  
to spend on marketing promotions, sales incentives, packaging treatments,       
licensing more recognizable brands, and advertising efforts. Competition has    
continued to intensify as our industry has consolidated, since we have remained 
a small software publisher and most of our competitors have either grown larger 
or have gone out of business. In order to be successful in the future, we must  
be able to better respond to technological changes, customer requirements and   
competitors' current products and innovations. We may not be able to compete    
effectively in this market, which would adversely affect our operating results  
and financial condition.                                                        

Our common stock has experienced low trading volumes and unpredictable          
volatility on the OTC Bulletin Board. Our shares of Common Stock are currently  
traded on the OTC Bulletin Board under the symbol EGAM, and we currently do not 
qualify for listing on any of the major exchanges, such as Nasdaq or the        
American Stock Exchange. Many stocks traded on the OTC Bulletin Board -         
including our stock - have experienced significant price and trading volume     
fluctuations. These fluctuations are often unrelated or disproportionate to the 
operating performance of individual companies. Our stock price may be adversely 
affected by such fluctuations, regardless of our operating results.             
Additionally, many common stocks traded on the OTC Bulletin Board are thinly    
traded, such as our common stock, which can make it difficult to sell shares of 
our stock. If our stock would become ineligible to be traded on the OTC Bulletin
Board, our stock would then be traded on the Pink Sheets, which may have even   
less trading volume potential and more share price fluctuations than on the OTC 
Bulletin Board.                                                                 

We may have difficulty protecting our intellectual property rights. We either   
own or have licensed the rights to copyrights for our product content,          
trademarks and our corporate name and logo. We may not have sufficient resources
to adequately protect our intellectual property rights, and our existing or     
future copyrights, trademarks, trade secrets or other intellectual property     
rights may not be of sufficient scope or strength to provide meaningful         
protection or commercial advantage to us. If we are not able to sufficiently    
protect our intellectual property rights, this would have an adverse effect on  
our business and operating results and on the overall value of our company.     

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We may incur substantial expenses and be required to use our internal resources 
to defend infringement claims, and settlements may not be favorable or          
attainable. We may from time to time be notified that we are infringing the     
intellectual property rights of others. Combinations of content acquired through
past or future acquisitions and content licensed from or developed by           
independent software developers may give rise to claims of infringement. In past
years, we have incurred significant defense costs and utilized substantial      
internal resources in defending trademark and copyright claims and lawsuits.    
Other third parties may initiate infringement actions against us in the future. 
Any future claims could result in substantial costs to us, and diversion of our 
limited resources. If we are found to be infringing the rights of others, we may
not be able to obtain licenses on acceptable terms or at all, and significant   
damages for past infringement may be assessed, or further litigation relating to
any such licenses or usage may occur. Our failure to obtain necessary licenses  
or other rights, or the initiation of litigation arising from any such claims,  
could materially and adversely affect our operating results.                    

We are exposed to the risk of product defects. Products we offer 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 
our 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 or product recalls, which would adversely affect our business,
operating results and financial condition.                                      

We depend on key management and technical personnel. We rely on our management  
and other key personnel for the successful operation of our business, especially
since we have so few employees. We are dependent upon the expertise and skills  
of several key sales, marketing and product development employees, and there can
be no assurance that we will be able to continue to retain these personnel at   
current compensation levels, or at all. Failure to continue to attract and      
retain qualified personnel could materially adversely affect our business and   
prospects.                                                                      

We may experience unique risks with our international revenues and distribution 
efforts. International net revenues, primarily consisting of licensing revenues,
represented $319,000, or 7% of our net sales for the fiscal year ended June 30, 
2006, compared to $468,000, or 9% of net sales for the fiscal year ended June   
30, 2005. We anticipate that in fiscal 2007 our international business will     
continue to be transacted primarily through third-party licensees, which is     
subject to some risks that our domestic business is not, including: varying     
regulatory requirements; difficulties in managing foreign distributors;         
potentially adverse tax consequences; and difficulties in collecting delinquent 
accounts receivable. Additionally, because our international business is        
concentrated among a small number of third-party licensees, the business failure
of any one of these licensees, and the resulting inability for us to collect the
related outstanding licensing receivable, could have a material adverse effect  
on our financial condition.                                                     

Item 2.    Properties                                                           

As of June 30, 2006, we leased 5,000 square feet of office space in Langhorne,  
Pennsylvania under an operating lease scheduled to expire on September 30, 2010.
We believe that our current operating facility will be adequate for our         
anticipated needs through at least June 30, 2007. For the years ended June 30,  
2006 and 2005, our rent expense for our operating facility was $56,000 and      
$58,000, respectively.                                                          

Item 3.    Legal Proceedings                                                    

None                                                                            

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

None                                                                            

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 PART II

Item 5.    Market for Common Equity, Related Stockholder Matters and Small      
Business Issuer Purchases of Equity Securities            

Our common stock began trading on the Over the Counter Bulletin Board ("OTCBB") 
under the symbol "EGAM" on April 2, 2001. Prior to that date, our common stock  
traded on the Nasdaq SmallCap Market under the same symbol. The quotations below
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.                              

The following table sets forth the quarterly high and low closing price per     
share of our common stock for the fiscal years ended June 30, 2006 and 2005, as 
reported by the OTCBB:                                                          

                               High        Low
                                ------------------
Fiscal Year Ended June 30, 2006                                           
-------------------------------                                           
First Quarter                          $ 0.56      $ 0.30       
Second Quarter                         $ 0.64      $ 0.30       
Third Quarter                          $ 0.69      $ 0.38       
Fourth Quarter                         $ 0.35      $ 0.32       

Fiscal Year Ended June 30, 2005                                           
-------------------------------                                           
First Quarter                          $ 1.62      $ 0.85       
Second Quarter                         $ 0.81      $ 0.38       
Third Quarter                          $ 0.91      $ 0.56       
Fourth Quarter                         $ 0.84      $ 0.53       

At June 30, 2006, we had approximately 152 shareholders of record.              

During fiscal 2005, we paid two quarterly cash dividends to shareholders of our 
common stock as of February 15, 2005 and May 17, 2005. We currently intend to   
retain earnings, if any, for use in funding our business and do not anticipate  
paying cash dividends in the foreseeable future.                                

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Item 6.    Management's Discussion and Analysis or Plan of Operation            

FORWARD-LOOKING STATEMENT SAFE HARBOR                                           

This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the     
Securities Exchange Act of 1934. All statements made in this report, other than 
statements of historical fact, including statements regarding industry prospects
and future results of operations or financial condition, are forward looking. We
use the words "believe", "expect", "anticipate", "intend", "will", "should",    
"may" and similar expressions to identify forward-looking statements. These     
forward-looking statements are subject to business volatility, economic risk,   
and world events, which are inherently uncertain and difficult to predict. Our  
actual results could differ materially from management's expectations due to    
such risks. We will not necessarily update information if any forward-looking   
statement later turns out to be inaccurate. In particular, these forward-looking
statements include, among others, statements about:                             

-  Our current strategy of focusing on publishing higher quality,     
 higher-priced PC games, in addition to value-priced jewel case PC
  games, and to tap into the growing sales of casual and hardcore PC
  games via the Internet while achieving a stronger retail presence;
-  Our expectation that reductions in retail shelf space allocated to 
  affordable PC game software will continue to negatively impact our
financial results in the future, and the strategies we are      
pursuing to offset the decreases in our net sales caused by this
market shift;                                                   
-  Our plan to continue to seek high-quality titles to license and    
  publish under our Cinemaware Marquee brand, while at the same time
continuing to publish high-quality, value-priced PC games under 
the eGames brand;                                               
-  Our plan to release four new titles at the beginning of calendar   
2007 under the Cinemaware brand, including "Defender of the     
Crown(R)" and "The Three Stooges(R)," and the anticipated launch
date of these new titles;                                       
     -  The anticipated completion and introduction of our new eGames web portal
    during fiscal 2007, designed to increase our sales via the Internet;
   -  Our plan to increase our distribution on third-party Internet websites
of game titles developed for us that we own;                    
 -  The expectation that our future development costs will significantly
     increase over prior periods as we increase our efforts to develop our
        own game titles, using both external and internal development resources;
-  Our expectation that we may incur greater costs and cash           
expenditures for promotional efforts, such as print ads, online 
 banner ads, in-store circulars, video loops, public relations and
slotting fees as we continue to publish higher priced titles for
the PC and the Internet;                                        
-  Our expectation that Take Two will continue representing a growing 
 percentage of our net sales and net accounts receivable, while we
  expect to cease conducting any significant amount of business with
Atari during the first quarter of fiscal 2007;                  
-  Our expectation that, during fiscal 2007, we will continue to sell 
our products to the retailers and distributors that charge sales
incentive and promotional fees, which will continue having a    
negative impact on our net sales, gross profit and gross profit 
margin;                                                         
-  Our expectation that additional quantities of discontinued titles  
will be returned to us from retailers and distributors that need
to be sold to inventory liquidators at discounted prices, which 
can cause inventory liquidation sales to vary from quarter to   
quarter;                                                        
-  Our belief that our ability to collect, in a timely manner, the    
  net account receivable owed by our major software distributors and
licensees will significantly impact our ability to meet our     
financial obligations and to fund our operations for the        
foreseeable future; and                                         
   -  Our expectation that future advance royalty commitments will be funded
by cash flows from operations.                                  

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The following important factors, as well as those factors discussed under       
"Factors Affecting Future Performance" beginning on page 9 in this report, could
cause our actual results to differ materially from those indicated by the       
forward-looking statements contained in this report:                            

 -  the market acceptance and successful sell-through of our products at
retail stores and on the Internet                               
    -  the shelf space allocated to our products at retail and on key Internet
game portals;                                                   
-  our ability to increase our retail and Internet sales and licensing
revenues;                                                       
-  maintaining commercially viable relationships with our principal   
software distributors, retailers and licensees;                 
 -  collecting timely receivable payments from our concentrated group of
software distributors, retailers and licensees;                 
-  maintaining acceptable payment terms with our trade vendors;       
 -  the amount of unsold product that is returned to us by retail stores
and distributors;                                               
 -  the amount of price markdowns granted to retailers and distributors;
 -  our ability to accurately estimate the amount of product returns and
  price markdowns that will occur and the adequacy of the allowances
established for such product returns and price markdowns;       
-  the success of our new business model of publishing higher         
quality, higher-priced PC games, in addition to our value-priced
jewel case PC games, and to tap into the growing sales of casual
  and hardcore PC games via the Internet, while achieving a stronger
retail presence;                                                
   -  our ability to control the development, promotional, manufacturing and
distribution costs of our software titles;                      
    -  our ability to retain a sufficient number of knowledgeable employees to
operate our business;                                           
-  the success of our distribution strategy, including the ability to 
 increase the distribution of our products into key North American
    mass-merchant retailers and Internet game portals, and to enter into
new distribution and direct sales relationships on commercially 
acceptable terms;                                               
    -  the ability of our international product distribution through licensing
       agreements to earn a royalty and the ability of our licensees to pay us
such royalties within agreed upon terms;                        
    -  the ability to deliver products in response to customer orders within a
commercially acceptable time frame;                             
-  downward pricing pressure;                                         
   -  fluctuating costs of developing, producing and marketing our products;
-  our ability to license or develop quality content for our products;
-  the success of our efforts to increase website traffic and product 
sales over the Internet on our websites;                        
 -  consumers' continued demand for affordable consumer entertainment PC
software;                                                       
-  increased competition in the affordable software category;         

and various other factors, many of which are beyond our control.                

Overview                                                                        

The following overview identifies certain recent trends and events in our       
business. We believe that an understanding of these trends and events is        
important in order to understand our results for fiscal 2006, as well as our    
potential future results. This overview is not intended to be exhaustive, nor is
it intended to be a substitute for the detailed discussion and analysis provided
elsewhere in this Form 10-KSB, including Item 1 "Business", the remainder of    
"Management's Discussion and Analysis or Plan of Operation", "Factors Affecting 
Future Performance" under "Business" or the financial statements and the related
notes. Amounts, other than percentages, discussed within the "Management's      
Discussion and Analysis or Plan of Operation" have been rounded to the nearest  
thousand ("000") dollars.                                                       

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About eGames                                                                    

eGames, Inc. ("eGames", "our", "us", or "we") is a Pennsylvania corporation     
incorporated in July 1992 that publishes, markets and sells PC software games.  
Historically, we have focused on publishing affordable software games for the PC
platform only, and selling the greatest volume of our PC games in mass-market   
retail stores. We have explored the possibility of publishing games for other   
gaming platforms, such as consoles and hand-held devices, and have determined at
this time to focus on publishing for the PC platform only because of the greater
amount of cash and other resources that would be required to pursue publishing  
titles for other gaming platforms. Our current strategy focuses on publishing   
higher quality, higher-priced PC games, in addition to our value-priced jewel   
case PC titles, and to tap into the growing sales of casual and hardcore PC     
games via the Internet, while achieving a stronger retail presence. In North    
America, our PC games are distributed primarily through third-party software    
distributors who service mass-merchant and major retailers. In territories      
outside North America, we license our PC games to third-party software          
distributors who are responsible for the manufacture and distribution of our PC 
games within specific geographic territories. We market and sell our game titles
under the eGames(TM), Cinemaware(R) and Cinemaware Marquee(TM) brands.          

Significant Trends and Events in our Business                                   

 Decreases in Retail Shelf Space for Value-Priced PC
Software Continued to Impact Our Sales
--------------------------------------

During fiscal 2006, the decline in retail shelf space retailers are allocating  
to value-priced PC games at the $9.99 retail price point in North America has   
continued to negatively impact our net sales. Throughout fiscal 2006, we began  
adjusting our business model to address these shifts in the retail market,      
including acquiring the assets of Cinemaware, Inc. in October 2005, which       
include a number of classic game properties that we believe will be the basis   
for developing unique and compelling casual games for the PC, Internet and      
potentially other game platforms. We also released six higher-priced, premium   
quality PC games under our "Cinemaware Marquee" and "eGames" brands during the  
second half of fiscal 2006 to increase our retail product offering in this      
higher-priced segment of PC game market. We will continue to seek high-quality  
titles to license and publish under our Cinemaware Marquee brand, while at the  
same time continuing to publish high-quality, value-priced PC games under the   
eGames brand.                                                                   

Development of Our Own Game Titles
----------------------------------

During the fourth quarter of fiscal 2006, we began using independent developers 
to develop new titles under agreements that will provide us with ownership      
rights to these titles, utilizing some of the original Cinemaware intellectual  
properties, as well as some new and unique game ideas. The first of these       
internally-developed titles, "Boss Hunter(TM)," was released as a $9.99 jewel   
case title under the eGames brand in September 2006, and four more titles are   
scheduled for release at the beginning of calendar 2007, including a new version
of Cinemaware's best-known title, "Defender of the Crown(R)," as well as "The   
Three Stooges(R)." The launch of these new titles is scheduled to coincide with 
the introduction of our new eGames web portal, which is being developed to      
attract both the serious and casual game markets.                               

Since we intend to increase our efforts to develop our own game titles, using   
both external and internal development resources, we expect our future          
development costs to significantly increase over prior periods and represent a  
greater use of available cash as we attempt to bring such products to market. As
we continue to publish higher priced titles for the PC and the Internet, we also
expect that we may incur greater costs and cash expenditures for promotional    
efforts, such as print ads, online banner ads, in-store circulars, video loops, 
public relations and slotting fees, to support the retail and online releases of
these higher quality titles competing at higher price points.                   

Concentration of Customers
--------------------------

We continue to have a concentration of customers consisting of a few large      
software distributors and retailers. Historically, Atari, Inc. ("Atari") has    
represented our primary software distributor servicing the North American       
mass-merchants and other major retailers. In December 2005, we transitioned the 
majority of our mass-merchant retail distribution to Take-Two Interactive       
Software ("Take Two"), which has distributed our titles into the office         
superstore and discount warehouse retail channels for several years.            

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During the year ended June 30, 2006, Atari accounted for $1,493,000, or 31%, of 
our net sales, compared to the year ended June 30, 2005, when Atari accounted   
for $2,412,000, or 45%, of our net sales. During the year ended June 30, 2006,  
Take Two accounted for $433,000, or 9%, of our net sales, compared to the year  
ended June 30, 2005, when Take Two accounted for $225,000, or 4%, of our net    
sales. During fiscal 2007, we anticipate that Take Two will continue            
representing a growing percentage of our net sales and net accounts receivable, 
while we expect to cease conducting any significant amount of business with     
Atari during the first quarter of fiscal 2007.                                  

At June 30, 2006, Atari's net receivable balance was $144,000, or 28% of our    
total net accounts receivable, compared to Take Two's net accounts receivable of
$14,000, or 3%, of our total net accounts receivable. Both of these net         
receivable balances were subsequently collected.                                

Critical Accounting Policies and Estimates                                      

Our significant accounting policies and methods used in the preparation of the  
Financial Statements are discussed in Note 1 of the Notes to Financial          
Statements. We believe our policies for revenue recognition, inventory valuation
and recoverability of advanced licensing and royalty payments require us to make
significant judgments and estimates that could materially affect the amount of  
revenue we recognize, the cost of sales we expense, and the reported net values 
for inventory, accounts receivable, prepaid and other expenses. Our discussion  
and analysis of our financial condition and results of operations are based upon
our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these    
financial statements requires us to make judgments and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses, and related     
disclosure of contingent assets and liabilities. On an ongoing basis, we        
evaluate our estimates for product returns, price markdowns, customer bad debts,
inventory obsolescence, recoverable values of advanced licensing and royalty    
payments, income tax expense, contingencies and litigation risks. We base our   
estimates on historical experience and on various other factors and assumptions 
that we believe are appropriate. Actual results may differ from these estimates 
under different assumptions or conditions.                                      

Revenue Recognition (Net Sales, Product Returns and Price Markdowns)
--------------------------------------------------------------------

We distribute the majority of our products through third-party software         
distributors to North American mass-merchant and major retailers and directly to
certain PC software retailers. The distribution of our products is governed by  
purchase orders, distribution agreements or direct sale agreements, most of     
which allow for product returns and price markdowns and have shipping terms of  
FOB destination. For product shipments to most software distributors and        
retailers, we record a provision for product returns and price markdowns as a   
reduction to gross sales at the time the title of our product transfers to the  
distributor or retailer. However, if we determine that we are not able to       
estimate an appropriate provision for product returns and price markdowns for   
any retailer or distributor or if we determine that the underlying terms of a   
retailer's or distributor's purchase order do not qualify as a sale, we then    
recognize revenues for product deliveries to these retailers or distributors on 
a consignment basis.                                                            

We also have relationships with certain software distributors for product       
distribution to various retailers based on consignment and sell-through         
agreements. Accordingly, revenues from product shipments pursuant to these types
of agreements are only recognized to the extent that the software distributor   
has reported to us that our product has actually sold through to consumers.     

Key Assumptions                                                                 

Our provision for anticipated product returns and price markdowns is based on   
the assumptions we make after evaluating various factors, including: our        
analysis of historical product return and price markdown results; current       
product sell-through activity at retail store locations; current field inventory
quantities at distributors' warehouses and at retail store locations; the length
of time that products have been released at retail along with their estimated   
remaining retail life; the introduction of new and/or competing software        
products that could negatively impact the sales of our current products;        
outstanding return material and price markdown authorizations; and the extent to
which units of products with higher price points or unproven genres remain in   
the retail channel.                                                             

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The adequacy of our allowance for product returns and price markdowns is        
reviewed throughout each reporting period and any necessary adjustment to this  
allowance is reflected within the current reporting period's provision for      
product returns and price markdowns. Significant management judgments and       
estimates must be made and used in order to determine how much revenue can be   
recognized in any reporting period. Material differences may result in the      
amount and timing of our revenue for any period if management's judgments or    
estimates for product returns or price markdowns prove to be insufficient or    
excessive compared to actual results.                                           

 Inventory Valuation
 -------------------

Our inventory valuation policy requires management to make estimates and        
assumptions about the recoverability of the carrying value of inventory as of   
the end of each reporting period and cost of sales expensed during each         
reporting period. The individual components of our software titles that are     
usually reflected in our net inventory valuation include some combination of the
manufactured costs of: CD's; jewel cases; box packaging; print materials;       
manuals; posters; novelty items; assembly and other miscellaneous items         
particular to specific titles. Our inventory could be valued differently at the 
close of any reporting period and the amount of expense recorded as cost of     
sales during any reporting period could differ, if management's judgments or    
estimates for the impairment of inventory value (recorded through the provision 
for inventory obsolescence) are insufficient or excessive when compared to      
actual results.                                                                 

Key Assumptions                                                                 

Our provision for inventory obsolescence is based on the assumptions we make    
after evaluating the remaining value of existing inventory units (consisting of 
unsold warehouse units, consignment units and estimated product return units),  
which involves: assessing the remaining product life of existing titles based on
how long the titles have been released at retail; analyzing the trend of current
product sell-through activity to consumers for existing titles; identification  
of competitors' new products with greater capabilities or more recognizable     
brands that could replace or shorten the lifecycles of our existing titles;     
assessing the potential for litigation that may affect our ability to sell      
existing titles containing certain product content; monitoring expiration dates 
of licensing agreements with software developers for content within existing    
titles; and tracking the current market value for remaining units of            
discontinued titles based on recent sales of similar products to inventory      
liquidators and discount retailers.                                             

Although we attempt to accurately match production requirements of our products 
to forecasted consumer demand, at the end of a product's lifecycle we usually   
have some level of excess inventory units that need to be disposed of through   
liquidation sales. If we cannot liquidate such inventory, or if we are unable to
sell any remaining units due to legal or other reasons, we would then write down
the remaining inventory value to zero. The adequacy of our allowance for        
inventory obsolescence is reviewed throughout each reporting period, and any    
necessary adjustment to this allowance is reflected in the current reporting    
period's provision for inventory obsolescence.                                  

Advance Licensing and Royalty Payments
--------------------------------------

We make advance licensing and royalty payments to independent software          
developers and other licensors for the licensing of software content and        
intellectual properties for use within our PC software titles. These advance    
payments are initially classified on our balance sheet as "Prepaid and other    
expenses", and are then usually expensed within the "Cost of sales" category of 
our Statements of Operations at the greater of the contractual or effective     
royalty rate.                                                                   

Key Assumptions                                                                 

We continually evaluate the recoverability of our advance licensing and royalty 
payments by reviewing the information available about each title and the        
underlying licensed content in existing titles. In particular, we evaluate the  
potential future sales of a title or subsequent titles containing the same      
licensed content based on current and potential sales programs, along with      
historical sell-through results of a title and similar titles, if any, to       
consumers. For titles that have achieved distribution into their intended retail
channels, we charge to cost of sales the remaining costs we determine to be     
non-recoverable in future periods. In the rare circumstance that a title does   
not achieve distribution into its intended retail channels, we charge to product
development expense the remaining costs we determine to be non-recoverable in   
future periods. Non-recoverable costs are expensed in the reporting period in   
which management determines that it is not likely that we will be able to       
recover these costs in future periods.                                          

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Results of Operations                                                           

The following discussion should be read together with our Financial Statements  
and Notes beginning on page 28.                                                 

Year Ended June 30, 2006 Compared to the Year Ended June 30, 2005               

Net Sales                                                                       

Net sales decreased by $588,000, or 11%, to $4,756,000 for the fiscal year ended
June 30, 2006, compared to $5,344,000 for fiscal year 2005. The $588,000        
decrease in net sales for the fiscal year ended June 30, 2006 resulted primarily
from a $1.2 million decrease in net product sales of our eGames brand of        
value-priced PC software games due largely to a reduction in retail shelf space 
allocated to $9.99 retail priced PC games in North America, combined with       
increased competition for the reduced retail shelf positions. This net sales    
decrease was partially offset by a $0.5 million increase in net product sales   
generated from the launch of the Company's new Cinemaware Marquee brand of      
higher-priced box titles in the second half of fiscal 2006. Additionally, the   
Company experienced increases in North American licensing revenues and in net   
sales of end-of-lifecycle titles to inventory liquidators, which were partially 
offset by a small decrease in Internet sales.                                   

The following table represents our net sales by distribution channel for the    
years ended June 30, 2006 and 2005:                                             

 Net Sales by Distribution Channel

                                                        [Enlarge/Download Table]

                                      Years Ended                                      
                                        June 30,                                       
                         --------------------------------------                        
                                                                     Increase      %   
Distribution Channel         2006       %         2005       %      (Decrease)   Change
---------------------------------------------------------------------------------------
                                                                                       
Software Distributors    $ 2,826,000   59%    $ 3,527,000   66%    ($ 701,000)    (20%)
Software Retailers           652,000   14%        722,000   13%       (70,000)    (10%)
Licensing                    658,000   14%        575,000   11%        83,000      14% 
Internet                     294,000    6%        323,000    6%       (29,000)     (9%)
Inventory Liquidators        326,000    7%        197,000    4%       129,000      65% 
---------------------------------------------------------------------------------------
Totals                   $ 4,756,000  100%    $ 5,344,000  100%    ($ 588,000)    (11%)
                         ===========  ====    ===========  ====     =========      === 


 Software Distributors
 ---------------------

For the year ended June 30, 2006, net sales to software distributors that serve 
North American mass-merchants and other major retailers amounted to $2,826,000, 
which represented a decrease of $701,000 or 20% compared to the year ended June 
30, 2005. This $701,000 decline in net sales to software distributors was caused
by a $919,000 decrease in net sales to Atari, which was partially offset by a   
$208,000 net sales increase to Take Two.                                        

Factors contributing to the $701,000 decrease in net sales to software          
distributors included: the reduction in overall retail shelf space allotted to  
PC software games at the $9.99 retail price point; increased competition for    
shelf positions within smaller value-priced PC software departments at retail;  
and a decrease in product sell-through rates of eGames titles to consumers at   
retail stores.                                                                  

Software Retailers
------------------

For the year ended June 30, 2006, net sales to software retailers totaled       
$652,000, which represented a $70,000 decrease compared to the year ended June  
30, 2005. This decrease resulted primarily from net sales decreases to Dollar   
Tree Stores of $165,000 and CompUSA of $58,000, which were partially offset by  
net sales increases to Big Lots of $120,000 and GameStop of $49,000.            

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 Licensing
 ---------

For the years ended June 30, 2006 and 2005, we recognized licensing revenues of 
$658,000 and $575,000, respectively, which represented 14% and 11%,             
respectively, of net sales. Licensing revenues are generated from sales made by 
third-party licensees under a series of licensing agreements covering both North
American and international retail markets. During fiscal 2006, North American   
licensing revenues increased to 52% of total licensing revenues, compared to 21%
of total licensing revenues for fiscal 2005, (due to a major North American     
electronics retailer transitioning the distribution of its value-priced PC      
titles to a licensing arrangement), combined with a decrease in licensing       
revenues generated by our German licensee that was related to negative changes  
in the German value-priced PC retail market.                                    

Internet
--------

For the years ended June 30, 2006 and 2005, Internet sales were $294,000 and    
$323,000, respectively, and represented 6% of net sales during both fiscal      
years. During fiscal 2006, our Internet sales strategy focused on distributing  
our game titles more broadly via affiliate programs and on popular Internet game
websites and other web portals. During fiscal 2007, we plan to launch a new web 
portal, which is being designed to increase our sales via the Internet, and we  
also plan to increase our distribution on third-party Internet websites of game 
titles developed for us that we own.                                            

 Inventory Liquidators
 ---------------------

For the years ended June 30, 2006 and 2005, net sales to inventory liquidators  
were $326,000 and $197,000, respectively, and represented 7% and 4%,            
respectively, of net sales. Net sales to inventory liquidators consist of sales 
of residual inventory titles that have been discontinued (in part or entirely)  
at traditional software retail stores because these titles had reached the end  
of their product lifecycles. As retailers continue to routinely change the mix  
of software titles displayed on their store shelves - usually on a quarterly    
basis - we expect to receive additional quantities of discontinued titles back  
from the retail channel that will then need to be liquidated, along with any    
quantities of those titles remaining in our warehouse. Accordingly, the amount  
of inventory liquidation sales can vary greatly, period to period, and are      
usually made at discounted prices with no right of product return or price      
markdown.                                                                       

 Product Returns and Price Markdowns
 -----------------------------------

Throughout each reporting period we continue to evaluate our product return and 
price markdown exposure for software units we had previously sold to software   
distributors and retailers, until physical units of our PC game titles are      
returned to us from software distributors or retailers, or until they sell      
through to consumers. During the years ended June 30, 2006 and 2005, our        
provision for product returns and price markdowns amounted to $966,000 and      
$1,254,000, respectively, or 18.2% and 20.5%, respectively, of related gross    
product sales to software distributors and retailers.                           

The fiscal 2006 decrease in the provision for product returns and price         
markdowns resulted from a decrease in this year's gross product sales, along    
with a reduction in this fiscal year's provision percentage for product returns 
and price markdowns. The decrease in the fiscal 2006 provision percentage       
resulted from our evaluation of the retail channel inventory level of our titles
and related product lifecycles relative to consumer demand at June 30, 2006,    
compared to the similar evaluation process a year earlier. The prior year       
analysis resulted in an increase in this provision percentage due to our        
evaluation of the impact from various titles being discontinued by retailers    
during this prior year combined with a decline in consumer sell-through rates of
our titles that remained in the retail channel at June 30, 2005.                

Sales Incentives and Promotional Costs
--------------------------------------

For the years ended June 30, 2006 and 2005, our sales incentives and promotional
costs were $525,000 and $419,000, respectively, or 9.9% and 6.9%, respectively, 
of related gross product sales. In order to maintain retail shelf space for our 
titles, we incur sales incentives and promotional costs from software           
distributors and retailers, such as pricing rebates and slotting fees, which are
recognized as reductions to gross sales. We plan to continue selling our        
products to software distributors and retailers that charge such fees, and      
accordingly we expect these types of costs to continue impacting our net sales, 
gross profit and gross profit margin.                                           

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Cost of Sales                                                                   

Cost of sales consists of the following costs that are associated with          
publishing our PC games: product costs; royalty costs incurred with             
third-parties for licensing product content or other intellectual properties;   
freight and handling costs; inventory obsolescence provision, reclamation fees  
and other costs.                                                                

The following table represents our cost of sales for the years ended June 30,   
2006 and 2005:                                                                  

June 30,      % of         June 30,       % of        Increase      %     
2006      net sales        2005       Net sales    (Decrease)   Change
---------------------------------------------------------------------------     
$ 2,659,000      55.9%      $ 2,483,000      46.5%      $ 176,000     7.1%      

During the year ended June 30, 2006, cost of sales increased by $176,000,       
compared to the prior year. This $176,000 cost of sales increase resulted from a
9.4% increase in cost of sales, as a percentage of net sales, which was         
partially offset by the impact on cost of sales related to an 11.0% reduction in
total net sales compared to fiscal 2005. The 9.4% increase in cost of sales, as 
a percentage of net sales, was primarily related to an 8.8% increase in product 
costs, as a percentage of net sales, which related to sales of:                 

 o  Titles sold to software distributors and retailers at selling prices
below historical levels;                                        
    o  Higher costing titles containing multiple CDs, posters, key chains, dog
tags, and manuals; and                                          
     o  End-of-lifecycle titles to inventory liquidators at prices substantially
 lower than titles active in traditional software retail channels.

Additionally, we experienced a 1.0% increase in royalty costs, as a percentage  
of net sales, due to higher contractual royalty rates on premium box titles,    
combined with higher effective royalty rates for titles with shorter life-cycles
due to lack of consumer demand for those titles. These increases in cost of     
sales, as a percentage of net sales, were partially offset by a 0.4% decrease in
other cost of sales, as percentage of net sales, largely due to a reduction in  
the provision for inventory obsolescence.                                       

Product Development                                                             

Product development expenses consist of personnel costs related to product      
management, content acquisition and product development, quality assurance      
testing, packaging design, and website administration, along with outside       
services for product ratings, language localization, quality assurance testing  
and website infrastructure maintenance. Product development expenses also       
include non-recoverable costs related to titles that did not achieve            
distribution into their intended retail channels.                               

The following table represents our product development expenses for the years   
ended June 30, 2006 and 2005:                                                   

June 30,      % of         June 30,       % of        Increase       %    
 2006      net sales        2005       net sales    (Decrease)    Change
----------------------------------------------------------------------------    
$ 562,000      11.8%       $ 538,000       10.1%       $ 24,000      4.5%   

The $24,000 increase in product development expenses for the year ended June 30,
2006 resulted from higher fees associated with securing industry game ratings   
for new titles in addition to increased costs for initial product development   
work related to future company owned titles. Additional product development     
expense increases were traceable to website development, travel and quality     
assurance expenses incurred to support new Cinemaware Marquee box titles        
released during fiscal 2006. These product development expense increases were   
partially offset by cost savings from the non recurrence of fiscal 2005's       
write-off of capitalized licensing and inventory costs related to the RealAge   
Games & Skills title.                                                           

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Selling, General and Administrative                                             

Selling, general and administrative expenses consist primarily of personnel     
related costs, insurance costs, stock-based compensation expense, advertising   
and promotional fees, commission expense, depreciation expense and professional 
service fees for legal, accounting and public relations costs, as well as       
occupancy costs including rent, utilities and phones, and other administrative  
expenses.                                                                       

The following table represents our selling, general and administrative expenses 
for the years ended June 30, 2006 and 2005:                                     

June 30,       % of         June 30,       % of        Increase        %    
2006       net sales        2005       net sales    (Decrease)    Change
----------------------------------------------------------------------------    
$ 2,615,000      55.0%      $ 2,492,000      46.6%      $ 123,000      4.9%     

The $123,000 increase in selling, general and administrative expenses for the   
year ended June 30, 2006 was caused by a $122,000 increase in severance costs   
related to the Company's recent organizational restructuring, which reduced our 
employee count by 25%, and is intended to achieve future cost savings and a     
better alignment of resources, combined with a $165,000 increase in advertising 
and public relations costs incurred to support our new Cinemaware Marquee       
branded box titles. These cost increases were partially offset by an $89,000    
decrease in legal expenses associated with the non-recurrence of certain        
intellectual property litigation in fiscal 2005, a $42,000 reduction in         
independent sales representative commissions related to lower net sales compared
to the year ago period, and a $29,000 decrease in charitable contributions.     

Interest Income, net                                                            

The following table represents our net interest income for the years ended June 
30, 2006 and 2005:                                                              

June 30,      % of         June 30,      % of        Increase      %        
2006      net sales        2005      net sales    (Decrease)   Change   
-------------------------------------------------------------------------       
$ 40,000       0.8%         $ 7,000       0.1%        $ 33,000    471.4%      

Benefit for Income Taxes                                                        

The following table represents our benefit for income taxes for the years ended 
June 30, 2006 and 2005:                                                         

June 30,      % of         June 30,     % of        Increase      %         
2006      net sales        2005     net sales    (Decrease)   Change    
-------------------------------------------------------------------------       
$ - 0 -        0.0%        $ 7,000       0.1%      ($ 7,000)    (100.0%)    

Net Loss                                                                        

The following table represents our net loss for the years ended June 30, 2006   
and 2005:                                                                       

June 30,        % of        June 30,       % of       Increase       %    
 2006        net sales       2005      net sales    (Decrease)    Change
----------------------------------------------------------------------------    
($ 1,039,000)     (21.8%)    ($ 155,000)     (2.9%)     $ 884,000     570.3%    

Weighted Average Common Shares                                                  

The weighted average common shares outstanding on a diluted basis increased by  
1,048,248 for the year ended June 30, 2006 to 11,493,464 from 10,445,216 for the
year ended June 30, 2005. This 1,048,248 increase in the diluted basis          
calculation of weighted average common shares resulted from the full year       
weighted average impact of common stock options exercised during fiscal 2005,   
combined with the weighted average impact from common stock issued during fiscal
2006 related to the acquisition of the assets of Cinemaware, Inc. Both years'   
calculation of weighted average common shares outstanding on a diluted basis    
excluded common share equivalents based on their potential anti-dilutive impact 
on these years' losses.                                                         

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Recent Accounting Pronouncements                                                

In December 2004, the Financial Accounting Standards Board ("FASB") issued      
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),    
"Share-Based Payment" which revised Statement of Financial Accounting Standards 
No. 123, "Accounting for Stock-Based Compensation". This statement supersedes   
APB Opinion No. 25, "Accounting for Stock Issued to Employees". The revised     
statement addresses the accounting for share-based payment transactions with    
employees and other third parties, eliminates the ability to account for        
share-based compensation transactions using APB 25 and requires that the        
compensation expense relating to such transactions be recognized in the         
statement of operations. The revised statement became effective as of the first 
interim period beginning after June 15, 2005. Since we had adopted within our   
financial statements the provisions of SFAS No. 123 as of July 1, 2002, we do   
not believe our adoption of SFAS No. 123 (revised 2004) had a material impact on
our financial statements.                                                       

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment 
of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in Accounting       
Research Bulletin ("ARB") No. 43, "Restatement and Revision of Accounting       
Research Bulletins", Chapter 4, "Inventory Pricing", to clarify the accounting  
for abnormal amounts of idle facility expense, freight, handling costs, and     
wasted material (spoilage) and requires that those items be recognized as       
current-period charges. SFAS No. 151 also requires that allocation of fixed     
production overheads to the costs of conversion be based on the normal capacity 
of the production facilities. SFAS No. 151 became effective for inventory costs 
incurred during fiscal years beginning after June 15, 2005. We do not believe   
our adoption of SFAS No. 151 had a material impact on our financial statements. 

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for       
Uncertainty in Income Taxes" (FIN 48). FIN 48 clarifies when tax benefits should
be recorded in financial statements, requires certain disclosures of uncertain  
tax matters and indicates how any tax reserves should be classified in a balance
sheet. FIN 48 is effective for us in the first quarter of fiscal 2008. We are   
evaluating the impact of FIN 48 on our results of operations and financial      
condition.                                                                      

Liquidity and Capital Resources                                                 

                   As of
                    June 30,
                    --------------------------

                                  2006           2005         Change
                                  ----------------------------------------
Cash and cash equivalents            $ 1,527,000    $ 2,412,000   ($ 885,000)   
                                 ===========    ===========    =========

Percent of total assets     40.0%          60.9%        
                    =====          =====

                   Years Ended
                    June 30,
                  ------------------------

                                   2006          2005         Change
                                  ----------------------------------------
Cash (used in) provided by operating                                            
 activities                        ($ 851,000)    $ 779,000    ($ 1,630,000)
Cash used in investing activities       (34,000)      (12,000)        (22,000)  
Cash used in financing activities         - 0 -       (97,000)         97,000   
                                  ----------------------------------------
Net (decrease) increase in cash and                                             
 cash equivalents                  ($ 885,000)    $ 670,000    ($ 1,555,000)
                                   =========     =========     ===========

Changes in Cash Flow, Operating Activities                                      

During the year ended June 30, 2006, we used $851,000 of cash in operating      
activities compared to $779,000 in cash provided by operating activities for the
year ended June 30, 2005. The $851,000 of cash used in operating activities for 
the year ended June 30, 2006 resulted primarily from our $1,039,000 net loss,   
combined with increases in accounts receivable and inventory of $252,000 and    
$80,000, respectively. These cash uses were partially offset by cash sources    
related to increases in accrued expenses and accounts payable of $205,000 and   
$187,000, respectively.                                                         

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Accounts Receivable, net
------------------------

At June 30, 2006, net accounts receivable totaled $521,000, compared to $269,000
at June 30, 2005. This $252,000 increase in net accounts receivable resulted    
from a $400,000 increase in gross accounts receivable which was partially offset
by a $148,000 increase in the allowance for product returns and price markdowns.
The $400,000 increase in gross accounts receivable resulted primarily from      
greater gross sales invoiced during the three months ended June 30, 2006        
compared to the three months ended June 30, 2005. The $148,000 increase in the  
allowance for product returns and price markdowns resulted from the fiscal 2006 
provision for product returns and price markdowns made to provide for, among    
other things, potential price markdowns and product returns of higher priced box
titles and end of lifecycle jewel case titles remaining in the retail channel at
June 30, 2006, exceeding the actual product returns and price markdowns         
experienced during fiscal 2006.                                                 

Generally, we have been able to collect net accounts receivable in the ordinary 
course of business, but periodically we have experienced slowness in accounts   
receivable collections from software distributors and retailers. Throughout each
reporting period, we communicate with software distributors and retailers in    
order to expedite their payments of past due amounts or to process receivable   
credits for authorized product returns and price markdowns. Since we do not hold
any collateral to secure payment from any of our customers and because most of  
our customers have the right to return products and receive price markdowns that
can be used to reduce their receivable payments to us, the realizable value of  
our net accounts receivable is continually reviewed in order to help anticipate 
future liquidity issues that could result from our inability to collect a net   
receivable balance in the normal course of business.                            

Concentration of Customers
--------------------------

Historically, Atari has represented the majority of our net accounts receivable 
and related cash receipts. In December 2005, we began to transition the majority
of our North American mass-merchant retail distribution to Take-Two Interactive 
Software ("Take Two"), which has distributed our titles into the office         
superstore and discount warehouse retail channels for several years. During     
fiscal 2007, we anticipate that Take Two will continue representing a growing   
percentage of our net sales and net accounts receivable, while we expect to     
cease having significant business activity with Atari during the first quarter  
of fiscal 2007.                                                                 

During the year ended June 30, 2006, we collected $1,164,000 in receivable      
payments from Atari and $673,000 in receivable payments from Take Two, which    
represented 26% and 15%, respectively, of our total accounts receivable         
collections during this period. At June 30, 2006, Take Two's net accounts       
receivable totaled $14,000, or 3%, of our total net accounts receivable,        
compared to Atari's net accounts receivable of $144,000, or 28%, of our total   
net accounts receivable. Both net receivable balances were subsequently         
collected.                                                                      

We believe that our ability to collect, in a timely manner, the net account     
receivable owed by our major software distributors and licensees, and in        
particular our net accounts receivables with Take Two, Ditan-Synergex, and      
Microgistix, will significantly impact our ability to meet our financial        
obligations and to fund our operations for the foreseeable future.              

Inventory, net
--------------

During the year ended June 30, 2006, our net inventory increased by $80,000     
which related to an increase in inventory shipments into the retail channel     
under consignment sales agreements of units that had not sold through to        
consumers as of June 30, 2006, in addition to a decrease in the allowance for   
inventory obsolescence due to the benefit from improved selling prices for end  
of lifecycle titles to inventory liquidators and discount retailers.            

Prepaid and other expenses
--------------------------

During the year ended June 30, 2006, our prepaid and other expenses decreased by
$14,000, which related to a refunding of prepaid federal taxes received during  
this reporting period.                                                          

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Accounts Payable
----------------

During the year ended June 30, 2006, our accounts payable increased by $187,000 
due to increased inventory purchases of higher costing box titles that contained
additional value-added components (multiple CDs, posters, manuals, and novelty  
items related to game themes), along with increased purchases of print and      
online advertising to support higher priced box titles under the Cinemaware     
Marquee brand.                                                                  

Accrued Expenses
----------------

During the year ended June 30, 2006, our accrued expenses increased by $205,000 
due to a $123,000 increase in severance costs in addition to smaller increases  
in royalties, marketing promotions, and state taxes, which were partially offset
by decreases in litigation costs and in customer accounts receivable credit     
balances reclassified to accrued expenses.                                      

Changes in Cash Flow, Non-Operating Activities                                  

During the year ended June 30, 2006, we had net cash used in investing          
activities of $34,000 for equipment and software upgrades to our computer       
network, compared to $12,000 in net cash used in investing activities during the
prior year for similar network upgrades.                                        

During the year ended June 30, 2006, we had no net financing activities compared
to $97,000 in net cash used in financing activities during the year ended June  
30, 2005.                                                                       

Credit Facility                                                                 

In December 2005, we renewed our credit facility agreement with TD Banknorth    
("TD"), formerly Hudson United Bank, which matures on December 1, 2006. This    
credit facility was established to provide working capital for our operations.  
Amounts outstanding under this credit facility are charged interest at one-half 
of one percent above TD's current prime rate and such interest is due monthly.  
Our access to these funds is limited to the lesser of $750,000 or seventy-five  
percent of qualified accounts receivable, which are defined as invoices less    
than ninety days old and net of any allowances for product returns, price       
markdowns and customer bad debts. At June 30, 2006, we had access to $390,000   
under this credit facility, based on the prescribed calculation of seventy-five 
percent of qualified accounts receivable as of that date. At June 30, 2006, we  
had no outstanding balance under this credit facility, which is secured by all  
of the Company's assets and requires us, among other things, to maintain certain
financial covenants that are tested quarterly.                                  

Contractual Obligations and Commitments                                         

We occupy our 5,000 square foot office facility located in Langhorne,           
Pennsylvania under an operating lease that is scheduled to expire on September  
30, 2010. Additionally, we currently rent certain office equipment through      
various operating lease agreements. At June 30, 2006, we had future operating   
lease commitments of $222,000.                                                  

Under various licensing agreements with independent software developers, we are 
required to pay royalties for the use of licensed content in our products. Most 
of these licensing agreements require us to make advance royalty payments to    
these software developers prior to the time we recognize any net sales of       
software titles containing this licensed content. At June 30, 2006, we had      
future commitments to pay $47,000 in advance licensing and royalty payments to  
various third-party licensors and software developers. We expect to fund these  
commitments by cash flows generated through anticipated income from operations. 

The following table represents a summary of our off-balance sheet contractual   
obligations and commitments at June 30, 2006.                                   

                          Payments Due by Period
                         -------------------------------------------------------

                                     Less than      1-3        3-5     More than
Contractual Obligations    Total       1 year      years      years     5 years 
--------------------------------------------------------------------------------
Operating leases         $ 222,000   $  64,000   $ 147,000   $ 11,000   $ - 0 - 
Advanced royalties          47,000      47,000       - 0 -     - 0 -      - 0 - 
--------------------------------------------------------------------------------
Totals                   $ 269,000   $ 111,000   $ 147,000   $ 11,000     - 0 - 
                        =========   =========   =========   ========     =====

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Liquidity Risk                                                                  

Our ability to maintain positive cash flow remains essential to our survival as 
a going concern because our access to our existing credit facility is limited to
the lesser of $750,000 or 75% of our qualified accounts receivable, which at    
June 30, 2006 amounted to approximately $390,000, based on the prescribed       
calculation as of that date. In particular, our ability to achieve positive cash
flow depends upon a variety of factors, including the timing of the collection  
of outstanding accounts receivable, the creditworthiness of our primary software
distributors and retailers, consumer demand for our products, and the costs of  
developing, producing, marketing and promoting our PC software titles.          

During the past two fiscal years, we have experienced repeated net losses and a 
substantial decrease in available cash to fund our operations, and accordingly  
we will continue evaluating the appropriateness of all non-operational cash     
expenditures. In particular, we will need to monitor the impact on our company's
financial condition from the significant costs we incur to remain a public      
company. These costs are projected to significantly increase for the foreseeable
future, and we may eventually determine that these costs, and the resulting     
drain on our limited cash resources, outweigh the benefits of remaining a public
company. These costs include, but are not limited to:                           

o  Legal and accounting fees to comply with SEC periodic reporting    
requirements;                                                   
 o  Internal and external costs to comply with increasing SEC disclosure
      requirements, and in particular the requirements in Section 404 of the
     Sarbanes-Oxley act of 2002, relating to the effectiveness of internal
control over financial reporting; and                           
o  Investor relation costs such as transfer agents, press release wire
services, annual meetings, proxy mailings and investor website  
administration.                                                 

There are significant challenges that we will need to successfully manage in    
order to fund our operations in the future. Our most significant challenge will 
be to reverse the trends of decreases in gross sales as well as gross profit    
margins that occurred in fiscal years 2006 and 2005. If during fiscal 2007 we   
are unable to increase our retail sales, while at the same time increasing our  
Internet sales and licensing revenues, we will not be able to continue funding  
the significant development expenditures associated with our recently begun     
product development efforts, which at this point is the most critical component 
of our strategy to enable us to continue operating in an increasingly           
competitive videogame industry. Additional challenges include, but are not      
limited to, maintaining commercially viable relationships with our principal    
software distributors and retailers, collecting timely receivable payments from 
our concentrated group of software distributors and retailers, and maintaining  
acceptable payment terms with our trade vendors. For example, our liquidity     
would be severely impacted if one of our largest software distributors or       
retailers did not make receivable payments to us on a timely basis, or if other 
business conditions caused them to fail to pay us at all.                       

Additionally, there are market factors beyond our control that could also       
significantly affect our operating cash flow. The most significant market       
factors are: the shelf space allocated to our products at retail and on key     
Internet game portals; and the market acceptance and sell-through rates of our  
products to consumers, both at retail and on the Internet. If major retailers   
where our products are sold further reduce or eliminate entirely the shelf space
allocated to $9.99 PC software games, or if consumers do not buy our games via  
the Internet, either on our own website or on other major gaming portals, our   
cash flow and future financial prospects could be significantly impacted. Also, 
if any of our software titles do not sell through to consumers at a rate        
acceptable to retailers, then we could be exposed to unanticipated product      
return and price markdown credit requests that could then be used by            
distributors and retailers to reduce their future receivable payments to us.    
This could also cause a reduction in retailer and/or distributor replenishment  
orders for these products. If we experienced a negative trend in any of these   
factors, we may not be able to achieve positive cash flow. Additional outside   
financing to supplement our cash flow from operations may not be available if   
and when we need it. Even if such financing were available from a bank or other 
financing source, such financing may cause significant stockholder dilution or  
may have other costs associated with such financing that would not be           
commercially acceptable to us.                                                  

Listing of Our Common Stock                                                     

Our common stock trades on the OTC Bulletin Board under the symbol EGAM.        

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Item 7.    Financial Statements                                                 

eGames, Inc.

 Index to Financial Statements

                                                                        Page
                                                                        ----

   Report of Independent Registered Public Accounting Firm...........   29

   Balance Sheet as of June 30, 2006.................................   30

Statements of Operations for the years                              
   ended June 30, 2006 and 2005......................................   31

Statements of Stockholders' Equity for the years                    
   ended June 30, 2006 and 2005......................................   32

Statements of Cash Flows for the years                              
   ended June 30, 2006 and 2005......................................   33

   Notes to Financial Statements.....................................   34

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 Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders                                         
eGames, Inc.                                                                    

We have audited the accompanying balance sheet of eGames, Inc. as of June 30,   
2006, and the related statements of operations, stockholders' equity, and cash  
flows for the years ended June 30, 2006 and 2005. These financial statements are
the responsibility of eGames' management. Our responsibility is to express an   
opinion on these financial statements based on our audits.                      

We conducted our audits in accordance with the standards of the Public Company  
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in   
all material respects, the financial position of eGames, Inc. as of June 30,    
2006 and the results of its operations and its cash flows for the years ended   
June 30, 2006 and 2005, in conformity with accounting principles generally      
accepted in the United States of America.                                       

/s/ Stockton Bates, LLP                                                         

Philadelphia, Pennsylvania                                                      
August 16th, 2006                                                               

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eGames, Inc.
 Balance Sheet

                                                                    June 30,
                                                                    2006
                                                                   -----------
ASSETS                                                                          
------                                                                          
Current assets:                                                                 
  Cash and cash equivalents                                        $ 1,526,629
  Accounts receivable, net of allowances of $654,076                   521,086
  Inventory, net                                                       973,735
  Prepaid and other expenses                                           299,661
                                                                   -----------
         Total current assets                                        3,321,111

Furniture and equipment, net                                             49,595 
Goodwill                                                                420,000 
Intangible assets                                                        24,089 
                                                                   -----------
         Total assets                                              $ 3,814,795
                                                                   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY                                            
------------------------------------                                            
Current liabilities:                                                            
  Accounts payable                                                 $   343,283
  Accrued expenses                                                     614,668
                                                                   -----------
         Total current liabilities                                     957,951
                                                                   -----------

Stockholders' equity:                                                           
Common stock, no par value (40,000,000 shares authorized;                       
  11,956,093 issued and 11,724,193 outstanding)                      9,179,827
  Additional paid-in capital                                         2,135,168
   Accumulated deficit                                               (7,956,734)
   Treasury stock                                                      (501,417)
                                                                   -----------
         Total stockholders' equity                                  2,856,844
                                                                   -----------
         Total liabilities and stockholders' equity                $ 3,814,795
                                                                   ===========

 See accompanying notes to financial statements.

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eGames, Inc.
Statements of Operations

                                                Years Ended June 30,
                                               -----------------------------

                                               2006             2005
                                               ------------     ------------
Net sales                                        $  4,756,187     $  5,343,981  

Cost of sales                                       2,658,574        2,483,220  
                                               ------------     ------------

Gross profit                                        2,097,613        2,860,761  

Operating expenses:                                                             
  Product development                               561,621          538,002
  Selling, general and administrative             2,614,723        2,492,357
                                               ------------     ------------

      Total operating expenses                    3,176,344        3,030,359
                                               ------------     ------------

Operating loss                                     (1,078,731)        (169,598) 

Interest income, net                                   40,033            7,130  
                                               ------------     ------------

Loss before income taxes                           (1,038,698)        (162,468) 

Benefit for income taxes                                - 0 -            7,571  
                                               ------------     ------------

Net loss                                        ($  1,038,698)   ($    154,897) 
                                               ============     ============

Net loss per common share:                                                      
      - Basic                                        ($ 0.09)         ($ 0.01)
                                                     ======           ======
      - Diluted                                      ($ 0.09)         ($ 0.01)
                                                     ======           ======

Weighted average common shares                                                  
  outstanding - Basic                            11,493,464       10,445,216

Dilutive effect of common share                                                 
  equivalents                                         - 0 -            - 0 -
                                                 ----------       ----------

Weighted average common shares                                                  
  outstanding - Diluted                          11,493,464       10,445,216
                                                 ==========       ==========

 See accompanying notes to financial statements.

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                                              eGames, Inc.
                                              Statements of Stockholders' Equity

                                                        [Enlarge/Download Table]


                                          Common Stock         Additional                       Treasury Stock                      
                                    -----------------------     Paid-in      Accumulated    ----------------------    Stockholders' 
                                      Shares       Amount       Capital        Deficit       Shares       Amount    Equity (Deficit)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    
Balances as of June 30, 2004        10,290,487  $ 9,179,827   $ 1,329,164   ($ 6,435,936)   (231,900)  ($ 501,417)    $ 3,571,638   
                                    ==========  ===========   ===========    ===========     =======    =========     ===========   

Net loss                                                                        (154,897)                                (154,897)  

Cash dividends paid to common                                                                                                       
stock shareholders                                                              (327,203)                                (327,203)  

Common stock options issued to                                                                                                      
employees and directors                                            77,338                                                  77,338   

Shares issued in connection with                                                                                                    
stock option exercises                 848,167                    229,642                                                 229,642   

---------------------------------------------------------------------------------------------------------------------------------   
Balances as of June 30, 2005        11,138,654  $ 9,179,827   $ 1,636,144   ($ 6,918,036)   (231,900)  ($ 501,417)    $ 3,396,518   
                                    ==========  ===========   ===========    ===========     =======    =========     ===========   

Net loss                                                                      (1,038,698)                              (1,038,698)  

Common stock warrants issued to                                                                                                     
shareholders of Cinemaware, Inc.                                  120,000                                                 120,000   

Common stock shares issued to                                                                                                       
shareholders of Cinemaware, Inc.       817,439                    300,000                                                 300,000   

Common stock options issued to                                                                                                      
employees and directors                                            79,024                                                  79,024   

---------------------------------------------------------------------------------------------------------------------------------   
Balances as of June 30, 2006        11,956,093  $ 9,179,827   $ 2,135,168   ($ 7,956,734)   (231,900)  ($ 501,417)    $ 2,856,844   
                                    ==========  ===========   ===========    ===========     =======    =========     ===========   


 See accompanying notes to financial statements.

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eGames, Inc.    
Statements of Cash Flows

                                                                [Download Table]

                                                           Years Ended June 30,    
                                                       --------------------------- 

                                                          2006             2005    
                                                       -----------     ----------- 
OPERATING ACTIVITIES:                                                              
                                                                                   
    Net loss                                          ($ 1,038,698)   ($   154,897)
    Adjustments to reconcile net loss to net cash                                  
         (used in) provided by operating activities:                               
    Stock-based compensation                                79,024          77,338 
    Depreciation and amortization                           34,464          36,667 
    Changes in operating assets and liabilities:                                   
          Accounts receivable, net                        (251,918)      1,264,691 
          Inventory, net                                   (79,969)        (79,480)
          Prepaid and other expenses                        14,023         126,447 
          Accounts payable                                 186,691        (284,424)
          Accrued expenses                                 205,028        (207,154)
                                                       -----------     ----------- 
Net cash (used in) provided by operating activities       (851,355)        779,188 

INVESTING ACTIVITIES:                                                              
     Purchase of furniture and equipment                   (34,178)        (11,689)
                                                       -----------     ----------- 
Net cash used in investing activities                      (34,178)        (11,689)

FINANCING ACTIVITIES:                                                              
     Proceeds from credit facility                         250,000           - 0 - 
     Repayments of credit facility                        (250,000)          - 0 - 
     Proceeds from exercise of stock options                 - 0 -         229,642 
     Dividend payments to common stockholders                - 0 -        (327,203)
                                                       -----------     ----------- 
Net cash used in financing activities                        - 0 -         (97,561)
                                                       -----------     ----------- 

Net (decrease) increase in cash and cash equivalents      (885,533)        669,938 

Cash and cash equivalents:                                                         
   Beginning of period                                   2,412,162       1,742,224 
                                                       -----------     ----------- 
   End of period                                       $ 1,526,629     $ 2,412,162 
                                                       ===========     =========== 

Supplemental cash flow information:                        2006            2005    
                                                       -----------     ----------- 

    Cash paid (refunds received) for income taxes     ($    31,315)    $   146,430 
                                                       ===========     =========== 

 See accompanying notes to financial statements.

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eGames, Inc.
 Notes to Financial Statements

1.  Summary of Significant Accounting Policies                                  

Description of Business                                                         

eGames, Inc. ("eGames", "our", "us", or "we") is a Pennsylvania corporation     
incorporated in July 1992 that publishes, markets and sells PC software games.  
Historically, we have focused on publishing affordable software games for the PC
platform only, and selling the greatest volume of our PC games in mass-market   
retail stores. Our current strategy focuses on publishing higher quality,       
higher-priced PC games, in addition to our value-priced jewel case PC titles,   
and to tap into the growing sales of casual and hardcore PC games via the       
Internet, while achieving a stronger retail presence. In North America, our PC  
games are distributed primarily through third-party software distributors who   
service mass-merchant and major retailers. In territories outside North America,
we license our PC games to third-party software distributors who are responsible
for the manufacture and distribution of our PC games within specific geographic 
territories. We market and sell our game titles under the eGames(TM),           
Cinemaware(R) and Cinemaware Marquee(TM) brands.                                

Basis of Presentation                                                           

The accompanying audited annual financial statements were prepared in accordance
with generally accepted accounting principles for financial information as      
promulgated in the United States of America. These statements include all       
adjustments that management believes are necessary for a fair presentation of   
the statements. Certain dollar amounts discussed within the "Notes to Financial 
Statements" have been rounded to the nearest thousand ("000").                  

Fair Value of Financial Instruments                                             

The recorded amounts of cash and net accounts receivable at June 30, 2006       
approximate fair value due to the relatively short period of time between       
origination of the instruments and their expected realization. All liabilities  
are carried at cost, which approximate fair value for similar instruments.      

Cash and Cash Equivalents                                                       

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

Accounts Receivable, net                                                        

Accounts receivable is reflected net of allowances for product returns, price   
markdowns and customer bad debts. The adequacy of these allowances is reviewed  
throughout each reporting period and any necessary adjustments to these         
allowances are reflected within the current period's provisions for product     
returns and price markdowns (reflected as a reduction to gross sales); and      
customer bad debts (if any, reflected as an operating expense). Actual product  
returns, price markdowns and customer bad debts are recorded as reductions to   
these allowances as well as reductions to the customers' individual accounts    
receivable balances (see Note 2).                                               

Inventory, net                                                                  

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

Furniture and Equipment, net                                                    

Furniture and equipment, net is stated at cost and net of accumulated           
depreciation. Depreciation is calculated on the straight-line method over the   
estimated useful lives of the assets ranging from three to five years           
(see Note 5).                                                                   

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Long-Lived Assets, net                                                          

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," we record     
impairment losses on long-lived assets, including intangible assets, used in    
operations when the fair value of those assets, less the cost to sell, is lower 
than our carrying value for those assets.                                       

Goodwill and Other Intangible Assets                                            

Goodwill is the excess purchase price paid by an acquiring company for          
identified intangible and tangible net assets. Intangible assets usually consist
of trademarks, intellectual property, non-compete agreements, customer lists and
acquired technology. SFAS No. 142, "Goodwill and Other Intangible Assets"       
requires that purchased goodwill and intangibles with indefinite lives not be   
amortized. Rather, goodwill and intangible assets with indefinite lives are     
subject to at least an annual assessment for impairment by applying a           
fair-value-based test. SFAS No. 142 requires a two-step approach to testing     
goodwill for impairment for each reporting unit. The first step tests for       
impairment by applying fair value-based tests at the reporting unit level. The  
second step (if necessary), measures the amount of impairment by applying fair  
value-based tests to individual assets and liabilities within each reporting    
unit.                                                                           

Software Development Costs                                                      

Software development costs are expensed as incurred. SFAS No. 86, "Accounting   
for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed" ,  
provides for the capitalization of certain software development costs incurred  
after technological feasibility of the software is established or for           
development costs that have alternative future uses. However, under our existing
process of developing new game titles, the technological feasibility of the     
underlying game software is not established until substantially all product     
development is complete. Accordingly, we did not capitalize any software        
development costs during the fiscal years ended June 30, 2006 and 2005.         

Revenue Recognition                                                             

 Product Sales
 -------------
We distribute the majority of our products through third-party software         
distributors to North American mass-merchant and major retailers and directly to
certain PC software retailers. The distribution of our products is governed by  
purchase orders, distribution agreements, or direct sales agreements, most of   
which allow for product returns and price markdowns. We recognize revenues from 
product shipments to most software distributors and retailers at the time title 
to our inventory transfers to the software distributor or retailer, less a      
provision for anticipated product returns and price markdowns. However, if we   
determine that we are not able to estimate an appropriate provision for product 
returns and price markdowns for any retailer or distributor or if we determine  
that the underlying terms of a retailer's or distributor's purchase order do not
qualify as a sale, we then recognize revenues for product deliveries to these   
retailers or distributors on a consignment basis.                               

Title to our products usually transfers to software distributors and retailers  
upon their receipt of our products, because retailer and distributor purchase   
orders typically reflect shipping terms of FOB destination. In order to         
recognize revenues associated with customer purchase orders having terms of FOB 
destination, we perform sales cut-off tests, in which we obtain proof of        
deliveries for product shipments made during the last two weeks of a reporting  
period from the freight companies that deliver our products to our retail and   
distribution customers. Revenues and costs associated with product shipments    
received by our customers after the end of a reporting period and having FOB    
destination terms are excluded from the current period's net sales and cost of  
sales, and are deferred until the subsequent reporting period.                  

We recognize revenues in accordance with the criteria of SFAS No. 48 at the time
title to our inventory passes to software distributors or retailers, based on   
the following: the selling price is fixed at the date of sale; the buyer is     
obligated to pay us; title of the product transfers to the buyer; the buyer has 
economic substance apart from us; we do not have further obligations to assist  
the buyer in the resale of the product; and product returns and price markdowns 
can be reasonably estimated at the time of sale. After product deliveries to our
distribution and retail customers are made, we do not provide any further       
services or materials that are essential to our products' functionality.        
However, we do provide basic telephone and web-based support as a means of      
improving consumer satisfaction and brand loyalty.                              

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We also have relationships with certain software distributors for product       
distribution to various retailers based on consignment and sell-through         
agreements. Accordingly, revenues from product shipments pursuant to these types
of agreements are only recognized to the extent that the distributor has        
reported to us that our product has actually sold through to consumers.         

 Provision for Product Returns and Price Markdowns
 -------------------------------------------------
Our provision for anticipated product returns and price markdowns (reflected as 
a reduction to gross sales) is primarily based on our analysis of: historical   
product return and price markdown results; current product sell-through activity
at retail store locations; current field inventory quantities at distributors'  
warehouses and at retail store locations; the length of time that products have 
been released at retail along with their estimated remaining retail life;       
outstanding return material and price markdown authorizations; the introduction 
of new and/or competing software products that could negatively impact the sales
of one or more of our current products; and the extent to which quantities of   
products with higher retail price points or unproven game genres remain in the  
retail channel. For the years ended June 30, 2006 and 2005, our provisions for  
product returns and price markdowns were $966,000 and $1,254,000, respectively, 
or 18.2% and 20.5%, respectively, of related gross product sales.               

The adequacy of our allowance for product returns and price markdowns is        
reviewed throughout each reporting period and any necessary adjustment to this  
allowance is reflected within the current reporting period's provision for      
product returns and price markdowns. At the end of each reporting period, the   
allowance for product returns and price markdowns is reflected as a reduction to
our gross accounts receivable.                                                  

At June 30, 2006, the allowance for product returns and price markdowns amounted
to 56% of our gross accounts receivable. Historically, the allowance for product
returns and price markdowns has represented a large percentage of our gross     
accounts receivable because we continue to have product return and price        
markdown exposure for the software units related to paid receivables while      
previously sold units remain in the retailers' stores or in the retailers' or   
distributors' warehouses. Throughout each reporting period we continue to       
evaluate our product return or price markdown exposure for software units we had
previously sold to software distributors and retailers, until physical units of 
our PC game titles are returned to us from software distributors or retailers,  
or until they sell through to consumers. During reporting periods, through      
retailer and distributor provided reports, we have regular and timely visibility
of product sell-through activity and remaining quantities of our titles in the  
retail channel that help us assess our exposure for future product returns and  
price markdowns.                                                                

Prepaid and Other Expenses                                                      

Prepaid and other expenses represent advance payments made to third parties for 
items such as licensing of software and intellectual properties used in our     
products, estimated tax payments, certain insurance coverage, retail market     
reporting, certain advertising costs and various service contracts. Prepaid and 
other expenses are usually expensed as operating expenses on a straight-line    
basis over the period of time covered by a contract. Advance licensing and      
royalty payments are usually expensed as cost of sales at the higher of the     
contractual or effective rate (see Notes 4 and 7). Tax payments are reflected as
income tax expense when appropriate.                                            

We continually evaluate the recoverability of our advanced licensing and royalty
payments by reviewing the information available about each title and the        
underlying licensed content. In particular, we evaluate the expected future     
sales of a title or potential subsequent titles containing the same licensed    
content based on current and potential sales programs, along with historical    
sell-through results of similar titles to consumers. For titles that have       
achieved distribution into their intended retail channels, we charge to cost of 
sales the remaining capitalized costs we determine to be non-recoverable in     
future periods. In the rare circumstance that a title does not achieve          
distribution into its intended retail channels, we charge to product development
expense the remaining capitalized costs we determine to be non-recoverable in   
future periods. Capitalized costs determined to be non-recoverable are expensed 
in the reporting period in which the decision is reached by management that     
recoverability of these costs in future periods is unlikely.                    

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Income Taxes                                                                    

We use 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 and for net operating loss and credit carry-forwards.
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 Net Income (Loss) per Common Share                               

Net income (loss) per common share is computed in accordance with SFAS No. 128, 
"Earnings per Share". Basic earnings per share is computed by dividing net      
income (loss) by the weighted average number of common shares outstanding during
each period. Diluted earnings per share is computed by dividing net earnings by 
the weighted average number of common shares and common share equivalents       
("CSEs") outstanding during each period that we report net income. CSEs may     
include common stock options and common stock warrants using the treasury stock 
method.                                                                         

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. Estimates and assumptions are made in: determining allowances for  
inventory obsolescence, product returns, price markdowns and customer bad debts;
disclosure of contingent assets and liabilities; initial valuation and          
subsequent measurement of goodwill and other intangible assets; evaluating the  
recoverable value of advanced licensing and royalty payments at the end of the  
reporting period; in addition to determining the amounts of revenues and        
expenses recognized during each reporting period. We recognize the critical     
nature and potential impact from making these and any other estimates and       
attempt to make reliable estimates, based upon the information available to us  
as of any reporting period. However, we also recognize that actual results could
differ from any of our estimates and that such differences could have either a  
negative or positive impact on future financial results.                        

2.  Accounts Receivable, net                                                    

Accounts receivable, net consists of the following:                             

    Accounts receivable, gross                                     $ 1,175,000
     Allowance for product returns and price markdowns                 (654,000)
                                                                   -----------
    Accounts receivable, net                                       $   521,000
                                                                   ===========

3.  Inventory, net                                                              

Inventory, net consists of the following:                                       

    Raw materials - warehouse                                      $   249,000
    Finished goods - warehouse                                         612,000
    Consignment product -  retailer and distributor locations          173,000
    Product returns -  retailer and distributor locations               56,000
                                                                   -----------

    Inventory, gross                                                 1,090,000

     Allowance for obsolescence                                        (116,000)
                                                                   -----------
    Inventory, net                                                 $   974,000
                                                                   ===========

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4.  Prepaid and Other Expenses                                                  

Prepaid and other expenses consists of the following:                           

    Royalties                                                      $   134,000
    Federal tax                                                         52,000
    Retailer slotting fees                                              30,000
    Insurances                                                          27,000
    Advertising                                                         22,000
    Market research                                                     14,000
    Other                                                               21,000
                                                                   -----------
    Prepaid and other expenses                                     $   300,000
                                                                   ===========

5.  Furniture and Equipment, net                                                

Furniture and equipment consists of the following:                              

    Furniture and equipment, gross                                 $   392,000
     Accumulated depreciation                                          (342,000)
                                                                   -----------
    Furniture and equipment, net                                   $    50,000
                                                                   ===========

6.  Accrued Expenses                                                            

Accrued expenses consists of the following:                                     

    Customers with credit balances                                 $   143,000
    Severance costs                                                    123,000
    Vacation accrual                                                   109,000
    Marketing promotions                                                63,000
    Professional fees                                                   57,000
    Royalties                                                           46,000
    State taxes                                                         40,000
    Other                                                               34,000
                                                                   -----------
    Accrued expenses                                               $   615,000
                                                                   ===========

7.  Commitments and Contingencies                                               

Our 5,000 square foot office facility located in Langhorne, Pennsylvania is     
occupied under an operating lease through September 30, 2010. Additionally, we  
currently rent certain office equipment through various operating lease         
agreements. For the years ended June 30, 2006 and 2005, total rent expense      
amounted to $84,000 and $87,000, respectively. At June 30, 2006, we had future  
operating lease commitments of $222,000 that are scheduled to be paid as        
follows: $64,000 in less than one year; $147,000 in one to three years; and     
$11,000 in three to five years.                                                 

Under various licensing agreements with independent software developers, we are 
required to pay royalties for the use of licensed content in our products. Most 
of these licensing agreements require us to make advance royalty payments to    
these developers prior to the time we recognize any net sales of software titles
containing this licensed software content. At June 30, 2006, we had future      
commitments to pay $47,000 in advance licensing and royalty payments to various 
independent licensors and software developers, which are all scheduled to be    
paid in less than one year.                                                     

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8.  Credit Facility                                                             

In December 2005, we renewed our credit facility agreement with TD Banknorth    
("TD"), formerly Hudson United Bank, which matures on December 1, 2006. This    
credit facility was established to provide working capital for our operations.  
Amounts outstanding under this credit facility are charged interest at one-half 
of one percent above TD's current prime rate and such interest is due monthly.  
Our access to these funds is limited to the lesser of $750,000 or seventy-five  
percent of qualified accounts receivable, which are defined as invoices less    
than ninety days old and net of any allowances for product returns, price       
markdowns and customer bad debts. At June 30, 2006, we had access to $390,000   
under this credit facility, based on the prescribed calculation of seventy-five 
percent of qualified accounts receivable as of that date. At June 30, 2006, we  
had no outstanding balance under this credit facility, which is secured by all  
of the Company's assets and requires us, among other things, to maintain certain
financial covenants that are tested quarterly.                                  

9.   Advertising Costs                                                          

We generally expense advertising costs (such as in-store circulars and point of 
sale materials) as incurred, except for costs associated with media campaigns   
(such as print ads, online banner ads and video loops) which would be recognized
as prepaid assets (to the extent these items were paid in advance) and expensed 
during the period in which the ad or video loop is released to consumers. During
the years ended June 30, 2006 and 2005, advertising expenses amounted to        
$131,000 and $26,000, respectively. The large increase in advertising costs     
during fiscal 2006 resulted from our efforts to promote our higher priced box   
titles published under the Cinemaware Marquee brand.                            

10. Concentration of Customers                                                  

We continue to have a concentration of customers consisting of a few large      
software distributors and retailers. Historically, Atari, Inc. ("Atari") has    
represented our primary software distributor servicing the North American       
mass-merchants and other major retailers. In December 2005, we transitioned the 
majority of our mass-merchant retail distribution to Take-Two Interactive       
Software ("Take Two"), which has distributed our titles into the office         
superstore and discount warehouse retail channels for several years.            

During the year ended June 30, 2006, Atari accounted for $1,493,000, or 31%, of 
our net sales, compared to the year ended June 30, 2005, when Atari accounted   
for $2,412,000, or 45%, of our net sales. During the year ended June 30, 2006,  
Take Two accounted for $433,000, or 9%, of our net sales, compared to the year  
ended June 30, 2005, when Take Two accounted for $225,000, or 4%, of our net    
sales. At June 30, 2006, Atari's net receivable balance was $144,000, or 28% of 
our total net accounts receivable, compared to Take Two's net accounts          
receivable of $14,000, or 3%, of our total net accounts receivable.             

11.   Goodwill and Other Intangible Assets                                      

At June 30, 2006, we had goodwill of $420,000, which related to the acquisition 
of substantially all of the assets of Cinemaware, Inc. in October 2005. The     
acquired assets consisted principally of goodwill, intellectual property and    
contract rights. We intend to use the acquired Cinemaware assets for developing,
publishing and branding higher-priced game titles for the PC and possibly for   
other gaming platforms in the future. In consideration for the Cinemaware       
assets, eGames issued to Cinemaware 817,439 shares of its common stock valued at
$300,000 based on the average closing stock price of the eGames' common stock   
for the ten trading days that ended on October 12, 2005, and warrants (valued at
$120,000 using the Black-Scholes valuation model) to purchase 300,000 shares of 
eGames common stock. At June 30, 2006, we also had other intangible assets of   
approximately $24,000 relating to the Company's trademark registration          
activities with the United States Patent and Trademark Office. As of June 30,   
2006, we had not recorded any impairment charge relating to goodwill or other   
intangible assets based upon our evaluation that no impairment has occurred.    

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12.  Income Taxes                                                               

The provision (benefit) for income taxes is comprised of the following          
components for the years ended June 30, 2006 and 2005, respectively:            

                         2006           2005
                        ----------     ---------
Current                                                                         
Federal                               $  - 0 -      $   - 0 -             
State                                (   - 0 -)        (7,000)            
                         --------      ---------
                         (   - 0 -)        (7,000)

Deferred                                                                        
Federal                              (   - 0 -)        (5,000)            
State                                (   - 0 -)      (139,000)            
                         --------      ---------
                         (   - 0 -)      (144,000)

Valuation allowance                         - 0 -        144,000                
                         --------      ---------

Benefit for income taxes                ( $ - 0 -)    ($   7,000)               
                         ========      =========

The reconciliation between the statutory federal income tax rate and our        
effective federal rate for income tax provision for the years ended June 30,    
2006 and 2005, respectively, is as follows:                                     

                                                 2006           2005
                                                 ----------     ----------

Statutory federal income tax rate                       34%            34%      

Increase (decrease) in taxes resulting from:                                    

Change in valuation allowance and other            (34%)          (34%) 
                                                 ----------     ----------

Effective federal rate for income tax provision       - 0 -%         - 0 -%     
                                                 ======         ======

The tax effect of temporary differences that give rise to significant portions  
of the deferred tax assets and deferred tax liabilities at June 30, 2006 and    
2005 is as follows:                                                             

                                                 2006           2005
                                                 ----------     ----------
Net deferred tax assets:                                                        
Alternative minimum tax credit                    $   52,000     $   52,000 
Accrued expenses and other                            55,000         51,000 
Allowances for accounts receivable                                          
   and inventory                                    359,000        303,000
Depreciation                                          10,000         12,000 
Net operating losses and capital losses            1,456,000      1,142,000 
                                                 ----------     ----------
   Gross deferred tax assets                      1,932,000      1,560,000
Less: Valuation allowance                        ( 1,880,000)   ( 1,508,000)
                                                 ----------     ----------
Net deferred tax assets                             $   52,000     $   52,000   
                                                 ==========     ==========

The deferred tax asset is offset by a full valuation allowance against timing   
differences as of June 30, 2006, as management currently believes that it is    
more likely than not that the deferred tax asset relating to timing differences 
will not be realized. During fiscal 2006, the valuation allowance for net       
deferred tax assets increased by approximately $372,000. The increase was a     
result of net changes in the temporary differences in the accounts reflected in 
the table above.                                                                

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As of June 30, 2006, we had approximately $3,944,000 of net operating loss      
carry-forwards for federal income tax purposes, (expiring through fiscal year   
ending June 30, 2026), which are available to offset future federal taxable     
income, and $1,149,000 in net operating loss carry-forwards for state purposes, 
(expiring through the fiscal year ending June 30, 2011), which are available to 
offset future state taxable income.                                             

13.  Common Stock                                                               

On June 30, 1995, we amended our 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 was intended to protect the interests of our existing         
stockholders' in the event that we were confronted with coercive or unfair      
takeover tactics. On March 4, 2005, our Board of Directors approved an amendment
to the Stockholders Rights Plan to accelerate the expiration date from June 1,  
2009 to March 7, 2005. With this action, the Plan was terminated on March 7,    
2005. The Board's decision to terminate the Plan was not made in connection with
any business transaction pending at that time.                                  

On October 13, 2005, in consideration for acquiring substantially all of the    
assets of Cinemaware, Inc., the Company issued 817,439 shares of its common     
stock to Cinemaware, Inc.                                                       

14.  Common Stock Options and Warrants                                          

Common Stock Options                                                            
--------------------                                                            

During 1995, we adopted, amended and restated our 1995 Amended and Restated     
Stock Option Plan (the "1995 Plan"), which expired on June 30, 2005. The 1995   
Plan allowed for the granting of options to purchase shares of our common stock 
through June 30, 2005, after which date any previously granted option remains in
effect through its contractual term. At our 1997 Annual Meeting of Shareholders,
the shareholders of our 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 our 2000 Annual Meeting of Shareholders, the            
shareholders of our 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  
was administered by the Board of Directors and provided 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 had also provided for automatic grants
of options to non-employee directors of our company. Each non-employee director 
received options for 10,000 shares of common stock upon appointment or election 
to the board and, in addition, each director would receive options for 5,000    
shares of common stock on the first trading day in January of each year.        

Except with respect to automatic grants of options to non-employee directors,   
the expiration of a stock option and its vesting period are 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. Stock option grants under the
1995 Plan vest over periods ranging from six months to ten years. In most cases,
upon termination of employment, vested options must be exercised by the optionee
within three months after the termination of the optionee's employment with our 
company.                                                                        

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Information regarding our common stock options is as follows:                   

                        Number
                                                  of          Weighted Average
                                              Options         Exercise Price
                                              --------------------------------
Balance, June 30, 2004                     2,590,000           $ 0.79 
                                         ==========           ======

 Granted                                     48,333             1.21
 Canceled                                  (310,500)            2.78
 Exercised                                 (848,167)            0.27
                                              --------------------------------
Balance, June 30, 2005                     1,479,666           $ 0.69 
                                         ==========           ======

 Granted (not part of any plan)             300,000             0.37
 Canceled                                  (172,500)            0.55
 Exercised                                    - 0 -              n/a
                                              --------------------------------
Balance, June 30, 2006                     1,607,166           $ 0.64 
                                          =========           ======

At June 30, 2006, 769,166 of outstanding common stock options were vested and no
common stock options were available for issuance under the 1995 Plan, since the 
1995 Plan expired on June 30, 2005. The following summarizes information about  
the common stock options outstanding at June 30, 2006:                          

                                                        [Enlarge/Download Table]

                                     Options Outstanding                         Options Exercisable       
                    ---------------------------------------------------------------------------------------

                                          Weighted Avg.      Weighted                                      
                          Number           Remaining           Avg.            Number            Weighted  
Range of Exercise     Outstanding at    Contractual Life     Exercise      Exercisable at      Avg.Exercise
     Prices           June 30, 2006        (in years)          Price       June 30, 2006          Price    
-----------------------------------------------------------------------------------------------------------
                                                                                                           
  $0.25 - $0.50          625,667             4.09              $0.39           325,667            $0.42    
  $0.56 - $0.75          310,666             1.20              $0.74           310,666            $0.74    
  $0.79 - $1.50          670,833             7.37              $0.83           132,833            $0.81    
  -------------        ---------             ----              -----           -------            -----    
  $0.25 - $1.50        1,607,166             4.90              $0.64           769,166            $0.62    
                       =========                                               =======                     

The per share weighted-average fair values of common stock options granted      
during the years ended June 30, 2006 and 2005 were $0.36 and $1.21,             
respectively, as determined on the date of grant using the Black-Scholes        
option-pricing model with the following assumptions:                            

                                       Years Ended
                                        June 30,
                                       -------------------------
                                     2006           2005
                                       -------------------------
Dividend Yield                               0%              0%       
Volatility Factor                           215%       227% to 300%   
Risk-Free Interest Rate                     4.30%          2.68%      
Average Expected Option Life               4 Years        3 Years     

Common Stock Warrants                                                           
---------------------                                                           

Information regarding our common stock warrants is as follows:                

                                             Number of      Weighted Average
                                            Warrants        Exercise Price
                                             -------------------------------
Balance, June 30, 2005                       - 0 -             n/a    
                                       =======             ===
Granted                                  300,000             0.63 
Canceled                                   - 0 -             n/a  
Exercised                                  - 0 -             n/a  
                                              ------------------------------
Balance, June 30, 2006                     300,000           $ 0.63   
                                        =======           ======

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The per share weighted-average fair values of common stock warrants granted     
during the year ended June 30, 2006 were $0.40 as determined on the date of     
grant using the Black-Scholes option-pricing model with the following           
assumptions:                                                                    

                                         Years Ended
                                          June 30,
                                         ---------------------------
                                         2006           2005
                                         ---------------------------
Dividend Yield                                 0%             n/a     
Volatility Factor                             215%            n/a     
Risk-Free Interest Rate                      4.30%            n/a     
Average Expected Warrant Life               3 Years           n/a     

15.  Accounting for Stock-Based Compensation                                    

Prior to July 1, 2002, we accounted for all stock option grants under the       
recognition and measurement provisions of APB Opinion No. 25, "Accounting for   
Stock Issued to Employees", and related Interpretations. Accordingly, no        
stock-based employee compensation cost is reflected in net income before fiscal 
2003, as all stock option grants had an exercise price equal or greater than the
market value of the underlying common stock on the date of grant.               

Effective July 1, 2002, we adopted within our financial statements the          
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" by        
applying the fair value method prospectively for stock options grants made on or
after that date. As of January 1, 2003, we adopted the provisions of SFAS No.   
148, "Accounting for Stock-Based Compensation - Transition and Disclosure".     

During the fiscal years ended June 30, 2006 and 2005, we recognized stock-based 
compensation expense of $79,000 and $77,000, respectively within our financial  
statements. All stock options that vested during these fiscal years were valued 
at date of grant under the fair value method, and accordingly no reconciliation 
of stock-based compensation expense between the valuation methods for APB       
Opinion No. 25 and SFAS No. 123 is presented.                                   

16. 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 products,         
geographic areas and major customers.                                           

Based on our organizational structure, we operate in only one geographic area,  
which is North America, and only one reportable segment, which is publishing    
consumer entertainment software for PCs.                                        

17.  Acquisition of Assets of Cinemaware, Inc.                                  

On October 13, 2005, eGames completed the acquisition of substantially all of   
the assets of Cinemaware, Inc. pursuant to an Asset Purchase Agreement. The     
acquired assets consisted principally of intellectual property, contract rights 
and goodwill. As part of the transaction, Cinemaware and its principal          
shareholder, Lars Fuhrken-Batista, entered into non-competition agreements, and 
Mr. Batista became Vice President of Development for eGames.  We intend to use  
the Cinemaware assets for the purpose of publishing new higher-priced PC game   
titles for distribution on the Internet and to North American retailers. eGames 
did not assume any of Cinemaware's liabilities, except for certain obligations  
relating to assumed contracts.                                                  

In consideration for the Cinemaware assets, eGames issued to Cinemaware:        
   o  817,439 shares of its common stock (determined by dividing $300,000 by
   the average closing price of a share of eGames common stock for the
 five trading days prior to the date of the Agreement and the five
trading days ending one trading day prior to the closing);      
    o  one five year warrant to purchase 150,000 shares of eGames common stock
      at an exercise price of $.50 per share (valued at $60,000 based on the
Black-Scholes valuation model); and                             
    o  one five year warrant to purchase 150,000 shares of eGames common stock
      at an exercise price of $.75 per share (valued at $60,000 based on the
Black-Scholes valuation model).                                 

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18.  Recent Accounting Pronouncements                                           

In December 2004, the Financial Accounting Standards Board ("FASB") issued      
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),    
"Share-Based Payment" which revised Statement of Financial Accounting Standards 
No. 123, "Accounting for Stock-Based Compensation". This statement supersedes   
APB Opinion No. 25, "Accounting for Stock Issued to Employees". The revised     
statement addresses the accounting for share-based payment transactions with    
employees and other third parties, eliminates the ability to account for        
share-based compensation transactions using APB 25 and requires that the        
compensation expense relating to such transactions be recognized in the         
statement of operations. The revised statement became effective as of the first 
interim period beginning after June 15, 2005. Since we had adopted within our   
financial statements the provisions of SFAS No. 123 as of July 1, 2002, we do   
not believe our adoption of SFAS No. 123 (revised 2004) had a material impact on
our financial statements.                                                       

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment 
of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in Accounting       
Research Bulletin ("ARB") No. 43, "Restatement and Revision of Accounting       
Research Bulletins", Chapter 4, "Inventory Pricing", to clarify the accounting  
for abnormal amounts of idle facility expense, freight, handling costs, and     
wasted material (spoilage) and requires that those items be recognized as       
current-period charges. SFAS No. 151 also requires that allocation of fixed     
production overheads to the costs of conversion be based on the normal capacity 
of the production facilities. SFAS No. 151 became effective for inventory costs 
incurred during fiscal years beginning after June 15, 2005. We do not believe   
our adoption of SFAS No. 151 had a material impact on our financial statements. 

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for       
Uncertainty in Income Taxes" (FIN 48). FIN 48 clarifies when tax benefits should
be recorded in financial statements, requires certain disclosures of uncertain  
tax matters and indicates how any tax reserves should be classified in a balance
sheet. FIN 48 is effective for us in the first quarter of fiscal 2008. We are   
evaluating the impact of FIN 48 on our results of operations and financial      
condition.                                                                      

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

None                                                                            

Item 8A.   Controls and Procedures                                              

(a) Disclosure Controls and Procedures. Under the supervision and with the      
participation of our Chief Executive Officer and Chief Financial Officer, we    
carried out an evaluation of the effectiveness of our disclosure controls and   
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the  
Securities Exchange Act of 1934, as of June 30, 2006 (the "Evaluation Date").   
Based on that evaluation, our Chief Executive Officer and Chief Financial       
Officer have concluded that as of the Evaluation Date, our disclosure controls  
and procedures were effective to provide reasonable assurance that the          
information required to be disclosed in our reports filed or furnished under the
Exchange Act was recorded, processed, summarized and reported, within the       
periods specified in the SEC's rules and forms. We believe that a controls      
system, no matter how well designed and operated, cannot provide absolute       
assurance that the objectives of the controls system are met, and no evaluation 
of controls can provide absolute assurance that all the control issues and      
instances of fraud, if any, within a company have been detected.                

(b) Changes in Internal Control over Financial Reporting. There have not been   
any changes in our internal control over financial reporting during the fiscal  
quarter ended June 30, 2006 that have materially affected, or are reasonably    
likely to materially affect, our internal control over financial reporting.     

Item 8B.   Other Information                                                    

None                                                                            

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PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;        
Compliance with Section 16(a) of the Exchange Act         

Executive Officers:                                                             

The executive officers of the Company are as follows:                           

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

Gerald W. Klein        58    President and Chief Executive Officer              
Thomas W. Murphy       48    Vice President, Finance and Chief Financial Officer
Ellen Pulver Flatt     43    Vice President, General Counsel and Secretary      
Richard H. Siporin     47    Vice President, Sales and Marketing                
Lars Fuhrken-Batista   35    Vice President, Development                        

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. 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 in a number of financial positions at Checkpoint Systems,     
Inc., a provider of security and access control systems, including serving as   
Accounting Manager from 1991 to 1992.                                           

Ms. Pulver Flatt has been Vice President and General Counsel since August 2003. 
She joined the Company in July 1999, and from that time until August 2003, she  
served as Senior Associate Counsel. From 1992 until she joined eGames, she was  
an associate with the law firm of McCausland, Keen & Buckman.                   

Mr. Siporin joined the Company in January 2000 as Vice President of Sales and   
Marketing. 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.                              

Mr. Batista joined the Company in October 2005 as Vice President of Development 
following the completion of the acquisition of assets of Cinemaware, Inc., where
Mr. Batista had served as President and CEO since 2000. Between 1995 and 2000,  
Mr. Batista served in a number of positions at Activision, Inc., including      
Localization Coordinator, Producer and Business Development Producer.           

Directors:                                                                      

There is no family relationship between any director and any other director or  
executive officer of the Company.                                               

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The names of the members of our Board of Directors and certain information about
them are set forth below. The information about the Company's Board of Directors
is based, in part, upon information furnished by the directors.                 

Director Name               Age   Title                                   Since 
-------------               ---   -----                                   ----- 
Gerald W. Klein             58    Director, President and Chief            1994 
     Executive Officer

Eugene H. Mauro(1)(4)       37    Director                                 2005 

Thomas D. Parente (2)(3)    59    Director                                 1995 

Lambert C. Thom (1)(2)      61    Director                                 1997 
-------                                                                         
(1)    Member of Audit Committee                                                
(2)    Member of Compensation Committee                                         
(3)    Chairman of Audit Committee                                              
(4)    Chairman of Compensation Committee                                       

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.                 

Eugene H. Mauro is a 12-year veteran of the interactive entertainment industry  
and from September 2005 to present has been managing his consulting business,   
Mauro Media, Inc., where he advises an international clientele on the           
interactive entertainment industry.  From March 2004 until September 2005 he    
served as Chief Executive Officer and Executive Producer at Myelin Media, LLC,  
a start-up video game publishing company. Mr. Mauro was the founder and, from   
May 2001 until December 2003, Chief Executive Officer of Capital Entertainment  
Group, Inc., an independent video game production studio. From 1997 until 2001, 
Mr. Mauro served as President of Dotted Line Entertainment, Inc., where he      
represented game developers, publishers and licensors.                          

Thomas D. Parente has served as a Director of the Company since June 1995.  He  
served as Chairman of the Board from August 1998 until December 2000, at which  
time former Director Robert M. Aiken, Jr. was elected as Chairman of the Board. 
Mr. Parente was again elected as Chairman of the Board in December 2005 upon    
Mr. Aiken's retirement.  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 1996, 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.                                   

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.                                                     

Compliance with Section 16(a) of the Exchange Act:                              

Section 16(a) of the Securities and Exchange Act of 1934 required 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.                                                         

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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, 2006, all of its officers and directors complied with all filing       
requirements applicable to them.                                                

Audit Committee:                                                                

The Board of Directors of the Company has an Audit Committee comprised of       
Eugene H. Mauro, Lambert C. Thom, and Thomas D. Parente. Mr. Parente is the     
Chairman of the Audit Committee.  All of the members of the Audit Committee are 
independent, as that term is defined in Section 10A of the Securities  Exchange 
Act of 1934, the SEC rules there under, and Section 121(A) of the American      
Stock  Exchange's Listing  Standards,  Policies  and  Requirements. The  Board  
of  Directors  has determined that the Audit Committee has at least one "audit  
committee financial expert," which is Mr. Parente.                              

Code of Ethics:                                                                 

The Company has adopted a Code of Ethics that applies to all of its directors   
and employees, including its Chief Executive Officer, Chief Financial Officer   
and senior financial and accounting officers. In addition to other matters, the 
Code of Ethics establishes policies to deter wrongdoing and to promote honest   
and ethical conduct, including ethical handling of actual or apparent conflicts 
of interest, compliance with applicable laws, rules and regulations, full, fair,
accurate, timely and understandable disclosure in public communications and     
prompt internal reporting of violations of the Code of Ethics. A copy of the    
eGames Code of Ethics is available on our website at                            
http://www.egamesonline.com/egames/investors/ethics.asp. Amendments to and      
waivers from the Code of Ethics will also be disclosed promptly on the website. 
In addition, shareholders may request a printed copy of the Code of Ethics, free
of charge, by contacting our Vice President and Chief Financial Officer at:     

eGames, Inc.                                                          
Attention: Vice President and Chief Financial Officer                 
2000 Cabot Boulevard, Suite 110                                       
Langhorne, PA 19047                                                   

Item 10.   Executive Compensation                                               

Summary Compensation Table                                                      

The following table sets forth certain information concerning the compensation  
paid during the fiscal years ended June 30, 2006, 2005, and 2004 to the         
Company's Chief Executive Officer and the Company's other executive officers    
whose salary and bonus exceeded $100,000 during the 2006 fiscal year.           

                                                        [Enlarge/Download Table]

                                              Annual Compensation               Long-Term Compensation    
                                              -------------------               ----------------------    
                                                                            Securities          All Other 
                                      Fiscal                                Underlying        Compensation
Name & Principal Position              Year     Salary ($)       Bonus ($)  Options (#)          (1) ($)  
                                       ----     ----------       ---------  -----------          -------  
                                                                                                          
Gerald W. Klein                        2006      200,000           1,170        -0-               9,519   
President and Chief Executive          2005      207,308           1,170        -0-               9,023   
Officer                                2004      188,269          59,697      110,000             7,904   

Lawrence F. Fanelle (2)                2006      150,000           1,170        -0-               6,570   
Vice President - Operations            2005      155,385           1,170        -0-               9,849   
                                       2004      138,846          37,106      75,000              9,408   

Thomas W. Murphy                       2006      124,000           1,170        -0-               7,193   
Vice President - Finance and           2005      128,385           1,170        -0-               7,053   
Chief Financial Officer                2004      112,962          30,431      75,000              6,521   

Richard H. Siporin                     2006      170,000           1,170        -0-               7,354   
Vice President - Sales and Marketing   2005      176,154           1,170        -0-               7,202   
                                       2004      158,846          42,240      75,000              6,711   

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(1)  Represents: (a) amounts contributed by the Company to each named     
     executive officer's 401(k) Plan, and (b) life insurance premiums paid
by the Company.                                                 
  (2)  On August 16, 2006, Mr. Fanelle entered into a Separation Agreement and
     General Release of All Claims with the Company in connection with the
 elimination of Mr. Fanelle's position at the Company effective on
      August 1, 2006. Under the agreement, Mr. Fanelle agreed to release the
      Company from any claims relating to his employment, and in return, the
    Company agreed to pay Mr. Fanelle $79,180, less taxes required to be
      withheld by law, and to pay $10,100 to an outplacement service for Mr.
   Fanelle. Additionally, under the terms of the Separation Agreement,
       98,000 of Mr. Fanelle's outstanding vested stock options, with exercise
      prices ranging from $0.50 to $0.75, will continue to be exercisable in
      accordance with their original terms, and Mr. Fanelle was permitted to
      keep a Company-owned desktop computer. The amounts paid to Mr. Fanelle
      during the 2006 fiscal year do not include amounts paid to Mr. Fanelle
pursuant to the Separation Agreement.                           

Stock Option Grants During 2006 Fiscal Year                                     

There were no stock option grants to the named executive officers during Fiscal 
2006.                                                                           

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

The following table provides information related to employee stock options      
exercised by the named executive officers during fiscal 2006 and the value of   
such stock options at year-end.                                                 

                                                        [Enlarge/Download Table]

                      Shares                                                   Value* of Unexercised
                     Acquired                        Number of Securities      In-The-Money Options 
                        on                          Underlying Unexercised         at FY-End ($)    
                     Exercise                        Options at FY End (#)        Exercisable/Un    
      Name              (#)    Value Realized ($)  Exercisable/Un-exercisable       Exercisable     
      ----              ---    ------------------  --------------------------       -----------     
                                                                                                    
Gerald W. Klein         -0-           -0-               92,000 / 88,000               -0- / -0-     
Thomas W. Murphy        -0-           -0-              135,000 / 60,000            $4,000 / -0-     
Richard H. Siporin      -0-           -0-               88,333 / 60,000               -0- / -0-     
Lawrence F. Fanelle     -0-           -0-              113,000 / 60,000               -0- / -0-     


* Value of stock options based upon a share price of $0.35, the closing price of
our Common Stock on June 30, 2006.                                              

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, who are also members of the 
Company's Audit Committee and Compensation Committee, receive $15,000 annually  
for their services as a member of the Board, Audit Committee and Compensation   
Committee. This fee is payable in four quarterly installments. All directors are
entitled to reimbursement for reasonable expenses incurred in the performance of
their duties as Board members. The Company's Amended and Restated 1995 Stock    
Option Plan, which expired June 30, 2005, had provided 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 received 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. The final automatic option grant to the      
non-employee members of the Board of Directors pursuant to the Amended and      
Restated 1995 Stock Option Plan was made on January 1, 2005. On December 1,     
2005, each of the outside Directors received options to purchase 50,000 shares  
of Common Stock at an exercise price of $0.31 a share, which grant was not      
pursuant to any stock option plan.                                              

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Change of Control Severance Arrangements                                        

In June 2004, the Company adopted a Change of Control Severance Plan for Level  
One Employees (the "Severance Plan"). The Chief Executive Officer, the          
President, any Vice President of the Company, and each other person designated  
by the Board in writing are eligible to participate in the Severance Plan. The  
Severance Plan provides for benefits in the event that the Company or its       
successor terminates an eligible individual's employment within 90 days prior to
or 365 days after a change of control for any reason other than for "cause," as 
defined in the Severance Plan, or any eligible employee terminates his or her   
employment for "good reason," as defined in the Severance Plan. The eligible    
employees under the Severance Plan may be eligible to receive (A) a lump sum    
payment of two times the sum of their annual base salary and the greater of (1) 
the annual cash bonus, if any, actually paid or declared for the year           
immediately preceding the year in which the employee's employment terminates or 
(2) the annual bonus for the year immediately preceding the year the change of  
control giving rise to the termination of employment and (B) continuation of    
health benefits for up to 24 months.                                            

Item 11.   Security Ownership of Certain Beneficial Owners and Management and   
Related Stockholder Matters                               

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 as of August 14, 2006 (unless otherwise noted) by: (i) those persons or   
entities known by management to beneficially own more than five percent of the  
Common Stock; (ii) each 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.                     

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

Steven N. Bronson                      624,413 (3)                 5.3 %        
Catalyst Financial LLC                                                          
100 Mill Plain Road                                                             
Danbury, Connecticut  06811                                                     

Lawrence F. Fanelle (4)                223,000 (4)                 1.9 %        

Gerald W. Klein                        628,200 (5)                 5.3 %        

Eugene H. Mauro                           -0-                       n/a         

Thomas W. Murphy                       218,642 (6)                 1.8 %        

Thomas D. Parente                       96,425 (7)                   *          

Richard H. Siporin                     177,300 (8)                 1.5 %        

Lambert C. Thom                        146,124 (9)                 1.3 %        

All executive officers and           1,622,291 (10)               13.2 %        
directors as a group (9 persons)                                                

*Less than 1%                                                                   

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(1)   Unless otherwise indicated, the address of each named holder is c/o   
        eGames, Inc., 2000 Cabot Boulevard West, 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, the shares in this column include shares
that may be acquired upon exercise of stock options within sixty
days of August 14, 2006. 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.                                     
(3)   Steven N. Bronson filed a Schedule 13D dated June 29, 2006, upon      
 which the Company has relied in making this disclosure. Steven N.
   Bronson has sole voting and dispositive power as to 624,413 shares.
(4)   On August 16, 2006, Mr. Fanelle entered into a Separation Agreement   
and General Release of All Claims with the Company in connection
  with the elimination of Mr. Fanelle's position at the Company. His
 beneficial ownership includes 113,000 shares of Common Stock that
may be acquired through the exercise of options that were       
 exercisable as of August 14, 2006 or became exercisable within 60
days of that date.                                              
(5)   Includes 92,000 shares of Common Stock that may be acquired through   
   the exercise of options that were exercisable as of August 14, 2006
or became exercisable within 60 days of that date. Also includes
1,200 shares held by Mr. Klein's immediate family members.      
(6)   Includes 135,000 shares of Common Stock that may be acquired          
  through the exercise of options that were exercisable as of August
14, 2006 or became exercisable within 60 days of that date. Also
  includes 788 shares held by Mr. Murphy's immediate family members.
(7)   Includes 35,000 shares of Common Stock that may be acquired through   
   the exercise of options that were exercisable as of August 14, 2006
or became exercisable within 60 days of that date. Also includes
4,425 shares held by Mr. Parente's immediate family members.    
(8)   Includes 88,333 shares of Common Stock that may be acquired through   
   the exercise of options that were exercisable as of August 14, 2006
or became exercisable within 60 days of that date.              
(9)   Includes 10,000 shares of Common Stock that may be acquired through   
   the exercise of options that were exercisable as of August 14, 2006
or became exercisable within 60 days of that date.              
(10)  Includes 555,333 shares of Common Stock that may be acquired by       
  such persons through the exercise of options that were exercisable
  as of August 14, 2006 or became exercisable within 60 days of that
date.                                                           

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Equity Compensation Plan Information:                                           
-------------------------------------                                           
The following table summarizes, as of June 30, 2006, outstanding warrants and   
options to acquire shares of our Common Stock that have been issued under our   
1995 Amended and Restated Stock Option Plan, which expired June 30, 2005, or    
that were issued outside this plan.                                             

                                                        [Enlarge/Download Table]

                                                                                        Number of securities  
                                                                                       remaining available for
                                                                                        future issuance under 
                               Number of securities to       Weighted-average           equity compensation   
                               be issued upon exercise       exercise price of            plans (excluding    
                               of outstanding options,      outstanding options,       securities reflected in
                                 warrants and rights        warrants and rights             column (a))       
Plan category                            (a)                        (b)                         (c)           
--------------------------------------------------------------------------------------------------------------

                                                                                                              
Equity compensation                                                                                           
plans approved by                                                                                             
security holders                      1,307,166                    $0.70                         - 0 -        

Equity compensation                                                                                           
plans not approved by                                                                                         
security holders(1)                     300,000                    $0.37                         - 0 -        

Warrants issued to                                                                                            
Cinemaware, Inc.(2)                     300,000                    $0.63                         - 0 -        

--------------------------------------------------------------------------------------------------------------
Total                                 1,907,166                    $0.64                         - 0 -        
=====                                 =========                    =====                         =====        

(1) In October 2005, when we hired Lars Fuhrken-Batista as Vice President of    
Development as part of the Cinemaware transaction, we granted to Mr. Batista a  
stock option to purchase 150,000 shares of our Common Stock with an exercise    
price of $0.43 per share, the market price on the date of grant. This stock     
option is not part of any stock option plan and it vests over five years after  
the date of grant in equal annual installments. This stock option has a term of 
six years. In December 2005, we granted stock options to our outside Directors  
to purchase 150,000 shares of our Common Stock at an exercise price of $0.31,   
the market price on the date of grant. These stock options have ten year terms, 
and vest over three years after the date of grant in equal annual installments. 

(2) In partial consideration for the acquisition of assets of Cinemaware, Inc.  
in October 2005, we issued to Cinemaware a warrant to purchase 150,000 shares of
our Common Stock at an exercise price of $.50 per share, and a warrant to       
purchase 150,000 shares of our Common Stock at an exercise price of $.75 per    
share (collectively, the "Warrants"). The Warrants each have a term of five     
years.                                                                          

Item 12.   Certain Relationships and Related Transactions                       

None.                                                                           

 PART IV

Item 13.                                                                        

Exhibits                                                                        

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

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

(1)   2.1       Asset Purchase Agreement between eGames, Inc., Cinemaware, Inc. 
         and Lars Fuhrken-Batista dated as of October 6, 2005. The
             Company agrees to furnish supplementally a copy of any of the
      exhibits and schedules to the Asset Purchase Agreement
              identified therein upon request of the Securities and Exchange
Commission.                                     
(2)   3.1       Amended and Restated Articles of Incorporation of the           
Registrant.                                     
(3)   3.2       By-Laws of the Registrant.                                      
(4)  10.1       Warrant for the Purchase of 150,000 shares of Common Stock of   
eGames, Inc. exercisable at $0.75 per share     
(4)  10.2       Warrant for the Purchase of 150,000 shares of Common Stock of   
eGames, Inc. exercisable at $0.50 per share     
(4)  10.3       Escrow Agreement dated October 13, 2005 between and among       
                eGames, Inc., Cinemaware, Inc. and TD Banknorth, formerly Hudson
United Bank                                     
(4)  10.4       Non-Competition and Confidentiality Agreement dated             
              October 13, 2005 between Lars Fuhrken-Batista and eGames, Inc.
(4)  10.5       Non-Competition and Confidentiality Agreement dated October     
  13, 2005 between Cinemaware, Inc. and eGames, Inc.
(5)  10.6*      Amended and Restated 1995 Stock Option Plan.                    
(6)  10.7*      Form of Incentive Stock Option Agreement.                       
(6)  10.8*      Form of Non-Employee Director Stock Option Agreement.           
(7)  10.9       Note and Loan Modification Agreement by and between TD          
             Banknorth, formerly Hudson United Bank and eGames, Inc. dated
December 5, 2005                                
(8)  10.10      Business Loan Agreement by and between TD Banknorth, formerly   
              Hudson United Bank and the Registrant dated November 23, 2004.
(8)  10.11      Promissory Note dated November 23, 2004.                        
(8)  10.12      Commercial Security Agreement dated November 23, 2004.          
(9)  10.13*     Change of Control Severance Plan for Level One Employees.       
(9)  10.14*     Change of Control Severance Plan for Level Two Employees.       
 10.15      Separation Agreement and General Release of All Claims dated
             August 15, 2006 between eGames, Inc. and Lawrence F. Fanelle.
(10) 10.16      Distribution Agreement dated November 15, 2005 between          
     Gathering of Developers, Inc., a division of Take-Two
Interactive Software Inc., and eGames, Inc.     
(11) 14.1       Code of Ethics for Employees and Board Members                  
23.1       Consent of Stockton Bates, LLP.                            
31.1       Certification of Gerald W. Klein as President and Chief    
                Executive Officer of eGames, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                     
    31.2       Certification of Thomas W. Murphy as Chief Financial Officer of
              eGames, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.                                        
32.1       Certification of Gerald W. Klein as President and Chief    
               Executive Officer of eGames, Inc. pursuant to 18 U.S.C. Section
              1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.                                    
    32.2       Certification of Thomas W. Murphy as Chief Financial Officer of
           eGames, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
          pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*              Management contracts.                                          
(1)             Incorporated herein by reference from the Registrant's Form 8-K 
       as filed with the Securities and Exchange Commission on
October 11, 2005.                               
(2)             Incorporated herein by reference from the Registrant's Form SB-2
       as filed with the Securities and Exchange Commission on
July 28, 1995.                                  
(3)             Incorporated herein by reference 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.
(4)             Incorporated herein by reference from the Registrant's Form 8-K 
       as filed with the Securities and Exchange Commission on
October 19, 2005.                               

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(5)             Incorporated by reference herein 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.
(6)             Incorporated by reference herein from the Registrant's Form     
         10-KSB for the year ended June 30, 2004 as filed with the
        Securities and Exchange Commission on September 27, 2004
(7)             Incorporated herein by reference from the Registrant's Form 8-K 
       as filed with the Securities and Exchange Commission on
December 7, 2005.                               
(8)             Incorporated herein by reference from the Registrant's Form 8-K 
       as filed with the Securities and Exchange Commission on
November 24, 2004.                              
(9)             Incorporated herein by reference from Registrant's Form 8-K as  
    filed with the Securities and Exchange Commission on
June 28, 2004.                                  
(10)            Incorporated herein by reference from Registrant's Form 8-K as  
            filed with the Securities and Exchange Commission on May 15,
              2006. Confidential treatment requested as to certain portions,
         which portions were omitted and filed separately with the
             Securities and Exchange Commission pursuant to a Confidential
Treatment Request.                              
(11)            Incorporated herein by reference from Registrant's Form 10-KSB  
       as filed with the Securities and Exchange Commission on
September 27, 2005.                             

Item 14.      Principal Accountant Fees and Services                            

The following table sets forth the fees that the Company paid to its independent
auditors for services provided to the Company during the last two fiscal years: 

    2006        2005
    ----        ----
Audit Fees (1)             $ 60,000    $ 59,100                       
Audit-Related Fees (2)     $   -0-     $   -0-                        
Tax Fees (3)               $ 10,000    $  6,400                       
All Other Fees (4)         $  5,810    $   -0-                        

(1)   Audit Fees consist of fees billed for professional services rendered
        for the audit of the Company's annual financial statements and reviews
         of the financial statements included in the Company's quarterly reports
on Forms 10-QSB.                                              
 (2)   Audit-Related Fees consist of services that are reasonably related to
   the performance of the audit or review of the Company's financial
statements and are not reported under "Audit Fees."           
 (3)   Tax Fees consist of professional services rendered by the independent
         auditors for tax compliance, tax advice, and tax planning. The services
for the fees disclosed under this category include tax return 
preparation and tax advice.                                   
(4)   Other fees consist of services such as: review of distribution      
   agreements; research on dividend reporting and tax withholding on
 international royalty payments; and annual meeting preparation.

The Audit Committee has considered whether the provision of services other than 
audit services is compatible with maintaining the independent public            
accountant's independence.                                                      

During fiscal 2006, the Audit Committee approved all audit, non-audit, tax and  
all other services which Stockton Bates, LLP was to perform during the year and 
the range of fees for each of these categories. The Audit Committee's current   
policy is to consider for pre-approval annually all categories of audit,        
non-audit, tax and other services proposed to be provided by our independent    
auditors for the fiscal year, which categories and services are reviewed as     
needed throughout the year. The Audit Committee must separately pre-approve any 
service that is not included in the approved list of services or any proposed   
services exceeding pre-approved cost levels.                                    

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SIGNATURES

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

eGames, Inc.                                                                    

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

Date: September 27, 2006                                                        
------------------------                                                        

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

Date: September 27, 2006                /s/  Gerald W. Klein                    
------------------                --------------------              
                              Gerald W. Klein, President and
                       Chief Executive Officer

Date: September 27, 2006                /s/ Thomas W. Murphy                    
------------------                --------------------              
                                 Thomas W. Murphy, Chief Financial
                                    Officer and Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the Registrant in  
the capacities indicated and on the 27th of September 2006.                     

Name                                 Title                                    
--------------------------------------------------------------------------      

/s/  Gerald W. Klein                 President and Chief Executive Officer      
----------------------               and Director                               
Gerald W. Klein                                                                 

/s/  Eugene H. Mauro                 Director                                   
-----------------------                                                         
Eugene H. Mauro                                                                 

/s/  Thomas D. Parente               Chairman of the Board of Directors         
------------------------                                                        
Thomas D. Parente                                                               

/s/  Lambert C. Thom                 Director                                   
----------------------                                                          
Lambert C. Thom                                                                 

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                                                               Exhibit 10.15

SEPARATION AGREEMENT AND
 GENERAL RELEASE OF ALL CLAIMS
 -----------------------------

  This Separation Agreement and Release of all Claims (hereinafter
"Agreement") is entered into by and between Lawrence F. Fanelle (referred to as 
"Employee"), and eGames, Inc. (referred to as the "Company") as of the 15th day 
of August, 2006.                                                                

RECITALS

   The Company and Employee have agreed upon the benefits, terms and
conditions of Employee's separation from the Company, effective August 1, 2006, 
upon the terms and conditions set forth herein.                                 

   WHEREFORE, the parties, intending to be legally bound hereby and for good
and valuable consideration, the receipt and sufficiency of which are            
acknowledged, have agreed that it is in their respective best interests to      
amicably resolve all matters relative to Employee's employment with and         
separation from the Company pursuant to the following terms and conditions:     

I.

    In consideration of Employee's release of claims and covenants set
forth in this Agreement, including but not limited to, his release of all claims
for compensation, personal injury, mental and emotional distress and attorneys' 
fees, and without creating any precedent in the administration of its policies  
and benefits, the Company agrees to the following: (i) The Company shall pay    
Employee a lump sum of $79,180, less taxes required to be withheld by law, which
amount shall be payable on the next regular payroll period following the        
expiration of the Revocation Period (as defined in Section IX of this           
Agreement); (ii) the options to acquire 49,000 shares of the Company's Common   
Stock at an exercise price of $.50 per share, and the options to acquire 49,000 
shares of the Company's Common Stock at an exercise price of $.75 per share (the
"Stock Options") pursuant to the Company's 1995 Amended and Restated Stock      
Option Plan, will continue to be exercisable in accordance with their terms,    
notwithstanding the termination of Employee's employment with the Company; (iii)
The Company shall pay Employee $5,481, less taxes required to be withheld by    
law, on the next regular payroll period following the expiration of the         
Revocation Period, which amount represents Employee's accrued vacation as of    
August 1, 2006; (iv) The Company shall make the September 2006 quarterly payment
of $584.33 to West Coast Life Insurance Company in payment of Employee's life   
insurance policy #ZOO994308; (v) The Company shall pay to Kingston & Cooper     
$10,100 in payment of outplacement services for Employee, which payment shall be
made within two (2) business days following the expiration of the Revocation    
Period, and (vi) The Company shall give Employee the Dell desktop computer with 
peripherals, product key #KKB38-DYD3Y-HV97G-W9PKK-TJPPM.                        

 II.

      In exchange for the promises set forth in Section I, above, Employee
covenants and agrees to:                                                        

         (a) Fully and forever release, discharge, cancel, waive, and acquit for
himself, his heirs, executors, administrators and assigns, the Company and any  
and all of its related entities, affiliates, Boards of Directors, agents,       
officers, owners, employees, attorneys, successors and assigns (the "eGames     
Released Parties"), of and from any and all rights, claims, demands, causes of  
action, obligations, damages, penalties, fees, costs, expenses, and liability of
any nature whatsoever, including personal injury claims, which Employee has, had
or may have had against any of the eGames Released Parties, arising out of, or  
by reason of any cause, matter, or thing whatsoever existing as of the date of  
execution of this Agreement, WHETHER KNOWN TO THE PARTIES AT THE TIME OF        
EXECUTION OF THIS AGREEMENT OR NOT.                                             

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         This FULL WAIVER OF ALL CLAIMS includes, without limitation, attorneys'
fees, costs, any claims, demands, or causes of action arising out of, or        
relating in any manner whatsoever to, the employment and/or cessation of that   
employment, such as, BUT NOT LIMITED TO, any charge, claim, lawsuit or other    
proceeding arising under the Older Worker's Benefit Protection Act (OWBPA), the 
Age Discrimination in Employment Act (ADEA), the Civil Rights Act of 1866       
(Section 1981), Title VII as amended by the Civil Rights Act of 1991, the       
Americans with Disabilities Act (ADA), the Labor Management Relations Act       
(LMRA), the National Labor Relations Act (NLRA), ERISA, COBRA, the Fair Labor   
Standards Act (FLSA), the Family and Medical Leave Act of 1993 (FMLA), all as   
amended, as well as any claims arising under any other federal, state, or local 
statutes and common law claims for wrongful termination, discrimination, breach 
of contract or misrepresentation.                                               

    (b) Immediately waive all right, title and interest in any benefit
plan of the Company and waive and release all claims based on or related to such
benefit plans or programs, except for the benefits described in Section I of    
this Agreement.                                                                 

   (c) Refrain from making any disparaging statements concerning the
Company, its affiliates, officers, Boards of Directors, attorneys, agents,      
employees, successors or assigns, either publicly or privately.                 

  (d) From August 1, 2006 until December 31, 2006 (the "Consulting
Period"), Employee shall serve as a consultant to the Company; provided,        
however, that Employee shall in no case be deemed to be an employee of the      
Company but instead shall serve as an independent contractor for all purposes.  
Employee agrees to make himself available for consulting upon the reasonable    
request of the Company by telephone or in person, during normal business hours; 
provided, however, in no event shall Employee be required to perform more than  
two days per month in service as a consultant to the Company during the         
Consulting Period. In the event the Company requests Employee to incur any      
expenses in connection with these services, the Company agrees to pay, in       
accordance with the Company's normal reimbursement policies, all reasonable     
expenses actually incurred by Employee in connection with providing the         
services. The cash and other consideration paid to Employee under Section I     
shall constitute sufficient consideration for these services pursuant to this   
Section II(d), and for the covenants and agreements contained in this Agreement,
including the release contained in Section II(a). The Company shall have no     
other compensation obligations to Employee with respect to the services provided
pursuant to this Agreement.                                                     

III.

(a) As a material inducement to the Company to enter into this
Agreement, Employee agrees to hold in the strictest confidence the terms and    
conditions of this Agreement. Employee covenants and agrees that Employee will  
not, either directly or through any other person, agent or representative,      
discuss or disclose either publicly or privately, the existence or content of   
this Agreement, except to accountants, attorneys, any state tax department or   
the Internal Revenue Service, or any other state or federal official in response
to legitimate inquiry. Should Employee be required by law to disclose any       
information made confidential by this Agreement, Employee shall first provide at
least ten (10) business days' written notice to the Company at the address set  
forth at the beginning of this Agreement, of Employee's requirement to do so    
such that the Company may take any steps it deems necessary to protect the      
confidentiality of this information.                                            

         (b) Employee acknowledges that all documents and electronic information
related to the business of the Company that Employee acquired or generated      
during the period of Employee's employment with the Company, and all copies     
thereof, including but not limited to, handwritten notes, memoranda, computer   
programs, software, and electronic information, are and shall be the property of
the Company, and that all such property of the Company shall be returned to the 
Company on or prior to August 15, 2006. By execution of this Agreement, Employee
certifies that he has returned or destroyed or will return or destroy prior to  
August 15, 2006 all copies thereof. Employee shall delete all computer programs,
software and electronic information of the Company to the extent that it may    
have been retained on any personal computer system, hard drives or computer     
disks. Except for the Dell computer identified in Section I of this Agreement,  
all Company-owned property including laptop computers, peripheral software and  
hardware, security and/or entry cards, credit cards and any other property shall
be returned to the Company within five (5) business days' of the execution of   
this Agreement.                                                                 

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      (c) Employee further acknowledges that any confidential information,
including but not limited to, trade secrets, know-how, customer lists and/or    
preferences, marketing strategies, customer and vendor addresses and telephone  
numbers and contact names, pricing policies, operational methods, technical     
processes, and other business, financial and personnel information of the       
Company, including any such information retained in Employee's memory, that has 
not previously been released to the public by an authorized representative of   
the Company ("Confidential Information") cannot be used by Employee in any way  
or disclosed to any third-party outside of the Company. By execution of this    
Agreement, Employee further agrees not to use any such Confidential Information 
in any way or disclose any such Confidential Information to any third party     
outside of the Company.                                                         

IV. 

        Employee agrees that the breach or threatened breach of Section III of
this Agreement shall cause the Company to suffer irreparable harm. In addition  
to all other remedies that the Company may have at law or in equity for breach  
of this Agreement, the Company shall therefore have the right to injunctive     
relief. The Company shall further have the right to rescind this Agreement, and 
shall have the right to recover all monies paid to Employee pursuant to the     
terms set forth in Section I of this Agreement, including but not limited to,   
attorneys' fees required to take any such actions.                              

V.

      By execution of this Agreement, Employee confirms that the following
statements are true:                                                            
         (a) Employee has been given the opportunity and has, in fact, read this
entire Agreement, and has had all questions regarding its meaning answered to   
Employee's satisfaction;                                                        

   (b) Employee has been advised to seek and has been given the full
opportunity to seek independent advice and/or counsel;                          

      (c) The payments and benefits that the Company has agreed to provide
in Section I of this Agreement are, in whole or in part, payments and benefits  
to which Employee would not be otherwise entitled in the absence of this        
Agreement;                                                                      

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       (d) The contents of this Agreement are written in plain language, are
fully understood, and it is also understood that it is a FULL WAIVER OF ALL     
CLAIMS;                                                                         

    (e) This FULL WAIVER OF ALL CLAIMS is given in return for valuable
consideration as provided under the terms of this Agreement including but not   
limited to the consideration described in Section I above;                      

     (f) This Agreement is knowingly and voluntarily entered into and no
representations have been made to induce or influence Employee's execution of   
this Agreement other than those contained herein;                               

       (g) Employee confirms having been given at least twenty-one (21) days
to consider this Agreement before signing;                                      

      (h) Employee has not heretofore assigned or transferred or purported
to assign or transfer to any person or entity any claim or portion thereof or   
interest therein which is released, acquitted or discharged in this Agreement;  

         (i) Employee is not obligated to provide and Employee shall not receive
any money or consideration from the Company other than the money and            
consideration promised in Section I of this Agreement for settlement of the     
claims released in this Agreement;                                              

         (j) Employee has not relied upon any advice whatsoever from the Company
or its attorneys as to the taxability, whether pursuant to federal, state or    
local tax statutes, regulations or otherwise of the payments or considerations  
promised hereunder and Employee is solely responsible and liable for any amount 
of tax obligations arising from the payment of the sums specified in Section I  
and all tax obligations, if any, will be paid in full by Employee. Employee     
agrees to indemnify and hold the Company harmless from and against any and all  
liabilities arising out of Employee's failure to comply with this Section;      

       (k) Employee acknowledges that, effective on August 1, 2006, Employee
will not be entitled to further participate in any benefits made available to   
employees of the Company other than those described in Section I of this        
Agreement; and                                                                  

         (l) Employee has no pending Workers Compensation claim(s) against the
Company and knows of no situations that might give rise to any such claim.      

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 VI.

 This Agreement shall be governed in all respects, whether as to
validity, construction, capacity, performance, or otherwise, by the laws of the 
Commonwealth of Pennsylvania, and no action involving this Agreement may be     
brought except in either the Court of Common Pleas of Delaware County or the    
District Court for the Eastern District of Pennsylvania.                        

   If any provision of this Separation Agreement and Release, or the
application thereof, is held to be invalid, void or unenforceable for whatever  
reason, the remaining provisions not so declared shall nevertheless continue in 
full force and effect without being impaired in any manner whatsoever.          

VII.

   This Agreement shall be deemed drafted by the parties hereto. The
language of all parts of this Agreement shall be construed as a whole, according
to their fair meaning and any presumption or other principles that language     
herein is to be construed against any party shall not apply.                    

VIII. 

      This Agreement constitutes the sole and entire Agreement between the
parties hereto, and supersedes any and all understandings and agreements made   
prior hereto. There are no collateral understandings, representations or        
agreements other than those contained herein. It is understood and agreed that  
the execution of this Agreement by the Company is not an admission of liability 
on its part to Employee, and execution of this Agreement by Employee is not an  
admission of liability on Employee's part to the Company, but is a settlement   
agreement to put to rest any claim of any kind whatsoever relating to the       
employment of Employee by the Company and/or the cessation of that employment.  

 IX.

         Employee understands and acknowledges that Employee has twenty-one (21)
days from the date hereof to consider this Agreement. Employee also understands 
and acknowledges that he has seven (7) days after signing this Agreement to     
revoke his consent to signing this Agreement (the "Revocation Period"). If      
Employee elects to revoke this Agreement, he must send his written notice of    
revocation to the Company by overnight mail via a recognized commercial courier.

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   IN WITNESS WHEREOF, the undersigned parties have signed this Agreement on
the date indicated herein.                                                      

EGAMES, INC.                                                                    

By:    /s/ Gerald W. Klein                                                      

Title: President and CEO                                                        

Date:  August 15, 2006                                                          

I DECLARE THAT THE TERMS OF THIS AGREEMENT/RELEASE HAVE BEEN COMPLETELY READ,   
THAT I HAD THE OPPORTUNITY TO CONSULT WITH AN ATTORNEY AND WAS ADVISED TO DO SO,
THAT THE TERMS OF THE LEGAL RELEASE ARE FULLY UNDERSTOOD AND ARE VOLUNTARILY    
ACCEPTED KNOWING THAT I AM WAIVING LEGAL RIGHTS.                                

By:   /s/ Lawrence F. Fanelle                                                   

Name: Lawrence F. Fanelle                                                       

Date: August 16, 2006                                                           

 EXHIBIT I
 ---------

 ACKNOWLEDGEMENT OF RIGHTS UNDER
OLDER WORKERS BENEFIT PROTECTION ACT
------------------------------------

         I, Lawrence F. Fanelle, acknowledge that I have read and understand the
attached Separation Agreement ("Agreement"). I further understand that the      
Agreement is revocable by me for a period of seven (7) days following execution 
thereof, and that except for the recital identifying the effective date and     
Section V(k) thereof, which are effective immediately, the Agreement shall not  
become effective or enforceable until this seven-day revocation period has      
ended.                                                                          

  I acknowledge that I have been encouraged to discuss the release
language in the Agreement with an attorney prior to executing the Agreement and 
that I have thoroughly reviewed and understand the effect of the release. I     
further acknowledge that I have been given twenty-one (21) days in which to     
consider the Agreement and that, if I sign the Agreement before the end of the  
twenty-one (21) day period, I am doing so freely, voluntarily and after having  
had full and fair opportunity to consult with my retained counsel.              

/s/ Lawrence F. Fanelle                 Date: August 16, 2006                   

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                                                                Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors                                                          
eGames, Inc.                                                                    

We consent to the incorporation by reference in the registration statement (No. 
333-42661) on Form S-8 of eGames, Inc. of our report dated August 16th, 2006,   
with respect to the balance sheet as of June 30, 2006 and the statements of     
operations, stockholders' equity, and cash flows of eGames, Inc. for the years  
ended June 30, 2006 and 2005, which report appears in the June 30, 2006 annual  
report on Form 10-KSB of eGames, Inc.                                           

/s/ Stockton Bates, LLP                                                         

Philadelphia, Pennsylvania                                                      
September 27, 2006                                                              

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                                                                Exhibit 31.1

 Certification

I, Gerald W. Klein, certify that:                                               

1. I have reviewed this annual report on Form 10-KSB of eGames, Inc.;           

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements 
made, in light of the circumstances under which such statements were made, not  
misleading with respect to the period covered by this report;                   

3. Based on my knowledge, the financial statements, and other financial         
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business 
issuer as of, and for, the periods presented in this report;                    

4. The small business issuer's other certifying officer and I are responsible   
for establishing and maintaining disclosure controls and procedures (as defined 
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and
have:                                                                           

     a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our   
        supervision, to ensure that material information relating to the small
         business issuer, including its consolidated subsidiaries, is made known
       to us by others within those entities, particularly during the period
in which this report is being prepared;                       

b) Evaluated the effectiveness of the small business issuer's 
     disclosure controls and procedures and presented in this report our
    conclusions about the effectiveness of the disclosure controls and
         procedures, as of the end of the period covered by this report based on
such evaluation; and                                          

       c) Disclosed in this report any change in the small business issuer's
    internal control over financial reporting that occurred during the
        small business issuer's most recent fiscal quarter (the small business
      issuer's fourth fiscal quarter in the case of an annual report) that
        has materially affected, or is reasonably likely to materially affect,
        the small business issuer's internal control over financial reporting;

5. The small business issuer's other certifying officer and I have disclosed,   
based on our most recent evaluation of internal control over financial          
reporting, to the small business issuer's auditors and the audit committee of   
the small business issuer's board of directors (or persons performing the       
equivalent functions):                                                          

       a) all significant deficiencies and material weaknesses in the design
     or operation of internal control over financial reporting which are
   reasonably likely to adversely affect the small business issuer's
         ability to record, process, summarize and report financial information;
and                                                           

    b) any fraud, whether or not material, that involves management or
   other employees who have a significant role in the small business
issuer's internal control over financial reporting.           

Date:  September 27, 2006                                                       

                   /s/ Gerald W. Klein
               Gerald W. Klein
                                     President and Chief Executive Officer
                             (Principal Executive Officer)

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                                                                Exhibit 31.2

 Certification

I, Thomas W. Murphy, certify that:                                              

1. I have reviewed this annual report on Form 10-KSB of eGames, Inc.;           

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements 
made, in light of the circumstances under which such statements were made, not  
misleading with respect to the period covered by this report;                   

3. Based on my knowledge, the financial statements, and other financial         
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business 
issuer as of, and for, the periods presented in this report;                    

4. The small business issuer's other certifying officer and I are responsible   
for establishing and maintaining disclosure controls and procedures (as defined 
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and
have:                                                                           

     a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our   
        supervision, to ensure that material information relating to the small
         business issuer, including its consolidated subsidiaries, is made known
       to us by others within those entities, particularly during the period
in which this report is being prepared;                       

b) Evaluated the effectiveness of the small business issuer's 
     disclosure controls and procedures and presented in this report our
    conclusions about the effectiveness of the disclosure controls and
         procedures, as of the end of the period covered by this report based on
such evaluation; and                                          

       c) Disclosed in this report any change in the small business issuer's
    internal control over financial reporting that occurred during the
        small business issuer's most recent fiscal quarter (the small business
      issuer's fourth fiscal quarter in the case of an annual report) that
        has materially affected, or is reasonably likely to materially affect,
        the small business issuer's internal control over financial reporting;

5. The small business issuer's other certifying officer and I have disclosed,   
based on our most recent evaluation of internal control over financial          
reporting, to the small business issuer's auditors and the audit committee of   
the small business issuer's board of directors (or persons performing the       
equivalent functions):                                                          

       a) all significant deficiencies and material weaknesses in the design
     or operation of internal control over financial reporting which are
   reasonably likely to adversely affect the small business issuer's
         ability to record, process, summarize and report financial information;
and                                                           

    b) any fraud, whether or not material, that involves management or
   other employees who have a significant role in the small business
issuer's internal control over financial reporting.           

Date:  September 27, 2006                                                       

                    /s/ Thomas W. Murphy
                Thomas W. Murphy
                       Chief Financial Officer
                             (Principal Financial Officer)

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                                                                Exhibit 32.1

 CERTIFICATION PURSUANT TO
 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 
--------------------------------------------- 

In connection with the Annual Report of eGames, Inc. (the "Company") on Form    
10-KSB for the fiscal year ended June 30, 2006 as filed with the Securities and 
Exchange Commission on the date hereof (the "Report"), I, Gerald W. Klein,      
President and Chief Executive Officer of the Company, certify, pursuant to 18   
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of    
2002, that:                                                                     

   1. The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and      
  2. The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
of the Company.                                           

/s/ Gerald W. Klein                                                             
-------------------                                                             
Gerald W. Klein                                                                 
President and Chief Executive Officer                                           
September 27, 2006                                                              

The foregoing certification is being furnished to the Securities and Exchange   
Commission pursuant to 18 U.S.C. Section 1350 as an exhibit to the Report and is
not being filed as part of the Report or as a separate disclosure document.     

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                                                                Exhibit 32.2

 CERTIFICATION PURSUANT TO
 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 
--------------------------------------------- 

In connection with the Annual Report of eGames, Inc. (the "Company") on Form    
10-KSB for the fiscal year ended June 30, 2006 as filed with the Securities and 
Exchange Commission on the date hereof (the "Report"), I, Thomas W. Murphy, Vice
President and Chief Financial Officer of the Company, certify, pursuant to 18   
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of    
2002, that:                                                                     

      1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and         
  2. The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
of the Company.                                           

/s/ Thomas W. Murphy                                                            
--------------------                                                            
Thomas W. Murphy                                                                
Chief Financial Officer                                                         
September 27, 2006                                                              

The foregoing certification is being furnished to the Securities and Exchange   
Commission pursuant to 18 U.S.C. Section 1350 as an exhibit to the Report and is
not being filed as part of the Report or as a separate disclosure document.     

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10KSB’ Filing		Date		First		Last			Other Filings
		6/30/26		41
		6/30/11		41
		9/30/10		13		38
		6/1/09		41
		6/30/07		13
		12/31/06		56
		12/1/06		9		39
Filed on:		9/27/06		1		65
		9/13/06		1
		8/16/06		48		60			8-K
		8/15/06		52		60
		8/14/06		49		50
		8/1/06		48		58
For Period End:		6/30/06		1		65			8-K
		6/29/06		50
		5/15/06		53					10QSB,  8-K
		12/7/05		53					8-K
		12/5/05		52					3,  4,  8-K
		12/1/05		48					3,  4,  8-K
		11/15/05		52
		10/19/05		52					8-K
		10/13/05		41		52			3,  4,  8-K
		10/12/05		39
		10/11/05		52					8-K
		10/6/05		52					8-K
		9/27/05		53					10KSB
		6/30/05		5		61			10KSB,  8-K,  DEF 14A
		6/15/05		24		44
		5/17/05		14
		3/7/05		41
		3/4/05		41					8-K
		2/15/05		14
		1/1/05		48
		11/24/04		53					8-K
		11/23/04		52					8-K
		9/27/04		53					10KSB
		6/30/04		47		53			10KSB
		6/28/04		53					8-K
		1/1/03		43
		7/1/02		24		44
		4/2/01		14
		6/1/99		41					8-K
		11/16/98		52					10QSB
		9/30/98		52					10QSB
		9/10/98		53					10KSB
		6/30/98		53					10KSB
		7/28/95		52
		6/30/95		41
									List all Filings