At eGames, Inc

eGames Announces Second Quarter Fiscal 2009 Financial Results

Langhorne, Pa., – February 24, 2009 – eGames, Inc. (Pink Sheets: EGAM), a developer and publisher of games for the PC, game consoles and the Internet, today released financial results for its three and six months ended December 31, 2008.

COMMENTS:

“Our fiscal 2009 second quarter was perhaps the most challenging in the history of eGames,” commented Jerry Klein, President and CEO of eGames. “During the two previous quarters we were witnessing signs that we could reasonably expect to see our business opportunities improving by now, but instead the worsening economy and its affect on retailers and consumers alike have created a situation that has severely impacted eGames and its future prospects. As a result, we have reduced our current and future development commitments and focused our resources and efforts to minimize all expenditures while attempting to increase revenues. Our goal is to structure our business so that we can sustain our operations at current and ongoing revenue levels. Our priority is to remain a viable video game business that can continue to seek, obtain, and serve customers so that we are positioned to benefit when the economy ceases to worsen and begins improving. Hopefully, we will begin to see that happening in the weeks and months ahead.”

“During the second quarter, we released two newly-developed PC games, Satisfashion and Burger Island 2: The Missing Ingredient, on several of the leading Internet game portals. We also released Burger Island and Puzzle City on the Nintendo DS (Germany only for Puzzle City) during the second quarter. None of these releases occurred early enough in the second quarter to enjoy any substantial revenues during the second quarter. We are still awaiting the launch of a variety of Burger Island mini-games for the Apple iPhone which should occur during our fiscal third quarter,” Klein continued.

“The challenges that today’s economic situation present are persistent challenges that we constantly face in business. What is different today is the breadth and depth of the challenges – the demise of the credit markets, high and rising unemployment, the precipitous decline in home values and savings, and the trickle down effect on retail traffic and consumer spending. Prior economic slowdowns have typically left the videogame industry virtually unscathed. This time our business and many other companies in the videogame industry are being battered with only a few individual exceptions. Our goal is to survive while doing our best to demonstrate our capability to create and publish great top selling games so we can sell more products, increase revenues, and then ultimately achieve profitability and positive cash flows. Those remain our challenges and expectations,” Klein said.

FINANCIAL DISCUSSION:

Three Months ended December 31, 2008:

Net revenues decreased by $229,000, or 19.1%, to $967,000 for the quarter ended December 31, 2008, compared to $1,196,000 for the comparative quarter a year ago. The $229,000 decrease in net revenues resulted from decreases in North American traditional product revenues and in worldwide licensing revenues which were both related to the challenging retail markets along with weaker consumer demand for our PC games relative to our competitors’ products. Internet revenues continued to increase due to growth in consumer installations of the eGames toolbar (now available on all eGames published PC games) along with increased PC game sales on www.egames.com.

Net loss was $394,000, or $0.03 per diluted share, for the quarter ended December 31, 2008, compared to net income of $58,000, or nil per diluted share, for the comparative quarter a year earlier. This $452,000 decrease in profitability for the quarter ended December 31, 2008 was comprised of a $256,000 decrease in gross profit (related to lower net revenues and an 11.0% decline in the gross profit margin), and a $197,000 increase in operating expenses.

The 11.0% gross profit margin decline related to cost increases, as a percentage of net revenues, of:

5.3% in royalty costs traceable to higher royalty rates associated with our better selling third-party PC games at North American retail stores and online at www.egames.com;
2.4% in product costs due to an increase in liquidation product shipments; and
3.3% in other cost of revenues related to return processing fees and additional packaging costs.

The $197,000 increase in operating expenses related to:

· $180,000 in product development and quality assurance costs incurred to develop company owned proprietary games for the PC, iPhone, Nintendo DS and Wii game platforms; and

· $17,000 in other operating expenses related to various employment costs.

Six Months ended December 31, 2008:

Net revenues decreased by $46,000, or 2.4%, to $1,851,000 for the six months ended December 31, 2008, compared to $1,897,000 for the similar six-month period a year earlier. This $46,000 decrease in net revenues resulted from a decrease of $244,000 in North American traditional product revenues, which was partially offset by net revenue increases of: $109,000 in Internet revenues; $31,000 in licensing revenues; and $58,000 in liquidation product revenues.

Net loss was $854,000, or $0.07 per diluted share, for the six months ended December 31, 2008, compared to a net loss of $271,000, or $0.02 per diluted share, for the six months ended December 31, 2007. This $583,000 increase in the net loss resulted from a $190,000 decrease in gross profit and a $393,000 increase in operating expenses, both due to similar factors that impacted the three month results.

The following tables represent eGames’ net revenues by distribution channel for the three and six months ended December 31, 2008 and 2007, respectively:

Net Revenues by Distribution Channel

(rounded to the nearest thousand)

	Three Months Ended December 31,
Distribution Channel	2008	%	2007	%	Increase (Decrease)	% Change
Traditional product revenues	$ 524,000	54%	$ 743,000	62%	($ 219,000)	(29%)
Licensing revenues	142,000	15%	206,000	17%	(64,000)	(31%)
Internet revenues	246,000	25%	229,000	19%	17,000	7%
Liquidation product revenues	55,000	6%	18,000	2%	37,000	206%
Totals	$ 967,000	100%	$ 1,196,000	100%	($ 229,000)	(19%)

	Six Months Ended December 31,
Distribution Channel	2008	%	2007	%	Increase (Decrease)	% Change
Traditional product revenues	$ 995,000	54%	$ 1,239,000	65%	($ 244,000)	(20%)
Licensing revenues	296,000	16%	265,000	14%	31,000	12%
Internet revenues	469,000	25%	360,000	19%	109,000	30%
Liquidation product revenues	91,000	5%	33,000	2%	58,000	176%
Totals	$ 1,851,000	100%	$ 1,897,000	100%	($ 46,000)	(2%)

Liquidity Condition:

At December 31, 2008, eGames had $460,000 in cash compared to $874,000 in cash at June 30, 2008. Additionally, our net working capital (current assets minus current liabilities) decreased to $106,000 compared to $938,000 at June 30, 2008. Considering our net losses for the most recent quarters and for fiscal years 2008, 2007 and 2006, and the fact that we do not currently have access to a credit facility, we are continuing to evaluate our options to fund future operations if eGames does not become cash flow positive from operations in the very near future.

eGames, Inc.

Balance Sheets


	As of	As of
	December 31,	June 30,
ASSETS	2008	2008
Current assets:
Cash and cash equivalents	$ 460,206	$ 874,188
Accounts receivable, net	425,323	467,506
Inventory, net	557,247	590,601
Prepaid and other expenses	191,851	284,380
Total current assets	1,634,627	2,216,675

Furniture and equipment, net	30,718	27,548
Intangible assets	444,089	444,089
Total assets	$ 2,109,434	$ 2,688,312


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 663,795	$ 591,494
Unearned revenues	482,824	248,454
Accrued expenses	382,080	439,208
Total current liabilities	1,528,699	1,279,156


Stockholders' equity:
Convertible preferred stock	704,568	704,568
Common stock	9,179,827	9,179,827
Additional paid-in capital	2,509,930	2,462,406
Accumulated deficit	(11,260,653)	(10,384,708)
Treasury stock, at cost	(552,937)	(552,937)
Total stockholders' equity	580,735	1,409,156
Total liabilities and stockholders' equity	$ 2,109,434	$ 2,688,312

eGames, Inc.

Statements of Operations

Three Months Ended

December 31,

Six Months Ended

December 31,

	2008	2007	2008	2007
Net revenues	$ 967,061	$ 1,195,735	$ 1,850,793	$ 1,897,067

Cost of revenues	443,829	416,986	838,699	694,610

Gross profit	523,232	778,749	1,012,094	1,202,457

Operating expenses:
Product development	472,673	292,793	928,417	603,603
Selling, general and administrative	445,354	428,212	939,138	870,753

Total operating expenses	918,027	721,005	1,867,555	1,474,356

Operating income (loss)	(394,795)	57,744	(855,461)	(271,899)

Interest income, net	586	118	1,392	1,323

Income (loss) before income taxes	(394,209)	57,862	(854,069)	(270,576)

Provision for income taxes	- 0 -	- 0 -	- 0 -	- 0 -

Net income (loss)	($ 394,209)	$ 57,862	($ 854,069)	($ 270,576)


Net income (loss) per common share:
- Basic	($ 0.03)	$ 0.00	($ 0.07)	($ 0.02)
- Diluted	($ 0.03)	$ 0.00	($ 0.07)	($ 0.02)


Weighted average common shares outstanding – Basic	11,957,193	11,786,741	11,957,193	11,773,118

Dilutive effect of common share equivalents	- 0 -	379,971	- 0 -	- 0 -

Weighted average common shares outstanding - Diluted	11,957,193	12,166,712	11,957,193	11,773,118

eGames, Inc.

Statements of Cash Flows

Six Months Ended December 31,

	2008	2007
OPERATING ACTIVITIES:
Net loss	($ 854,069)	($ 270,576)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation	63,685	41,417
Depreciation and amortization	11,470	9,644
Changes in operating assets and liabilities:

Accounts receivable, net	42,183	(195,340)
Inventory, net	33,354	4,901
Prepaid and other expenses	76,367	(31,054)
Accounts payable	109,647	224,571
Unearned revenues	234,370	33,540
Accrued expenses	(68,066)	(174,449)
Net cash used in operating activities	(351,059)	(357,346)

INVESTING ACTIVITIES:
Purchase of furniture and equipment	(14,639)	(10,640)
Net cash used in investing activities	(14,639)	(10,640)

FINANCING ACTIVITIES:
Net disbursements from issuance of preferred stock	(26,638)	- 0 -
Dividend payments to preferred stockholders	(21,646)	- 0 -
Proceeds from stock option exercises	- 0 -	7,230
Net cash (used in) provided by financing activities	(48,284)	7,230

Net decrease in cash and cash equivalents	(413,982)	(360,756)

Cash and cash equivalents:
Beginning of period	874,188	644,524
End of period	$ 460,206	$ 283,768

eGames, Inc.

Statements of Stockholders’ Equity

Convertible

Preferred Stock

Common Stock

Additional Paid-in

Accumulated

Treasury Stock

Stockholders’

	Shares	Amount	Shares	Amount	Capital	Deficit	Shares	Amount	Equity

Balances at June 30, 2007	- 0 -	$ - 0 -	11,956,093	$ 9,179,827	$ 2,205,242	($ 9,467,234)	(231,900)	($ 501,417)	$ 1,416,418

Net loss						(902,250)			(902,250)
Shares issued and retired in connection with stock option exercises			95,000		58,750		(46,000)	(51,520)	7,230

Common stock options issued to employees and directors					79,585				79,585

Shares issued in connection with consulting agreement			60,000		38,792				38,792

Shares issued in connection with preferred stock offering	875,000	875,000							875,000

Costs incurred and common stock shares and warrant issued in connection with preferred stock offering		(170,432)	124,000		80,037				(90,395)

Dividends declared on preferred stock						(15,223)			(15,223)

Rounding						(1)			(1)
Balances at June 30, 2008	875,000	$ 704,568	12,235,093	$ 9,179,827	$ 2,462,406	($ 10,384,708)	(277,900)	($ 552,937)	$ 1,409,156

Net loss						(854,069)			(854,069)

Common stock options issued to employees and directors					47,524				47,524

Dividends declared on preferred stock						(21,876)			(21,876)


Balances at December 31, 2008	875,000	$ 704,568	12,235,093	$ 9,179,827	$ 2,509,930	($ 11,260,653)	(277,900)	($ 552,937)	$ 580,735

Three Months Ended

Distribution Channel

Six Months Ended

Distribution Channel

ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

Treasury Stock