SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                     For the fiscal year ended June 30, 2006

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

                         Commission File Number 0-27102

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

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


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

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

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

    Title of each class            Name of each exchange on which registered
    -------------------            -----------------------------------------
 Common Stock, No Par Value                          None


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

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

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

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

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

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $2,367,000 as of September 13, 2006.

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS:

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

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 11,724,193 shares of Common Stock, no
par value per share, as of September 27, 2006.




<PAGE>


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

                                      INDEX


                                                                           Page
                                                                           ----
                                     PART I

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

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

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

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

                                     PART II

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

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

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

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

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

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

                                    PART III

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

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

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

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

                                     PART IV

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

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


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

<PAGE>

                                     PART I

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

Item 1.    Business

GENERAL

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

INDUSTRY BACKGROUND

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

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

BUSINESS STRATEGY

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

<PAGE>

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

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

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

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

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

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

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


<PAGE>


INTERNET STRATEGY

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

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

MARKETING

Our marketing efforts focus on:

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

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

SALES AND DISTRIBUTION

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

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



<PAGE>


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

COMPETITION

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

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

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

PRODUCT DEVELOPMENT

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

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

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

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


<PAGE>


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

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

BACKLOG

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

PRODUCT SUPPORT

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

OPERATIONS - INTERNAL

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

OPERATIONS - EXTERNAL

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

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

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


<PAGE>


SEASONALITY

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

EMPLOYEES AND INDEPENDENT PC SOFTWARE DEVELOPERS

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

INTELLECTUAL PROPERTY RIGHTS

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

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

PC game developers and publishers are subject to infringement claims, and there
has been substantial litigation in the industry regarding copyright, trademark
and other intellectual property rights. When claims or litigation, with or
without merit, are brought against us, such claims can and have been costly and
result in a diversion of management's attention and our financial resources,
which could have a material adverse effect on our business, operating results
and financial condition. We can and have incurred substantial expenses in
evaluating and defending such claims, regardless of the merit of the claims. In
the event that there is a determination that we have infringed on a third
party's intellectual property rights, we could incur significant monetary
liability and be prevented from using these rights in the future.



<PAGE>


FACTORS AFFECTING FUTURE PERFORMANCE

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

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

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

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

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


<PAGE>


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

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

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

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

<PAGE>

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

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

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

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

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



<PAGE>


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

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

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

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

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



<PAGE>


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

We are exposed to the risk of product defects. Products we offer can contain
errors or defects. The PC hardware environment is characterized by a wide
variety of non-standard peripherals, such as sound and graphics cards, and
configurations that make pre-release testing for programming or compatibility
errors difficult and time-consuming. Despite the extensive testing performed by
our quality assurance personnel, new products or releases may contain errors
discovered after shipments have commenced, resulting in a loss of or delay in
market acceptance or product recalls, which would adversely affect our business,
operating results and financial condition.

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

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


Item 2.    Properties

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

Item 3.    Legal Proceedings

None

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

None



<PAGE>


                                     PART II

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

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

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

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

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

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

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




<PAGE>


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

FORWARD-LOOKING STATEMENT SAFE HARBOR

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

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



<PAGE>


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

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

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

Overview

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

<PAGE>


About eGames

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

Significant Trends and Events in our Business

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

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

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

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

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

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

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


<PAGE>


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

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

Critical Accounting Policies and Estimates

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

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

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

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

Key Assumptions

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


<PAGE>


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

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

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

Key Assumptions

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

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

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

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

Key Assumptions

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

<PAGE>


Results of Operations

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

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

Net Sales

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

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

                        Net Sales by Distribution Channel

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

</TABLE>


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

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

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

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

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


<PAGE>


                                    Licensing
                                    ---------

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

                                    Internet
                                    --------

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

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

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

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

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

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

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

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


<PAGE>


Cost of Sales

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

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

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


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

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

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

Product Development

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

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

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

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


<PAGE>


Selling, General and Administrative

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

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

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


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

Interest Income, net

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

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


Benefit for Income Taxes

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

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


Net Loss

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

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


Weighted Average Common Shares

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


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

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

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

Liquidity and Capital Resources

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

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

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


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

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

Changes in Cash Flow, Operating Activities

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


<PAGE>

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

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

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

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

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

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

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

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

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

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

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


<PAGE>


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

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

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

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

Changes in Cash Flow, Non-Operating Activities

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

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

Credit Facility

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

Contractual Obligations and Commitments

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

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

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


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

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



<PAGE>


Liquidity Risk

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

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

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


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

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

Listing of Our Common Stock

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


<PAGE>


Item 7.    Financial Statements


                                  eGames, Inc.

                          Index to Financial Statements


                                                                          Page
                                                                          ----

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

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

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

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

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

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




<PAGE>


             Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders
eGames, Inc.

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

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eGames, Inc. as of June 30,
2006 and the results of its operations and its cash flows for the years ended
June 30, 2006 and 2005, in conformity with accounting principles generally
accepted in the United States of America.


/s/ Stockton Bates, LLP

Philadelphia, Pennsylvania
August 16th, 2006



<PAGE>


                                  eGames, Inc.
                                  Balance Sheet

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

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


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


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






                 See accompanying notes to financial statements.


<PAGE>


                                  eGames, Inc.
                            Statements of Operations


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

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

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

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

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

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

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


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

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


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

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


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


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

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

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





                 See accompanying notes to financial statements.



<PAGE>



                                                         eGames, Inc.
                                              Statements of Stockholders' Equity

<TABLE>
<CAPTION>


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

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

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

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

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

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

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

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

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

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

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

</TABLE>










                 See accompanying notes to financial statements.


<PAGE>




                                eGames, Inc.
                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                           Years Ended June 30,
                                                       ---------------------------

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

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

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

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

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



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

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









                 See accompanying notes to financial statements.


<PAGE>


                                  eGames, Inc.
                          Notes to Financial Statements

1.  Summary of Significant Accounting Policies

Description of Business

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

Basis of Presentation

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

Fair Value of Financial Instruments

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

Cash and Cash Equivalents

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

Accounts Receivable, net

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

Inventory, net

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

Furniture and Equipment, net

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


<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.

Goodwill and Other Intangible Assets

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

Software Development Costs

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

Revenue Recognition

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

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

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


<PAGE>


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

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

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

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

Prepaid and Other Expenses

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

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



<PAGE>


Income Taxes

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

Computation of Net Income (Loss) per Common Share

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

Management's Estimates

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

2.  Accounts Receivable, net

Accounts receivable, net consists of the following:

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

3.  Inventory, net

Inventory, net consists of the following:

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

     Inventory, gross                                                 1,090,000

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



<PAGE>


4.  Prepaid and Other Expenses

Prepaid and other expenses consists of the following:

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

5.  Furniture and Equipment, net

Furniture and equipment consists of the following:

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

6.  Accrued Expenses

Accrued expenses consists of the following:

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

7.  Commitments and Contingencies

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

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


<PAGE>


8.  Credit Facility

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

9.   Advertising Costs

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

10. Concentration of Customers

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

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

11.   Goodwill and Other Intangible Assets

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



<PAGE>


12.  Income Taxes

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

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

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

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

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


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

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

Statutory federal income tax rate                       34%            34%

Increase (decrease) in taxes resulting from:

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

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


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

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

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


<PAGE>


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


13.  Common Stock

On June 30, 1995, we amended our Articles of Incorporation to authorize the
issuance of 40,000,000 shares of common stock, without par value, and 10,000,000
shares of preferred stock, without par value.

On June 1, 1999, the Board of Directors adopted a Stockholders Rights Plan (the
"Plan"). The Plan was intended to protect the interests of our existing
stockholders' in the event that we were confronted with coercive or unfair
takeover tactics. On March 4, 2005, our Board of Directors approved an amendment
to the Stockholders Rights Plan to accelerate the expiration date from June 1,
2009 to March 7, 2005. With this action, the Plan was terminated on March 7,
2005. The Board's decision to terminate the Plan was not made in connection with
any business transaction pending at that time.

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


14.  Common Stock Options and Warrants

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

During 1995, we adopted, amended and restated our 1995 Amended and Restated
Stock Option Plan (the "1995 Plan"), which expired on June 30, 2005. The 1995
Plan allowed for the granting of options to purchase shares of our common stock
through June 30, 2005, after which date any previously granted option remains in
effect through its contractual term. At our 1997 Annual Meeting of Shareholders,
the shareholders of our company approved an amendment to increase the number of
shares available for issuance under the 1995 Plan from the 950,000 shares of
common stock approved during the 1996 Annual Meeting of Stockholders to a total
of 1,950,000 shares. At our 2000 Annual Meeting of Shareholders, the
shareholders of our company approved an amendment to increase the number of
shares available for issuance under the 1995 Plan from the 1,950,000 shares of
common stock previously approved to a total of 2,950,000 shares. The 1995 Plan
was administered by the Board of Directors and provided for the grant of
incentive stock options and non-qualified stock options to employees and
eligible independent contractors and non-qualified stock options to non-employee
directors at prices not less than the fair market value of a share of common
stock on the date of grant. The 1995 Plan had also provided for automatic grants
of options to non-employee directors of our company. Each non-employee director
received options for 10,000 shares of common stock upon appointment or election
to the board and, in addition, each director would receive options for 5,000
shares of common stock on the first trading day in January of each year.

Except with respect to automatic grants of options to non-employee directors,
the expiration of a stock option and its vesting period are determined by the
Board of Directors at the time of the grant, but in no event will an option be
exercisable after 10 years from the date of grant. Stock option grants under the
1995 Plan vest over periods ranging from six months to ten years. In most cases,
upon termination of employment, vested options must be exercised by the optionee
within three months after the termination of the optionee's employment with our
company.



<PAGE>


Information regarding our common stock options is as follows:

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

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

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

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

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

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

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

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

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

 Information regarding our common stock warrants is as follows:

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



<PAGE>


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

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


15.  Accounting for Stock-Based Compensation

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

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

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


16. Operations by Reportable Segment and Geographic Area

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

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


17.  Acquisition of Assets of Cinemaware, Inc.

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

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


<PAGE>


18.  Recent Accounting Pronouncements

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

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

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


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

None

Item 8A.   Controls and Procedures

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

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

Item 8B.   Other Information

None


<PAGE>


                                    PART III

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

Executive Officers:

The executive officers of the Company are as follows:

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

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


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

Mr. Murphy has been Chief Financial Officer of the Company since July 1999. He
joined the Company as Controller in May 1996. Prior to joining the Company, Mr.
Murphy was Controller of Megamation Incorporated, a publicly traded company that
manufactured automation work cells used in various industries, from January 1995
until April 1996, and Accounting Manager of Ohmicron, Inc., a biotechnology
company, from January 1993 until December 1994. From September 1985 to May 1992,
Mr. Murphy served in a number of financial positions at Checkpoint Systems,
Inc., a provider of security and access control systems, including serving as
Accounting Manager from 1991 to 1992.

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

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

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

Directors:

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


<PAGE>


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

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

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

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

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

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

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

Thomas D. Parente has served as a Director of the Company since June 1995.  He
served as Chairman of the Board from August 1998 until December 2000, at which
time former Director Robert M. Aiken, Jr. was elected as Chairman of the Board.
Mr. Parente was again elected as Chairman of the Board in December 2005 upon
Mr. Aiken's retirement.  Mr. Parente is Corporate Secretary and Director of
Corporate Development for Ole Hansen & Sons, Inc., a privately owned holding
company, a position he has held since December 1996. From May 1995 to November
1996, he was self-employed as a financial consultant to businesses. From April
1988 until April 1996, he was a Vice-President and the Chief Financial Officer
of Suvar Corporation, a manufacturer of specialty chemicals for the printing
and coatings markets. From June 1970 until April 1988, Mr. Parente was employed
by KPMG LLP and was a partner with that firm from April 1979 until April 1988.
Mr. Parente is a certified public accountant.

Lambert C. Thom joined the Company as a Director in December 1997. He has served
as Vice President and Managing Director of Bangert, Dawes, Reade, Davis & Thom,
Incorporated, a private investment firm, since 1975. From 1989 to 1995, Mr. Thom
served as Vice President of John Hancock Capital Growth Management, Inc., an
investment management firm.

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

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


<PAGE>


Based solely upon a review of the copies of such reports furnished to the
Company, or written representations from certain reporting persons that no other
reports were required, the Company believes that during the fiscal year ended
June 30, 2006, all of its officers and directors complied with all filing
requirements applicable to them.

Audit Committee:

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

Code of Ethics:

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

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


Item 10.   Executive Compensation

Summary Compensation Table

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

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

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

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

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

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


Stock Option Grants During 2006 Fiscal Year

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

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

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

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

</TABLE>

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

Long-Term incentive Plans

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

Compensation of Directors

The non-employee members of the Board of Directors, who are also members of the
Company's Audit Committee and Compensation Committee, receive $15,000 annually
for their services as a member of the Board, Audit Committee and Compensation
Committee. This fee is payable in four quarterly installments. All directors are
entitled to reimbursement for reasonable expenses incurred in the performance of
their duties as Board members. The Company's Amended and Restated 1995 Stock
Option Plan, which expired June 30, 2005, had provided that all non-employee
members of the Board of Directors receive an initial grant of options to
purchase 10,000 shares of Common Stock upon appointment or election to the
Board, and thereafter received options to purchase 5,000 shares of Common Stock
on January 1 of each year that such person is a non-employee director. The
options have terms of five years and have an exercise price equal to the fair
market value on the date of grant. The final automatic option grant to the
non-employee members of the Board of Directors pursuant to the Amended and
Restated 1995 Stock Option Plan was made on January 1, 2005. On December 1,
2005, each of the outside Directors received options to purchase 50,000 shares
of Common Stock at an exercise price of $0.31 a share, which grant was not
pursuant to any stock option plan.


<PAGE>


Change of Control Severance Arrangements

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

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

The following table sets forth information as supplied to the Company regarding
the number and percentage of shares of the Company's Common Stock beneficially
owned as of August 14, 2006 (unless otherwise noted) by: (i) those persons or
entities known by management to beneficially own more than five percent of the
Common Stock; (ii) each director of the Company; (iii) each of the Company's
executive officers named in the Summary Compensation Table; and (iv) all
directors and executive officers of the Company as a group.

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

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

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

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

Eugene H. Mauro                           -0-                       n/a

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

Thomas D. Parente                       96,425 (7)                   *

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

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

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

*Less than 1%


<PAGE>


  (1)   Unless otherwise indicated, the address of each named holder is c/o
        eGames, Inc., 2000 Cabot Boulevard West, Suite 110, Langhorne, PA 19047.
  (2)   Beneficial ownership is determined in accordance with the rules of
        the Securities and Exchange Commission (the "SEC") and generally
        includes voting or investment power with respect to securities. In
        accordance with SEC rules, the shares in this column include shares
        that may be acquired upon exercise of stock options within sixty
        days of August 14, 2006. Except as indicated by footnote, and
        subject to community property laws where applicable, the persons or
        entities named in the table above have sole voting and investment
        power with respect to all shares of Common Stock shown as
        beneficially owned by them.
  (3)   Steven N. Bronson filed a Schedule 13D dated June 29, 2006, upon
        which the Company has relied in making this disclosure. Steven N.
        Bronson has sole voting and dispositive power as to 624,413 shares.
  (4)   On August 16, 2006, Mr. Fanelle entered into a Separation Agreement
        and General Release of All Claims with the Company in connection
        with the elimination of Mr. Fanelle's position at the Company. His
        beneficial ownership includes 113,000 shares of Common Stock that
        may be acquired through the exercise of options that were
        exercisable as of August 14, 2006 or became exercisable within 60
        days of that date.
  (5)   Includes 92,000 shares of Common Stock that may be acquired through
        the exercise of options that were exercisable as of August 14, 2006
        or became exercisable within 60 days of that date. Also includes
        1,200 shares held by Mr. Klein's immediate family members.
  (6)   Includes 135,000 shares of Common Stock that may be acquired
        through the exercise of options that were exercisable as of August
        14, 2006 or became exercisable within 60 days of that date. Also
        includes 788 shares held by Mr. Murphy's immediate family members.
  (7)   Includes 35,000 shares of Common Stock that may be acquired through
        the exercise of options that were exercisable as of August 14, 2006
        or became exercisable within 60 days of that date. Also includes
        4,425 shares held by Mr. Parente's immediate family members.
  (8)   Includes 88,333 shares of Common Stock that may be acquired through
        the exercise of options that were exercisable as of August 14, 2006
        or became exercisable within 60 days of that date.
  (9)   Includes 10,000 shares of Common Stock that may be acquired through
        the exercise of options that were exercisable as of August 14, 2006
        or became exercisable within 60 days of that date.
  (10)  Includes 555,333 shares of Common Stock that may be acquired by
        such persons through the exercise of options that were exercisable
        as of August 14, 2006 or became exercisable within 60 days of that
        date.



<PAGE>


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

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

<S>                                   <C>                          <C>                           <C>
Equity compensation
plans approved by
security holders                      1,307,166                    $0.70                         - 0 -

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


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


--------------------------------------------------------------------------------------------------------------
Total                                 1,907,166                    $0.64                         - 0 -
=====                                 =========                    =====                         =====
</TABLE>

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

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


Item 12.   Certain Relationships and Related Transactions

None.


                                     PART IV

Item 13.

Exhibits

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



<PAGE>



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

(1)   2.1       Asset Purchase Agreement between eGames, Inc., Cinemaware, Inc.
                and Lars Fuhrken-Batista dated as of October 6, 2005. The
                Company agrees to furnish supplementally a copy of any of the
                exhibits and schedules to the Asset Purchase Agreement
                identified therein upon request of the Securities and Exchange
                Commission.
(2)   3.1       Amended and Restated Articles of Incorporation of the
                Registrant.
(3)   3.2       By-Laws of the Registrant.
(4)  10.1       Warrant for the Purchase of 150,000 shares of Common Stock of
                eGames, Inc. exercisable at $0.75 per share
(4)  10.2       Warrant for the Purchase of 150,000 shares of Common Stock of
                eGames, Inc. exercisable at $0.50 per share
(4)  10.3       Escrow Agreement dated October 13, 2005 between and among
                eGames, Inc., Cinemaware, Inc. and TD Banknorth, formerly Hudson
                United Bank
(4)  10.4       Non-Competition and Confidentiality Agreement dated
                October 13, 2005 between Lars Fuhrken-Batista and eGames, Inc.
(4)  10.5       Non-Competition and Confidentiality Agreement dated October
                13, 2005 between Cinemaware, Inc. and eGames, Inc.
(5)  10.6*      Amended and Restated 1995 Stock Option Plan.
(6)  10.7*      Form of Incentive Stock Option Agreement.
(6)  10.8*      Form of Non-Employee Director Stock Option Agreement.
(7)  10.9       Note and Loan Modification Agreement by and between TD
                Banknorth, formerly Hudson United Bank and eGames, Inc. dated
                December 5, 2005
(8)  10.10      Business Loan Agreement by and between TD Banknorth, formerly
                Hudson United Bank and the Registrant dated November 23, 2004.
(8)  10.11      Promissory Note dated November 23, 2004.
(8)  10.12      Commercial Security Agreement dated November 23, 2004.
(9)  10.13*     Change of Control Severance Plan for Level One Employees.
(9)  10.14*     Change of Control Severance Plan for Level Two Employees.
     10.15      Separation Agreement and General Release of All Claims dated
                August 15, 2006 between eGames, Inc. and Lawrence F. Fanelle.
(10) 10.16      Distribution Agreement dated November 15, 2005 between
                Gathering of Developers, Inc., a division of Take-Two
                Interactive Software Inc., and eGames, Inc.
(11) 14.1       Code of Ethics for Employees and Board Members
     23.1       Consent of Stockton Bates, LLP.
     31.1       Certification of Gerald W. Klein as President and Chief
                Executive Officer of eGames, Inc. pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.
     31.2       Certification of Thomas W. Murphy as Chief Financial Officer of
                eGames, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act
                of 2002.
     32.1       Certification of Gerald W. Klein as President and Chief
                Executive Officer of eGames, Inc. pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.
     32.2       Certification of Thomas W. Murphy as Chief Financial Officer of
                eGames, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 *              Management contracts.
(1)             Incorporated herein by reference from the Registrant's Form 8-K
                as filed with the Securities and Exchange Commission on
                October 11, 2005.
(2)             Incorporated herein by reference from the Registrant's Form SB-2
                as filed with the Securities and Exchange Commission on
                July 28, 1995.
(3)             Incorporated herein by reference from the Registrant's Form
                10-QSB for the quarter ended September 30, 1998 as filed with
                the Securities and Exchange Commission on November 16, 1998.
(4)             Incorporated herein by reference from the Registrant's Form 8-K
                as filed with the Securities and Exchange Commission on
                October 19, 2005.

<PAGE>

(5)             Incorporated by reference herein from the Registrant's Form
                10-KSB for the year ended June 30, 1998 as filed with the
                Securities and Exchange Commission on September 10, 1998.
(6)             Incorporated by reference herein from the Registrant's Form
                10-KSB for the year ended June 30, 2004 as filed with the
                Securities and Exchange Commission on September 27, 2004
(7)             Incorporated herein by reference from the Registrant's Form 8-K
                as filed with the Securities and Exchange Commission on
                December 7, 2005.
(8)             Incorporated herein by reference from the Registrant's Form 8-K
                as filed with the Securities and Exchange Commission on
                November 24, 2004.
(9)             Incorporated herein by reference from Registrant's Form 8-K as
                filed with the Securities and Exchange Commission on
                June 28, 2004.
(10)            Incorporated herein by reference from Registrant's Form 8-K as
                filed with the Securities and Exchange Commission on May 15,
                2006. Confidential treatment requested as to certain portions,
                which portions were omitted and filed separately with the
                Securities and Exchange Commission pursuant to a Confidential
                Treatment Request.
(11)            Incorporated herein by reference from Registrant's Form 10-KSB
                as filed with the Securities and Exchange Commission on
                September 27, 2005.


Item 14.      Principal Accountant Fees and Services

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

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

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

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

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


<PAGE>


                                   SIGNATURES

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

eGames, Inc.

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

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

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

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

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

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


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

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

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

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

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



<PAGE>


                                                                 Exhibit 10.15



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

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

                                    RECITALS

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

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

                                       I.

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

                                       II.

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

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

<PAGE>

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

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

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

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

                                      III.

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

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

<PAGE>

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

                                      IV.

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

                                       V.

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

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

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

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

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

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

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

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

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

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

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

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


<PAGE>


                                       VI.

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

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

                                      VII.

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

                                     VIII.

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

                                       IX.

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


<PAGE>


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

EGAMES, INC.

By:    /s/ Gerald W. Klein

Title: President and CEO

Date:  August 15, 2006

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


By:   /s/ Lawrence F. Fanelle

Name: Lawrence F. Fanelle

Date: August 16, 2006

                                    EXHIBIT I
                                    ---------

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

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

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


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







<PAGE>


                                                                  Exhibit 23.1


            Consent of Independent Registered Public Accounting Firm


The Board of Directors
eGames, Inc.

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



/s/ Stockton Bates, LLP

Philadelphia, Pennsylvania
September 27, 2006




<PAGE>


                                                                  Exhibit 31.1

                                  Certification

I, Gerald W. Klein, certify that:

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

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

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

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

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

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

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

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

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

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


Date:  September 27, 2006

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



<PAGE>


                                                                  Exhibit 31.2

                                  Certification

I, Thomas W. Murphy, certify that:

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

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

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

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

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

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

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

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

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

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


Date:  September 27, 2006

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


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

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


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

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




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

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


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

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