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

                                   FORM 10-QSB

(Mark One)

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

                  For the quarterly period ended March 31, 2005

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

                         Commission File Number 0-27102

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

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

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

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

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

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

                                Yes (X)  No ( )


                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 10,906,754 shares of common stock, no
par value per share, as of May 10, 2005.

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


<PAGE>



                                      INDEX

                                                                           Page
                                                                           ----
Part I.         Financial Information

Item 1.         Unaudited Financial Statements:

                Balance Sheet as of March 31, 2005.........................  3

                Statements of Operations for the three and nine months
                    ended March 31, 2005 and 2004 .........................  4

                Statements of Cash Flows for the nine months
                    ended March 31, 2005 and 2004  ........................  5

                Notes to Financial Statements .............................  6

Item 2.         Management's Discussion and Analysis of Financial
                    Condition and Results of Operations ...................  12

                Factors Affecting Future Performance ......................  24

Item 3.         Controls and Procedures ...................................  28

Part II.        Other Information

Item 6.         Exhibit Listing ...........................................  28

Exhibit Index   ...........................................................  28

Signatures      ...........................................................  29

Exhibits        ...........................................................  30




<PAGE>


Item 1.  Unaudited Financial Statements

                                  eGames, Inc.
                                  Balance Sheet
                                   (Unaudited)

                                                                      As of
                                                                     March 31,
                                                                       2005
                                                                   ------------
ASSETS
------
Current assets:
   Cash and cash equivalents                                        $ 2,275,038
   Accounts receivable, net of allowances of $830,265                   795,834
   Inventory, net                                                       932,954
   Prepaid and other expenses                                           315,968
                                                                    -----------
          Total current assets                                        4,319,794

Furniture and equipment, net                                             59,398
Intangible assets                                                        24,089
                                                                    -----------
          Total assets                                              $ 4,403,281
                                                                    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
   Accounts payable                                                 $   200,082
   Accrued expenses                                                     351,445
                                                                    -----------
          Total current liabilities                                     551,527
                                                                    -----------

Commitments and contingencies

Stockholders' equity:
   Common stock, no par value (40,000,000 shares authorized;
         11,138,654 issued and 10,906,754 outstanding)                9,179,827
   Additional paid-in capital                                         1,615,778
   Accumulated deficit                                               (6,442,434)
   Treasury stock, at cost - 231,900 shares                            (501,417)
                                                                    -----------
          Total stockholders' equity                                  3,851,754
                                                                    -----------
          Total liabilities and stockholders' equity                $ 4,403,281
                                                                    ===========




                 See accompanying notes to financial statements.


<PAGE>


                                        eGames, Inc.
                                 Statements of Operations
                                        (Unaudited)
<TABLE>
<CAPTION>
                                       Three Months Ended            Nine Months Ended
                                            March 31,                    March 31,
                                   -------------------------    -------------------------

                                       2005          2004           2005          2004
                                   -----------   -----------    -----------   -----------
<S>                                <C>           <C>            <C>           <C>
Net sales                          $ 1,459,623   $ 2,152,859    $ 4,550,082   $ 6,320,892

Cost of sales                          646,116       874,230      2,056,508     2,585,045
                                   -----------   -----------    -----------   -----------

Gross profit                           813,507     1,278,629      2,493,574     3,735,847

Operating expenses:
    Product development                101,894       119,344        444,887       386,431
    Selling, general and
       administrative                  660,969       608,454      1,879,634     1,800,271
                                   -----------   -----------    -----------   -----------
        Total operating expenses       762,863       727,798      2,324,521     2,186,702
                                   -----------   -----------    -----------   -----------

Operating income                        50,644       550,831        169,053     1,549,145

Interest income (expense), net           2,007         2,430          4,834        (1,087)
                                   -----------   -----------    -----------   -----------

Income before income taxes              52,651       553,261        173,887     1,548,058

Provision for income taxes               6,483        25,137         16,784        70,335
                                   -----------   -----------    -----------   -----------

Net income                         $    46,168   $   528,124    $   157,103   $ 1,477,723
                                   ===========   ===========    ===========   ===========


Net income per common
share:
       - Basic                     $      0.00   $      0.05    $      0.02   $      0.15
                                   ===========   ===========    ===========   ===========
       - Diluted                   $      0.00   $      0.05    $      0.01   $      0.14
                                   ===========   ===========    ===========   ===========


Weighted average common shares
    outstanding - Basic             10,655,108     9,989,337     10,291,370     9,989,337

Dilutive effect of common share
    equivalents                        375,041     1,380,022        700,962       886,948
                                   -----------   -----------    -----------   -----------

Weighted average common shares
    outstanding - Diluted           11,030,149    11,369,359     10,992,332    10,876,285
                                   ===========   ===========    ===========   ===========
</TABLE>


                      See accompanying notes to financial statements.


<PAGE>


                                  eGames, Inc.
                            Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Nine Months Ended
                                                                  March 31,
                                                         --------------------------
                                                             2005           2004
                                                         -----------    -----------
<S>                                                      <C>            <C>
Cash flows from operating activities:
    Net income                                           $   157,103    $ 1,477,723
    Adjustment to reconcile net income to net cash
             provided by operating activities:
    Stock-based compensation                                  56,972         47,091
    Depreciation                                              27,151         15,358
    Changes in operating assets and liabilities:
             Accounts receivable, net                        738,025       (366,534)
             Inventory, net                                 (118,668)      (292,428)
             Prepaid and other expenses                      124,162       (117,691)
             Accounts payable                               (240,934)      (166,753)
             Accrued expenses                               (265,349)         8,009
                                                         -----------    -----------
Net cash provided by operating activities                    478,462        604,775
                                                         -----------    -----------

Cash flows from investing activities:
    Purchases of furniture and equipment                     (11,689)       (57,433)
    Expenditures for intangible assets                         - 0 -        (19,300)
                                                         -----------    -----------
Net cash used in investing activities                        (11,689)       (76,733)
                                                         -----------    -----------

Cash flows from financing activities:
    Dividend payments to common stockholders                (163,601)         - 0 -
    Proceeds from exercise of stock options                  229,642          - 0 -
                                                         -----------    -----------
Net cash provided by financing activities                     66,041          - 0 -
                                                         -----------    -----------

Net increase in cash and cash equivalents                    532,814        528,042

Cash and cash equivalents:
   Beginning of period                                     1,742,224      1,024,237
                                                         -----------    -----------
   End of period                                         $ 2,275,038    $ 1,552,279
                                                         ===========    ===========


Supplemental cash flow information:

   Cash paid during the period for interest              $     - 0 -    $     5,475
                                                         ===========    ===========

   Cash paid during the period for income taxes          $   137,040    $    43,646
                                                         ===========    ===========

</TABLE>

                 See accompanying notes to financial statements.



<PAGE>


eGames, Inc.
Notes to Financial Statements
(Unaudited)

1.  Summary of Significant Accounting Policies

Description of Business

eGames, Inc. ("eGames", "our" or "we") is a Pennsylvania corporation
incorporated in July 1992 that publishes, markets and sells affordable PC
software games. We focus on publishing software games for the PC platform, and
we currently do not plan to publish products for any other game platform, such
as console devices, hand held game devices, mobile phones and personal digital
assistants. Our product line enables us to satisfy consumers who are seeking a
broad range of high-quality, affordable PC gaming software, which are sold on
CDs or online through the Internet. 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.

Basis of Presentation

The accompanying unaudited interim financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information as promulgated in the United States of America. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The Notes to Financial Statements included in our Form 10-KSB for
the fiscal year ended June 30, 2004 should be read in conjunction with the
accompanying statements. These statements include all adjustments that
management believes are necessary for a fair presentation of the statements.
These interim operating results are not necessarily indicative of the results
for a full year. Amounts discussed within the "Notes to Financial Statements"
have been rounded to the nearest thousand dollars.

Fair Value of Financial Instruments

The recorded amounts of cash and net accounts receivable at March 31, 2005
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, net is reflected on our balance sheet net of the 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 (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)
(see Note 3).

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).


<PAGE>


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.

Intangible assets

At March 31, 2005, we had intangible assets of approximately $24,000, which
related to the Company's trademark registration activities with the United
States Patent and Trademark Office. As of March 31, 2005, we had not recorded
any expense relating to these assets based upon our evaluation that no
impairment has occurred.

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. These retailers have traditionally been in the
business of selling consumer entertainment PC software products. The
distribution of our products in these retailers 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 software distributors and retailers at the time title to our
inventory passes, less a provision for anticipated product returns and price
markdowns. Title to our products usually passes to software distributors and
retailers upon their receipt of our products, because customer 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. All 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 operating results 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 these 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 the product returns and price
markdowns can be reasonably estimated at the time of sale. After 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. Costs associated with our
customer support efforts usually occur within one year from the period we
recognize revenue and these costs have continued to be minimal (averaging about
1% of net sales).

We also have relationships with certain software distributors related to product
distribution to various office superstores, which are based on consignment sales
agreements. Accordingly, revenues from product shipments pursuant to these
arrangements are only recognized to the extent that the software distributor has
reported to us the actual product sell-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 based upon, among other factors, our analysis of:
historical product return and price markdown results; current product
sell-through results at retail store locations; current field inventory
quantities at distributors' warehouses and at retail store locations; the length
of time that products have been out 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 new products with higher retail price points
or unproven genres remain in the retail channel.  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 period's provision. 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 balance.


<PAGE>


At March 31, 2005, the allowance for product returns and price markdowns
amounted to 51% of our gross accounts receivable. Historically, the allowance
for product returns and price markdowns has represented a substantial percentage
of our gross accounts receivable because we have product return and price
markdown exposure relating to paid receivables while the physical software units
relating to these paid receivables remain in the retailers' stores or in the
retailers' or distributors' warehouses. Until the physical product units are
actually returned to us, or sell through to consumers, we continue to evaluate
our product return or price markdown exposure for these units remaining in the
retail channel. During these time periods, through retailer and distributor
provided reports, we have regular and timely visibility of the product
sell-through results and remaining unit levels in the retail channel for our
titles that help us estimate 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 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, except
for advance licensing and royalty payments, which are usually expensed in cost
of sales at contractual rates based on the net sales of the related software
titles (see Notes 4 and 7), and income tax payments that are reflected as income
tax expense when appropriate.

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 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 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. 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.

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 per Common Share

Net income per common share is computed in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings per share is computed by dividing net
earnings by the weighted average number of common shares outstanding during each
period. Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares and common share equivalents ("CSE's")
outstanding during each period that we report net income. CSE's may include
stock options and 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 at the date of the financial
statements, the recoverable value of advance licensing and royalty payments, and
the reported amounts of revenues and expenses during the 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.


<PAGE>


2.  Accounts Receivable, net

Accounts receivable, net consists of the following:

     Accounts receivable, gross                                 $ 1,626,000
     Allowance for product returns and price markdowns             (830,000)
                                                                -----------
     Accounts receivable, net                                   $   796,000
                                                                ===========

3.  Inventory, net

Inventory, net consists of the following:

     Raw materials - warehouse                                   $  262,000
     Finished goods - warehouse                                     695,000
     Product returns - retailer and distributor locations           114,000
                                                                 ----------

                                                                  1,071,000

     Allowance for obsolescence                                    (138,000)
                                                                 ----------
     Inventory, net                                              $  933,000
                                                                 ==========

4.  Prepaid and Other Expenses

Prepaid and other expenses consists of the following:

     Royalties                                                   $  162,000
     Federal tax                                                     72,000
     Insurances                                                      50,000
     Other expenses                                                  32,000
                                                                 ----------
     Prepaid and other expenses                                  $  316,000
                                                                 ==========

5.  Furniture and Equipment, net

Furniture and equipment consists of the following:

     Furniture and equipment                                     $  358,000
     Accumulated depreciation                                      (299,000)
                                                                 ----------
     Furniture and equipment, net                                $   59,000
                                                                 ==========

6.  Accrued Expenses

Accrued expenses consists of the following:

     Professional fees                                           $   83,000
     Vacation pay                                                    79,000
     Customers with credit balances                                  70,000
     Marketing promotions                                            42,000
     Royalties                                                       32,000
     Other                                                           45,000
                                                                 ----------
     Accrued expenses                                            $  351,000
                                                                 ==========



<PAGE>


7.  Commitments and Contingencies

Our 5,000 square foot office facility located in Langhorne, Pennsylvania is
occupied under an operating lease through September 30, 2007. Additionally, we
currently rent certain office equipment through various operating lease
agreements. Total rent expense amounted to $21,000 for both quarters ended March
31, 2005 and 2004, and total rent expense was $64,000 and $63,000, respectively,
for the nine months ended March 31, 2005 and 2004. At March 31, 2005, we had
future operating lease commitments of $174,000 that are scheduled to be paid as
follows: $64,000 in less than one year; $109,000 in one to three years; and
$1,000 in three to five years.

Under various licensing agreements with third-party 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. As of March 31, 2005, we had future
commitments to pay $61,000 in advance licensing and royalty payments to various
third-party licensors and software developers, which are scheduled to be paid as
follows: $49,000 in less than one year; and $12,000 in one to three years.

8.  Credit Facility

In November 2004, we renewed our credit facility agreement with Hudson United
Bank ("HUB"), which matures on December 1, 2005. Amounts outstanding under this
credit facility are charged interest at one-half of one percent above HUB'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. The credit facility is secured by all of the Company's assets and
requires us, among other things, to maintain the following financial covenants
to be tested quarterly: a total liabilities to tangible net worth ratio of 1.25
to 1.00 and a tangible net worth requirement of $2.0 million.

At March 31, 2005, we were in compliance with each of those covenants. This
credit facility was established to provide working capital for our operations.
As of March 31, 2005, we had not utilized any of this credit facility, and we
had access to approximately $600,000 under this credit facility, based on the
prescribed calculation of seventy-five percent of qualified accounts receivable
as of that date.

9.  Accounting for Stock-Based Compensation

At March 31, 2005, we had one existing stock-based employee compensation plan,
which was adopted, amended and restated during 1995. This Plan, known as our
1995 Amended and Restated Stock Option Plan (the "1995 Plan"), is administered
by the Board of Directors and provides for the granting of incentive stock
options and non-qualified stock options through July 1, 2005 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.

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 option 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".

We recognized stock-based compensation expense within our financial statements
of $20,000 and $22,000, respectively, during the quarters ended March 31, 2005
and 2004, and $57,000 and $47,000, respectively, during the nine months ended
March 31, 2005 and 2004. All stock options that vested during these periods had
been previously valued 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.

10. Dependence on One Large Software Distributor - Atari

Atari is our primary software distributor servicing the North American
mass-merchants and other major retailers, such as Wal-Mart, Target, and Best
Buy, among others. During the quarter ended March 31, 2005, Atari accounted for
$803,000 of net sales, or 55% of net sales, compared to the quarter ended March
31, 2004, when Atari accounted for $1,454,000 of net sales, or 68% of net sales.
During the nine months ended March 31, 2005, Atari accounted for $2,280,000 of
net sales, or 50% of net sales, compared to the nine months ended March 31,
2004, when Atari accounted for $4,408,000 of net sales, or 70% of net sales.


<PAGE>


As of March 31, 2005, Atari represented 60% of net accounts receivable, compared
to March 31, 2004, when Atari represented 74% of net accounts receivable. During
the three and nine months ended March 31, 2005, we collected receivable payments
of $937,000 and $3,055,000, respectively, from Atari, which represented 48% and
57%, respectively, of total customer receipts. This compares to the three and
nine months ended March 31, 2004, when we collected receivable payments from
Atari of $1,073,000 and $4,128,000, respectively, which represented 60% and 70%,
respectively, of total customer receipts.

If we were to lose our product distribution through Atari, or if they were not
able or willing to make timely receivable payments to us in the normal course of
business, our financial condition would be significantly impacted. Since the
retail distribution of PC software is a competitive business, there may be
alternative distributors that could distribute our products to retailers if, for
example, Atari chose to discontinue distributing our titles, Atari was unable or
unwilling to make timely receivable payments in the normal course of business,
or if any retailers decided to discontinue their relationship with Atari.

11. 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.

12. Quarterly Cash Dividend

On February 22, 2005, we made our first quarterly cash dividend payment of
$0.015 per common share to shareholders of record on February 15, 2005.
Additionally, on April 28, 2005, our Board of Directors authorized a quarterly
cash dividend of $0.015 per common share to be payable on May 25, 2005 to
shareholders of record on May 17, 2005. It is our intention to continue paying a
comparable quarterly cash dividend to shareholders of our common stock. However,
the payment of any further cash dividends depends entirely upon the discretion
of our Board of Directors and may be discontinued at any time, for any reason.

13. 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 supercedes
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 is 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 expect the adoption of SFAS No. 123 (revised 2004) to have 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 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not believe
the adoption of SFAS No. 151 will have a material impact on our financial
statements.


<PAGE>


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

This Quarterly Report on Form 10-QSB 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 Quarterly Report on
Form 10-QSB, other than statements of historical fact, including statements
regarding industry prospects and future results of operations or financial
position, 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 belief that the largest single source of our net sales,
            accounts receivable and related cash receipts will continue to be
            attributable to Atari during fiscal 2005;
        -   Our expectation that reductions in retail shelf space allocated to
            affordable PC game software will continue to negatively impact our
            financial results and inventory levels in the future;
        -   The strategies and new opportunities that we are exploring in order
            to offset reductions in the retail shelf space allocated to
            affordable PC game software;
        -   Our expectation that we will begin earning licensing revenues from
            Microgistix, Inc. during the fourth quarter of fiscal 2005, which
            could cause our net sales attributable to Best Buy to decrease;
        -   Our expectation that, during the remainder of fiscal 2005, 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 our gross profit margin will continue to be
            impacted by higher royalty expense and freight costs during the
            remainder of fiscal 2005;
        -   Additional quantities of discontinued titles being 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 expectation that the adoption of SFAS No. 123 (revised 2004)
            and SFAS No. 151 will not have a material impact on our financial
            statements;
        -   Our expectation that future advance royalty commitments will be
            funded by cash flows from operations; and
        -   Our current intention not to seek listing on a stock exchange even
            if we meet the standards for listing.

The following important factors, as well as those factors discussed under
"Factors Affecting Future Performance" beginning on page 24 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 results for our
            products at retail stores, particularly at North American
            mass-merchant retailers where consumer entertainment PC software
            has traditionally been sold;
        -   The continued successful business relationship between us and
            Atari, as our largest customer and our distributor to Wal-Mart,
            Target, and Best Buy, among others;
        -   The amount of shelf space Wal-Mart, Target and Best Buy allocate to
            ($9.99 retail priced) jewel case PC game software;
        -   The amount of unsold product that is returned to us by software
\           retailers and distributors;
        -   The amount of price markdowns we grant to retailers and
            distributors;
        -   Our ability to accurately estimate the provision needed for product
            returns and price markdowns that will occur and the adequacy of the
            allowances established for such product returns and price markdowns;
        -   The continued success of our current business model of selling,
            primarily through third-party distributors, to a concentrated
            number of mass-merchant and major retailers;
        -   Our ability to control the manufacturing and distribution costs of
            our software titles;
        -   The success of our distribution strategy, including the ability to
            continue to distribute our products into major North American
            mass-merchant retailers and to enter into new distribution and
            direct sales relationships on commercially acceptable terms;

<PAGE>

        -   Our ability to collect outstanding accounts receivable and
            establish an adequate allowance for bad debts;
        -   Downward pricing pressure and competition in the markets we serve;
        -   Fluctuating costs of developing, producing and marketing our
            products;
        -   Our ability to license or develop quality content for our products;
        -   Consumers' continued demand for affordable consumer entertainment
            PC software;

and various other factors set forth in our Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2004 as filed with the Securities and Exchange
Commission.

Primary Trends in our Business

         The Decrease in Retail Shelf Space for Value-Priced PC Software
         ---------------------------------------------------------------
                             Has Reduced Our Sales
                             ---------------------
The reduced amount of shelf space being allocated to our category of products in
retail stores during this fiscal year has contributed substantially to our
declining net sales during this period. Typically referred to as retail
"facings," we have historically experienced higher sales with more retail
facings, especially at the large mass-merchant retailers in North America, and
lower sales when we have fewer retail facings. We continue to see indications
that the amount of retail shelf space being allocated to PC game software at the
$9.99 retail price point is shrinking, and we expect this negative trend will
continue to impact our results for the foreseeable future. We are attempting to
offset this reduction in product distribution by establishing "out of
department" displays at retailers currently selling our titles, exploring
incremental licensing and OEM opportunities, launching a new online game website
to drive Internet sales, as well as investigating alternative retail channels,
packaging, displays and price points that may help develop currently untapped
markets for value-priced PC software. We cannot predict whether these new
opportunities and strategies will be effective in increasing net sales and
offsetting the decreases in net sales caused by recent reductions in the shelf
space allocated to affordable PC game software at retail stores.

              Dependence on One Large Software Distributor - Atari
              ----------------------------------------------------
We continue to have a concentrated customer base of a few large software
distributors and retailers. Atari is our primary software distributor serving
the mass-merchant and major retailers in North America, such as Wal-Mart,
Target, and Best Buy, among others. During the three and nine months ended March
31, 2005, Wal-Mart accounted for the majority of our business with Atari, while
Best Buy and Target accounted for most of our remaining units sold through
Atari. Atari continues to represent the largest percentage of our net sales, net
accounts receivable, and customer cash receipts.

Although Atari's percentage of our business has declined comparatively to prior
year periods, we anticipate that during the remainder of fiscal 2005 the largest
single source of our net sales, accounts receivable and related cash receipts
will continue to be Atari. Our financial condition and ability to continue as a
going concern would be significantly affected if we lost our distribution
capability through Atari, if the amount of net sales to Atari were to
substantially decrease, or if Atari would not be able or willing to make timely
receivable payments to us in the normal course of business.

                                 Inventory Costs
                                 ---------------
During the nine months ended March 31, 2005, we experienced a $119,000, or 15%,
increase in net inventory. This increase was due to many of our newer titles
that were manufactured during the first half of the year not reaching the level
of retail distribution we had anticipated due in part to the reduction in retail
shelf space being allotted to PC software titles at the $9.99 retail price
point. We are currently evaluating the future retail and consumer demand for our
existing titles, but we anticipate that the reduction of retail shelf space for
$9.99 retail priced PC software games will continue to impact our inventory
levels for the remainder of fiscal 2005.

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 revenue recognition and inventory valuation
accounting policies 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 net values of our inventory and accounts receivable. Our

<PAGE>

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, recoverability of advanced licensing and royalty
payments, income taxes, 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 mass-merchant and major retailers and directly to certain PC
software retailers, all of which have traditionally sold consumer entertainment
PC software products. 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. For product shipments to these software
distributors or retailers, we record a provision for product returns and price
markdowns as a reduction of gross sales at the time the title of our product
passes to these software distributors or retailers.

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 results at retail store locations; current field inventory
quantities at distributors' warehouses and at retail store locations; the length
of time that products have been out 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 new products with higher price points or unproven genres remain
in the retail channel.

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 period's provision. Significant
management judgments and estimates must be made and used in order to determine
how much sales 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 accounting policy for inventory valuation requires management to make
estimates and assumptions about the recoverability of the carrying value of
inventory at the end of any reporting period and cost of sales during any
reporting period. Our inventory could be valued differently at the close of any
reporting period and the amount recorded as cost of sales during any reporting
period could differ, if management's judgments or estimates of provisions for
the potential impairment of inventory value 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 warehouse and field inventory
units, which involves: estimating the remaining product life of existing titles
based on how long the titles have been out at retail; analyzing the trend of
current product sell-through results to consumers for existing titles;
identification of competitors' new products with capabilities or technologies
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 liquidation sales of similar products.

Although we attempt to accurately match production requirements of our products
to forecasted consumer demand, we may from time to time produce an amount of
inventory of a product that exceeds the eventual consumer demand for such
product. 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 adjustments
are reflected in the current period's inventory obsolescence provision.


<PAGE>


                     Advance Licensing and Royalty Payments
                     --------------------------------------
We make advance licensing and royalty payments to third party 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 under the caption
"Prepaid and other expenses", and are then usually expensed within the "Cost of
sales" category of our Statements of Operations based upon contractual rates
applied against our net sales of the related software titles to third party
software distributors and retailers.

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 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 similar titles 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.

Results of Operations

The following discussion should be read together with our Financial Statements
and Notes beginning on page 3.

Three and Nine months Ended March 31, 2005 and 2004

Net Sales

The following table represents our net sales by distribution channel for the
three and nine months ended March 31, 2005 and 2004, respectively:

                              Net Sales by Distribution Channel
                              (rounded to the nearest thousand)

                                     Three Months Ended
                                          March 31,
                           ---------------------------------------
<TABLE>
<CAPTION>
                                                                       Increase       %
Distribution Channel          2005        %         2004        %     (Decrease)   Change
-----------------------------------------------------------------------------------------
<S>                        <C>           <C>     <C>           <C>    <C>           <C>
Software Distributors      $1,017,000    70%     $1,769,000    82%    ($ 752,000)   (43%)
Software Retailers            135,000     9%        166,000     8%       (31,000)   (19%)
Licensing                     176,000    12%         82,000     4%        94,000    115%
Internet                       96,000     7%         79,000     4%        17,000     22%
Inventory Liquidators          36,000     2%         57,000     2%       (21,000)   (37%)
-----------------------------------------------------------------------------------------
Totals                     $1,460,000   100%     $2,153,000   100%    ($ 693,000)   (32%)
                           ==========   ====     ==========   ====     =========     ===
</TABLE>

                                      Nine Months Ended
                                           March 31,
                           ---------------------------------------
<TABLE>
<CAPTION>
                                                                        Increase      %
Distribution Channel          2005        %         2004        %      (Decrease)  Change
-----------------------------------------------------------------------------------------
<S>                        <C>           <C>     <C>           <C>    <C>           <C>
Software Distributors      $3,274,000    72%     $5,169,000    82%    ($1,895,000)  (37%)
Software Retailers            433,000    10%        532,000     8%        (99,000)  (19%)
Licensing                     423,000     9%        292,000     5%        131,000    45%
Internet                      242,000     5%        217,000     3%         25,000    12%
Inventory Liquidators         178,000     4%        111,000     2%         67,000    60%
-----------------------------------------------------------------------------------------
Totals                     $4,550,000   100%     $6,321,000   100%    ($1,771,000)  (28%)
                           ==========   ====     ===========  ====     ==========    ===
</TABLE>


                             Software Distributors
                             ---------------------
For the three months ended March 31, 2005, net sales to software distributors
that serve North American mass-merchants and other major retailers amounted to
$1,017,000, which represented a decrease of $752,000 or 43% compared to the
three months ended March 31, 2004. For the quarter ended March 31, 2005, net
sales to software distributors decreased to 70% of total net sales, compared to
82% of total net sales for the three months ended March 31, 2004.
<PAGE>


The $752,000 decline in net sales to software distributors during the three
months ended March 31, 2005 was driven by a $651,000 decrease in net sales to
Atari, our primary software distributor in the United States servicing many of
the larger mass-merchant and major retailers (such as Wal-Mart, Target and Best
Buy, among others), in addition to a $75,000 net sales decrease to Take Two
Interactive serving certain North American office supply stores and warehouse
clubs. Atari's reduced purchasing requirements during the current quarter were
impacted by a reduction in the retail shelf space being allotted to PC software
games at the $9.99 retail price point, along with the impact from Best Buy's
transition to Microgistix, Inc, as its new single-source software supplier for
jewel case PC game software.

During the fourth quarter of fiscal 2005, when Microgistix will begin
manufacturing and distributing our jewel case PC game titles to Best Buy, we
anticipate earning licensing revenues based upon their reported sales of our
titles to consumers at Best Buy. This compares to prior periods, when we had
recognized product sales based only on selling finished good units to Atari for
their distribution to Best Buy. We anticipate that this new arrangement with
Microgistix could cause our net sales attributable to Best Buy to decrease,
compared to prior periods, but could favorably impact our operating results
because we expect to earn higher margins on these licensing revenues.

For the nine months ended March 31, 2005, net sales to software distributors
that serve North American mass-merchants and other major retailers amounted to
$3,274,000, which represented a decrease of $1,895,000 or 37% compared to the
nine months ended March 31, 2004. For the nine months ended March 31, 2005, net
sales to North American software distributors decreased to 72% of total net
sales, compared to 82% of total net sales for the nine months ended March 31,
2004.

The $1,895,000 decline in net sales to North American software distributors
during the nine months ended March 31, 2005 was driven by a $2,128,000 decrease
in net sales to Atari due to similar factors that affected the three month
period, which net sales decrease was partially offset by a $209,000 increase in
net sales to Canadian software distributors.

                      Primary Software Distributor - Atari
                      ------------------------------------
Atari is our primary software distributor servicing the North American
mass-merchants and other major retailers, such as Wal-Mart, Target, and Best
Buy, among others. During the quarter ended March 31, 2005, Atari accounted for
$803,000 of net sales, or 55% of net sales, compared to the quarter ended March
31, 2004, when Atari accounted for $1,454,000 of net sales, or 68% of net sales.

During the nine months ended March 31, 2005, Atari accounted for $2,280,000 of
net sales, or 50% of net sales, compared to the nine months ended March 31,
2004, when Atari accounted for $4,408,000 of net sales, or 70% of net sales.
While the percentage of our business that is generated by sales to Atari has
declined year over year, we expect that during the remainder of fiscal 2005, the
largest single source of our net sales, accounts receivable and related cash
receipts will continue to be Atari

                               Software Retailers
                               ------------------
For the three months ended March 31, 2005, net sales made directly to software
retailers were $135,000, which represented a $31,000 decrease compared to the
three months ended March 31, 2004. The $31,000 decrease in net sales made
directly to software retailers for the three months ended March 31, 2005
resulted primarily from a decrease in net sales to CompUSA traceable to
declining sales of various PC software box titles retail priced at $19.99 that
did not achieve the level of consumer demand we had expected.

For the nine months ended March 31, 2005, net sales made directly to software
retailers were $433,000, which represented a $99,000 decrease compared to the
nine months ended March 31, 2004, and resulted from reasons similar to those
impacting the three month period.

                                    Licensing
                                    ---------
Licensing revenues continued to grow year over year, and were primarily
generated from increased sales made by our international software distributors
under a series of licensing agreements covering specific territories outside of
North America, with the majority of our licensing revenue growth originating
from Germany (due to expanded distribution into alternative retail channels) and
the United Kingdom (resulting from increased distribution to mass-merchant
retailers).


<PAGE>


For the quarters ended March 31, 2005 and 2004, licensing revenues amounted to
$176,000 and $82,000, respectively, and represented 12% and 4%, respectively, of
net sales. For the nine months ended March 31, 2005 and 2004, licensing revenues
amounted to $423,000 and $292,000, respectively, and represented 9% and 5%,
respectively, of net sales.

                                    Internet
                                    --------
In October 2004, we launched a new online games website, www.egamesonline.com,
which is intended to complement our existing e-commerce website and increase the
profitability of our overall Internet sales, through additional advertising
revenues, and downloadable demos that are designed to generate incremental sales
by promoting the sale of eGames software titles.

For the three months ended March 31, 2005 and 2004, Internet sales were $96,000
and $79,000, respectively, and represented 7% and 4%, respectively, of net sales
during those periods. For the nine months ended March 31, 2005 and 2004,
Internet sales were $242,000 and $217,000, respectively, and represented 5% and
3%, respectively, of net sales during those periods.

                              Inventory Liquidators
                              ---------------------
Net sales to inventory liquidators consist of sales of residual inventory titles
that have been discontinued at traditional software retail stores because these
titles have 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, quarter to quarter, and are usually made at discounted prices with no
right of return or price markdown.

For the three months ended March 31, 2005 and 2004, net sales to inventory
liquidators were $36,000 and $57,000, respectively, and for the nine months
ended March 31, 2005 and 2004, net sales to inventory liquidators amounted to
$178,000 and $111,000, respectively.

                       Product Returns and Price Markdowns
                       -----------------------------------
Until physical units of our products are returned to us from our software
distributors or retailers, or until they sell through to consumers, we continue
to evaluate our product return or price markdown exposure for physical units
remaining in the retail channel.

During the three months ended March 31, 2005 and 2004, our provisions for
product returns and price markdowns for customers that have traditionally sold
PC software games amounted to $338,000 and $398,000, respectively, or 20% and
16%, respectively, of related gross sales. Although the amount of the provision
for product returns and price markdowns decreased due to comparatively lower
sales during the current quarter, this provision, as a percentage of related
gross sales, increased due to our evaluation of retail channel inventory
quantities in relation to the shrinking amount of retail shelf space being
allocated to PC software games at the $9.99 retail price point.

During the nine months ended March 31, 2005 and 2004, our provisions for product
returns and price markdowns for customers that have traditionally sold consumer
entertainment PC software products were $978,000 and $1,432,000, respectively,
or 19% of related gross sales during both nine month periods. The decrease in
the amount of the provisions for product returns and price markdowns resulted
primarily from lower sales during the current nine month period.

                     Sales Incentives and Promotional Costs
                     --------------------------------------
In order to maintain retail shelf space for our titles, we incur sales
incentives and promotional costs from distributors and retailers, such as
rebates and slotting fees, and recognize them as reductions to gross sales. For
the remainder of fiscal 2005, we will continue to sell our products to software
retailers and distributors that charge such fees, and accordingly we expect
these types of costs to continue impacting our net sales, gross profit and gross
profit margin.

For the quarters ended March 31, 2005 and 2004, our sales incentives and
promotional costs were $113,000 and $141,000, respectively, or 7% and 6%,
respectively, of related gross sales. For the nine months ended March 31, 2005
and 2004, our sales incentives and promotional costs were $352,000 and $383,000,
respectively, or 7% and 5%, respectively, of related gross sales.


<PAGE>


Cost of Sales

Cost of sales consists of the following costs that are associated with
publishing our PC games for retail distribution: product costs; royalty costs
incurred with third-party software developers for licensing product content or
with other third-parties related to licensing various intellectual properties;
freight and handling costs; inventory obsolescence provision and other costs.

The following table represents our cost of sales for the three and nine months
ended March 31, 2005 and 2004:

<TABLE>
<CAPTION>
                        March 31,      % of         March, 31,     % of        Increase         %
                           2005      net sales         2004      net sales    (Decrease)     Change
---------------------------------------------------------------------------------------------------
<S>                    <C>             <C>         <C>             <C>        <C>            <C>
Three months ended     $   646,000     44.3%       $   874,000     40.6%      ($ 228,000)    (26.1%)

Nine months ended      $ 2,057,000     45.2%       $ 2,585,000     40.9%      ($ 528,000)    (20.4%)
</TABLE>

During the three months ended March 31, 2005, cost of sales decreased by
$228,000, or 26.1%, compared to the three months ended March 31, 2004. This
$228,000 cost of sales decrease for the three months ended March 31, 2005 was
due to a 32.2% decrease in net sales, which was partially offset by a 3.7%
higher cost of sales percentage on those reduced sales. The 3.7% increase in
cost of sales, as a percentage of net sales, was primarily due to cost
increases, as a percentage of net sales of:

      o   4.1% in royalty expense resulting from the write-down of advance
          royalty payments for certain game titles that did not achieve
          sufficient consumer demand, combined with the impact from product
          mix changes; and

      o   1.7% in freight expense resulting from increased product shipments
          of smaller per order deliveries of box titles to retailers,
          combined with decreased product shipments to Atari that are more
          cost effective due to shorter delivery distances and larger unit
          requirements per delivery.

These cost of sales increases, as a percentage of net sales, were partially
offset by a cost of sales decrease, as a percentage of net sales, of 2.7% in
product costs that was impacted by an increase in worldwide licensing revenues
that do not incur any product costs, along with a decrease in inventory
liquidation sales that reflect a higher product cost percentage compared to
product sales to traditional software retailers and distributors.

During the nine months ended March 31, 2005, cost of sales decreased by
$528,000, or 20.4%, compared to the nine months ended March 31, 2004. The
$528,000 cost of sales decrease for the nine months ended March 31, 2005 was due
to a 28.0% decrease in net sales, which was partially offset by a 4.3% increase
in the cost of sales percentage on those lower sales. The 4.3% increase in cost
of sales, as a percentage of net sales, was primarily due to cost increases, as
a percentage of net sales of:

      o   2.9% in royalty expense due to the write down of advance royalty
          payments related to various game and productivity titles, in addition
          to product mix changes; and

      o   1.5% in freight expense resulting from decreased product shipments
          to Atari that are more cost effective due to shorter delivery
          distances and larger unit requirements per delivery, combined with
          increased product shipments to Canadian distributors having longer
          delivery distances.

For the remainder of fiscal 2005, we expect our gross profit margin to continue
to be impacted by higher average royalty expense (due to product mix changes and
the potential for additional write downs of advanced royalties based upon future
sell-through results of certain titles at retail) and freight costs (due to the
potential that our product shipments to Atari may continue to decline as a
percentage of our overall product deliveries compared to prior year periods).

Product Development

Product development expenses consist of personnel costs related to product
management, quality assurance testing, packaging design and website
administration, along with outside services for product ratings, website
maintenance and non-recoverable project costs related to products prior to
achieving distribution into their intended retail channels.


<PAGE>


The following table represents our product development expenses for the three
and nine months ended March 31, 2005 and 2004:
<TABLE>
<CAPTION>

                        March 31,      % of        March, 31,      % of        Increase        %
                          2005       net sales        2004       net sales    (Decrease)    Change
--------------------------------------------------------------------------------------------------
<S>                    <C>             <C>         <C>             <C>        <C>           <C>
Three months ended     $ 102,000       7.0%        $ 119,000       5.5%       ($ 17,000)    (14.3%)

Nine months ended      $ 445,000       9.8%        $ 386,000       6.1%        $ 59,000      15.3%

</TABLE>

The $17,000 decrease in product development expenses for the three months ended
March 31, 2005 resulted from the current period's non-recurrence of costs
incurred during the year ago period for redesigning our website, in addition to
no current period expense related to the fiscal 2005 employee incentive
compensation plan.

The $59,000 increase in product development expenses for the nine months ended
March 31, 2005 resulted from the write-off of $122,000 in capitalized licensing
and inventory costs related to the RealAge Games & Skills title due to our
determination during our first quarter of this fiscal year that the recovery of
these costs in future periods was unlikely, based upon our consideration of all
available information at that time, and in particular on the expected amount of
any future sales. This expense increase was partially offset by the non
recurrence of the year ago period's costs related to the redesign of our website
and to the fiscal 2004 employee incentive compensation plan.

The write-off of the costs related to the RealAge Games & Skills title were
charged to product development expense, rather than to cost of sales, because we
determined that these costs related to a new title and brand that had not
achieved distribution into its intended retail channels. This title was not
designed for traditional retail distribution through our normal business
operations, but rather through alternative retail distribution channels such as
direct response TV. The RealAge Games & Skills brand was developed during fiscal
2004, in an attempt to attract new consumers to the PC game category by
providing consumers with a compelling reason to play PC games in order to help
maintain mental sharpness.

Selling, General and Administrative

Selling, general and administrative expenses consist of personnel related costs,
insurance costs, stock-based compensation expense, professional service fees for
legal, accounting and public relations, along with occupancy costs including
rent, utilities and phones.

The following table represents our selling, general and administrative expenses
for the three and nine months ended March 31, 2005 and 2004:
<TABLE>
<CAPTION>

                        March 31,      % of         March, 31,     % of        Increase         %
                           2005      net sales         2004      net sales    (Decrease)     Change
---------------------------------------------------------------------------------------------------
<S>                    <C>             <C>         <C>             <C>         <C>            <C>
Three months ended     $   661,000     45.3%       $   608,000     28.3%       $ 53,000       8.7%

Nine months ended      $ 1,880,000     41.3%       $ 1,800,000     28.5%       $ 80,000       4.4%

</TABLE>

The $53,000 increase in selling, general and administrative expenses for the
three months ended March 31, 2005 was driven by an increase in legal expenses
incurred in enforcing our intellectual property rights, in addition to a small
increase in marketing costs. These cost increases were partially offset by the
non recurrence in public relations costs associated with the RealAge Games &
Skills brand and a decrease in salary related costs due to no current period
expense related to the fiscal 2005 employee incentive compensation plan.

The $80,000 increase in selling, general and administrative expenses for the
nine months ended March 31, 2005 was caused by similar factors impacting the
three month period, with the addition of small increases in consulting costs,
accounting fees and charitable contributions.


<PAGE>


Interest Income (Expense), net

The following table represents our net interest income (expense) for the three
and nine months ended March 31, 2005 and 2004:

<TABLE>
<CAPTION>

                         March 31,     % of       March, 31,    % of        Increase     %
                           2005     net sales        2004     net sales    (Decrease)  Change
----------------------------------------------------------------------------------------------
<S>                      <C>           <C>         <C>          <C>         <C>         <C>
Three months ended       $ 2,000       0.1%        $ 2,000      0.1%        $ - 0 -     n/a

Nine months ended        $ 5,000       0.1%       ($ 1,000)     0.0%        $ 6,000     n/m

</TABLE>

Provision for Income Taxes

The following table represents our provision for income taxes for the three and
nine months ended March 31, 2005 and 2004:
<TABLE>
<CAPTION>

                         March 31,     % of       March, 31,    % of        Increase     %
                            2005     net sales       2004     net sales    (Decrease)  Change
------------------------------------------------------------------------------- -------------
<S>                      <C>           <C>        <C>           <C>        <C>         <C>
Three months ended       $  6,000      0.4%       $ 25,000      1.2%       ($ 19,000)  (76.0%)

Nine months ended        $ 17,000      0.5%       $ 70,000      1.1%       ($ 53,000)  (75.7%)

</TABLE>

For the three months ended March 31, 2005, our provision for income taxes
decreased by $19,000, compared to the same period a year earlier. The $19,000
decrease for the three months ended March 31, 2005 was due to a decrease in the
current period's estimated taxable income for state income tax purposes, which
was partially offset by a higher effective state income tax rate for fiscal
2005. At the beginning of fiscal 2005, we had approximately $2.3 million in net
operating loss carry-forwards ("NOL's") available to offset future taxable
income for federal income tax purposes.

For the nine months ended March 31, 2005, our provision for income taxes
decreased by $53,000, compared to the nine months ended March 31, 2004. This
$53,000 decrease for the nine months ended March 31, 2005 was due to the
reduction in the current period's estimated taxable income for state income tax
purposes, which was partially offset by a higher effective state income tax rate
for fiscal 2005.

Net Income

The following table represents our net income for the three and nine months
ended March 31, 2005 and 2004:
<TABLE>

                         March 31,      % of         March, 31,      % of         Increase       %
                            2005      net sales         2004       net sales     (Decrease)    Change
-----------------------------------------------------------------------------------------------------
<S>                      <C>             <C>        <C>              <C>        <C>            <C>
Three months ended       $  46,000       3.2%       $   528,000      24.5%      ($   482,000)  (91.3%)

Nine months ended        $ 157,000       3.5%       $ 1,478,000      23.4%      ($ 1,321,000)  (89.4%)

</TABLE>

Weighted Average Common Shares

The weighted average common shares outstanding on a diluted basis decreased by
339,210 for the quarter ended March 31, 2005 to 11,030,149 from 11,369,359 for
the quarter ended March 31, 2004. This 339,210 decrease in the diluted basis
calculation of weighted average common shares resulted from the combination of a
decrease in common share equivalents (due to a lower average share price for
eGames common stock during the current three month period), which was partially
offset by an increase in outstanding shares due to the exercise of common stock
options.

The weighted average common shares outstanding on a diluted basis increased by
116,047 for the nine months ended March 31, 2005 to 10,992,332 from 10,876,285
for the nine months ended March 31, 2004. This 116,047 increase in the diluted
basis calculation of weighted average common shares resulted from increase in
outstanding shares due to the exercise of common stock options, which was
partially offset by a decrease in common share equivalents (due to a lower
average share price for eGames common stock during the current nine month
period).


<PAGE>


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 supercedes
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 is 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 expect the adoption of SFAS No. 123 (revised 2004) to have 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 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not believe
the adoption of SFAS No. 151 will have a material impact on our financial
statements.

Liquidity and Capital Resources

                                                 As of
                                                March 31,
                                        -------------------------

                                            2005          2004       Change
                                        -------------------------------------
Cash and cash equivalents               $ 2,275,000   $ 1,552,000   $ 723,000
                                        ===========   ===========   =========

            Percent of total assets         51.7%         36.1%
                                            =====         =====


                                               Nine Months Ended
                                                   March 31,
                                           ------------------------

                                              2005          2004        Change
                                           -------------------------------------

Cash provided by operating activities      $ 478,000     $ 605,000   ($ 127,000)
Cash used in investing activities            (11,000)      (77,000)      66,000
Cash provided by financing activities         66,000         - 0 -       66,000
                                           -------------------------------------
Net increase in cash and cash equivalents  $ 533,000      $ 528,000   $   5,000
                                           =========      =========   =========


Changes in Cash Flow, Operating Activities

During the nine months ended March 31, 2005, we had $478,000 in cash provided by
operating activities compared to $605,000 in cash provided by operating
activities for the nine months ended March 31, 2004. The $478,000 in cash
provided by operating activities for the nine months ended March 31, 2005
resulted primarily from:

        o    Collections of accounts receivable from our larger software
             distributors, licensees and Internet customers; and
        o    Net income earned during this period.

Partially offsetting these cash sources were cash uses from:

        o    Employee bonus payments related to the fiscal 2004 employee
             incentive compensation plan that were accrued as of June 30, 2004,
             and paid during fiscal 2005;
        o    Accelerated accounts payable vendor payments made in exchange for
             obtaining cash discounts, in addition to increased vendor payments
             related to higher levels of inventory; and
        o    Income tax payments associated with estimated federal alternative
             minimum tax.


<PAGE>


                            Accounts Receivable, net
                            ------------------------
Gross accounts receivable totaled $1.6 million and $2.7 million at March 31,
2005 and June 30, 2004, respectively. This $1.1 million decrease in gross
accounts receivable resulted from accounts receivable collections exceeding the
slowing pace of sales during the nine months ended March 31, 2005. At March 31,
2005, the allowances for product returns, price markdowns and bad debts had
declined to $0.8 million, compared to $1.2 million at June 30, 2004. Although
the allowances for product returns, price markdowns and bad debts had decreased
in dollars terms during this period, these allowances had increased, on a
percentage basis, at March 31, 2005 to 51% of gross accounts receivable,
compared to 43% of gross accounts receivable at June 30, 2004.

Generally, we have been able to collect our net accounts receivable in the
ordinary course of business, but have from time to time experienced periods of
slowness in customer payments. We continually monitor our receivable balances
and communicate with our customers in order to expedite their payments of past
due amounts or to process authorized receivable credits for 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 payments
to us, the valuation of our accounts receivable is continually reviewed in order
to help anticipate liquidity issues that could result from our inability to
collect a receivable balance in the normal course of business.

We continue to have a very concentrated customer base consisting of a few large
software distributors and retailers. In particular, as of March 31, 2005, our
largest software distributor, Atari, represented 60% of our net accounts
receivable. Additionally, during the nine months ended March 31, 2005, we
collected receivable payments of $3.1 million from Atari, which represented 57%
of our total customer receipts for that period. Our ability to collect, in a
timely manner, the net receivable amount owed by Atari remains critical for us
to be able to meet our financial obligations and to fund normal operations. If
at any time Atari would become unable or unwilling to make receivable payments
to us in a timely manner, our ability to continue ongoing operations would be
significantly impaired.

                                 Inventory, net
                                 --------------
During the nine months ended March 31, 2005, we experienced a $119,000, or 15%,
increase in net inventory, resulting primarily from an increase in our gross
inventory, which was partially offset by a small increase in the allowance for
inventory obsolescence. The increase in gross inventory was due to many of our
newly manufactured titles not achieving the level of retail distribution we had
anticipated due in part to the reduction in retail shelf space being allotted to
PC software titles at the $9.99 retail price point. We are currently evaluating
the future retail and consumer demand for our manufactured products, but we
anticipate that the reduced shelf space for $9.99 jewel case PC software
products at retail will continue to impact our inventory levels for the
remainder of fiscal 2005.

                                Accounts Payable
                                ----------------
During the nine months ended March 31, 2005, accounts payable decreased by
$241,000, which resulted from our continued acceleration of payments to our
primary trade vendors in exchange for receiving cash discounts, combined with
increased payments relating to higher inventory levels.

                                Accrued Expenses
                                ----------------
During the nine months ended March 31, 2005, accrued expenses decreased by
$265,000 as a result of employee bonus payments made pursuant to the fiscal 2004
employee incentive compensation plan. There was no such expense recorded during
the nine months ended March 31, 2005 relating to the fiscal 2005 employee
incentive compensation plan due to our determination that we will not achieve
the operating income threshold required for bonus payments pursuant to this
fiscal year's plan.

Changes in Cash Flow, Non-Operating Activities

For the nine months ended March 31, 2005, we had net cash used in investing
activities of $11,000 for equipment upgrades to our computer network, compared
to $76,000 in cash used in investing activities during the year ago period for
similar network upgrades and certain trademark related expenditures.


<PAGE>


For the nine months ended March 31, 2005, we had $66,000 in net cash provided by
financing activities that related to proceeds from the exercise of options to
purchase shares of our common stock, which proceeds were partially offset by our
quarterly cash dividend payment to shareholders of our common stock.

Credit Facility

In November 2004, we renewed our credit facility agreement with Hudson United
Bank ("HUB"), which matures on December 1, 2005. Amounts outstanding under this
credit facility are charged interest at one-half of one percent above HUB'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. This credit facility is secured by all of the Company's assets and
requires us, among other things, to maintain the following financial covenants
to be tested quarterly: a total liabilities to tangible net worth ratio of 1.25
to 1.00 and a tangible net worth requirement of $2.0 million.

As of May 13, 2005, we were in compliance with each of those covenants. This
credit facility was established to provide working capital for our operations.
As of May 13, 2005, we had not utilized any of this credit facility, although we
had access to approximately $600,000 under this credit facility, based on the
prescribed calculation of seventy-five percent of qualified accounts receivable
as of that date.

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, 2007. Additionally, we currently rent certain office equipment through
various operating lease agreements. At March 31, 2005, we had future operating
lease commitments of $174,000, as reflected in the table below.

Under various licensing agreements with third-party 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. As of March 31, 2005, we had
future commitments to pay $61,000 in advance licensing and royalty payments to
various third-party licensors and software developers as reflected in the table
below. These commitments are expected to be funded by cash flows generated
through anticipated income from operations.

The following table represents a summary of our off-balance sheet contractual
obligations and commitments.

<TABLE>
<CAPTION>
                                                  Payments Due by Period
                              ---------------------------------------------------------------

                                             Less than       1-3          3-5       More than
Contractual Obligations         Total         1 year        years        years       5 years
---------------------------------------------------------------------------------------------
<S>                           <C>           <C>           <C>           <C>         <C>
Operating leases              $ 174,000     $   64,000    $ 109,000     $ 1,000     $   - 0 -
Advanced royalties               61,000         49,000       12,000       - 0 -         - 0 -
---------------------------------------------------------------------------------------------
Totals                        $ 235,000     $  113,000    $ 121,000     $ 1,000     $   - 0 -
                              =========     ==========    =========     =======     =========
</TABLE>

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. In
particular, our ability to maintain 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, sell-through of our products to consumers, and the costs of
developing, producing, marketing and promoting our PC software titles.

There are significant challenges that we will need to successfully manage in
order to fund our operations in the future. These challenges include, but are
not limited to, maintaining our relationships with our principal distributors
and retailers, maintaining timely receivable payments from our concentrated
group of distributors and retailers, in addition to maintaining acceptable
payment terms with our trade vendors. For example, our liquidity would be
severely impacted if Atari 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.


<PAGE>


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 the market
acceptance and sell-through rates of our products to consumers. If one of the
major retailers where our products are sold were to further reduce or eliminate
entirely the shelf space allocated to $9.99 PC software games, 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 maintain 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.

Listing of Our Common Stock

Our common stock trades on the OTC Bulletin Board under the symbol EGAM. We have
considered applying for listing on an exchange, such as the American Stock
Exchange, but at this time we do not meet the standards for listing. Even if we
did meet these standards, however, we do not believe at this time that the
benefits of listing are substantial enough to justify the fees, costs and
additional regulatory requirements imposed by such listing.

FACTORS AFFECTING FUTURE PERFORMANCE

Our business is subject to many risks and uncertainties that could affect our
future financial performance. The following discussion highlights some of the
more important risks we have identified, but they may not be the only factors
that could affect our future performance.

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 major retailers in
North America, and therefore our business relies on a concentrated group of
these large customers. Atari is our primary North American distributor servicing
the major mass-merchant retailers in North America, such as Wal-Mart, Target,
and Best Buy, among others. During fiscal 2004, Wal-Mart accounted for about
half of our unit sales to Atari, while Best Buy and Target accounted for most of
our remaining business with Atari. During the first quarter of fiscal 2005, the
decision by one of North America's largest mass-merchant retailers to implement
a chain-wide decrease in the size of its PC game software department allocated
to $9.99 jewel case titles more than halved the number of our titles that are
now being sold in that retailer's stores. This event negatively affected our net
sales and operating results for three and nine months ended March 31, 2005, and
we expect that it will continue to impact our results for the foreseeable
future.

Our net sales to Atari during the fiscal year ended June 30, 2004 were $5.5
million and represented 69% of our total net sales. We anticipate that net sales
to Atari will continue representing the largest percentage of our net sales
during fiscal 2005. Accordingly, we expect to continue depending upon a limited
number of significant distributors and retailers, and in particular Atari, for
the foreseeable future.

If we cannot continue viable business relationships with key distributors and
retailers, this would materially harm our business. The terms of our business
relationships with the primary distributors of our products do not require them
to purchase our products. If these distributors were to stop distributing our
products, our sales would decline substantially and in a brief period of time.
In addition, if distributors of our products 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 these retailers, it might be on terms that
are not commercially acceptable. Our inability to negotiate commercially viable
distribution relationships with major software retailers and distributors, or
the loss of, or significant reduction in sales to, any of our key distributors
or retailers, would adversely affect our business, operating results and
financial condition.

The consumer entertainment PC software market is highly competitive and changes
rapidly. The market for consumer entertainment PC software is highly
competitive. A constantly increasing number of software titles are competing for
a limited amount of shelf space, which has diminished over time. Retailer
changes to shelf space allocations, such as the reductions in shelf space that
recently occurred at a major retailer, can negatively affect our future sales
and operating results. The competition for retail shelf space continues to

<PAGE>

intensify. We are seeing shifts in the retail market for PC software games that
are likely to continue to affect our operating results, including the recent
decision by Best Buy to continue participating in the value-priced PC software
market, but through a single-source software supplier, Microgistix, Inc., that
will now control the manufacture, distribution and merchandising of this
category of products at Best Buy. Competition for retail shelf space also
results in greater leverage for retailers and distributors in negotiating terms
of sale, including price markdowns and product return policies, and our larger
competitors may have more leverage than we do to negotiate more and
better-positioned shelf space 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 develop more successful
products, offer competitive products at lower price points, or if we do not
continue to develop consistently high-quality and well-received products, our
revenue, margins, and profitability will decline.

We depend on the market acceptance of our products, and these products typically
have relatively short product life cycles. Our profitability depends on our
ability to publish new PC software titles that get into retail stores and
successfully sell through to consumers. Consumer preferences for entertainment
PC software products are difficult to predict and only a few products achieve
sustained market acceptance. Typical product life cycles are no more than six to
fifteen months. New products we introduce may not achieve any significant degree
of market acceptance, or the product life cycles may not be long enough for us
to recover advance royalty, inventory, development, 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
relationships with these distributors and retailers. We may also lose 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 would adversely impact our business, operating results and financial
condition.

If our major distributors or retailers are not able to or are unwilling to pay
us at all or within the normal course of business, this would materially harm
our financial condition. 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 failed. If any significant 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
anticipated uncollectible accounts receivable which we believe to be adequate.
The actual allowance 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 distribution or retail
customers failed to pay an outstanding receivable, particularly Atari, which as
of March 31, 2005 represented 60% of our net accounts receivable balance, our
business, operating results and financial condition would be significantly
harmed.

We may need additional funds, and we may not be able to obtain such funding if
we need it. In November 2004, we renewed our $750,000 credit facility agreement
with Hudson United Bank ("HUB"), which matures on December 1, 2005. Our capital
requirements are currently funded from the cash flow generated from product
sales and our $750,000 credit facility with Hudson United Bank. This credit
facility is subject to limitations based on the value of our accounts
receivable, and therefore working capital may not be available to us when we
need it. Our ability to continue operations essentially requires us to generate
sufficient cash flow from operations to fund our business activities. In the
past we have experienced dramatic fluctuations in cash flows, so we cannot be
sure we will be able to continue achieving sufficient cash flows to fund our
operations in the future. If we had to seek financing, we may only be able to
obtain such financing 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
long-term viability.

If we are not able to continue our quarterly dividend program, this would
adversely affect our stock price. The Company's Board of Directors has declared
two consecutive quarterly cash dividends of $0.015 per common share, one of
which was paid in February 2005 and one is anticipated to be paid on May 25,
2005. It is the Company's intention to continue paying a comparable quarterly
cash dividend to shareholders of its common stock in future periods. However,
the payment of any further cash dividends depends entirely upon the discretion
of the Company's Board of Directors and may be discontinued at any time, for any
reason. If we are not able to continue our quarterly dividend program, this
would adversely affect the Company's stock price and could also harm the
Company's overall reputation and market valuation.


<PAGE>


Price markdowns and product returns could materially reduce our net sales and
results of operations. Most of our customer relationships allow for product
returns and price markdowns. We generally establish allowances for future
product returns and price markdowns at the time revenues associated with 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 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. Actual product returns and price markdowns
could exceed our established allowances for these anticipated amounts, which
would negatively impact our future 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 retailers and distributors and other changes in market forces.
Fluctuations in quarterly operating results will depend upon many factors
including:

        - Seasonality of consumer entertainment PC software purchases;
        - Shelf space allocations by major retailers;
        - Timing of major distributor and retailer purchase orders;
        - Amount and timing of product returns and price markdown requests; and
        - Timing of our new product introductions, product enhancements and
          those of our competitors.

The seasonal nature of the PC software market can result in harm to our
financial results if our product releases, shipments and orders do not optimize
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. This is due to increased demand for PC software games during the
back-to-school and holiday selling seasons. 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 buying season.
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 be adversely affected. Additionally, if
our products do not adequately sell-in to our customers' retail locations or
sell-through to consumers at these retail locations 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 arrangements with
third party software developers. Independent software developers develop all of
the content for our software titles. Our success in introducing new high quality
PC software titles depends on our ability to maintain relationships and obtain
licensing agreements on favorable terms with skilled independent software
developers. Increased competition for the licensing rights to quality consumer
entertainment PC software content has compelled us to agree to increasingly
higher 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
costs, this would have a negative impact on our financial results. 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, licensing recognizable
brands, and advertising efforts. Competition has continued to intensify as our
industry has consolidated, since we have remained a small software publisher and
some of our competitors have grown larger. In order to be successful in the
future, we must be able to 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.


<PAGE>


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 our stock.
If our stock is not eligible to be traded on the OTC Bulletin Board, our stock
will then be traded on the Pink Sheets, which may have even less trading volume
potential and more price fluctuations than the OTC Bulletin Board.

Regulation of our product content and features could affect the marketability of
our products. Due to the competitive environment in the consumer entertainment
software industry, we have and will continue to incorporate features into our
products, such as an Internet browser-like interface and online consumer
registration capabilities, to differentiate our products to retailers, provide
value-added features to consumers, and to potentially increase website traffic
and create new revenue streams. These features may not enhance the product's
value, and in fact such features may detract from a product's value if they are
not accepted in the marketplace or if new regulations governing the Internet and
related technologies are enacted which impact these features.

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.

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 third-party software
developers may give rise to claims of infringement. In past years, we have
incurred significant defense costs and utilized 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. 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 10% and 9%, respectively, of our net sales for the three and nine
months ended March 31, 2005. We anticipate that in fiscal 2005 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.


<PAGE>


Item 3.  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 March 31, 2005 (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 are 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 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 third
quarter ended March 31, 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 6.  Exhibit Listing

The following exhibits are being filed or furnished as part of this Quarterly
Report on Form 10-QSB:

Exhibit Number                              Description of Exhibit
--------------                              ----------------------

(1) 4.1     First Amendment to Rights Plan, dated as of March 4, 2005, between
            eGames, Inc. and StockTrans, Inc.
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 Vice President and 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 Section 906 of the
            Sarbanes-Oxley Act of 2002.
32.2        Certification of Thomas W. Murphy as Vice President and Chief
            Financial Officer of eGames, Inc. pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002.

(1) Incorporated herein by reference from the Registrant's Form 8-K as filed
    with the Securities and Exchange Commission on March 4, 2005.


<PAGE>


                                   SIGNATURES


In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                                  eGames, Inc.
                                  (Registrant)




Date: May 13, 2005                         /s/  Gerald W. Klein
      ------------                         --------------------
                                           Gerald W. Klein, President, Chief
                                           Executive Officer and Director


Date: May 13, 2005                         /s/ Thomas W. Murphy
      ------------                         --------------------
                                           Thomas W. Murphy, Chief Financial
                                           Officer and Chief Accounting Officer



<PAGE>


                                                                 Exhibit 31.1

                                  Certification
                                  -------------

I, Gerald W. Klein, certify that:

1. I have reviewed this quarterly report on Form 10-QSB 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 registrant as
of, and for, the periods presented in this report;

4. The registrant'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 registrant 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
         registrant, 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 registrant'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 registrant's internal
         control over financial reporting that occurred during the registrant's
         most recent fiscal quarter that has materially affected, or is
         reasonably likely to materially affect, the registrant's internal
         control over financial reporting;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's
         internal control over financial reporting.


Date:  May 13, 2005
-------------------

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



<PAGE>


                                                                  Exhibit 31.2

                                  Certification
                                  -------------

I, Thomas W. Murphy, certify that:

1. I have reviewed this quarterly report on Form 10-QSB 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 registrant as
of, and for, the periods presented in this report;

4. The registrant'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 registrant 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
         registrant, 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 registrant'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 registrant's internal
         control over financial reporting that occurred during the registrant's
         most recent fiscal quarter that has materially affected, or is
         reasonably likely to materially affect, the registrant's internal
         control over financial reporting;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's
         internal control over financial reporting.


Date:  May 13, 2005
-------------------

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




<PAGE>


                                                                  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 Quarterly Report of eGames, Inc. (the "Company") on Form
10-QSB for the third quarter ended March 31, 2005 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, based on my knowledge, 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
Date:  May 13, 2005

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.




<PAGE>


                                                                  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 Quarterly Report of eGames, Inc. (the "Company") on Form
10-QSB for the third quarter ended March 31, 2005 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, based on my knowledge, 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
Date:  May 13, 2005

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.