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, 2004

    |_|         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

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

State issuer's revenues for its most recent fiscal year:  $8,038,000

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: $8,717,000 as of September 24, 2004.

                   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: 10,108,587 shares of Common Stock, no
par value per share, as of September 24, 2004.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the issuer's definitive proxy statement for its 2004 Annual Meeting
of Shareholders are incorporated by reference into Part III and Part IV of this
report. With the exception of those portions, which are expressly incorporated
by reference, the proxy statement is not deemed to be filed as a part of this
report.


<PAGE>


                                  eGames, Inc.
                                   Form 10-KSB
                     For the Fiscal Year Ended June 30, 2004

                                      INDEX

                                                                           Page
                                                                           ----
                                     PART I

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

Item  2.   Properties...................................................... 14

Item  3.   Legal Proceedings............................................... 14
...
Item  4.   Submission of Matters to a Vote of Security Holders ............ 14

                                     PART II

Item  5.   Market for the Registrant's Common Stock and Related
           Stockholder Matters............................................. 15

Item  6.   Management's Discussion and Analysis of Financial Condition
           and Results of Operations....................................... 16

Item  7.   Financial Statements ........................................... 31

Item  8.   Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure ........................................... 48

Item 8A.   Controls and Procedures ........................................ 48

Item 8B.   Other Information .............................................. 48

                                    PART III

Item  9.   Directors and Executive Officers of the Registrant.............. 49

Item 10.   Executive Compensation.......................................... 49

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

Item 12.   Certain Relationships and Related Transactions ................. 49

                                     PART IV

Item 13.   Exhibits, List and Reports on Form 8-K ......................... 50

Item 14.   Principal Accountant Fees and Services.......................... 51


Signatures................................................................. 52




<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" or "we") is a Pennsylvania corporation
incorporated in July 1992 that publishes, markets and sells affordable PC
software games. We have chosen to focus our resources on publishing software
games for the PC platform only, and we do not currently plan to publish products
for any other game platform, such as game consoles, hand held game devices,
mobile phones and personal digital assistants. Our product line enables us to
serve consumers who are seeking a broad range of high-quality, affordable PC
gaming software, which are sold on CDs or online via the Internet. In North
America, our products are distributed primarily on a non-exclusive basis through
third-party software distributors that service the 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.

Our strategy is to target home PC users who seek feature rich, affordable and
easy-to-use consumer entertainment software. All eGames titles are family
friendly, easy-to-use, and are typically rated E for Everyone by the
Entertainment Software Ratings Board, which means they are non-violent and
appropriate for all ages. The majority of our software titles are sold in jewel
case packaging that incorporate many of the attractive packaging features found
in higher priced box products, yet are retail priced at $9.99. Additionally, we
sell a small number of higher priced box titles that are usually retail priced
at $19.99, yet include game content, features and attractive packaging
comparable to other boxed PC software titles with higher retail pricing.

We promote the eGames(TM) and Home Office Help(TM) brands in order to generate
customer loyalty, encourage repeat purchases and differentiate eGames software
products to retailers and consumers. We also publish and market RealAge(R) Games
& Skills, a collection of PC software activities and games designed to help
build and maintain mental sharpness.

Industry Background

The worldwide consumer entertainment software market is very competitive. We
compete with other companies having operations that vary from small companies
with limited resources to large companies with much greater resources than we
have.

The changing characteristics of the worldwide consumer entertainment 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, expanded memory chips, as well as higher
capacities and faster speeds for CD 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). As a
result of the increased competition in the overall consumer entertainment market
that has been driven by this growing array of alternative game-playing
technologies, market data suggests that the retail market for PC game software
has decreased over the past two years. An indication of this trend are recent
plans communicated by Wal-Mart that it intends to decrease the size of its jewel
case PC game software department chain-wide, which we expect will decrease the
number of our titles that are currently sold in Wal-Mart and has already
negatively affected our net sales and operating results for the first quarter of
fiscal 2005. We have begun exploring opportunities within the productivity
software market, which continues to be a robust category, as well as different
PC game genres that have recently performed well. In addition to these
strategies, we are launching an online game website, with free online game play,
chat rooms and potentially skill-based games and contests, in order to tap into
potential revenue streams from the growing online game market. We cannot predict
whether these new opportunities and strategies will be effective in increasing
net sales and offsetting the decreases in net sales caused by anticipated
reductions in the affordable PC game software market.


<PAGE>


Additionally, the 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 consumer entertainment 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 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 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, in addition to the diversification of products offered by these
companies. 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

The goal of our business strategy is to be a leading publisher of high quality,
affordably priced PC software games and productivity titles. We continue to work
towards executing our business plan that focuses on:

    o   Gaining brand name recognition of our PC game software 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 software categories;
    o   Strengthening existing and developing new distribution and retail
        relationships; and
    o   Expanding our online presence through more attractive and value-adding
        websites.

The eGames Business Model. The dominant element of our strategy is to bring
familiar, fun, family friendly games to PC gamers of all ages and capabilities
at affordable prices, while maintaining a lean and focused business
organization. Our business model focuses primarily on the under-$20 retail
priced segment of the PC game software market because that is where we have an
established track record of successful titles.

We Rely On Marketplace Sales Data. We evaluate marketplace sales data to
determine which types of products are achieving successful consumer acceptance
through strong retail sell-through results of various consumer entertainment
software categories. We then focus on developing successful titles that can have
sustainable lifecycles and be attractive to a wide range of PC gaming consumers.
We seek to obtain the rights to PC gaming content that we anticipate will meet
these criteria while complementing our branding strategy.

Deliver Products To Market Quickly To Maximize Sales Opportunities. We believe
that the best method of bringing products to market successfully is to identify
games that consumers are currently enjoying and will likely continue buying. We
then focus on quickly developing or obtaining product content that we believe
the consumer will buy when it is combined with our exciting and distinctive
packaging designed to drive impulse sales in retail stores. Our product
development efforts focus on product design, a user-friendly eGames unique
interface, ease-of-use, product quality and consistency. Our internal product
development team collaborates with third-party software developers in developing
PC software games that we believe consumers will want to play. Although we do
not develop our titles internally, we maintain control over the creative and
marketing aspects of our products by working closely with an experienced group
of third-party software developers in order to minimize product development
costs and to increase the potential consumer acceptance of new titles at retail
locations.

Develop PC Games That Are Easy To Play. We design PC games so they are easy to
install and easy to play, requiring little or no technical experience or
subsequent support. We provide very basic product support to consumers who have
purchased our products, and based on consumer feedback we may incorporate
different or upgraded features within future titles.
<PAGE>

Gaining Distribution. Gaining full North American retail distribution is a very
important element of our business strategy. Our flexible distribution model
enables retailers to buy eGames software titles either directly from us or from
a distributor that they prefer to manage their software requirements. Our
challenge is to make retailers aware of our PC game offerings and to assure that
they have access to our titles in a manner acceptable to them and profitable to
both of us. Due to the additional costs associated with servicing certain
retailers directly, we attempt to adjust our pricing structure with these
retailers to help cover the additional costs associated with direct-to-store
product shipments. Our aim is to make eGames software titles easily available to
consumers at the retail stores in which they shop most frequently.

Market Brand Names That Deliver Consistent Quality. We focus our marketing
resources on developing brands that represent value, quality and consistency to
the gaming consumer. We believe that recognizable brands offer a safer choice to
the consumer in an otherwise confusing, rapidly changing and often intimidating
software marketplace for games. We believe that consumers view successful brand
logos as friendly reminders of high quality. 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 that recognizable brands can help drive consistent product demand by
consumers at retail stores, which is our objective.

INTERNET STRATEGY

Our websites, www.egames.com and www.realagegames.com, are comprehensive
websites where visitors can: try out great demos; play fun games for free; buy
our products (both physical and downloadable versions); register software
purchases; access product support; or review investor relations information such
as regulatory filings, press releases and corporate governance documents. We
seek to maintain leading edge websites that provide value added services and
information to new and repeat visitors. Our goal is to continually improve the
quality of our websites so that our Internet presentation clearly communicates
our commitment to providing fun and easy-to-use games that are affordably
priced.

In October 2004, we will be launching a new online games website,
www.egamesonline.com, which is intended to complement our existing e-commerce
website by channeling additional consumer traffic to our online store and
increase the profitability of our Internet sales. This new online games website
is designed to be supported by advertising revenues, and will also cross-promote
eGames downloadable demonstration software and drive retail sales through the
main eGames website. In conjunction with the launch of this new system, we are
updating the look of our websites and we will continue to improve their more
popular features, including our downloadable demos offerings, in order to drive
incremental Internet sales of our products. We will also continue programs
previously implemented to expand on-line registration of our retail products in
order to increase our database of registered users who are interested in
receiving promotional offers about our products.

MARKETING

Our marketing efforts focus on:

        o   Coordinating in-store advertising programs with certain retailers;
        o   Participating in retail trade shows;
        o   Improving our websites, (www.egames.com and www.realagegames.com);
        o   Issuing press releases and establishing media contacts; and
        o   Distributing demonstration software through the Internet or on CDs.

Our marketing department is responsible for designing attractive programs
intended to increase retailer demand for our software products through
incremental retailer or distributor purchase orders, and to then achieve
positive consumer acceptance through satisfactory product sell-through results
to consumers. Our marketing personnel create attractive product catalogs, sales
brochures, advertisements and related promotional materials. Our marketing
personnel and distribution partners work together to coordinate retail and
promotional programs so that they are in place when products are initially
shipped to retailers. Accordingly, in-store advertising, public relations, and
advertisements are designed and implemented in parallel with product
availability at retail stores.


<PAGE>


SALES AND DISTRIBUTION

North American Sales and Distribution. We primarily sell our products through
national software distributors servicing North American mass-merchant and major
retailers, including Wal-Mart, Target, Best Buy, Office Max, Circuit City, Sam's
Club and BJ's. Additionally, we have direct sales relationships with certain
software retailers, including CompUSA. We often utilize electronic data
interchange hardware and software systems in order to satisfy our retailers that
require us to have direct-to-store distribution and replenishment capability.

During the year ended June 30, 2004, we had one major distributor, Atari, that
represented 69% of our net sales compared to the year ended June 30, 2003, when
Atari accounted for approximately 61% of our net sales. During fiscal 2004,
Wal-Mart accounted for about half of our business through Atari, while Best Buy
and Target accounted for most of our remaining sales to Atari. (See "A
significant part of our sales come from a limited number of customers, and if we
are unable to continue viable business relationships with key distributors and
retailers, this could materially harm our business" under our "Factors Affecting
Future Performance," on page 10).

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, 2004 and 2003, were $341,000 and $314,000,
respectively, and represented 4% of net sales during both fiscal years.

We seek to maximize our worldwide sales and earnings by releasing high quality
localized foreign language titles, whenever practicable, and by continuing to
expand the number of third-party licensees authorized to replicate and
distribute our products. Currently, we license the publishing of localized
versions of our products in French, German, Italian, Spanish, Portuguese and
Japanese.

Distribution Procedures. Our sales staff calls on retail accounts directly and
works with distributors' sales and purchasing personnel in order to maximize
sales with specific retailers. Our sales staff works with the retail buyers and
their distributors to ensure that an appropriate level of our products are
available at each retail store, stocking levels are sufficient, promotions and
advertising are coordinated with product availability, and in-store
merchandising plans are properly maintained.

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. Our sales are primarily to software distributors and
retailers and are typically made on credit, with terms that vary depending upon
the customer and the nature of the product. (See "Our distributors and retailers
have the right to return our products and to take price markdowns, which could
reduce our net sales and results of operations", and "If our major distributors
or retailers are not able to or are unwilling to pay us at all or within the
normal course of business, this would materially harm our financial condition",
under "Factors Affecting Future Performance" on page 11). We establish and
maintain allowances for product returns and price markdowns by distributor and
retailer at levels we believe are adequate based upon many factors, including:
our analysis of historical product return and price markdown results; current
product sell-through results at retail store locations; current field inventory
quantities at distributors' warehouses and at retail store locations; the length
of time that products have been out at retail along with their estimated
remaining retail life; the introduction of new and/or competing software
products that could negatively impact the sales of one or more of our current
products; outstanding return material and price markdown authorizations; and the
extent to which units of new products with higher price points or unproven
genres remain in the retail channel. (See Note 1 to Financial Statements,
"Summary of Significant Accounting Policies, Revenue Recognition" and Item 6
"Management's Discussion and Analysis of Results of Operations and Financial
Condition".)

COMPETITION

The consumer entertainment PC game software industry is intensely competitive
and is continuing to consolidate. The market for affordable consumer
entertainment PC software games is especially competitive. We believe that the
principal competitive factors include content quality, which is a combination of
product features such as 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.


<PAGE>


We compete primarily with other PC game publishers. Our primary competitors are
very large companies with much greater financial, marketing, distribution and
technical resources than we have. Although there are a variety of consumer PC
software game publishers, based on our product lines and retail price points,
Microsoft, Electronic Arts, Atari, Activision, Disney, Vivendi, THQ, Cosmi,
Take-Two Interactive, and Interplay are our primary competitors. In addition, it
is very probable that an increasing number of large software and media companies
will intensify their focus on the consumer entertainment software market and, as
a result, could directly compete with us. We also face additional competition
for the consumer's entertainment purchases from other evolving gaming platforms,
such as game consoles, online game websites, hand held game devices, mobile
phones and personal digital assistants.

The market for product content from third-party PC software game developers is
also extremely competitive. We may not be successful in competing for the best
content to be included in our products if our competitors achieve better access
to distribution channels, have greater financial resources to pay for
third-party software development services or to structure acceptable royalty
agreements, or have developed a widely recognized brand more attractive to a
potential licensor. (See "We rely entirely on third party independent software
developers for our product content, and therefore our success depends on our
ability to secure commercially viable licensing agreements with these
developers" under "Factors Affecting Future Performance" on page 12).

PRODUCT DEVELOPMENT

We have continued developing a broad line of branded titles in the PC game
software category, in addition to recently beginning to build a new line of
productivity software that will provide consumers with easy-to-use PC products
at exceptional values. We primarily use marketplace sales data, which includes
reported industry sales and retail product sell-through results to consumers, to
help determine what products and product genres are achieving successful sales
results in the consumer PC software game and productivity categories. We
evaluate potential product ideas based on this market research in the subject
area, the type and demographics of the target consumer, and the existence and
characteristics of competitive products. We then attempt to obtain the licensed
rights to product content that we expect will meet these criteria while
complementing our branding strategy.

Our product development team meets regularly throughout each reporting period 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 this team valuable visibility into:

    o   Products currently being sold at the major retailers;
    o   Genres being covered by upcoming titles;
    o   New product availability for presenting and subsequent delivery to the
        major retailers during upcoming quarters based on retailer shelf reset
        dates; and
    o   Timing and scope of financial commitments relating to the content
        within future titles.

Our Manager of Product Development maintains relationships with our third-party
software developers to oversee the external development of our products, usually
from conception through completion, and controls the scope, design, content and
management of ongoing projects. We strive to publish new products that
incorporate all of the important functions and features of the leading
competitive products and to add innovative, helpful concepts and improvements to
achieve "better than" characteristics compared to directly competitive products.

Our internal development efforts focus primarily on top-level product design,
features, and quality. We supplement our internal product development resources
by combining existing technologies and externally developed programming and
content. We believe this results in a more efficient method of creating higher
quality products. Using this method, we maintain internal control over the
creative and market-driven aspects of product development while using external
resources to shorten product development time and lower product development
costs and risks. As competition for PC gaming and productivity software
increases, and as we bring more higher-priced titles to market, the likelihood
that we will pay increasingly large advance royalties will continue.


<PAGE>

Completed products are tested by our quality assurance personnel before they are
released for mass production by 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, under a manager's supervision,
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 still being 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 our jewel case and box
packaging. 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. We have continued to enhance our
packaging features through use of flap-fronts on our jewel case and box
products, affording us additional print space upon which to communicate our
products' features to consumers. We have also utilized unique cutouts in the
packaging and special embossing and foils, which further help differentiate our
products from those of our competitors.

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 already included in the
price we charge to our distributors and retailers. We believe that 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 only physical location, which is
situated in Langhorne, Pennsylvania. Our information management system supports
order entry, order processing, picking, billing, accounts receivable, accounts
payable, general ledger, financial reporting, inventory control, and mailing
list management. We coordinate with our major suppliers through our
comprehensive 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 contractors'
facilities shortly after we receive them. Based upon specific instructions from
our internal operations department, third-party contractors:

    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   Ship our products directly from one of their warehousing facilities to
        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 mid to late August and continuing through
the holiday selling season before culminating in January. We typically
experience our highest sales and best operating results during our second fiscal
quarter, which ends in December, compared to the quarter ending in June when we
usually experience our seasonal lows in sales and operating results. Our
financial results can also vary based on other factors, such as: the timing of
retailer decisions to reset their software department offerings; periodic
changes in consumer demand for our type of 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 with us for new titles in the future.

EMPLOYEES AND THIRD-PARTY PC SOFTWARE DEVELOPERS

As of June 30, 2004, we had 15 full-time and 2 part-time employees, of which 5
were employed in product development, 3 in sales, marketing and customer
support, and 9 in operations, finance and administration. In addition, at any
point in time, we regularly utilize approximately 20 third-party PC software
developers in connection with our product development activities. Of these
third-party PC software developers, we are substantially dependent on less than
five of them to develop the PC software titles that have become and continue to
be our best-selling products. 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.

We generally sell our published software titles under license agreements with
third-party PC software game developers, and in such case we do 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 licenses, the development of many of our
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.

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.

FACTORS AFFECTING FUTURE PERFORMANCE

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


<PAGE>

A significant part of our sales come from a limited number of customers, and if
we are unable to continue viable business relationships with key distributors
and retailers, this could materially harm our business. The majority of our
current sales are to major mass-market and PC software retailers in North
America, and the distributors serving such retailers, and therefore our business
relies on a concentrated group of large software distributors and retailers.
Atari is our primary North American distributor servicing the major
mass-merchant retailers in North America, such as Wal-Mart, Target, and Best
Buy, among others. During fiscal 2004, Wal-Mart accounted for about half of our
sales to Atari, while Best Buy and Target accounted for most of our remaining
business with Atari. Recently, Wal-Mart has indicated that it intends to
decrease the size of its jewel case PC game software department chain-wide,
which we expect will decrease the number of our titles that are currently sold
in Wal-Mart and has already negatively affected our net sales and operating
results for the first quarter of fiscal 2005.

Our net sales to Atari during the fiscal year ended June 30, 2004 were $5.5
million and represented 69% of our total net sales. We anticipate that net sales
to Atari may represent approximately 70% of our total net sales during fiscal
2005. Accordingly, we expect to continue depending upon a limited number of
significant distributors and retailers, and in particular Atari, for the
foreseeable future.

We do not have long-term agreements with the primary distributors of our
products (Atari, Take Two Interactive and E.B. Carlson), and the terms of our
business relationships with these distributors do not require them to purchase
our products. If these distributors were to stop distributing our products, our
sales would decline substantially and in a brief period of time. In addition, if
distributors of our products were only willing to distribute our products on
terms that were commercially unacceptable to us, our financial condition would
be materially harmed. We also might not be successful in distributing our
products directly to key retailers. Even if we were successful in selling our
products directly to these retailers, it might be on terms that are not
commercially acceptable. Our inability to negotiate commercially viable
distribution relationships with major software retailers and distributors, or
the loss of, or significant reduction in sales to, any of our key distributors
or retailers, would adversely affect our business, operating results and
financial condition.

We depend on the market acceptance of our products, and these products typically
have relatively short product life cycles. Our profitability is dependent on our
ability to publish successful new PC software titles. Consumer preferences for
entertainment PC software products are difficult to predict and few products
achieve sustained market acceptance. The market for consumer entertainment PC
software is also subject to shifts in consumer preferences and typical product
life cycles of no more than six to fifteen months. New products we introduce may
not achieve any significant degree of market acceptance, or the product life
cycles may not be long enough for us to recover advance royalties, development,
marketing and promotional costs. Also, if a product does not sell through to
consumers at a rate satisfactory to our retailers or distributors, we could be
forced to accept substantial product returns or be required to issue significant
price markdowns to maintain our relationships with these distributors and
retailers. We may also lose retail shelf space if our products do not sell
through to consumers at satisfactory rates to the retailers. Failure of new
products to achieve or sustain market acceptance would adversely impact our
business, operating results and financial condition.

We may need additional funds, and we may not be able to obtain such funding if
we need it. Our capital requirements are currently funded from the cash flow
generated from product sales and our $500,000 credit facility with Hudson United
Bank. This credit facility is subject to limitations based on the value of our
accounts receivable, and therefore working capital may not be available to us
when we need it. This credit facility expires on December 1, 2004. Our ability
to continue operations essentially requires us to generate sufficient cash flow
from operations to fund our business activities. In the past we have experienced
dramatic fluctuations in cash flows, so we cannot be sure we will be able to
continue achieving sufficient cash flows to fund our operations in the future.

If we are not able to achieve cash flow from operations at a level sufficient to
support our business activities, we may require additional funds. Our current
financial condition, small size, and our historical fluctuating financial
results could make it difficult for us to obtain additional financing, 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 long-term viability.


<PAGE>


If our major distributors or retailers are not able to or are unwilling to pay
us at all or within the normal course of business, this would materially harm
our financial condition. Distributors and retailers in the consumer
entertainment PC software industry and in mass-market retail channels can and
have experienced significant fluctuations in their businesses and some of these
companies have failed. If any significant retailer or distributor of our
products experienced financial difficulties, became insolvent, or went out of
business, this would significantly harm our business, operating results and
financial condition. Our sales are typically made on credit, with terms that
vary depending upon the customer and the nature of the product. We do not hold
collateral to secure payment. We maintain an allowance for bad debts for
anticipated uncollectible accounts receivable which we believe to be adequate.
The actual allowance required for any one customer's account or on all of the
accounts receivable in total, may ultimately be greater than our allowance for
bad debts at any point in time. If any of our major distributors or retail
customers failed to pay an outstanding receivable, particularly Atari, which as
of June 30, 2004 represented 83% of our total net accounts receivable balance,
our business, operating results and financial condition would be significantly
harmed.

Our distributors and retailers have the right to return our products and to take
price markdowns, which could reduce our net sales and results of operations.
Most of our customer relationships allow for product returns and price
markdowns. We establish allowances for future product returns and price
markdowns at the time revenue is recognized for sales to traditional software
retail customers and distributors servicing such retailers. These allowances are
based on historical product return and price markdown results with these types
of customers, product sell-through information and channel inventory reports
supplied by these retailers and the distributors that serve them, among other
factors. Our sales to these customers are reported net of product return and
price markdown provisions. Actual product returns and price markdowns could
exceed our allowances for these anticipated amounts, particularly for products
that have higher price points than our typical $9.99 jewel case products, or are
in genres that have not been proven to be successful for us, which would
negatively impact our future results of operations.

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

    o   Seasonality of consumer entertainment PC software purchases;
    o   Timing of major distributor and retailer purchase orders;
    o   Amount and timing of product returns and price markdowns; and
    o   Timing of our new product introductions, product enhancements and
        those of our competitors.

Products are usually shipped within days following the receipt of customer
orders so we typically operate with little or no backlog. Therefore, net sales
in any reporting period are usually dependent on orders booked, shipped and
received by our customers during each reporting period.


We are exposed to seasonality in the purchases of our products. The PC game
software industry is highly seasonal, with sales tending to be higher during the
quarter ending December 31st. This is due to increased demand for PC software
games during the back-to-school and holiday selling seasons primarily because
retailers experience greater store traffic during these periods. 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 - typically referred to
as merchandising "resets" - such as the year-end holiday buying season. Our
ability to maintain adequate liquidity to satisfy critical software developers
with required advance royalty payments and paying our manufacturing vendors
within acceptable timeframes are critical to avoiding any delays in having
product available for sale throughout the year, but especially during seasonal
peaks in demand. If we miss product deliveries during these key selling periods,
or if our products are not ready for shipment to meet these critical selling
periods, our net sales and operating results would be adversely affected.
Additionally, if our products do not adequately sell-in to our customers' retail
locations or sell-through to consumers at these retail locations during the
back-to-school or holiday selling seasons, our financial results for the entire
fiscal year would be adversely affected.

<PAGE>


The consumer entertainment PC software market is highly competitive and changes
rapidly. The market for consumer entertainment PC software is highly
competitive, particularly at the retail shelf level where a constantly
increasing number of software titles are competing for a limited amount of shelf
space, which has diminished over time. Retailers have a finite amount of shelf
space on which to display consumer entertainment PC software products. There is
intense competition among consumer entertainment PC software publishers for
retail shelf space and promotional support from retailers. The competition for
retail shelf space continues to intensify and results in greater leverage for
retailers and distributors in negotiating terms of sale, including price
discounts and product return policies. Also, our larger competitors may have
more leverage than we do to negotiate more and better-positioned shelf space
than we do. Our retail and distribution customers have no long-term obligations
to purchase our products, and may discontinue purchasing our products at any
time. If any of our large customers stopped buying our products or significantly
reduced their purchases, our operating results and financial condition would be
negatively impacted.

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

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

Our common stock has experienced low trading volumes and other risks on the OTC
Bulletin Board. Our shares of Common Stock are currently traded on the OTC
Bulletin Board under the symbol EGAM. Many stocks traded on the OTC Bulletin
Board have experienced extreme price and trading volume fluctuations. These
fluctuations are often unrelated or disproportionate to the operating
performance of individual companies. Our stock price may be adversely affected
by such fluctuations, regardless of our operating results. Additionally, many
common stocks traded on the OTC Bulletin Board are thinly traded, such as our
common stock, which can make it difficult to sell our stock. If our stock is not
eligible to be traded on the OTC Bulletin Board, our stock will then be traded
on the Pink Sheets, which may have even less trading volume potential and more
price fluctuations than the OTC Bulletin Board.

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

<PAGE>


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 trade names and other marketing materials. We also hold trademark
rights in our corporate logo, and the names of the products owned or licensed by
us. Our success depends in part on our ability to protect our proprietary rights
to the trademarks, trade names and content used in our top-selling products. We
rely on a combination of copyrights, trademarks, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary rights. These
initiatives to protect our proprietary rights require us to use internal
resources as well as outside legal counsel. 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. Also, in selling our products, we rely
on "click-through" licenses that are not signed by licensees and, therefore, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign countries do not protect our proprietary rights, as do the laws
of the United States. Our inability to sufficiently protect our intellectual
property rights would have an adverse effect on our business and operating
results and on the overall value of our company.

Policing unauthorized use of an easily duplicated and broadly disseminated
product such as computer software is very difficult. Software piracy is expected
to be a persistent problem for the software industry for the foreseeable future.
Software piracy is a much greater problem in certain international markets. A
significant amount of unauthorized copying of our products would adversely
affect our business, operating results and financial condition.

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 on the
intellectual property rights of others. Combinations of content acquired through
past or future acquisitions and content licensed from third-party software
developers may give rise to claims of infringement. In past years, we have
incurred significant defense costs and utilized internal resources in defending
trademark and copyright claims and lawsuits. Other third parties may initiate
infringement actions against us in the future. Any future claims could result in
substantial costs to us, and diversion of our limited resources. If we are found
to be infringing on 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. Our success depends to a
significant degree on the continued efforts of our key management, marketing,
sales, product development and operational personnel. The loss of one or more
key employees could adversely affect our operating results. We also believe our
future success will depend in large part on our ability to attract and retain
highly skilled management, technical, marketing, sales, product development and
operational personnel. Competition for such personnel can be intense, and, due
to our limited resources and size, we may not be successful in attracting and
retaining such personnel.

We may experience unique risks with our international revenues and distribution
efforts. International net revenues, primarily consisting of licensing revenues,
represented 4% of our net sales for the fiscal year ended June 30, 2004. We
anticipate that in fiscal 2005 our international business will continue to be
transacted primarily through third-party licensees, which is subject to some
risks that our domestic business is not, including: varying regulatory
requirements; difficulties in managing foreign distributors; potentially adverse
tax consequences; and difficulties in collecting delinquent accounts receivable.
Additionally, because our international business is concentrated among a small
number of third-party licensees, the business failure of any one of these
licensees, and the resulting inability for us to collect the related outstanding
licensing receivable, could have a material adverse effect on our financial
condition.

<PAGE>


Item 2.       Properties

As of June 30, 2004, we leased 5,000 square feet of office space in Langhorne,
Pennsylvania under an operating lease scheduled to expire on September 30, 2007.
We believe that our current operating facility will be adequate for our
anticipated needs through at least June 30, 2005. Rent expense for our operating
facility was $58,000 and $56,000 for the years ended June 30, 2004 and 2003,
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 the Registrant's Common Equity and Related
              Stockholder Matters

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 closing bid
prices shown below are as reported by the OTCBB. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

The following are the range of high and low bid prices for the years ended
June 30, 2004 and 2003, as reported by the OTCBB:


                                                High         Low
      Fiscal Year Ended June 30, 2004          ------       ------
      -------------------------------
           First Quarter                       $ 0.75       $ 0.29
           Second Quarter                      $ 0.94       $ 0.59
           Third Quarter                       $ 1.47       $ 1.04
           Fourth Quarter                      $ 1.70       $ 1.29
      Fiscal Year Ended June 30, 2003
      -------------------------------
           First Quarter                       $ 0.39       $ 0.06
           Second Quarter                      $ 0.37       $ 0.16
           Third Quarter                       $ 0.31       $ 0.18
           Fourth Quarter                      $ 0.43       $ 0.20

As of June 30, 2004, we had approximately 158 shareholders of record. We have
not paid any dividends on our common stock. 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.

Equity Compensation Plan Information
------------------------------------
The following table summarizes, as of June 30, 2004, outstanding options to
acquire shares of the Company's Common Stock that may be issued under the
Company's 1995 Amended and Restated Stock Option Plan, as well as options issued
to the Company's outside directors, the issuance of which was not approved by
the Company's shareholders.

<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                    2,590,000                   $0.79                          207,918

Equity compensation
plans not approved by
security holders                      - 0 -                      n/a                            - 0 -

--------------------------- -------------------------- ------------------------- ------------------------------------
Total                               2,590,000                   $0.79                          207,918
                                    =========                   =====                          =======
</TABLE>

<PAGE>


Item 6.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations

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 position, are forward looking. We
use the words "believe", "expect", "anticipate", "intend", "will", "should",
"may" and similar expressions to identify forward-looking statements. These
forward-looking statements are subject to business volatility, economic risk,
and world events, which are inherently uncertain and difficult to predict. Our
actual results could differ materially from management's expectations due to
such risks. We will not necessarily update information if any forward-looking
statement later turns out to be inaccurate. In particular, these forward-looking
statements include, among others, statements about:

        -   our plans not to publish products for any other game platforms,
            such as consoles, hand-held game devices, mobile phones and personal
            digital assistants;
        -   our anticipated net sales, accounts receivable and cash receipts
            related to Atari during fiscal 2005;
        -   our anticipated product returns and price markdowns for fiscal 2005;
        -   our plans during fiscal 2005 to increase product distribution at
            retailers that charge sales incentive and promotional fees, and the
            corresponding negative impact on our net sales, gross profit and
            gross profit margin;
        -   the extent that our gross profit margin will be negatively impacted
            by higher royalty rates associated with future titles and pricing
            pressure;
        -   our plans to publish more personal productivity software titles and
            game software in different genres than we have historically
            published;
        -   our plans to launch a new online game website, which is intended to
            increase the amount and profitability of our Internet sales and
            generate advertising revenues;
        -   our belief that the significant judgments and estimates we make
            regarding our revenue recognition and inventory valuation could
            materially affect the amount of revenue we recognize, the cost of
            sales we expense and the value of our inventory;
        -   our expectation that, if our product distribution expands in
            existing markets or shifts into new markets, downward pricing
            pressures may continue to negatively impact our gross profit
            margin;
        -   the possibility that our future products will not achieve as
            strong sell-through results as some of our top-selling products in
            fiscal 2004, which could negatively impact our fiscal 2005
            financial results and erode our market share;
        -   our expectation that our licensing revenues will remains flat or
            grow moderately during fiscal 2005 and continue representing
            approximately 5% of net sales;
        -   our expectation that Internet sales will continue to represent
            about 4% of our net sales;
        -   our plans to attempt to expand our distribution of select higher
            price point products during fiscal 2005;
        -   our expectation that product development costs will continue to
            increase at a modest rate during fiscal 2005;
        -   our belief that during fiscal 2005, our provision for income taxes
            will continue to increase;
        -   our belief that the increase in our accounts receivable balance and
            slowing in customer receivable payments during fiscal 2004 does not
            represent a reduction in the quality of our customer balances or
            change in credit policy;
        -   our expectation that our inventory purchasing costs will continue
            to rise at a modest rate if our distribution to new and existing
            customers increases;
        -   our anticipation that we will continue to pay more advanced royalty
            payments and increased royalty rates in the future;
        -   our expectation that we will continue leveraging any excess cash by
            making accelerated vendor payments in exchange for cash discounts;
        -   our plans to continue upgrading our computer network during
            fiscal 2005, but at a decreased rate compared to fiscal 2004;
        -   our expectation that we will not have any financing activities
            during fiscal 2005 except receiving cash proceeds from option
            exercises;
<PAGE>

        -   our expectation that we will meet the stockholder's equity
            requirement of the American Stock Exchange (AMEX) by the first
            half of fiscal 2005 and our plan to apply for listing to the AMEX
            or an equivalent exchange as soon as practicable after meeting the
            listing standards;
        -   our belief that we do not have any Variable Interest Entities that
            would require disclosure or consolidation under FIN No. 46; and
        -   our expectation that the adoption of EITF 00-21 did not have any
            impact on our financial statements.

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 results for our
            products at retail stores, particularly at North American
            mass-merchant retailers where consumer entertainment PC software
            has traditionally been sold;
        -   the continued successful business relationship between us and Atari,
            as our largest customer and our distributor to Wal-Mart, Target,
            and Best Buy, among others;
        -   the amount of shelf space Wal-Mart, Target and Best Buy allocate to
            affordable, jewel case PC game software;
        -   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 successful sell-through to consumers of our new higher price
            point products, in all retail channels where they are sold;
        -   the continued success of our current business model of selling,
            primarily through third-party distributors, to a concentrated
            number of select mass-merchant and major retailers;
        -   our ability to control the manufacturing and distribution costs of
            our software titles;
        -   the success of our distribution strategy, including the ability to
            continue to increase the distribution of our products into key
            North American mass-merchant retailers and to enter into new
            distribution and direct sales relationships on commercially
            acceptable terms;
        -   the allocation of shelf space (retail facings) for our products in
            major retail chain stores;
        -   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;
        -   our ability to collect outstanding accounts receivable and
            establish an adequate allowance for bad debts;
        -   the continued increase in the number of PCs in homes in North
            America and worldwide;
        -   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;
        -   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.


<PAGE>


Overview
--------
The following overview is a summary of our operating results as well as some
identified trends in our business. We believe that an understanding of these
trends is important in order to understand our results for fiscal 2004, as well
as our future results. This summary 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 of Financial Condition and Results of
Operations", "Factors Affecting Future Performance" under "Business" or the
financial statements and the related notes.

About eGames
------------
We publish, market and sell consumer entertainment PC software games to
consumers seeking a broad range of high-quality, affordably priced PC games,
either on CDs or online at www.egames.com. We focus on publishing software games
for the PC platform only, and we do not currently plan to publish products for
any other game platform, such as console devices, hand held game devices, mobile
phones and personal digital assistants. In North America, our PC games are
distributed primarily through third-party software distributors who service the
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 promote the eGames(TM) and Home Office Help(TM) brands in order to generate
customer loyalty, encourage repeat purchases and differentiate eGames software
products to retailers and consumers. We also publish and market RealAge(R) Games
& Skills, a collection of PC software activities and games designed to help
build and maintain mental sharpness.

Summary of Fiscal 2004 Financial Results:
-----------------------------------------
Net sales increased by $827,000, or 11%, to $8,038,000 for the year ended June
30, 2004, compared to $7,211,000 for the prior fiscal year. Contributing to the
$827,000 increase in net sales was a $1,555,000 increase in sales of our
products through software distributors to North American mass-merchant and major
retailers, warehouse clubs and office superstores. Partially offsetting this
increase in net sales was a $397,000 decrease in direct sales to software
retailers and a $273,000 decrease in inventory liquidation sales.

Operating income increased 21% to $1,822,000 for the year ended June 30, 2004,
compared to $1,507,000 for fiscal 2003. Net income was $1,740,000, or $0.16 per
diluted share, for the year ended June 30, 2004, compared to $1,592,000, or
$0.16 per diluted share, for the prior year. The growth in earnings resulted
primarily from increased net sales, which was partially offset by a slight
decrease in our gross profit margin and a moderate increase in operating
expenses.

Cash provided by operating activities for fiscal 2004 was $805,000 compared to
$1,278,000 for fiscal 2003. This decrease resulted from: an increase in net
accounts receivable due to business growth and a slowing in customer payments;
an increase in net inventory due to higher product costs; higher advanced
royalties paid to software developers for new product content; and a decrease in
accounts payable resulting from leveraging our excess cash resources to achieve
cash discounts from our key vendors.

Primary Trends in our Business:
-------------------------------
Dependence on One Large Software Distributor - Atari. We continue to have a
highly concentrated customer base of a few large software distributors and
retailers. Atari is our primary software distributor serving the mass-merchant
and major retailers in North America, such as Wal-Mart, Target, and Best Buy,
among others. During fiscal 2004, Wal-Mart accounted for about half of our
business with Atari, while Best Buy and Target accounted for most of our
remaining sales to Atari. During fiscal 2004, we recognized net sales to Atari
of $5.5 million, which represented 69% of our total net sales, and as of June
30, 2004, Atari represented 83% of our total net accounts receivable.
Additionally, during fiscal 2004, cash receipts from Atari amounted to $5.1
million, which represented 68% of our total customer cash receipts collected
during that fiscal year.


<PAGE>


We anticipate that net sales to Atari may represent approximately 70% of our
total net sales during fiscal 2005 and that throughout fiscal 2005 the majority
of our accounts receivable and related cash receipts will continue to be
attributable to Atari. Our financial condition and ability to continue as a
going concern would be significantly affected in the event that we would lose
our distribution capability through Atari, if the amount of net sales to Atari
were to substantially decrease, or if they would not be able or willing to make
timely receivable payments in the normal course of business.

The PC Game Software Market is Shrinking. As the competition for overall
consumer entertainment has increased, and with the proliferation of game-playing
alternatives, from game consoles and cell phones to online and downloadable
games, the market for PC game software sales at retail has been steadily
decreasing during the past two years. Even though eGames has experienced
year-over-year increases in sales into the PC game retail channels and increased
product sell-through to consumers, we are aware of the fact that the PC game
market, and in particular the affordable jewel case PC game market, is not
growing and is in fact decreasing in size. An indication of this trend are
recent plans communicated by Wal-Mart that it intends to decrease the size of
its jewel case PC game software department chain-wide, which we expect will
decrease the number of our titles that are currently sold in Wal-Mart and has
already negatively affected our net sales and operating results for the first
quarter of fiscal 2005. We have begun exploring opportunities within the
productivity software market, which continues to be a robust category, as well
as different PC game genres that have recently performed well. In addition to
these strategies, we are launching an online game website, with free online game
play, chat rooms and potentially skill-based games and contests, in order to tap
into potential revenue streams from the growing online game market. We cannot
predict whether these new opportunities and strategies will be effective in
increasing net sales and offsetting the decreases in net sales caused by
anticipated reductions in the affordable PC game software market.

Product Returns and Price Markdowns. During the year ended June 30, 2004, our
provision for product returns and price markdowns for customers that have
traditionally sold PC software increased to 18% of related gross sales, compared
to 13% of related gross sales for the prior fiscal year. Based on our product
packaging and pricing strategies, we anticipate our provision for product
returns and price markdowns could range from 16% to 18% of related gross sales
for fiscal 2005.

Sales Incentives and Promotional Costs. During fiscal 2004, these types of fees
(recognized as reductions to gross sales) continued to increase, and resulted
from our increased product sales to retailers and distributors who require these
fees in order to maintain retail shelf space. During fiscal 2005, we plan to
increase our product distribution at these retailers and through these
distributors that charge such fees, and so we expect these types of costs to
continue having a negative impact on our net sales, gross profit and gross
profit margin.

Gross Profit Margin. For fiscal 2004, our gross profit margin declined by 1% to
59% due primarily to small increases in both product costs and the provision for
inventory obsolescence, in addition to the unfavorable impact from an increase
in sales incentives and promotional costs discussed above. During fiscal 2005,
we also expect our gross profit margin to be negatively impacted by higher
royalty rates associated with future titles, combined with continued pricing
pressures from our distributors and retailers. In addition, during fiscal 2005,
our gross profit margin may range from 58% to 61%, based on how successful we
are in offsetting these negative margin impacts with product cost reductions and
selective releases of higher priced titles.

Critical Accounting Policies and Estimates
------------------------------------------
Our significant accounting policies and methods used in the preparation of the
Financial Statements are discussed in Note 1 of the Notes to Financial
Statements. We believe our revenue recognition and inventory valuation
accounting policies require us to make significant judgments and estimates that
could materially affect the amount of revenue we recognize, the cost of sales we
expense, and the value of our inventory. 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, income taxes, contingencies and litigation risks. We base our
estimates on historical experience and on various other factors and assumptions
that we believe are reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.


<PAGE>

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

We distribute the majority of our products through third-party software
distributors to mass-merchant and major retailers and directly to certain PC
software retailers, all of which have traditionally sold consumer entertainment
PC software products. The distribution of our products is governed by purchase
orders, distribution agreements or direct sale agreements, most of which allow
for product returns and price markdowns. For product shipments to these software
distributors or retailers, we record a provision for product returns and price
markdowns as a reduction of gross sales at the time the title of our product
passes to these distributors or retailers.

Our provision for anticipated product returns and price markdowns is based upon
many factors, including: our analysis of historical product return and price
markdown results; current product sell-through results at retail store
locations; current field inventory quantities at distributors' warehouses and at
retail store locations; the length of time that products have been out at retail
along with their estimated remaining retail life; the introduction of new and/or
competing software products that could negatively impact the sales of one or
more of our current products; outstanding return material and price markdown
authorizations; and the extent to which units of new products with higher price
points or unproven genres remain in the retail channel. The adequacy of our
allowance for product returns and price markdowns is continually reviewed
throughout each reporting period and any necessary adjustment to this allowance
is reflected within the current period's provision. At the end of each reporting
period, the allowance for product returns and price markdowns is reflected as a
reduction to our gross accounts receivable balance.

Significant management judgments and estimates must be made and used in order to
determine how much sales revenue can be recognized in any reporting period.
Material differences may result in the amount and timing of our revenue for any
period if management's judgments or estimates for product returns or price
markdowns prove to be insufficient or excessive compared to actual results.
These differences, if material, would significantly affect our operating results
and financial condition in any given period.

Inventory Valuation

Our accounting policy for inventory valuation requires management to make
estimates and assumptions about the recoverability of the carrying value of
inventory that affect the reported value of inventory at the end of any
reporting period and cost of sales during any reporting period. Our inventory
could be valued differently at the close of any reporting period and the amount
recorded as cost of sales during any reporting period could differ, if
management's judgments or estimates of provisions for the potential impairment
of inventory value are insufficient or excessive when compared to actual
results. These differences, if material, would significantly affect our
operating results and financial condition.

We are exposed to inventory obsolescence because of our products' relatively
short life cycles, which average six to fifteen months. If our products do not
sell-through to consumers during their life cycles, or if we, or our
competitors, introduce new products with capabilities or technologies that can
replace or shorten the life cycles of our existing products, then we may need to
write-down the value of such inventory below its previous carrying value.
Additionally, from time to time, we have been subject to litigation or
threatened litigation involving product content, which has caused certain
products to no longer be saleable. License agreements with third-party software
developers for product content may also expire before such inventory has been
sold. Although we attempt to accurately match production requirements of our
products to forecasted consumer demand, we may from time to time produce an
amount of inventory of a product that exceeds the eventual consumer demand for
such product. When this occurs, we attempt to liquidate these excess quantities
of remaining inventory, frequently at closeout prices below their original
manufactured costs. If we cannot liquidate such inventory, or if we are unable
to sell any remaining units due to legal or other reasons, we would then write
down the remaining inventory value to zero. The adequacy of our allowance for
inventory obsolescence is reviewed throughout each reporting period, and any
adjustments are reflected in the current period's inventory obsolescence
provision.

<PAGE>


Results of Operations
---------------------

The following discussion should be read together with our Financial Statements
and Notes beginning on page 31.

Year Ended June 30, 2004 Compared to the Year Ended June 30, 2003

Net Sales
---------
Net sales increased by $827,000, or 11%, to $8,038,000 for the year ended June
30, 2004, compared to $7,211,000 for the prior fiscal year. Contributing to the
$827,000 increase in net sales was a $1,555,000 increase in sales of eGames
software titles to software distributors who serve North American mass-merchant
and major retailers, warehouse clubs and office superstores. Partially
offsetting this increase in net sales was a $397,000 decrease in direct sales to
software retailers and a $273,000 decrease in inventory liquidation sales.

The following table represents our net sales by distribution channel for the
years ended June 30, 2004 and 2003:

<TABLE>
<CAPTION>
                            Net Sales by Distribution Channel
                            ---------------------------------
                                       Years ended
                                         June 30,
                         ----------------------------------------
                                                                     Increase      %
Distribution Channel         2004        %        2003        %     (Decrease)   Change
------------------------ -------------------- -------------------  ----------------------
<S>                      <C>            <C>   <C>            <C>   <C>              <C>
Software Distributors    $ 6,522,000    81%   $ 4,967,000    69%   $ 1,555,000      31%
Software Retailers           660,000     8%     1,057,000    15%      (397,000)    (38%)
Licensing                    425,000     5%       429,000     6%        (4,000)     (1%)
Internet                     246,000     3%       199,000     3%        47,000      24%
Inventory Liquidators        166,000     2%       439,000     6%      (273,000)    (62%)
Other                         19,000     1%       120,000     1%      (101,000)    (84%)
------------------------ -------------------- -------------------  ----------------------
Total Net Sales          $ 8,038,000   100%   $ 7,211,000   100%   $   827,000      11%
                         ===========   ====   ===========   ====   ===========      ===

</TABLE>
Net sales for the year ended June 30, 2004 increased by 11%, compared to the
year ended June 30, 2003. The overall increase in net sales was primarily driven
by increased distribution of our products to many of the larger North American
mass-merchant and major retailers (such as Wal-Mart, Target and Best Buy)
through our largest software distributor, Atari. In addition, net sales
benefited from new distribution of our products to major office superstores and
warehouse clubs, such as Office Max, Staples, Circuit City, Sam's Club and BJ's,
primarily through other software distributors, such as Take Two Interactive
("Take Two") and E.B. Carlson.

As we have expanded our product distribution into more retail channels, our net
sales have been negatively impacted by downward pricing pressures from the
increasingly competitive retail environment. Although some of this increased
product distribution has negatively affected our gross profit margin, as a
percentage of net sales, it has contributed favorably to the overall growth in
our overall gross profit and operating income. We anticipate that if our product
distribution expands further into new and existing retail markets, downward
pricing pressures may continue to negatively impact our gross profit margin.

During fiscal 2004, distribution of our products increased to many retailers
that have historically been successful in merchandising consumer entertainment
PC software as a result of our products' strong sell through rates to consumers
at these retailers' stores. An example of consumers' acceptance of our products
at retail has been the strong performance noted in weekly NPD Techworld ("NPD")
rankings based on units sold at retail during fiscal 2004. For example, based on
reports by NPD, eGames' Drop! and 251 Games Collectors Edition both ranked
within the Top Ten PC games sold at retail for several weeks during fiscal 2004.
In addition, we consistently had several titles ranked within the Top Fifty PC
games sold at retail throughout fiscal 2004. In future periods, if our products
do not achieve similarly strong sell-through results, we may not achieve
comparable financial results for those periods. This could cause our stock price
to drop and could also leave room for competitors to take retail shelf space
that we could otherwise have retained and erode our market share and revenue
potential.


<PAGE>

Retailers that have historically been successful in merchandising PC game
software typically designate the distributor that they want to use for the
distribution of our products to their stores, and in certain instances retailers
have decided that we should distribute our software products directly to them.
Distribution to these retailers is a competitive business within itself and
typically there are several distributors who distribute PC software products to
these leading national retail chains. Our goal is to increase the distribution
of our products offered at retail locations, by whatever means - third party
distribution or direct shipments to retailers - that will provide us with
sufficient profitability and cash flows, as well as continued access to these
retail markets.

Software Distributors

For the year ended June 30, 2004, net sales to software distributors amounted to
$6,522,000 and represented an increase of $1,555,000 or 31% compared to the year
ended June 30, 2003. For the year ended June 30, 2004, net sales to software
distributors increased to 81% of net sales, compared to 69% of net sales for the
year ended June 30, 2003.

For the year ended June 30, 2004, the $1,555,000 increase in net sales to
software distributors was predominantly driven by a $1,138,000 increase in net
sales to Atari, a $301,000 increase in net sales to Take Two, and a $201,000
increase in net sales to EB Carlson. Strong consumer sell-through results for
our products during fiscal 2004 and increased product distribution to more
retail locations were the primary reasons for the overall net sales increases
through this distribution channel.

Dependence on One Large Software Distributor - Atari

Atari is our primary software distributor serving the mass-merchants and major
retailers in North America, such as Wal-Mart, Target, and Best Buy, among
others. During the year ended June 30, 2004, Atari accounted for $5,508,000, or
69%, of our net sales, compared to the year ended June 30, 2003 when Atari
accounted for $4,370,000, or 61%, of our net sales.

During fiscal 2004, we continued to expand our product distribution through
Atari to the major North American mass-merchant retailers by increasing the
number of our titles carried by these retailers and the number of stores within
these retailers' store chains that offer our titles to consumers. Our financial
condition and ability to continue as a going concern would be significantly
affected in the event that we would lose our distribution capability through
Atari, if the amount of net sales to Atari were to substantially decrease, or if
they would not be able or willing to make timely receivable payments in the
normal course of business. The distribution of PC software to these retailers is
a competitive business within itself, and there are several alternative
distributors that could potentially distribute our products to these retailers
if, for example, Atari chose to discontinue distributing our titles, Atari was
not able or willing to make timely receivable payments in the normal course of
business or if any of these retailers decided to discontinue their relationship
with Atari. We can provide no assurance, however, that we would be able to
secure agreements with such alternative distributors on commercially reasonable
terms or at all, or if these distributors would be acceptable to these
retailers.

Software Retailers

For the year ended June 30, 2004, net sales made directly to software retailers
were $660,000, and represented a $397,000 decrease compared to fiscal 2003. For
the year ended June 30, 2004, net sales directly to software retailers decreased
to 8% of net sales, compared to 15% of net sales for the year ended June 30,
2003.

The $397,000 decrease in net sales directly to software retailers for the year
ended June 30, 2004 resulted from our decision to stop directly distributing PC
software titles to certain retailers, such as Office Depot, and transitioning
certain direct sales relationships to one of our software distributors under
terms more acceptable to us. In addition, during fiscal 2004 we decreased the
number of our PC software titles offered at various retailers, such as CompUSA,
EB Games and GameStop, to a smaller number of more productive titles that were
more representative of the consumer demand for our titles at these retailers'
stores. As a result of these changes, during the year ended June 30, 2004, we
recognized the following net sales decreases compared to the year ended June 30,
2003: Office Depot - $124,000; EB Games - $124,000; CompUSA - $88,000; and
GameStop - $55,000.


<PAGE>


Licensing

During fiscal 2004, licensing revenues were generated primarily from sales made
by our international software distributors under a series of licensing
agreements covering various territories outside of North America, with the
majority of our licensing revenues originating from Germany, The United Kingdom,
Australia and Brazil. For the year ended June 30, 2004, licensing revenues
amounted to $425,000 and represented 5% of net sales, compared to the year ended
June 30, 2003, when licensing revenues totaled $429,000 and amounted to 6% of
net sales.

The $4,000 decrease in licensing revenues for the year ended June 30, 2004 was
caused primarily by a decrease in licensing revenues generated in the United
States, that was partially offset by an increase in licensing revenues earned in
Australia. Due to the potential for continued weakness in consumer demand for PC
software games and downward pricing pressures within international markets for
PC software games, we anticipate licensing revenues to either remain flat or
grow moderately during fiscal 2005 and continue representing approximately 5% of
net sales.

Internet

Internet sales were $246,000 and $199,000 for the years ended June 30, 2004 and
2003, respectively, and represented 3% of net sales during both fiscal years.
The $47,000 increase in Internet sales during fiscal 2004 represented a 24% rise
from the prior fiscal year, and was generated from our decision during fiscal
2003 to manage our Internet sales internally in order to more effectively
respond to the various growth opportunities for this part of our business.
During fiscal 2005, we anticipate that Internet sales will continue to represent
about 4% of our net sales.

In October 2004, we will be launching a new online games website,
www.egamesonline.com, which is intended to complement our existing e-commerce
website and increase the profitability of our overall Internet sales, through
additional advertising revenues, and downloadable demos that we anticipate will
generate incremental sales on the main eGames website by cross-promoting the
full game versions of those eGames titles.

Inventory Liquidators

For the years ended June 30, 2004 and 2003, net sales to inventory liquidators
were $166,000 and $439,000, respectively, and represented 2% and 6%,
respectively, of net sales during these fiscal years.

Net sales to inventory liquidators consist of sales of residual inventory titles
that have been discontinued at retail because these titles have reached the end
of their product lifecycles. As retailers 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 remaining
quantities of these titles still in our warehouse. Inventory liquidation sales
are usually made at discount prices, below a product's previous wholesale price
point, and are usually sold to these inventory liquidators with no right of
product return or price markdown.

Other Sales

For the years ended June 30, 2004 and 2003, other sales amounted to $19,000 and
$120,000, respectively, or 1% of net sales for both fiscal years. This 84%
decrease in other sales resulted from our decision to stop distributing software
titles to retailers that have not traditionally sold PC software successfully
(such as food and drug retailers).

Product Returns and Price Markdowns

During the years ended June 30, 2004 and 2003, our provisions for product
returns and price markdowns for customers that have traditionally sold consumer
entertainment PC software products were $1,727,000 and $1,016,000, respectively,
or 18% and 13%, respectively, of related gross sales.

<PAGE>


This $711,000 increase in the provisions for product returns and price markdowns
resulted primarily from the negative impact of underperforming promotional box
titles (at the higher $19.99 retail price point) that were distributed during
the fiscal 2004 holiday selling season, combined with a proportionate increase
in these provisions that resulted from the $1.9 million rise in gross sales
experienced in fiscal 2004 compared to the prior fiscal year. Higher priced
titles represent a greater risk of price markdown or product return exposure if
they do not sell through to consumers at rates acceptable to retailers.

Based upon historical results and current trends in our product sell-through
rates to consumers, combined with continued inventory controls being maintained
by retailers and distributors, we anticipate that our overall fiscal 2005
provisions for product returns and price markdowns could range from 16% to 18%
of related gross sales. Among other things, a factor that we will continue to
closely evaluate in determining our provisions for anticipated product returns
and price markdowns will be the consumer sell-through results of any higher
price point products distributed in the future. We expect to continue attempting
to expand our distribution of select higher price point products during fiscal
2005, but at a cautious rate. The sale of such products, with a targeted retail
price point of $19.99, continues to represent a departure from our typical more
affordable product offering to the casual gamer that has historically been
retail priced at about $9.99. Accordingly, these higher priced titles will
continue to represent a greater risk of higher provisions for product returns or
price markdowns if they do not sell through to consumers at rates satisfactory
to retailers.

Sales Incentives and Promotional Costs

We incur sales incentives and promotional costs from distributors and retailers,
such as rebates and slotting fees, and recognize them as reductions to gross
sales. During the years ended June 30, 2004 and 2003, our sales incentives and
promotional costs were $518,000 and $200,000, respectively, or 5% and 2%,
respectively, of gross sales.

These fees continued to increase during fiscal 2004 compared to fiscal 2003
because of increased sales of our software titles to retailers and distributors
who make these fees a requirement for gaining and then maintaining retail shelf
space. These fees are recognized as price reductions to gross sales. Because we
currently plan to increase our distribution at the retailers and through the
distributors that charge such fees, we expect these types of costs to continue
having a negative affect on our net sales, gross profit and gross profit margin.

Cost of Sales
-------------
Cost of sales consists of actual product costs, royalty costs incurred with
third-party software developers related to licensing product content, freight
costs, inventory obsolescence provisions and other costs.

The following table represents our cost of sales for the years ended June 30,
2004 and 2003:

  June 30,      % of            June 30,      % of           Increase     %
    2004      net sales           2003      net sales       (Decrease)  Change
-------------------------------------------------------------------------------
$ 3,312,000      41%          $ 2,904,000      40%          $ 408,000     14%

For the year ended June 30, 2004, cost of sales, as a percentage of net sales,
increased to 41% from 40% for the year ended June 30, 2003, and was primarily
due to 1% increases in both product costs and the provision for inventory
obsolescence, that were partially offset by a 1% decrease in other costs of
sales. Additionally, all categories of cost of sales, as a percentage of net
sales, have been unfavorably impacted by the increase in sales incentives and
promotional costs (reflected as selling price adjustments) charged by retailers
and distributors in order to maintain retail distribution for our titles.

The 1% increase in product costs, as a percentage of net sales, was caused by:

    o   Increased sales of lower margin box titles containing the additional
        costs of multiple CDs; and
    o   Additional costs associated with the current year's requirement of
        certain retailers to have security sensor tags included in software
        packages.
<PAGE>

These product cost increases were partially offset by a decrease in product
costs from the fiscal 2004 decline in lower margin inventory liquidation sales.

The 1% increase in the provision for inventory obsolescence was mainly due to a
rise in end-of-lifecycle products being revalued below their previous carrying
costs because of declining market values for those titles, combined with a rise
in un-saleable product returns coming back from our software distributors and
being scrapped.

During fiscal 2005, we expect our gross profit margin to be negatively impacted
by higher royalty rates associated with most of our future titles, combined with
continued pricing pressures from our distributors and retailers as we attempt to
maintain or increase our share of retail shelf space. We hope to offset these
factors negatively impacting our gross profit margin by continuing to search for
product cost reductions and selectively attempting to release higher priced
titles.

Operating Expenses
------------------
Product Development expenses consist of personnel costs related to product
management, quality assurance testing and packaging design, along with outside
services for product ratings and website design.

The following table represents our product development expenses for the years
ended June 30, 2004 and 2003:

  June 30,     % of             June 30,    % of            Increase     %
    2004     net sales            2003    net sales        (Decrease)  Change
------------------------------------------------------------------------------
 $ 510,000      6%             $ 440,000     6%             $ 70,000    16%

For the year ended June 30, 2004, product development expenses increased by
$70,000, or 16%, to $510,000, compared to the year ended June 30, 2003. This
expense increase was driven by higher personnel-related costs traceable to
annual compensation increases for existing employees, along with increased costs
incurred to upgrade our website's functionality and higher fees to obtain
industry ratings for our software titles. During fiscal 2005, we expect these
types of costs to continue increasing but at a modest rate due to anticipated
salary increases and higher industry rating fees.

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

The following table represents our selling, general and administrative expenses
for the years ended June 30, 2004 and 2003:

  June 30,     % of             June 30,    % of            Increase      %
    2004     net sales            2003    net sales        (Decrease)   Change
-------------------------------------------------------------------------------
$ 2,394,000     30%           $ 2,360,000    33%            $ 34,000      1%

For year ended June 30, 2004, selling, general and administrative expenses
increased by $34,000, or 1%, to $2,394,000 compared to the year ended June 30,
2003. This $34,000 expense increase was caused by increases of:

    o   $62,000 in public relations costs associated with our new title RealAge
        Games & Skills;
    o   $35,000 in bad debt expense due to our prior year's recovery of a
        previously written off receivable; and
    o   $23,000 in higher personnel-related costs traceable to annual
        compensation increases for existing employees.


<PAGE>


These expense increases were partially offset by decreases of:

    o   $35,000 in stock compensation expense due to the vesting of employee
        stock options and non-recurring common stock warrant expense;
    o   $33,000 in professional service fees related to the non-recurrence of
        various matters including the prior year's income tax compliance
        efforts associated with a previously owned foreign subsidiary and
        consulting services to support our EDI system; and
    o   $19,000 in depreciation expense related to expiring assets.

Operating Income
----------------
The following table represents our operating income for the years ended June 30,
2004 and 2003:

  June 30,     % of             June 30,     % of           Increase     %
    2004     net sales            2003     net sales       (Decrease)  Change
------------------------------------------------------------------------------
$ 1,822,000     23%           $ 1,507,000     21%          $ 315,000     21%

For the year ended June 30, 2004, operating income increased by $315,000, or
21%, compared to the year ended June 30, 2003 due to a $419,000 increase in
gross profit, which was partially offset by a $104,000 increase in operating
expenses.

Interest Expense, net
---------------------
The following table represents our net interest expense for the years ended June
30, 2004 and 2003:

  June 30,    % of             June 30,    % of             Increase     %
    2004    net sales            2003    net sales         (Decrease)  Change
------------------------------------------------------------------------------
    n/m        n/m            $ 36,000       1%            ($ 36,000)  (100%)

For the year ended June 30, 2004, we incurred no net interest expense compared
to $36,000 for fiscal 2003. The reduction in net interest expense resulted from
the elimination of the prior year's bank debt, combined with the interest income
we earned on higher average cash balances we maintained throughout the year
ended June 30, 2004, compared to the prior fiscal year.

Provision (Benefit) for Income Taxes
------------------------------------
The following table represents our income tax provision for the year ended June
30, 2004 and our income tax benefit for the year ended June 30, 2003:

  June 30,    % of             June 30,    % of             Increase     %
    2004    net sales            2003    net sales         (Decrease)  Change
------------------------------------------------------------------------------
 $ 83,000      1%            ($ 121,000)    (2%)           $ 204,000    169%


For the year ended June 30, 2004, our provision for income taxes increased by
$204,000 compared to the prior year. This provision related to the estimated
taxable income from various states net of available state operating loss
carry-forwards. There was no estimated taxable income calculated for federal
income tax purposes because of our remaining federal net operating loss
carry-forwards ("NOL's"), which were sufficient to offset estimated taxable
income for federal income tax purposes for the year ended June 30, 2004.

The benefit for income taxes realized during the year ended June 30, 2003
resulted from income tax refunds received during this period, when there was no
previously recorded deferred income tax asset. During fiscal 2005, we expect
that our provision for income taxes will continue to increase because we
exhausted our state NOL's during fiscal 2004.

<PAGE>


Net Income
----------
The following table represents our net income for the years ended June 30, 2004
and 2003:

   June 30,     % of            June 30,    % of            Increase     %
     2004    net sales            2003    net sales        (Decrease)  Change
------------------------------------------------------------------------------
 $ 1,740,000    22%           $ 1,592,000    22%           $ 148,000     9%

Weighted Average Common Shares
------------------------------
The weighted average common shares outstanding on a diluted basis increased by
1,065,643 for the year ended June 30, 2004 to 11,065,491 from 9,999,848 for the
year ended June 30, 2003. The current year's increase in the diluted basis
calculation of weighted average common shares resulted from including additional
common share equivalents, compared to the prior year, due to more common share
equivalents being "in the money" or having an exercise price less than the
average market price of our common shares during fiscal 2004.

Liquidity and Capital Resources
-------------------------------

<TABLE>
<CAPTION>
                                                         Years Ended
                                                 --------------------------

                                                   June 30,       June 30,
                                                     2004           2003         Change
                                                 ----------------------------------------
<S>                                              <C>            <C>             <C>
Cash and cash equivalents                        $ 1,742,000    $ 1,024,000     $ 718,000
                                                 ===========    ===========     =========

                  Percent of total assets            38%           35%

                                                 ----------------------------------------
Cash provided by operating activities            $   805,000    $ 1,278,000    ($ 473,000)
Cash used in investing activities                   (104,000)        (8,000)      (96,000)
Cash provided by (used in) financing activities       17,000       (946,000)      963,000
                                                 ----------------------------------------
Net increase in cash and cash equivalents        $   718,000    $   324,000     $ 394,000
                                                 ===========    ===========     =========
</TABLE>

Changes in Cash Flow, Operating Activities:
-------------------------------------------
During the year ended June 30, 2004, we generated $805,000 of cash from
operating activities compared to $1,278,000 for the year ended June 30, 2003.
The $805,000 in cash provided by operating activities for the year ended June
30, 2004 resulted primarily from $1,740,000 in net income, which was partially
offset by increases in:

    o   Net accounts receivable due to the combination of increased net sales
        and a slowing in customer payments;
    o   Net inventory due to our increased purchases and retailer returns of
        higher costing products (box titles containing multiple CDs and jewel
        case titles including security sensor tags);
    o   Advanced royalty and licensing payments with software developers and
        licensors for new products; and
    o   Accelerated vendor payments in exchange for obtaining cash discounts.

Accounts Receivable, net

During the year ended June 30, 2004, our net accounts receivable increased by
$385,000, which resulted primarily from a $750,000 increase in our gross
accounts receivable. The increase in our gross accounts receivable, which was
partially offset by a $365,000 increase in our allowances for product returns,
price markdowns and bad debts, was due to the combination of increased net sales
to our larger software distributors, along with a slowing in customer receivable
payments. Although this receivable growth negatively impacted our cash flows
during fiscal 2004, we do not believe it represents a reduction in the quality
of our customer balances, or a change in credit policy. Generally, we have been
able to collect our net accounts receivable in the ordinary course of business,
but have from time to time experienced periods of slowness in customer payments.
Accordingly, we routinely monitor our receivable balances and maintain an active
communication with our customers in order to expedite their payments of past due
amounts or to process authorized credits for product returns and price
markdowns. Since we do not hold any collateral to secure payment from any of our
customers and because most of our customers have the right to return products
and receive price markdowns that can be used to reduce their payments to us, the
valuation of our accounts receivable is continually reviewed and analyzed in
order to help anticipate any liquidity issues that could result from our
inability to collect a receivable balance in the normal course of business.

<PAGE>


We continue to have a highly concentrated customer base of a few large software
distributors and retailers. In particular, as of June 30, 2004, our largest
software distributor, Atari, represented 83% of our net accounts receivable,
which compared to June 30, 2003 when Atari represented 77% of our net accounts
receivable. Additionally, during the years ended June 30, 2004 and 2003, we
collected receivable payments of $5.1 million and $4.0 million, respectively,
from Atari, which represented 68% and 59%, respectively, of our total customer
receipts during those fiscal years. Our ability to ultimately collect the net
receivable amount owed from Atari remains critical for us being able to meet our
financial obligations and to fund normal operations. If at any time Atari would
become unable or unwilling to make its receivable payments to us in a timely
manner, our ability to continue ongoing operations would be significantly
impaired.

Inventory, net

During the fiscal year ended June 30, 2004, we experienced a $315,000 increase
in net inventory, which resulted from a $374,000 increase in our gross inventory
that was partially offset by a $59,000 increase in the allowance for inventory
obsolescence. The increase in our gross inventory was due to: increased
distribution of our products at new and existing retail locations; higher costs
of certain box titles containing multiple CDs; and the additional costs of
security sensor tags required by mass-merchant retailers for PC software
products during fiscal 2004. As we attempt to continue increasing our product
distribution to new and existing customers, we expect our inventory purchasing
costs to continue rising at a modest rate.

Advanced Royalty and Licensing Payments

In order to gain a competitive advantage in the retail PC software marketplace,
we continually seek higher quality software content and more recognizable brand
licenses. During the year ended June 30, 2004, we experienced an increase in
advanced royalty and licensing payments that were related to obtaining the
software content and brand licenses for new titles. We anticipate that this
trend will continue, as the competition for quality software content and
well-known brand licenses is likely to continue increasing.

Accelerated Vendor Payments

During the last six months of fiscal 2004, we accelerated our payments to
various trade vendors in exchange for receiving cash discounts, which resulted
in a $38,000 improvement to our gross profit.  During fiscal 2005, we expect to
continue leveraging any excess cash by making accelerated vendor payments in
exchange for receiving additional cash discounts.

Changes in Cash Flow, Non-Operating Activities:
-----------------------------------------------
For the year ended June 30, 2004, we had net cash uses from investing activities
of $80,000 in purchases of furniture and equipment relating to the upgrading of
our computer network, combined with $24,000 in expenditures relating to
trademark registration activities. During fiscal 2005, we expect the upgrading
of our computer network to continue, but at a decreased rate.

For the year ended June 30, 2004, we had $17,000 in net cash provided by
financing activities from proceeds we received from the exercise of options to
purchase shares of our common stock. During fiscal 2005, we do not currently
anticipate any financing activities other than receiving cash proceeds from
further option exercises.

Credit Facility

In September 2003, we entered into a $500,000 credit facility agreement with
Hudson United Bank ("HUB"), which matures on December 1, 2004. Amounts
outstanding under this credit facility will be charged interest at one-half of
one percent above HUB's current prime rate and such interest is due monthly. Our
access to these funds is limited to the lesser of $500,000 or seventy-five
percent of qualified accounts receivable, which are defined as invoices less
than ninety days old and net of any allowances for product returns, price
markdowns and customer bad debts. This credit facility is secured by all of the
Company's assets and requires us, among other things, to maintain the following
financial covenants to be tested quarterly: a total liabilities to tangible net
worth ratio of 1.25 to 1.00 and a tangible net worth requirement of $1.5
million. As of September 22, 2004, we were in compliance with each of those
covenants. This new credit facility was established to provide working capital
for our operations. As of September 22, 2004, we had not utilized any of this
credit facility, although we were eligible to draw up to $500,000 under this
credit facility, based upon qualified accounts receivable as of that date.


<PAGE>


Contractual Obligations and Commitments
---------------------------------------
We occupy our 5,000 square foot office facility located in Langhorne,
Pennsylvania under an operating lease that is scheduled to expire on September
30, 2007. Additionally, we currently rent certain office equipment through
various operating lease agreements. As of June 30, 2004, we had future operating
lease commitments of $222,000 as reflected in the table below.

Under various licensing agreements with third-party software developers, we are
required to pay royalties for the use of licensed content in our products.
Additionally, most of these licensing agreements require us to make advance
royalty payments to these software developers prior to the time we recognize any
net sales of software titles containing this licensed content. As of June 30,
2004, assuming performance by certain third-party software developers under such
agreements, we had commitments to pay $40,000 in future advance royalty payments
to various software developers as reflected in the table below. These
commitments are expected to be funded by cash flows generated through
anticipated income from operations.

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

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

                                           Less than        1-3         3-5      More than
Contractual Obligations        Total        1 year         years       years      5 years
------------------------------------------------------------------------------------------
<S>                          <C>           <C>          <C>           <C>          <C>
Operating leases             $ 222,000     $ 64,000     $ 153,000     $ 5,000      $ - 0 -
Advanced royalties              40,000       28,000        12,000       - 0 -        - 0 -
------------------------------------------------------------------------------------------
Totals                       $ 262,000     $ 92,000     $ 165,000     $ 5,000      $ - 0 -
                             =========     ========     =========     =======      =======
</TABLE>

Liquidity Risk
--------------
From the first quarter of fiscal 2002 until we entered into our new credit
facility agreement in September 2003, we did not have access to a credit
facility and had been dependent entirely on cash flow from operations to meet
our financial obligations. 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 $500,000 or 75% of our qualified
accounts receivable. In particular, our ability to maintain positive cash flow
depends upon a variety of factors, including the timing of the collection of
outstanding accounts receivable, the creditworthiness of our primary software
distributors and retailers, sell-through of our products to consumers, and the
costs of developing, producing, marketing and promoting of our PC software
titles.

There are significant challenges that we will need to successfully manage in
order to fund our operations in the future. These challenges include, but are
not limited to, maintaining timely receivable payments from our concentrated
group of distributors and retailers, in addition to maintaining acceptable
payment terms with our trade vendors. For example, our liquidity would be
severely impacted if Atari, and to a lesser extent Take Two Interactive or EB
Carlson, 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 of these
market factors is the market acceptance and sell-through rates of our products
to consumers. 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 authorizations that could then be used
by distributors and retailers to reduce their upcoming receivable payments to
us, along with a reduction in retailer and/or distributor replenishment orders
for these products. If we experienced a negative trend in any of these factors,
we may not be able to maintain positive cash flow. Additional outside financing
to supplement our cash flow from operations may not be available if and when we
need it. Even if such financing were available from a bank or other financing
source, it may not be on terms satisfactory to us because of potential
stockholder dilution it may cause or other costs associated with such financing
that we could not accept.

<PAGE>


Listing of Our Common Stock
---------------------------
Our common stock trades on the OTC Bulletin Board under the symbol EGAM. We now
meet all of the listing standards for the American Stock Exchange except for
stockholders equity ($4 million) and the minimum bid share price ($3.00). We
anticipate meeting the stockholders equity requirement by the first half of
fiscal 2005, and we continue to implement business strategies and plans that are
designed to achieve financial results that could justify a higher share price
for our stock. We plan to apply for listing on the American Stock Exchange, or
an equivalent exchange, as soon as practicable after we achieve the standards
for listing.

Recent Accounting Pronouncements
--------------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN") No. 46, "Consolidation of Variable Interest
Entities". In December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46-R")
to address certain FIN 46 implementation issues. This interpretation requires
that the assets, liabilities, and results of operations of a Variable Interest
Entity ("VIE") be consolidated into the financial statements of the enterprise
that has a controlling interest in the VIE. The provisions of this
interpretation were effective immediately for all arrangements entered into with
new VIEs created after January 31, 2003, and became effective during the period
ended March 31, 2004 for any VIE created on or before January 31, 2003. Based
upon our review, we do not believe we have any such entities or arrangements
that would require disclosure or consolidation.


In March 2003, the Emerging Issues Task Force published Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it performs multiple revenue generating activities and
how to determine whether such an arrangement involving multiple deliverables
contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this Issue is effective for revenue arrangements entered in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 on July
1, 2003 did not have any impact on our financial statements.


<PAGE>


Item 7.       Financial Statements


                                  eGames, Inc.

                          Index to Financial Statements


                                                                       Page
                                                                       ----

   Independent Auditors' Report.......................................  32

   Balance Sheet as of June 30, 2004..................................  33

   Statements of Operations for the years
   ended June 30, 2004 and 2003.......................................  34

   Statements of Stockholders' Equity for the years
   ended June 30, 2004 and 2003.......................................  35

   Statements of Cash Flows for the years
   ended June 30, 2004 and 2003.......................................  36

   Notes to Financial
   Statements.........................................................  37




<PAGE>


                          Independent Auditors' Report


The Board of Directors and Stockholders
eGames, Inc.:

We have audited the accompanying balance sheet of eGames, Inc. as of June 30,
2004, and the related statements of operations, stockholders' equity, and cash
flows for the years ended June 30, 2004 and 2003. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eGames, Inc. as of June 30,
2004 and the results of its operations and its cash flows for the years ended
June 30, 2004 and 2003, in conformity with accounting principles generally
accepted in the United States of America.


/s/ Stockton Bates, LLP

Philadelphia, Pennsylvania
August 2nd, 2004



<PAGE>


                                  eGames, Inc.
                                  Balance Sheet



                                                                       As of
ASSETS                                                                June 30,
------                                                                  2004
                                                                    -----------
Current assets:
   Cash and cash equivalents                                        $ 1,742,224
   Accounts receivable, net of allowances of $1,170,154               1,533,859
   Inventory, net                                                       814,286
   Prepaid and other expenses                                           440,131
                                                                    -----------
          Total current assets                                        4,530,500

Furniture and equipment, net                                             74,859
Intangible assets                                                        24,089
                                                                    -----------
          Total assets                                              $ 4,629,448
                                                                    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
   Accounts payable                                                 $   441,016
   Accrued expenses                                                     616,794
                                                                    -----------
          Total current liabilities                                   1,057,810
                                                                    -----------

Commitments and contingencies

Stockholders' equity:
   Common stock, no par value (40,000,000 shares authorized;
          10,290,487 issued and 10,058,587 outstanding)               9,179,827
   Additional paid-in capital                                         1,329,164
   Accumulated deficit                                               (6,435,936)
   Treasury stock, at cost - 231,900 shares                            (501,417)
                                                                    -----------
          Total stockholders' equity                                  3,571,638
                                                                    -----------
          Total liabilities and stockholders' equity                $ 4,629,448
                                                                    ===========












                 See accompanying notes to financial statements.


<PAGE>


                                  eGames, Inc.
                            Statements of Operations
                       Years ended June 30, 2004 and 2003

<TABLE>
<CAPTION>
                                                               2004            2003
                                                           ------------    ------------
<S>                                                        <C>             <C>
Net sales                                                  $  8,038,169    $  7,210,712

Cost of sales                                                 3,312,120       2,904,104
                                                           ------------    ------------

Gross profit                                                  4,726,049       4,306,608

Operating expenses:
    Product development                                         510,282         439,894
    Selling, general and administrative                       2,393,571       2,360,021
                                                           ------------    ------------

        Total operating expenses                              2,903,853       2,799,915
                                                           ------------    ------------

Operating income                                              1,822,196       1,506,693

Interest (income) expense, net                                     (296)         35,617
                                                           ------------    ------------

Income before income taxes                                    1,822,492       1,471,076

Provision (benefit) for income taxes                             82,692        (121,399)
                                                           ------------    ------------

Net income                                                 $  1,739,800    $  1,592,475
                                                           ============    ============

Net income per common share:

         - Basic                                           $       0.17    $       0.16
                                                           ============    ============
         - Diluted                                         $       0.16    $       0.16
                                                           ============    ============

Weighted average common shares outstanding - Basic            9,996,607       9,989,337


Dilutive effect of common share equivalents                   1,068,884          10,511
                                                             ----------       ---------
Weighted average common shares
      and common share equivalents outstanding - Diluted     11,065,491       9,999,848
                                                             ==========       =========


</TABLE>









                 See accompanying notes to financial statements.



<PAGE>

<TABLE>
<CAPTION>
                                                            eGames, Inc.
                                                  Statements of Stockholders' Equity
                                                  Years ended June 30, 2004 and 2003




                                           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>
Balance as of June 30, 2002           10,221,237   $9,179,827   $1,189,229    ($9,768,212)   (231,900) ($501,417)           $99,427

Net income                                                                      1,592,475                                 1,592,475

Rounding                                                                                1                                         1

Common stock options issued to
employees and directors                                             87,658                                                   87,658

Common stock warrants redeemed
from Fleet Bank                                                    (33,750)                                                 (33,750)

------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2003           10,221,237   $9,179,827   $1,243,137    ($8,175,736)   (231,900) ($501,417)        $1,745,811

Net income                                                                      1,739,800                                 1,739,800

Common stock options issued to
employees and directors                                             68,952                                                   68,952

Shares issued in connection with
stock option exercises                    69,250                    17,075                                                   17,075

-----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2004           10,290,487  $9,179,827    $1,329,164    ($6,435,936)   (231,900) ($501,417)        $3,571,638
                                      ==========  ==========    ==========     ==========     =======   ========         ==========
</TABLE>












                 See accompanying notes to financial statements.


<PAGE>



                                  eGames, Inc.
                            Statements of Cash Flows
                       Years ended June 30, 2004 and 2003


                                                        2004           2003
                                                     -----------    -----------
Cash flows from operating activities:
-------------------------------------
    Net income                                       $ 1,739,800    $ 1,592,475
    Adjustments to reconcile net income to net
         cash provided by operating activities:
    Stock-based compensation                              68,952        103,908
    Depreciation and amortization                         24,570         44,107
    Changes in operating assets and liabilities:

          Accounts receivable, net                      (385,324)      (329,370)
          Inventory, net                                (314,771)       (32,217)
          Prepaid and other expenses                    (202,896)      (126,170)
          Accounts payable                              (132,081)       240,014
          Accrued expenses                                 6,925       (214,384)
                                                     -----------    -----------
Net cash provided by operating activities                805,175      1,278,363

Cash flows from investing activities:
-------------------------------------
    Purchase of furniture and equipment                  (80,174)        (7,685)
    Purchase of software rights and other assets         (24,089)         - 0 -
                                                     -----------    -----------
Net cash used in investing activities                   (104,263)        (7,685)

Cash flows from financing activities:
-------------------------------------
    Proceeds from exercise of stock options               17,075          - 0 -
    Repayments of bank debt                                - 0 -       (840,000)
    Redemption of common stock warrant                     - 0 -        (50,000)
    Repayments of notes payable                            - 0 -        (56,550)
                                                     -----------    -----------
Net cash provided by (used in) financing activities       17,075       (946,550)
                                                     -----------    -----------

Net increase in cash and cash equivalents                717,987        324,128

Cash and cash equivalents:
    Beginning of period                                1,024,237        700,109
                                                     -----------    -----------
    End of period                                    $ 1,742,224    $ 1,024,237
                                                     ===========    ===========




Supplemental cash flow information:                      2004           2003
-----------------------------------                  -----------    -----------

    Cash paid for interest                           $     5,475    $    38,211
                                                     ===========    ===========

    Cash paid (refunds received) for income taxes    $    55,326   ($    51,007)
                                                     ===========    ===========



                 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" or "we") is a Pennsylvania corporation
incorporated in July 1992 that publishes, markets and sells affordable PC
software games. We have chosen to focus our resources on publishing software
games for the PC platform only, and we do not currently plan to publish products
for any other game platform, such as console devices, hand held game devices,
mobile phones and personal digital assistants. Our product line enables us to
serve consumers who are seeking a broad range of high-quality, affordable PC
gaming software, which are sold on CDs or online via the Internet. In North
America, our products are distributed primarily on a non-exclusive basis through
third-party software distributors that service the mass-merchant and major
retailers. In territories outside North America, we license our PC games to
third-party software distributors who are responsible for the manufacture and
distribution of our PC games within specific geographic territories.

Basis of Presentation

The accompanying 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, accounts payable and accrued liabilities at June
30, 2004 approximate fair value due to the relatively short period of time
between origination of the instruments and their expected realization. All
liabilities are carried at cost, which approximate fair value for similar
instruments.

Cash and Cash Equivalents

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

Accounts Receivable, net

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

Inventory, net

Inventory, net consists primarily of finished goods and is valued at the lower
of cost or market. Cost is determined by the first-in, first-out method (FIFO)
(see Note 3).

Furniture and Equipment, net

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


<PAGE>


Long-Lived Assets, net

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

Intangible assets

At June 30, 2004, we had intangible assets of approximately $24,000, which
related to the Company's trademark registration activities with the United
States Patent and Trademark Office. As of June 30, 2004, we had not recorded any
amortization expense relating to these assets based upon our evaluation that no
impairment has occurred.

Revenue Recognition

Product Sales
-------------
We distribute the majority of our products through third-party software
distributors to mass-merchant and major retailers and directly to certain PC
software retailers. These retailers have traditionally sold consumer
entertainment PC software products. The distribution of our products is governed
by purchase orders, distribution agreements, or direct sale agreements, most of
which allow for product returns and price markdowns. We recognize sales revenues
from product shipments to these software distributors and retailers that
traditionally have sold consumer entertainment PC software products at the time
title to our inventory passes to these distributors or retailers, less a
provision for anticipated product returns and price markdowns. Title passes to
most of these distributors and retailers upon receipt of the product by these
customers, because most of these customers require shipping terms of FOB
destination. In order to recognize sales revenues associated with customer
purchase orders having terms of FOB destination, we perform sales cut-off tests,
in which we obtain proof of deliveries from the freight companies that deliver
our products to our retail and distribution customers for product shipments made
during the last two weeks of a reporting period. The results of these sales
cut-off tests are reviewed by our Controller, Chief Financial Officer and
independent auditors before the reporting period's earnings release is
distributed. Based on the results of the sales cut-off tests, any sales revenue
and cost of sales associated with product shipments received by our customers
after the reporting period and having FOB destination terms are excluded from
the current period's operating results and are deferred until the subsequent
reporting period.

We recognize product sales to customers that traditionally have sold consumer
entertainment PC software products in accordance with the criteria of SFAS No.
48 at the time title to our inventory passes to these distributors or retailers,
based on the following: the selling price is fixed at the date of sale; the
buyer is obligated to pay us; title of the product transfers to the buyer; the
buyer has economic substance apart from us; we do not have further obligations
to assist the buyer in the resale of the product; and the product returns and
price markdowns can be reasonably estimated at the time of sale. After
deliveries to our distribution and retail customers are made, we do not provide
any further services or materials that are essential to our products'
functionality. However, we do provide basic telephone and web-based support to
consumers who purchase our products as a means of improving consumer
satisfaction and brand loyalty. Costs associated with our customer support
efforts usually occur within one year from the period we recognize revenue and
these costs have continued to be minimal (averaging about 1% of net sales).
These costs to render customer support services, which are comprised of the
salary and related costs of our one customer support representative, are
recorded as operating expenses in the period incurred.

During fiscal 2004, we entered into relationships with certain software
distributors that expanded our product distribution into various office
superstores, which distribution is governed by consignment sales agreements.
Accordingly, sales revenues from product shipments pursuant to these
arrangements are only recognized to the extent that one of these third-party
software distributors has reported to us the actual product sell-through to end
consumers at these office superstore retailers.


<PAGE>


Provision for Product Returns and Price Markdowns
-------------------------------------------------
Our provision for anticipated product returns and price markdowns (reflected as
a reduction to gross sales) is based upon, among other factors, our analysis of:
historical product return and price markdown results; current product
sell-through results at retail store locations; current field inventory
quantities at distributors' warehouses and at retail store locations; the length
of time that products have been out at retail along with their estimated
remaining retail life; outstanding return material and price markdown
authorizations; the introduction of new and/or competing software products that
could negatively impact the sales of one or more of our current products; and
the extent to which quantities of new products with higher price retail points
or unproven genres remain in the retail channel.  The adequacy of our allowance
for product returns and price markdowns is reviewed throughout each reporting
period and any necessary adjustment to this allowance is reflected within the
current period's provision. At the end of each reporting period, the allowance
for product returns and price markdowns is recorded as a reduction to our gross
accounts receivable balance.

Historically, the allowance for product returns and price markdowns has
represented a substantial percentage of our gross accounts receivable. As of
June 30, 2004, the allowance for product returns and price markdowns was 43% of
related gross accounts receivable, compared to 41% of related gross accounts
receivable at June 30, 2003. This large percentage occurs because we continue to
have product return and price markdown exposure relating to paid receivables
while the physical product units relating to these receivables remain in the
retailers' stores or in the retailers' or distributors' warehouses. Until the
physical products are actually returned to us, or sell through to end consumers,
we continue to evaluate our product return or price markdown exposure for these
units remaining in the retail channel. During these time periods, through
customer-provided reports, we have regular and timely visibility of the
sell-through results and remaining unit levels in the retail channel for our
titles that help us estimate our exposure for future product returns and price
markdowns.

During the years ended June 30, 2004 and 2003, our provisions for product
returns and price markdowns for customers that have traditionally sold consumer
entertainment PC software products were $1,727,000 and $1,016,000, respectively,
or 18% and 13% of related gross sales, respectively. The dollar and percentage
increases in the provisions for product returns and price markdowns resulted
from the combined impact of underperforming promotional box titles (at the
higher $19.99 retail price point) that were distributed during the fiscal 2004
holiday selling season, in addition to a proportionate increase in the fiscal
2004 provisions traceable to the $1.9 million rise in gross sales for fiscal
2004.

Prepaid and Other Expenses

Prepaid and other expenses represent advance payments made to third parties for,
among other things, items such as licensing of software and intellectual
properties used in our products, estimated tax payments, certain insurance
coverage and various service contracts. Prepaid and other expenses are usually
expensed as operating expenses on a straight-line basis over the period of time
covered by a contract, except for advance licensing and royalty payments, which
are expensed in cost of sales at contractual rates based on the net sales of the
related software titles (see Notes 4 and 7), and income tax payments reflected
as income tax provisions when appropriate. We continually evaluate the
recoverability of advance licensing and royalty payments and charge to cost of
sales (in the reporting period in which such determination is made) the amount
we determine will likely not be recouped based on anticipated sales for a title.

Marketing Costs, Sales Incentives and Promotional Costs

Marketing costs reflected as operating expenses, such as advertising and
merchandising fees, are expensed as incurred. These costs were $71,000 and
$60,000, respectively, for the years ended June 30, 2004 and 2003.

Sales incentives and promotional costs we incur with distributors and retailers,
such as rebates and slotting fees, are recorded as reductions to gross sales as
incurred or on a straight-line basis over a contractual period. For the years
ended June 30, 2004 and 2003, our sales incentives and promotional costs were
$518,000 and $200,000, respectively, or 5% and 2%, respectively, of gross sales.


<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 per Common Share

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

Accounting for Stock-Based Compensation

As of 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 for stock option grants made on or after that date. For stock
option grants made prior to July 1, 2002, we recognized stock-based compensation
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). As of
January 1, 2003, we adopted the provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (see Note 11).

Management's Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, including allowances for inventory obsolescence, product returns,
price markdowns and customer bad debts, in addition to disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. 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 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                                 $ 2,704,000
     Allowance for product returns and price markdowns           (1,151,000)
     Allowance for bad debts                                        (19,000)
                                                                -----------
     Accounts receivable, net                                   $ 1,534,000
                                                                ===========

3.   Inventory, net

Inventory, net consists of the following:

     Raw materials                                              $   190,000
     Finished goods                                                 564,000
     Product returns                                                181,000
                                                                -----------

                                                                    935,000

     Allowance for obsolescence                                    (121,000)
                                                                -----------
     Inventory, net                                             $   814,000
                                                                ===========


<PAGE>


4.   Prepaid and Other Expenses

Prepaid and other expenses consists of the following:

     Prepaid royalties                                          $   313,000
     Prepaid federal tax                                             30,000
     Prepaid insurances                                              29,000
     Prepaid slotting fees                                           27,000
     Prepaid retail market analysis                                  11,000
     Other expenses                                                  30,000
                                                                -----------
     Prepaid and other expenses                                 $   440,000
                                                                ===========

5.   Furniture and Equipment, net

Furniture and equipment consists of the following:

     Furniture and equipment                                    $   346,000
     Accumulated depreciation                                      (271,000)
                                                                -----------
     Furniture and equipment, net                               $    75,000
                                                                ===========

During the year ended June 30, 2004, we removed $638,000 of fully depreciated
assets from the furniture and equipment records based on these assets no longer
being in service.

6.   Accrued Expenses

Accrued expenses consists of the following:

     Accrued payroll, bonus and vacation                        $   403,000
     Accrued state income taxes                                      80,000
     Accrued professional fees                                       62,000
     Customers with credit balances                                  34,000
     Other accrued expenses                                          38,000
                                                                -----------
     Accrued expenses                                           $   617,000
                                                                ===========

7.   Commitments and Contingencies

Our 5,000 square foot office facility located in Langhorne, Pennsylvania is
occupied under an operating lease through September 30, 2007. Additionally, we
currently rent certain office equipment through various operating lease
agreements. Total rent expense amounted to $82,000 and $80,000 for fiscal 2004
and 2003, respectively. As of June 30, 2004, we had future operating lease
commitments of $222,000 that are scheduled to be paid as follows: $64,000 in
less than one year; $153,000 in one to three years; and $5,000 in three to five
years.

Under various licensing agreements with third-party software developers, we are
required to pay royalties for the use of licensed content in our products. Most
of these licensing agreements require us to make advance royalty payments to
these developers prior to the time we recognize any net sales of software titles
containing this licensed software content. As of June 30, 2004, assuming
performance by certain third-party software developers under such agreements, we
had future commitments to pay $40,000 in advance royalty payments to various
software developers scheduled to be paid as follows: $28,000 in less than one
year; and $12,000 in one to three years.


<PAGE>


8.   Credit Facility

In September 2003, we entered into a $500,000 credit facility agreement with
Hudson United Bank ("HUB"), which matures on December 1, 2004. Amounts
outstanding under this new credit facility will be charged interest at one-half
of one percent above HUB's current prime rate and such interest is due monthly.
Our access to these funds is limited to the lesser of $500,000 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 or customer bad debts. The credit facility is secured by all of the
Company's assets and requires us, among other things, to maintain the following
financial covenants to be tested quarterly: a total liabilities to tangible net
worth ratio of 1.25 to 1.00 and a tangible net worth requirement of $1.5
million. As of June 30, 2004, we were in compliance with each of those
covenants. This credit facility was established to provide working capital for
our operations. As of June 30, 2004, we had not utilized any of this credit
facility, although we were eligible to draw up to $500,000 under this credit
facility, based upon qualified accounts receivable as of that date.

9.   Income Taxes

The provision (benefit) for income taxes is comprised of the following
components for the years ended June 30, 2004 and 2003, respectively:


                                                   2004          2003
                                                 --------      --------
Current
-------
   Federal                                       $  - 0 -     ($ 43,000)
   State                                           83,000        (8,000)
   Foreign                                          - 0 -       (70,000)
                                                 --------      --------
                                                   83,000      (121,000)

Deferred
--------
   Federal                                        665,000       536,000
   State                                          109,000       202,000
                                                 --------      --------
                                                  774,000       738,000

Valuation allowance                              (774,000)     (738,000)
                                                 --------      --------

Provision (benefit) for income taxes             $ 83,000     ($121,000)
                                                 ========      ========


The fiscal 2003 foreign benefit from income taxes noted above represents the
resolution of a prior year's assessment by The United Kingdom's Department of
Inland Revenue, which related to royalty payments made to us from our former
wholly-owned subsidiary.

The reconciliation between the statutory federal income tax rate and our
effective federal rate for income tax provision (benefit) for the years ended
June 30, 2004 and 2003, respectively, is as follows:

                                                             2004        2003
                                                          ----------- ----------

Statutory federal income tax rate                             34%        34%

Increase (decrease) in taxes resulting from:

    Change in valuation allowance and other                  (34%)      (37%)
                                                          ----------- ----------

Effective federal rate for income tax provision (benefit)   - 0 -%       (3%)
                                                            ======       ====




<PAGE>


The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2004 and
2003 is as follows:

                                                         2004          2003
                                                       ---------     ---------
Net deferred tax assets:
  Alternative minimum tax credit                       $  21,000     $   - 0 -
  Accrued expenses and other                              32,000        35,000
  Allowances for accounts receivable and inventory       516,000       347,000
  Depreciation                                            38,000        56,000
  Net operating losses and capital losses                778,000     1,700,000
                                                       ---------     ---------
      Gross deferred tax assets                        1,385,000     2,138,000
  Less: Valuation allowance                           (1,364,000)   (2,138,000)
                                                       ---------     ---------
Net deferred tax assets                                $  21,000     $   - 0 -
                                                       =========     =========

The deferred tax asset is offset by a full valuation allowance against timing
differences as of June 30, 2004, as management currently believes that it is
more likely than not that the deferred tax asset will not be realized. During
fiscal 2004, the valuation allowance for net deferred tax assets decreased by
approximately $774,000. The decrease was a result of net changes in the
temporary differences in the accounts reflected in the table above.

As of June 30, 2004, we had approximately $2,289,000 of net operating loss
carry-forwards for federal income tax purposes, (expiring in years 2011 through
2022), which are available to offset future federal taxable income. The
remaining $704,000 in net operating loss carry-forwards for state purposes were
fully utilized in fiscal 2004.

10.  Common and Preferred 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 is intended to protect the interests of our existing
stockholders' in the event that we are confronted with coercive or unfair
takeover tactics. The Plan contains provisions to safeguard existing
stockholders in the event of an unsolicited offer to acquire our company,
whether through a gradual accumulation of shares in the open market, a partial
or two-tiered tender offer that does not treat all stockholders equally, or
other abusive takeover tactics, which our Board of Directors believes is not in
the best interests of our stockholders. These tactics can unfairly pressure
stockholders and deprive them of the full value of their shares.

The Plan is not intended to prevent a takeover of our company and will not do so
if the terms are favorable and fair to all stockholders. The declaration of the
rights dividend (the "Rights") should not affect any prospective offer at a fair
price to all stockholders, and will not interfere with a merger or other
business combination transaction approved by our Board of Directors.

The issuance of the Rights will not change the way in which stockholders can
currently trade our shares. The Rights were issued to stockholders of record on
June 21, 1999, and will expire on June 1, 2009. Initially, the Rights will not
be exercisable, certificates will not be sent to any stockholders, and the
Rights will automatically trade with the common stock.

The Rights will not be exercisable until ten days after any person or group
becomes the beneficial owner of 15% or more of our common stock, or if any
person or group commences a tender or exchange offer which would, if
consummated, result in such person becoming the beneficial owner of 15% or more
of our common stock. At that time, separate certificates representing the Rights
will be distributed, and the Rights could then begin to trade independently from
our shares. At no time will the Rights have any voting power.

The Rights may be redeemed by us at $0.01 per Right prior to the time any person
or group has acquired 15% or more of our shares or voting power. After any
person or group has acquired 15% or more of our shares or voting power, the
Rights may be redeemed only with the approval of a majority of the Continuing
Directors. "Continuing Director" means any member of the Board of Directors who
was a member of the Board on June 1, 1999 or any person who is subsequently
elected to the Board if such person is recommended or approved by a majority of
the Continuing Directors.


<PAGE>


If the Rights become exercisable, a holder will be entitled to buy from us one
one-hundredth (1/100) of a share of a new Series A Preferred Stock of our
company at a purchase price of $35. If a person acquires 15% or more of our
common stock, each Right not owned by such person would become exercisable for
common stock of our company (or, in certain circumstances, cash, property or
other securities of our company) having a market value equal to two times the
exercise price of the Right.

11.  Stock Options and Warrants

Stock Option Plans:

During 1995, we adopted, amended and restated our 1995 Amended and Restated
Stock Option Plan (the "1995 Plan"). The 1995 Plan allows for the granting of
options to purchase shares of our common stock through July 1, 2005, after which
date any previously granted option will remain 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 is administered by the
Board of Directors and provides for the grant of incentive stock options and
non-qualified stock options to employees and eligible independent contractors
and non-qualified stock options to non-employee directors at prices not less
than the fair market value of a share of common stock on the date of grant. The
1995 Plan also provides for automatic grants of options to non-employee
directors of our company. Each non-employee director will receive options for
10,000 shares of common stock upon appointment or election to the board and, in
addition, each director receives options for 5,000 shares of common stock on the
first trading day in January of each year.

During fiscal 2003, we granted options to purchase 1,176,000 shares of common
stock with exercise prices ranging from $0.19 to $0.75. Included in these
1,176,000 options granted in fiscal 2003 were options for the purchase of 25,000
shares of common stock that were granted to each non-employee director at an
exercise price of $0.25, in lieu of the automatic annual option grants for 5,000
shares to each non-employee director pursuant to the 1995 Plan, which would have
been issued in January 2003.

During fiscal 2004, options to purchase 69,250 shares of common stock were
exercised at an average exercise price of $0.25, resulting in $17,075 in net
proceeds to us.

On November 4, 2003, options to purchase 700,000 shares of common stock with an
exercise price of $0.79 and a vesting period of ten years were granted to
employees and non-employee directors. Included in these 700,000 options granted
in fiscal 2004 were options for the purchase of 25,000 shares of common stock
that were granted to each non-employee director at an exercise price of $0.79,
in lieu of the automatic annual option grants for 5,000 shares to each
non-employee director pursuant to the 1995 Plan, which would have been issued in
January 2004.

Additionally during fiscal 2004, an option for the purchase of 2,500 shares of
common stock was granted to a new employee at an exercise price of $1.11,
vesting over two years and having a contractual life of five years. As of June
30, 2004, all of our stock options have been granted at or above the fair market
value of our common stock on their grant date.

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. 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 stock options is as follows:


                                            Number
                                              of          Weighted Average
                                            Options        Exercise Price
                                        -----------------------------------
     Balance, June 30, 2002                1,724,500           $ 1.46
       Granted                             1,176,000             0.48
       Canceled                             (555,000)            1.71
       Exercised                               - 0 -            - 0 -
                                        -----------------------------------
     Balance, June 30, 2003                2,345,500           $ 0.91
                                           =========           ======

       Granted                               702,500             0.79
       Canceled                             (388,750)            1.61
       Exercised                             (69,250)            0.25
                                        -----------------------------------
     Balance, June 30, 2004                2,590,000           $ 0.79
                                           =========           ======


At June 30, 2004, 1,248,667 of outstanding stock options were vested and 207,918
of stock options were available for issuance. The following summarizes
information about our stock options outstanding at June 30, 2004:
<TABLE>
<CAPTION>

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

                                           Weighted Avg.     Weighted                       Weighted
                            Number           Remaining         Avg.          Number           Avg.
  Range of Exercise     Outstanding at    Contractual Life   Exercise     Exercisable at    Exercise
        Prices           June 30, 2004       (in years)       Price       June 30, 2004      Price
----------------------------------------------------------------------------------------------------
    <S>                    <C>                 <C>            <C>           <C>              <C>
    $0.10 - $0.75          1,587,000           2.57           $0.40           933,167        $0.25
    $0.79 - $3.19          1,003,000           6.73           $1.41           315,500        $2.75
    -------------          ---------           ----           -----         ---------        -----
    $0.10 - $3.19          2,590,000           4.18           $0.79         1,248,667        $0.88
                           =========                                        =========
</TABLE>

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. 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. Stock option
grants under the 1995 Plan vest over periods ranging from six months to ten
years. Accordingly, the cost related to stock-based employee compensation
included in the determination of net income for fiscal 2003 is less than that
which would have been recognized during that period if the fair value based
method had been applied to all stock option grants since the original effective
date of SFAS No. 123.

As of January 1, 2003, we adopted the provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure". Accordingly, the
following table illustrates the effect on net income and net income per share if
the fair value method had been applied to all outstanding stock option grants in
each period.


<PAGE>

<TABLE>
<CAPTION>

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

                                                                          2004            2003
                                                                       -----------     -----------
<S>                                                                    <C>             <C>
Net income, as reported                                                $ 1,740,000     $ 1,592,000

Add: Stock-based employee compensation expense included in
  reported net income                                                       69,000          88,000

Deduct: Total stock-based employee compensation expense
determined under fair value based method for stock option grants           (69,000)       (208,000)
                                                                       ------------     ----------

Net income, pro forma                                                  $ 1,740,000     $ 1,472,000
                                                                       ===========     ===========


Net income per common share:

-  Basic, as reported                                                     $   0.17        $   0.16
                                                                          ========        ========
-  Basic, pro forma                                                       $   0.17        $   0.15
                                                                          ========        ========

-  Diluted, as reported                                                   $   0.16        $   0.16
                                                                          ========        ========
-  Diluted, pro forma                                                     $   0.16        $   0.15
                                                                          ========        ========
</TABLE>

The per share weighted-average fair values of stock options granted during the
years ended June 30, 2004 and 2003 were $0.79 and $0.12, respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions:


                                                        Years Ended
                                                          June 30,
                                            -----------------------------------
                                                  2004               2003
                                            -----------------------------------
     Dividend Yield                                0%                 0%
     Volatility Factor                            300%               300%
     Risk-Free Interest Rate                 2.25% to 3.81%         3.01%
     Average Expected Option Life             3 to 7 Years         3 Years

Common Stock Warrants:

On October 18, 1995, in connection with the initial public offering of our
Common Stock, the underwriter was granted 155,000 warrants. These warrants were
exercisable at anytime on or before October 13, 2002 at an exercise price of
$3.60 per share. In addition, 425,000 warrants were issued to the former owners
of Applied Optical Media Corporation. These warrants were exercisable anytime
before October 16, 2002 at an exercise price of $0.50 per share.

During the year ended June 30, 2002, we issued 750,000 warrants to Fleet Bank
with an exercise price of $0.09. The value of these warrants was initially
determined as $45,000 by using the Black-Scholes valuation model and was being
expensed at a monthly rate of $3,750 on a straight-line basis over the warrants'
one-year vesting period. On January 16, 2003, we redeemed these 750,000 warrants
for $50,000 and recognized the additional $5,000 in valuation expense during the
period ended December 31, 2002. During the year ended June 30, 2003, 45,100
warrants with exercise prices ranging from $0.50 to $3.60 expired per their
original terms.



<PAGE>


Information regarding our warrants is as follows:

                                                  Number of        Exercise
                                                   Warrants          Price
                                                  ----------------------------
     Balance, June 30, 2002                        795,100       $0.09 - $3.60
       Warrants granted                              - 0 -               - 0 -
       Warrants canceled                           (45,100)        0.50 - 3.60
       Warrants redeemed                          (750,000)               0.09
       Warrants exercised                            - 0 -               - 0 -
                                                   -------       -------------
     Balance, June 30, 2003                           - 0-              $ 0.00
                                                   =======       =============

       Warrants granted                              - 0 -               - 0 -
       Warrants canceled                             - 0 -               - 0 -
       Warrants redeemed                             - 0 -               - 0 -
       Warrants exercised                            - 0 -               - 0 -
                                                   -------       -------------
     Balance, June 30, 2004                          - 0 -              $ 0.00
                                                   =======       =============


12.  Dependence on One Large Software Distributor - Atari

Atari is our primary software distributor serving the mass-merchant and major
retailers in North America, such as Wal-Mart, Target, and Best Buy, among
others. During the year ended June 30, 2004, Atari accounted for $5,508,000 of
our net sales, or 69% of net sales, compared to the year ended June 30, 2003
when Atari accounted for $4,370,000 in net sales, or 61% of net sales.

We have continued to increase our product distribution through Atari to the
major North American mass-merchant retailers by increasing the number of our
individual titles carried by these retailers and the number of stores within
these retailers' store chains that offer our titles to consumers. Our financial
condition and ability to continue as a going concern would be significantly
affected in the event that we would lose our distribution capability through
Atari, or if they would not be able to or willing to make timely receivable
payments in the normal course of business. However, because the distribution of
PC software to these retailers is a competitive business within itself, there
are several alternative distributors that could potentially distribute our
products to these retailers if, for example, Atari chose to discontinue
distributing our titles, Atari was unable or unwilling to make timely receivable
payments in the normal course of business, or if any of these retailers decided
to discontinue their relationship with Atari. We can provide no assurance,
however, that we would be able to secure agreements with such alternative
distributors on commercially reasonable terms or at all, or if these
distributors would be acceptable to these retailers.

13.  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 our 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.

14.  Change in Control Severance Plans

On June 23, 2004, the eGames, Inc. Compensation Committee approved the adoption
of a Change of Control Severance Plan for level one employees and a Change of
Control Severance Plan for level two employees. These plans provide certain
severance benefits for each covered employee, in the event they would lose their
job after a change of control of eGames, Inc.

<PAGE>


The main components of these plans are:

    o   A lump sum severance payment equal to:
          o Two times annual compensation for level one employees; and
          o One and one half times annual compensation for level two employees.

    o   Continuation of existing coverage under any benefit plan for:
          o Twenty-four months after termination for level one employees; and
          o Eighteen months after termination for level two employees.

Level one employees are defined as the Chief Executive Officer, the President,
any Vice President of the Company, and each other person designated by the Board
in writing. Level two employees are defined as any employee of the Company that
has been identified by the Board in writing as a level two employee.

15.  Recent Accounting Pronouncements


In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN") No. 46, "Consolidation of Variable Interest
Entities". In December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46-R")
to address certain FIN 46 implementation issues. This interpretation requires
that the assets, liabilities, and results of operations of a Variable Interest
Entity ("VIE") be consolidated into the financial statements of the enterprise
that has a controlling interest in the VIE. The provisions of this
interpretation were effective immediately for all arrangements entered into with
new VIEs created after January 31, 2003, and became effective during the period
ended March 31, 2004 for any VIE created on or before January 31, 2003. Based
upon our review, we do not believe we have any such entities or arrangements
that would require disclosure or consolidation.

In March 2003, the Emerging Issues Task Force published Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it performs multiple revenue generating activities and
how to determine whether such an arrangement involving multiple deliverables
contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this Issue is effective for revenue arrangements entered in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 on July
1, 2003 did not have any impact on our financial statements.

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, 2004 (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 were 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, 2004 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 and Executive Officers of the Registrant


The information required by this Item with respect to directors is incorporated
herein by reference from the information provided under the caption "Election of
Directors" of our definitive Proxy Statement for our 2004 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission.

The information required by this Item with respect to executive officers is
incorporated herein by reference from the information provided under the caption
"Executive Officers of the Company" of our Proxy Statement.

The information required by this Item with respect to compliance with Section
16(a) of the Securities and Exchange Act is incorporated herein by reference
from the information provided under the caption "Compliance with Securities
Laws" of our Proxy Statement.

The information required by this Item with respect to our audit committee and
our audit committee financial expert is incorporated herein by reference from
the information provided under the heading "Election of Directors - Meetings and
Committees of the Board of Directors - Audit Committee" of our Proxy Statement.

The information required by this Item with respect to our Code of Ethics is
incorporated herein by reference from the information provided under the heading
"Election of Directors - Code of Ethics" of our Proxy Statement.

Item 10.      Executive Compensation

The information appearing under the captions "Executive Compensation" and
"Election of Directors" of our definitive Proxy Statement for our 2004 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
is incorporated by reference into this report on Form 10-KSB.

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

The information appearing under the captions "Voting Securities and Principal
Holders Thereof" and "Equity Compensation Plan Information" of our definitive
Proxy Statement for our 2004 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission is incorporated by reference into this report
on Form 10-KSB.

Item 12.      Certain Relationships and Related Transactions

The information appearing under the caption "Certain Transactions" of our
definitive Proxy Statement for our 2004 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission is incorporated by reference
into this report on Form 10-KSB.


<PAGE>


                                     PART IV

Item 13.

(a) Exhibits List

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.

Exhibit No.   Description of Exhibit
-----------   ----------------------
(1)  3.1      Amended and Restated Articles of Incorporation of the
              Registrant.
(2)  3.2      By-Laws of the Registrant.
(3)  4.1      Rights Agreement, dated as of June 1, 1999, between the
              Registrant and StockTrans, Inc.
(4) 10.1      Amended and Restated 1995 Stock Option Plan.
    10.2      Form of Incentive Stock Option Agreement.
    10.3      Form of Non-Employee Director Stock Option Agreement.
(5) 10.4      Business Loan Agreement by and between Hudson United Bank and
              the Registrant dated September 18, 2003.
(5) 10.5      Promissory Note dated September 18, 2003.
(5) 10.6      Commercial Security Agreement dated September 18, 2003.
    10.7      Description of Registrant's Fiscal 2005 Employee Incentive
              Compensation Plan.
(6) 10.8      Change of Control Severance Plan for Level One Employees.
(6) 10.9      Change of Control Severance Plan for Level Two Employees.
    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.
(1)           Incorporated herein by reference from the Registrant's Form SB-2
              as filed with the Securities and Exchange Commission on
              July 28, 1995.
(2)           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.
(3)           Incorporated herein by reference from the Registrant's Form 8-K
              as filed with the Securities and Exchange Commission on
              June 10, 1999.
(4)           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.
(5)           Incorporated herein by reference from the Registrant's Form 8-K
              as filed with the Securities and Exchange Commission on
              September 19, 2003.
(6)           Incorporated herein by reference from Registrant's Form 8-K as
              filed with the Securities and Exchange Commission on
              June 28, 2004.

<PAGE>


(b) Reports on Form 8-K

On April 5, 2004, eGames, Inc. filed a report on Form 8-K regarding a press
release announcing the date that it expected to release its financial results
for the three and nine months ended March 31, 2004.

On April 30, 2004, eGames, Inc. filed a report on Form 8-K regarding a press
release announcing its financial results for the three and nine months ended
March 31, 2004.

On June 28, 2004, eGames, Inc. filed a report on Form 8-K regarding the
Compensation Committee's approval of the adoption of a Change of Control
Severance Plan for level one employees and a Change of Control Severance Plan
for level two employees.

Item 14.      Principal Accountant Fees and Services

The information appearing under the caption "Audit Fees" under "Ratification of
the Appointment of Auditors" of our definitive Proxy Statement for our 2004
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission is incorporated by reference into this report on Form 10-KSB.


<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, 2004
------------------------

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, 2004                /s/  Gerald W. Klein
      ------------------                --------------------
                                        Gerald W. Klein, President and
                                        Chief Executive Officer

Date: September 27, 2004                /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 2004.


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

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


/s/  Robert M. Aiken, Jr.          Chairman of the Board of Directors
-------------------------
Robert M. Aiken, Jr.


/s/  Thomas D. Parente             Director
----------------------
Thomas D. Parente


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





<PAGE>


                                                                   Exhibit 10.2
                                  eGames, Inc.
                                  ------------

                        Incentive Stock Option Agreement

         eGames, Inc. (the "Company"), hereby grants to __________________ (the
"Optionee") this Option to purchase shares of the Company's Common Stock at a
price and on the terms set forth herein and subject to the terms and conditions
contained in the Company's Amended and Restated 1995 Stock Option Plan (the
"1995 Plan"), which terms and conditions are hereby incorporated herein.

         1. Grant. Effective as of __________________ (the "Date of Grant"), the
Company's Board of Directors (the "Board") granted to you an Option (the
"Option") to purchase up to ________ shares of the Common Stock of the Company
(the "Option Shares") at a price of $____ per share (the "Option Price").

         2. Type of Option. This Option is intended to be an incentive stock
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").

         3. Term. The Option granted hereunder shall expire at 5:00 p.m. (local
time at the principal executive offices of the Company) on ________________ (the
"Expiration Date"), unless sooner terminated as provided herein.

         4. Exercise of Option. Subject to Paragraph 2 and in accordance with
the terms and conditions contained in the 1995 Plan, the Option shall be
exercisable, on a cumulative basis, in accordance with the following schedule:

              Beginning On                         Number of Shares
              ------------                         ----------------



         5. Method of Exercise and Payment.

                  5.1 This Option shall be exercisable by written notice to the
Company, pursuant to Paragraph 13 hereof, specifying the number of Option Shares
to be purchased. The notice shall also be accompanied by payment of the
aggregate Option Price of the Option Shares being purchased.

                       If the listing, registration or qualification of the
Option Shares upon any securities exchange or under any federal or state law,
or the consent or approval of any governmental regulatory body is necessary as
a condition of or in connection with the purchase of such Option Shares, the
Company shall not be obligated to issue or deliver the certificates
representing the Option Shares as to which the Option has been exercised unless
and until such listing, registration, qualification, consent or approval shall
have been effected or obtained.

                  5.2 To the extent permitted by the Board, payment of the
Option Price may be made: (i) by cash, check or such other instrument as the
Board may accept; (ii) by exchange of shares of Common Stock valued at its fair
market value on the date of exercise; or (iii) by means of a broker's cash-less
exercise procedure approved in advance by the Company. Where payment of the
Option Price is to be made with shares of Common Stock acquired under any
compensation plan of the Company, such shares will not be accepted as payment
unless the Optionee has held such shares for a minimum period of time specified
in the 1995 Plan.

         6. Rights of Stockholders. Neither an Optionee nor his or her legal
representatives or beneficiaries shall have any of the rights of a stockholder
with respect to any shares subject to any Option until such shares shall have
been issued upon the proper exercise of such Option.

         7. Non-transferability of Options. Except as set forth herein, no
Option may be sold, transferred, pledged, assigned or otherwise alienated or
hypothecated otherwise than by will or by the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the Code, or
Title I of the Employee Retirement Income Security Act, or the rules thereunder.


<PAGE>

         8. Termination of Employment or Service. Subject to the condition that
no option shall be exercisable after the expiration of the period fixed by the
Board in accordance with Paragraph 3 hereof and unless otherwise determined by
the Board after the Date of Grant:

                  8.1 In the event that the Optionee ceases to be an employee of
the Company or its subsidiaries by reason of a discharge for cause, the Option
shall terminate immediately.

                  8.2 In the event that the Optionee ceases to be an employee of
the Company or its subsidiaries by reason of a voluntary or involuntary
termination for any reason other than death, disability, retirement or
termination for cause, the Option may be exercised, to the extent that it was
exercisable at the time of such termination or on such accelerated basis as the
Board may determine, for a period of three months after termination.

                  8.3 In the event that the Optionee shall die while employed by
the Company or within the periods referred to in Paragraphs 8.2 or 8.4, the
Option shall be exercisable during its remaining term, to the extent then
exercisable or on such accelerated basis as the Board may determine, by the
Optionee's legal representative, within one year after death.

                  8.4 In the event that the Optionee's employment terminates due
to disability (within the meaning of Code Section 22(e)(3)) or retirement, the
Option granted shall be exercisable during its remaining term, to the extent
then exercisable or on such accelerated basis as the Board may specify, within a
period of one year after such termination. For purposes of Section 8.4,
"Retirement" shall mean any employee retirement under the Company's retirement
policy.

         9. Rights of Employees. Nothing in the Option shall interfere with or
limit in any way the right of the Company or any subsidiary to terminate the
Optionee's employment at any time, nor confer upon the Optionee any right to
continue in the employ of the Company or any subsidiary. The Optionee shall not
have the right to be selected as an Optionee, or having been so selected, to be
selected again as an Optionee. The grant of the Option shall not constitute a
part of the base salary or any other compensation of the Optionee under any
other benefit plan of the Company or any subsidiary unless expressly so provided
in such other benefit plan.

         10. Adjustments. In the event of any change in the Common Stock of the
Company without receiving new consideration therefor, such as merger,
consolidation, reorganization, stock split, stock dividend, combination of
shares or exchange of shares, the Board shall adjust appropriately the maximum
number and class of shares subject to the Option and/or the Option Price, except
that any fractional shares resulting from such adjustments shall be eliminated
by rounding any portion of a share equal to .500 or greater up, and any portion
of a share equal to less than .500 down, in each case to the nearest whole
number.

         11. Tax Withholding. The Company shall have the authority, with respect
to the Option, to withhold, or to require the Optionee to remit to the Company,
prior to the issuance or delivery of any Option Shares, an amount sufficient to
satisfy federal, state and local withholding requirements on any exercise of the
Option. The Board may, in its sole discretion, permit the Optionee to elect to
satisfy withholding taxes, if any, arising in connection with the exercise of
the Option either by electing to have the Company retain (or by delivering to
the Company) shares of Common Stock then held by the Optionee valued at the fair
market value on the date the tax is to be withheld. Any such election shall be
subject to tax and securities law requirements.

         12. Change in Control. In the event of a "Change in Control," as that
term is defined in Section 14 of the 1995 Plan, remaining outstanding Options
shall be immediately exercisable for the total remaining number of Option Shares
and shall survive any such event.


<PAGE>



         13. Notices. Any notice to be given to the Company shall be addressed
to the Company at 2000 Cabot Boulevard West, Suite 110, Langhorne, PA 19047, and
any notice given to the Optionee shall be addressed to the Optionee at the
address then appearing on the personnel records of the Company or the subsidiary
of the Company by which the Optionee is employed, or at such other address as
either party hereafter may designate in writing to the other. Any such notice
shall be deemed to have been duly given when deposited in the United States
mail, addressed as aforesaid, registered or certified mail, and with proper
postage and registration and certification fees prepaid, or transmitted by hand
delivery or overnight express.


         IN WITNESS WHEREOF, the Company has granted this Option as of
the ___ day of _________________.

                                        eGames, Inc.



                                        By:    _______________________________
                                        Name:
                                        Title:


ACKNOWLEDGMENT and AGREEMENT:

         Optionee acknowledges receipt of this Agreement and agrees to all of
the terms and conditions contained herein.




OPTIONEE:  __________________________________
                     (Signature)

-----------------------------------------------------------------------
                             (Address)

-----------------------------------------------------------------------
                              (City)


-----------------------------------------------------------------------
         (State)                               (Zip Code)



<PAGE>


                                                                   Exhibit 10.3

                                  eGames. Inc.

                  Non-Employee Director Stock Option Agreement

         eGames, Inc. (the "Company") hereby grants to ________________ (the
"Optionee") this option to purchase shares of the Company's Common Stock at a
price and on the terms set forth herein and subject to the terms and conditions
contained in the Company's Amended and Restated 1995 Stock Option Plan, as
amended (the "1995 Plan"), which terms and conditions are hereby incorporated
herein.

         1. Grant. Effective as of _______________ (the "Date of Grant") the
Company granted to the Optionee an option (the "Option") to purchase ________
shares of the Common Stock of the Company (the "Option Shares") at a price of
$____ per share (the "Option Price").

         2. Type of Option. This Option is intended to be a non-qualified stock
option, granted under Part III of the 1995 Plan, and is not intended to be an
incentive stock option within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").

         3. Term. The Option granted hereunder shall expire at 5:00 p.m. (local
time at the principal executive offices of the Company) on ______________ (the
"Expiration Date"), unless sooner terminated as provided herein.

         4. Exercise of Option. Subject to Paragraph 3 and in accordance with
the terms and conditions contained in the 1995 Plan, the Option shall vest and
be exercisable, on a cumulative basis, in accordance with the following
schedule:

              Beginning On                       Number of Shares
              ------------                       ----------------


         5. Method of Exercise and Payment.

                  5.1 This Option shall be exercisable by written notice to the
Company, pursuant to Paragraph 11, specifying the number of Option Shares to be
purchased. The notice shall also be accompanied by payment of the aggregate
Option Price of the Option Shares being purchased.

                  If the listing, registration, or qualification of the Option
Shares upon any securities exchange or under any federal or state law, or the
consent or approval of any governmental regulatory body is necessary as a
condition of or in connection with the purchase of such Option Shares, the
Company shall not be obligated to issue or deliver the certificates representing
the Option Shares as to which the Option has been exercised unless and until
such listing, registration, qualification, consent, or approval shall have been
effected or obtained.


<PAGE>


                  5.2 Payment of the Option Price may be made: (i) in cash or
check; (ii) by exchange of shares of Common Stock valued at its fair market
value on the date of exercise; (iii) by means of a brokers' cashless exercise
procedure by the delivery to the Company of an exercise notice together with
irrevocable instructions to a broker to sell a sufficient number of shares of
Common Stock to pay the purchase price of Common Stock as to which such exercise
relates: and to deliver promptly such amount to the Company; or (iv) by any
combination of the foregoing. Where payment of the Option Price is to be made
with shares of Common Stock acquired under any compensation plan of the Company,
such shares will not be accepted as payment unless the Optionee has held such
shares for the period of time specified in the 1995 Plan.

         6. Rights of Shareholders. Neither an Optionee nor his or her legal
representatives or beneficiaries shall have any of the rights of a shareholder
with respect to any shares subject to any Option until such shares shall have
been issued upon the proper exercise of such Option.

         7. Nontransferability of Options. No Option may be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated otherwise than by will
or by the laws of descent and distribution or, with respect to nonqualified
stock options, pursuant to a qualified domestic relations order as defined by
the Code, or Title I of the Employee Retirement Income Security Act, or the
rules thereunder. Except as otherwise specifically provided herein, all Options
granted to an Optionee under the 1995 Plan shall be exercised during the
lifetime of such Optionee only by such Optionee.

         8. Termination of Service. Subject to the condition that no Option
shall be exercisable after the Expiration date:

                  8.1 Upon the Optionee's cessation of service as a non-employee
director (for reasons other than retirement or death), including cessation of
service due to physical or mental disability that prevents the Optionee from
rendering further services as a non-employee director, only those options
exercisable at the date of cessation of service shall be exercisable by the
Optionee. This Option shall be exercisable until the first to occur of (v) the
expiration of the remaining term of the Option or (vi) three months after the
Optionee's cessation of service.

         Upon the Optionee's retirement or death, this Option shall be
exercisable as follows:

                  (a) Retirement. Upon the Optionee's retirement as a
non-employee director after the Optionee has served for at least six consecutive
years as a director, this Option shall continue to be exercisable during its
term as if the Optionee had remained a non-employee director.

                  (b) Death. In the event of the Optionee's death while a member
of the Board of Directors or within the period after termination of service
during which the Option is exercisable by the Optionee in accordance with this
Paragraph 8, the Option shall be exercisable, to the extent then exercisable,
until the first to occur of (i) the expiration of the remaining term of the
Option or (ii) one year after the date of the Optionee's death.

         9. No Guaranteed Term of Office. Nothing in this Option shall be deemed
an agreement or condition guaranteeing to the Optionee any particular term of
office or limiting the right of the Company, the Board of Directors or the
shareholders to terminate the Optionee's term of office under the circumstances
set forth in the Company's Certificate of Incorporation or Bylaws, or as
otherwise provided by law.


<PAGE>


         10. Adjustments. In the event of any change in the outstanding Common
Stock of the Company without receiving new consideration therefor, such as
merger, consolidation, reorganization, stock split, stock dividend, combination
of shares or exchange of shares, the Board or the Committee shall adjust
appropriately the maximum number and class of shares subject to the option
and/or the Option Price, except that any fractional shares resulting from such
adjustments shall be eliminated by rounding any portion of a share equal to .500
or greater up, and any portion of a share equal to less than .500 down, in each
case to the nearest whole number.

         11. Notice. Any notice to be given to the Company shall be addressed to
the Company at 2000 Cabot Boulevard West, Suite 110, Langhorne, Pennsylvania
19047, and any notice given to the Optionee shall be addressed to the Optionee
at the address then appearing on the records of the Company, or at such other
address as either party hereafter may designate in writing to the other. Any
such notice shall be deemed to have been duly given when deposited in the United
States mail, addressed as aforesaid, registered, or certified mail, and with
proper postage, registration, and certification fees prepaid, or transmitted by
hand delivery or overnight express.

         IN WITNESS WHEREOF, the Company has granted this Option as of
the ___ day of ___________________.

                                        eGames, Inc.



                                        By:____________________________________


ACKNOWLEDGMENT and AGREEMENT:

          Optionee acknowledges receipt of this Agreement and the 1995 Plan and
agrees to all of the terms and conditions contained herein and therein.


OPTIONEE:  __________________________________
                       (Signature)

-----------------------------------------------------------------------
                              (Address)

-----------------------------------------------------------------------
                               (City)


-----------------------------------------------------------------------
            (State)                            (Zip Code)



<PAGE>


                                                                   Exhibit 10.7

      DESCRIPTION OF EGAMES, INC. 2005 EMPLOYEE INCENTIVE COMPENSATION PLAN


On June 23, 2004, the Compensation Committee of eGames, Inc. ("eGames", "we" or
"our") approved the adoption of a company-wide Employee Incentive Compensation
Plan (the "Plan"). The amount of incentive compensation that each employee is
eligible to earn under the Plan is contingent on eGames achieving a certain
threshold of operating income. Under the Plan, employees are eligible to earn a
specified percentage of their total annual salary in incentive compensation.
These percentages range from 15% to 35% of an employee's annual salary.

Employees are only eligible to be paid a bonus under the plan if during fiscal
2005 eGames earns operating income of at least $2,500,000, before deducting the
$359,000 in bonus expense that would be paid out to employees if the threshold
was to be achieved. If employee bonuses are earned, we will distribute these
bonus payments following the completion of the annual audit of our fiscal 2005
financial statements by the independent auditors appointed by the eGames Audit
Committee.

If during fiscal 2005 we earn more than $2,500,000 in operating income before
deducting any bonus expense, then the bonus pool may be increased at the
discretion of the Compensation Committee of eGames, Inc.


<PAGE>


                                                                   Exhibit 23.1

                         Consent of Independent Auditors

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 2nd, 2004,
with respect to the balance sheet as of June 30, 2004 and the statements of
operations, stockholders' equity, and cash flows of eGames, Inc. for the years
ended June 30, 2004 and 2003, which report appears in the June 30, 2004 annual
report on Form 10-KSB of eGames, Inc.



/s/ Stockton Bates, LLP

Philadelphia, Pennsylvania
September 27, 2004




<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 registrant 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, 2004

                                        /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, 2004

                                        /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, 2004 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, 2004

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, 2004 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, 2004

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.