Games 10QSB 2006 Q1 Quarterly report (small business)

U. S. Securities and Exchange Commission

WASHINGTON, D. C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

Commission file number 0-33345

GAMES, INC.

(Exact name of small business issuer as specified in its charter)

Delaware 75-2926440

(State of Incorporation) (I.R.S. Employer Identification Number)

425 Walnut Street, Suite 2300

Cincinnati, Ohio 45202

(Address of principal executive office)

(513) 721-3900

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or15 (d) of the Exchange Act 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 ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes ( )

No (X)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ( )

No (X)

As of November 18, 2005 there were 32,323,397 shares of the issuer’s Common Stock, $.001 par value per share, issued with 31,253,370 outstanding.

Transitional Small Business Disclosure Format (check one)

Yes ( )

No (X)

GAMES, INC.

Form 10-QSB Quarterly Report

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF

OPERATIONS

FORWARD-LOOKING STATEMENTS

OVERVIEW AND RECENT DEVELOPMENTS

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2005

COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004

REVENUE

COSTS AND EXPENSES

ITEM 3. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

CERTIFICATIONS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Games, Inc. and Subsidiary

Condensed Consolidated Balance Sheet

September 30, 2005

(unaudited)

Assets


Current assets:
Cash	$ 36,825
Accounts receivable – trade	11,959
Prepaid expense	24,000

Total current assets		$ 72,784

Property, equipment and software, net		85,413

Intangibles, net		160,124

Total assets		$318,321

Liabilities and Stockholders' Deficiency

Current liabilities:
Notes payable, net of debt discount of $6,760	$ 81,250
Line of credit – related party	460,000
Convertible promissory note	100,000
Accounts payable and accrued liabilities	1,191,329
Due to related parties	36,346
Accrued officers salaries	55,381
Accrued litigation and judgments including accrued interest of $399,876; see Note C	3,554,134
Series AA Convertible Redeemable Preferred stock, issued for deposit on Games.com assets, (aggregate liquidation preference of $3,025,000) including accrued interest of $198,727; see Note C	3,223,727
Total current liabilities		$ 8,702,167

Note payable, net of current maturities and debt discount of $5,096		119,393
Total liabilities		8,821,560

Commitments and contingencies

Stockholders' deficiency
Series A Convertible Redeemable Preferred stock, $0.001 par value, 50,000 shares authorized; 17,021 issued and 16,655 outstanding (aggregate liquidation preference of $1,702,100)	17
Common stock, $0.001, 65,000,000 shares authorized,
31,798,397 issued and 30,645,454 shares outstanding	31,798
Additional paid-in capital	41,778,260
Deferred compensation	(291,520)
Accumulated deficit	(49,978,490)
Less treasury stock, at cost 14,500 shares	(43,304)
Stockholders' deficiency		(8,503,239)
Total liabilities and stockholders’ deficiency		$ 318,321

The accompanying notes are an integral part of these condensed consolidated financial statements.

Games, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(unaudited)


	Three months ended		Three months ended
	September 30, 2005		September 30, 2004

Revenues	$ 99,506		$ 79,579
Cost of revenues	40,633		98,699

Gross profit (loss)	58,873		(19,120)

Operating expenses:
Selling, general and administrative expenses, including stock- based compensation of $17,437 and $157,136 in 2005 and 2004, respectively	671,405		653,411
Operating loss	(612,532)		(672,531)

Interest expense	(176,782)		(13,345)

Net loss		(789,314)	(685,876)

Dividends on Series A convertible redeemable preferred stock	(33,814)		--

Net loss attributable to common stockholders	$(823,128)		$(685,876)

Per Share Information:
Weighted average common shares outstanding -
basic and diluted	28,757,332		23,796,810

Net loss per common share – basic and diluted	$(0.03)		$(0.03)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Games, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Three months ended	Three months ended
	September 30, 2005	September 30, 2004
Net cash flows from operating activities:
Net cash used in operating activities	$(608,093)	$(323,194)

Cash flows from investing activities:
Purchase of equipment	(1,605)	--

Cash flows from financing activities:
Repayments on long-term debt	(18,750)	(21,500)
Repayments of due to related parties	(4,800)	(5,875)
Borrowings under line of credit – related party	460,000	--
Proceeds from issuance of common stock	200,000	332,000
Net cash provided by financing activities	636,450	304,625

Net increase (decrease) in cash	26,752	(18,569)

Cash at beginning of period	10,073	33,067

Cash at end of period	$ 36,825	$ 14,498

Cash paid for:
Interest	$ --	$ 7,191

The accompanying notes are an integral part of these condensed consolidated financial statements.

Games, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(unaudited)

NOTE A - NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Games, Inc. (“Games” or the “Company”) along with its majority owned subsidiary Lottery Corporation, formerly GameBanc, Inc. is a technology company operating in the area of interactive entertainment, primarily focused on Government Sponsored Lotteries and Internet Games. In August of 2005 the Company changed the name of its subsidiary to Lottery Corporation to better reflect the nature of its business.

The Company's principal business owns and operates a portfolio of online portals focused on the delivery of interactive entertainment and content to consumers. The Company features two community-focused online game sites with proprietary games for purchase-and-download, conventional online play, peer-to-peer and tournament game play. Games, Inc. also offers a digital greeting card site and has developed a proprietary back-end system for the online facilitation of the sale of lottery tickets. Itswww.Lottery.com website currently reports information on all state and provincially-sponsored Lotteries and redistributes this information to other larger portals. Revenues are driven by online advertising on all sites along with lottery administrative services, content provision and subscriptions services. The Company owns the following games and entertainment sites:

www.gameland.com,www.skillmoney.com, andwww.cards.com.

The Company owns the following lottery site: www.lottery.com

Games, Inc. provides an array of products and services for the domestic lottery markets. The Company develops, provides and maintains web marketing solutions for lottery retailers, SMS communications, database management, lottery information services. In addition the Company has developed software, applications and services to facilitate the electronic sale of new and existing lottery products via the Internet and wireless devices.

The accompanying interim condensed consolidated financial statements and notes to the financial statements for the interim periods as of September 30, 2005 and for the three months ended September 30, 2005 and 2004, are unaudited. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial statements and Item 310(b) of Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. It is the opinion of management that these statements include all normal recurring adjustments necessary to make the financial position, results of operations, and cash flows not misleading as of September 30, 2005 and for all periods presented.

Operating results for the three month period ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. The condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Form 10-KSB of the Company as of and for the year ended June 30, 2005.

NOTE B – GOING CONCERN UNCERTAINTY

As shown in the accompanying condensed consolidated financial statements, the Company incurred a net loss of $823,128 and $685,876 for the three months ended September 30, 2005 and September 30, 2004. Current liabilities of $8,702,167 at September 30, 2005 exceed current assets of $72,784 by $8,629,383. At September 30, 2005, the Company has a stockholders’ deficiency in the amount of $8,503,239.

At September 30, 2005, $547,917 of unpaid Federal and State payroll taxes (including interest and penalties) are included in accrued expenses. The Company is negotiating with the Internal Revenue Service (“IRS”) regarding a payment plan. There can be no assurance that the Company will be able to negotiate a payment plan with the IRS. If the Company is unable to negotiate a payment plan, the IRS could declare the Company in default of their fiduciary responsibility and could file a tax lien on the Company's assets or take other action against the Company and its responsible officers, which would have a material adverse effect on the Company's business.

Management of the Company is developing a plan to license the sale of lottery tickets online and to further develop its internet games web sites. In addition, the Company is seeking to raise equity capital to fund and expand its operations in addition to fund acquisitions.

Management believes that by (i) obtaining a license to sell lottery tickets online and (ii) if they are successful in obtaining additional equity capital to fund potential acquisitions, the cash flows would be sufficient to fund operations through the near term. However, there can be no assurance that the Company will be successful in its attempts to obtain a license to sell lottery tickets online, to generate positive cash flows or raise sufficient capital essential to its survival. To the extent that the Company is unable to generate or raise the necessary operating capital, it will become necessary to curtail operations. Additionally, even if the Company does raise operating capital, there can be no assurance that the net proceeds will be sufficient to enable it to develop its business to a level where it will generate profits and positive cash flows.

These matters, along with those discussed in Note C, raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE C – LITIGATION - ATARI, INC.

On December 31, 2003, Games entered into an Asset Purchase Agreement, Assignment and License Agreement (“Asset Purchase Agreement”) to purchase from Atari, Inc., (“Atari”), (i) the www.Games.com domain name, (“URL”) and certain related assets for a purchase price of $1,125,000 payable in $100,000 cash and 10,250 shares of Series AA Preferred Stock valued at $1,025,000 (See Note H), and in connection therewith entered into a five (5) year royalty agreement which provides initial consideration of 20,000 shares of Series AA Preferred Stock valued at $2,000,000. Furthermore, the Company is committed to additional minimum royalty payments over the five year term of the agreement of $3,000,000 for total consideration of $5,000,000, (“Prepaid Royalty”). Royalties are subdivided into two types: (a) royalties against which the Company may recoup against the Prepaid Royalty and (b) royalties that the Company pays, throughout the 5 year term of the agreement, beginning with the first dollar of net sales against which the Company may not apply against the Prepaid Royalty. Net sales from Licensed Products, (defined below), modified by the Company, will have an 8% recoupment-eligible royalty and, in addition, a 2% recoupment-ineligible royalty. On net Sales from Atari-provided Licensed Products, the Company shall pay an 18% recoupment-eligible royalty and, in addition, a 2% recoupment-ineligible royalty. The Asset Purchase Agreement in its entirety $6,025,000 has been guaranteed by CWP.

As part of this transaction, the Company purchased digital licenses and sublicenses with exclusive digital rights with respect to certain formats to a number of games including MONOPOLY, SCRABBLE, RISK, BATTLESHIP, BOGGLE and YAHTZEE and certain Atari games, (collectively “Licensed Products”). When Atari redeems or converts the 10,250 shares of Series AA Preferred Stock, it activates the above mentioned license agreement. Furthermore, the Asset Purchase Agreement allows for the license to be renewed by Games, Inc., for an additional five years including a right of first refusal.

On April 29, 2004, the Company notified Atari it was in material breach of the Asset Purchase Agreement. Atari then responded with a legal action, “Atari, Inc. Atari Interactive Inc. and Hasbro, Inc. vs. Games, Inc., Roger W. Ach II, and Chicago West Pullman LLC”, United States District Court, Southern District of New York, (JSR) 04 Civ. 3723. On May 18, 2004, the Court granted a temporary restraining order against the Company and the Company CEO from operating the Games.com site and Licensed Products and scheduled a preliminary injunction hearing prior to which, the Company agreed to the preliminary injunction. The Court signed an order granting the preliminary injunction pending the outcome of the case.

The Notice of Default issued by Games, Inc. pertained to the Asset Purchase Agreement dated December 31, 2003 which grants the Company exclusive rights to the URL www.Games.com and all online versions of the Hasbro games (as defined), reserving to the licensor rights to “downloadable” versions of the games (Licensed Products). Online versions

of Licensed Products have appeared on several sites including www.Zone.com, www.Real.com, and www.Shockwave.com.

The Company believes this resulted in an event of default being called on Atari pertaining to the property and rights with respect to the Games.com licenses, as they pertain to Licensed Products being distributed in the market by Atari.

Pursuant to the default, Games refused to pay the additional $3 million in advance royalties on these licenses and refused to redeem 10,250 shares of the Series AA Preferred Stock, until the matter is satisfactorily resolved. On May 3, 2004 Atari issued to Games, Inc. a notice of default regarding the non-payment of the $3,000,000 and non-redemption of the 10,250 shares of Series AA Preferred Stock.

By an Amended Judgment entered on June 20, 2005, the District Court ORDERED, ADJUDGED AND DECREED: That for the reasons stated in the Court’s Memorandum Orders dated May 4, 2005 and May 27, 2005 respectively, Atari is entitled to the following damages: (1) immediate payment of $3,104,108, plus interest at the annual rate of 9% from April 30, 2004; (3) immediate redemption of 10,000 additional shares for $1 million; (4) the $50,000 bond that plaintiffs posted on May 19, 2004, to secure a temporary restraining order in this case is exonerated; (5) redemption of the remaining 10,000 shares at any time after December 29, 2005 at a price of $100 per share, for a total of $1 million; (6) plaintiffs collectively are entitled to recoup their $150 filing fee; (7) this judgment runs directly against Games, but in the event Games fails to satisfy it, it runs secondarily against Chicago West Pullman and Ach; (8) the preliminary injunction is lifted; and 9) defendant Games, Inc. is enjoined from selling or distributing any product that contains the intellectual property it licensed in its contract with Atari, Inc., and plaintiffs’ and defendants’ motions for reconsideration are in all other respects denied.

On June 30, 2005, Games Inc. received the Final Order from the Court denying our request to file a 60b Motion requesting additional information on the recent transaction in which Infogrames, the French-based parent of Atari, Inc. sold back to its original owner, Hasbro, Inc. the Intellectual Property and game licenses which are the subject of this lawsuit. This sale was for a total of $65 million cash and included a 7 year license to a Infogrames subsidiary, Atari Inc.of IP that is included in the December 31, 2003 Asset Purchase and License Agreement.

Pursuant to a Notice of Appeal filed on June 30, 2005, Games, Inc. appealed the Amended Judgment and its constituent decisions. This appeal is pending before the United States Court of Appeals for the Second Circuit.

The Company intends to vigorously appeal and defend this action. However there can be no assurance that the Company will be successful in the action with Atari and even if the Company is successful there can be no assurance that the Company will retain the URL Games.com.

As a result of the Judgment, the assets, which include the Games.com URL and the Licensed Products, which had been classified as a long-term assets as “deposit on Games.com assets”

were considered impaired. Accordingly, the Company recorded a charge for impairment expense in the amount of $3,214,583 for the year ended June 30, 2005.

At September 30, 2005, the liabilities related to this litigation recorded on the balance sheet consisted of the following:

Series AA Preferred Stock immediately redeemable

$2,025,000

Series AA Preferred Stock redeemable December 29, 2005

1,000,000

Accrued interest at 9% from April 30, 2004

198,727

Total Series AA Preferred Stock recorded as a current liability

3,223,727

Court order immediately payable to Atari

3,154,258

Accrued interest at 9% from April 30, 2004

399,876

Accrued litigation and judgments

3,554,134

Total liability recorded to Atari, Inc. at September 30, 2005

$6,777,861

NOTE D – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Sources

Total revenues for the three months ended September 30, 2005 and 2004 are as follows:


	Three months ended September 30, 2005		Three months ended September 30, 2004
Revenue Source	Amount	Percent of Total	Amount	Percent of Total
1. Advertising	$ 51,459	52%	$30,972	39%
2. Lottery services	35,840	36%	35,803	45%
3. Subscriptions and fees	12,207	12%	12,804	16%
Total	$99,506	100%	$79,579	100%

Net Loss Per Share

The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 requires the presentation of basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted.

In accordance with Emerging Issues Task Force, (“EITF”), Issue No. 03-6, "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share," the Company uses the two-class method to calculate the effect of the participating Series A Convertible Preferred Stock, (“Series A Preferred Stock”), and Series AA Convertible Redeemable Preferred Stock on the calculation of basic EPS and the if-converted method is

used to calculate the effect of the participating Series A Preferred Stock and Series AA Preferred Stock on diluted EPS. The adoption of EITF Issue No. 03-6 did not require any changes to the Company's calculation of EPS.

The following equity securities are not reflected in diluted loss per share because their effects would be anti-dilutive:


	September 30,
	2005	2004
Options	6,469,639	4,160,500
Warrants	5,391,374	--
Series AA Preferred Stock	715,554	715,554
Series A Preferred Stock	4,153,124	55,000
Convertible notes	100,000	120,000
Total	16,829,691	5,051,054

Accordingly, basic and diluted loss per share are identical.

Stock Based Compensation

SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.” This Statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company continues to follow the pro-forma disclosures for stock-based compensation as permitted in SFAS 123. The following table illustrates the effect on net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensatio n:


	Three months ended September 30,
	2005	2004
Net loss attributable to common stockholders as reported	$(823,128)	$(685,876)

Add: stock-based employee compensation expense determined under the intrinsic value method	--	--
Less: stock-based employee compensation expense determined under fair value-based methods for all awards	(1,529,250)	(4,150)

Pro forma net loss	$(2,352,378)	$(690,026)

Pro forma net loss per share- Basic and diluted	$(0.08)	$(0.03)

Pro forma Information:

The fair value for the fiscal 2005 and 2004 options issued was estimated at the date of grant using a Black-Scholes option-pricing model to be $0.20 and $1.75 respectively per share with the following weighted-average assumptions.


Assumptions	2005	2004

Risk-free rate	4.2%	4.5%
Dividend yield	0.0%	0.0%
Volatility factor of the expected market price of the Company's Common Stock	233.7%	286.8%

Average life	9.2 years	3.4 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

The following summarizes the stock option transactions for the three months ended September 30, 2005:


		Weighted
		Average
		Exercise
	Options	Price
Options outstanding at July 1, 2005	6,469,639	$ 0.62
Granted	55,000	0.20
Exercised	--	--
Terminated	--	--

Options outstanding at September 30, 2005	6,524,639	$ 0.61


	Options Outstanding		Options Exercisable
		Weighted
		Average		Weighted
Range of		Remaining		Average
Exercise	Number	Contractual	Number	Exercise
Prices	Outstanding	Life	Exercisable	Price
$0.20 - $1.50	6,524,639	9.2 years	5,523,806	$0.62

New Accounting Pronouncements

In September of 2005 the Emerging Issues Task Force, (“EITF”), reached the following consensuses:

The issuance of convertible debt with a beneficial conversion feature results in a basis difference in applying FASB Statement of Financial Accounting StandardsSFAS No. 109,Accounting for Income Taxes. Recognition of such a feature effectively creates a debt instrument and a separate equity instrument for book purposes, whereas the convertible debt is treated entirely as a debt instrument for income tax purposes.

The resulting basis difference should be deemed a temporary difference because it will result in a taxable amount when the recorded amount of the liability is recovered or settled.

Recognition of deferred taxes for the temporary difference should be reported as an adjustment to additional paid-in capital.

The consensuses become effective for reporting periods ending after December 15, 2005. The adoption of this pronouncement is not expected to have a material effect on the Company’s consolidated financial statements.

NOTE E - CONVERTIBLE PROMISSORY NOTES

From March 2003 through June 2003, the Company issued $662,500 5% and 6% convertible promissory notes (the “March Notes”) in varying amounts due October 31, 2004. A portion of the proceeds raised from the placement has been used to fund the Company's working capital and capital expenditure requirements. The March Notes including accrued interest are convertible into one (1) share of Common Stock for each dollar of debt, at the option of the holder, subject to certain adjustments and conditions. From February, through April of 2004 note holders converted $587,500 of notes and $30,692 of accrued interest to 618,192 shares of Games common stock.

The fair value of the Company’s common stock exceeded the conversion price of the March Notes at the date of issuance. Accordingly, the Company recorded a beneficial conversion feature on the promissory notes of $88,000. The beneficial conversion feature and deferred debt discount accrete to interest expense over the life of the promissory notes.

During July 2003, the Company issued a $35,000 5% convertible promissory note. The promissory note including accrued interest is convertible into one (1) shares of Common Stock for each dollar of debt, at the option of the holder, subject to certain adjustments and conditions. In March of 2005 a note holder converted a $10,000 promissory note and accrued interest of $900 to 109 shares of Series A Convertible Preferred Stock.

As of September 30, 2005 there are two convertible notes that remain outstanding and were due in October 31, 2004, $75,000 bearing interest at 6% and $25,000 bearing interest at 5%. The Company is in the process of attempting to extend the terms of these Promissory Notes or convert them to equity.

NOTE F – NOTE PAYABLE

Note payable at September 30, 2005 is as follows:


The Company issued a non-interest bearing note payable in connections with the acquisition of Cards.com; interest is imputed at 6%; quarterly payments of $18,750 through June 30, 2008: includes debt discount $11,857 at September 30, 2005		$ 200,643

Less: current maturities		(81,250)

Note payable, less current maturities		$ 119,393

The future commitments as of September 30, 2005 for the periods ending June 30 of the following years are as follows:


For the year ending June 30, 2006	$62,500
For the year ending June 30, 2007	75,000
For the year ending June 30, 2008	75,000
Less: imputed interest expense	(11,857)
Total	$200,643

NOTE G – LINE OF CREDIT – RELATED PARTY

On October 2, 2005, Games, Inc. entered into a one-year $500,000 borrowing facility with a shareholder. Interest of 5% per annum is payable semi-annually. The facility is secured by substantially all of the equipment, intellectual property and other assets of the Company and its subsidiaries. The Company received advances on this line in August and September of 2005 totaling $460,000.

NOTE H- LITIGATION AND CONTINGENCIES

Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II, and Chicago West Pullman LLC

For a description of this litigation see Note C – Deposit on Games.com Assets.

The Company is also in a dispute with Data Return, LLC, a firm the Company contracted with in May 2004 for certain software and hardware requirements. With the assistance of legal counsel, Games attempted to negotiate a settlement of this dispute, however on September 6, 2005 Data Return's counsel informed the Company’s attorney that they had filed suit against the Company in the Cook County, Illinois Circuit Court, seeking total damages of $516,118 plus attorneys' fees and costs. The Company has not yet been formally served with this lawsuit, however. Management believes its position is meritorious and that it intends to vigorously defend this matter. At this time, the Company cannot predict the outcome in this matter, or if the outcome is adverse, the likely liability of the Company, if any.

In the ordinary course of conducting its business, the Company has become subject to additional litigation and claims regarding various matters. There exists a reasonable possibility that the Company will not prevail in all cases. However, sufficient uncertainty exists in these cases to prevent the Company from determining the amount of its liability, if any.

NOTE I – STOCKHOLDERS’ DEFICIENCY

Common Stock

During the three months ended September 30, 2005, Games, Inc. issued 2,000,000 shares of common stock for $200,000 in gross proceeds to six accredited investors, one of these investors who is a member of Games Board of Directors acquired 50,000 shares for $5,000.

During the three months ended September 30, 2005, Games, Inc. issued 147,500 shares of common stock for compensation of the Board of Directors in the amount of $29,500.

During the three months ended September 30, 2005, Games, Inc. issued 2,000,000 shares of common stock to the Company’s Executive Deferred Compensation Plan in exchange for $200,000 in deferred and accrued salary to the officers of the Company. As of September 30, 2005, 355,885 of these shares have not been earned and therefore are not reflected as outstanding.

During the three months ended September 30, 2005, Games, Inc. exchanged 4,500 of Series A Convertible Redeemable Preferred Stock for 1,098,000 shares of common stock.

During the three months ended September 30, 2005, Games, Inc. cancelled 132,945 shares of common stock issued in 2002 that were issued and outstanding for services that were never performed.

During the three months ended September 30, 2005, Games, Inc. issued 115,840 shares of common stock to pay $39,733 in dividends on Series A Convertible Redeemable Preferred Stock.

Series A Convertible Redeemable Preferred Stock

At September 30, 2005 there are 17,021 Series A Convertible Redeemable Preferred shares issued; each share of Series A Convertible Redeemable Preferred Stock has the following characteristics:

Dividends.

The Preferred Stock shall have a 6% coupon to be paid in cash or common stock at the Company’s option on the first day of each quarter.

Liquidation Preference.

The holder of each outstanding share of Series A Convertible Redeemable Preferred Stock shall be entitled to receive, a liquidation preference in the amount of $100 per share subject to certain restrictions (as defined).

Voting Rights.

The holders of Series A Convertible Redeemable Preferred Stock shall not have voting rights.

Conversion.

The holders of the Series A Convertible Redeemable Preferred Stock shall have conversion rights as follows:

Each share of its Series A Convertible Redeemable Preferred Stock is immediately convertible into 244 shares of common stock, or $0.41 per share.

Warrant.

Each share also carries a three year warrant to purchase an additional 244 shares of common stock at $0.80 per share. At September 30, 2005 there are 5,391,374 warrants issued and outstanding.

The Company also agreed to register for resale the shares of common stock as well as the shares issued upon exercise of the warrants. The registration statement must be declared effective no later than 120 days after the closing, on March 11, 2005. If the Company fails to meet these registration obligations as required under the terms of the Agreements, the Company will be obligated to make certain cash damage payments to the investors. At September 30, 2005, the registration obligations have not been met, and the Company has accrued $46,000 for this obligation.

Beneficial Conversion Feature.

Pursuant to EITF 98-5, the Company recorded a deemed dividend in the amount of $2,152,100 to reflect the beneficial conversion feature of the Series A Convertible Redeemable Preferred Stock at the time of issuance.

Series AA Convertible Redeemable Preferred Stock

On December 31, 2003 the Company’s Board of Directors authorized the establishment of a new series of preferred stock designated as “Series AA Convertible Redeemable Preferred Stock”, $.001 par value per share (“Series AA Preferred Stock”). The Company authorized 30,250 shares of Series AA preferred stock.

On December 31, 2003 the Company issued 30,250 shares of Series AA Preferred Stock in connection with the acquisition of the deposit on Games.com assets (See Note C).

Each share of Series AA Preferred Stock has the following characteristics:

Dividends.

No dividends on the Preferred Stock shall be paid unless the amount of such dividend on the Common Stock is also paid on the Series AA Preferred Stock on an as-converted to Common Stock basis. Otherwise, the holders of the Series AA Preferred Stock shall not be entitled to receive dividends.

Liquidation Preference.

The holder of each outstanding share of Series AA Preferred Stock shall be entitled to receive, a liquidation preference in the amount of $100 per share subject to certain restrictions (as defined).

Voting Rights.

The holders of Series AA Preferred Stock shall not have voting rights.

Conversion.

The holders of the Series AA Preferred Stock shall have conversion rights as follows:


Preferred Stock Series AA	Conversion date Shares	Price	Common stock
	March 30, 2004 10,250	$2.50	410,000
	December 31, 2004 10,000	$6.00	166,666
	December 31, 2005 10,000	$7.20	138,888
			715,554

Redemption.

The Company may redeem the Series AA Preferred Stock at any time with 15 days written notice. The holder of Series AA Preferred Stock has the right, exercisable any time following March 29, 2004, upon written notice delivered to the Company, to require the Company to redeem an aggregate of 10,250 shares of Series AA Preferred Stock for a cash redemption price of $100 per share. Additionally, the holder of Series AA Preferred Stock shall have the right, exercisable as of each of December 31, 2004 and December 31, 2005, upon written notice delivered to the Company at least 5 business days prior to these dates, to require the Company to redeem an aggregate of 10,000 shares of Series AA Preferred Stock per year for a cash redemption price of $100 per share. As a result of Atari’s demand for redemption, (see Note C), the Company has classified the 30,250 shares as a current liability. As a result of CWP’s guarantee, and in accordance with E ITF 00-19, the Company has recorded the remaining shares as a current liability.

At September 30, 2005 the Company has classified the Series AA Redeemable Preferred Stock as a liability, see Note C.

NOTE J – SUBSEQUENT EVENTS

On October 18, 2005 the Company issued 275,000 shares of common stock valued at $27,500 for consulting services related to the lottery operations.

On October 21, 2005 the issued 250,000 shares of common stock to an accredited investor for $25,000 in cash.

On October 25, 2005, the Board of Directors of Games, Inc. voted to approve a plan to spin off the shares of Lottery Corporation to its shareholders. The Lottery Corporation shares will be distributed as a stock dividend, with each Games Inc. shareholder receiving one share of the new corporation for each four shares of Games Inc. held on the Record Date, rounded up to the nearest whole share. The Company has not set a record date for the transaction.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Except for the historical information contained herein, the following discussion and analysis in this Form 10-QSB and other materials filed by the company with the Commission contain certain 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. These forward-looking statements that are not historical facts are based on management's current projections and estimates and are identified by words such as "expects," "intends," "plans," "projects," "anticipates," "believes," "estimates" and similar words. Statements relating to the future anticipated direction of the industry, plans for future expansion, various business development activities, planned capital expenditures, future funding sources, anticipated sales and potential contracts. Such forward-looking information involves important ri sks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of Games. These risks and uncertainties include, but are not limited to, those relating to development and expansion activities, dependence on existing management, financing activities, domestic and global economic conditions, changes in federal or state tax laws and market competition factors. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements.

OVERVIEW AND RECENT DEVELOPMENTS

The terms “Games”, “GMSI,” “the Company,” “we,” “our,” and “us” refer to Games, Inc. and its consolidated subsidiary, unless otherwise specified.

Except for historical information, the following description of the Company’s business contains forward-looking statements based on current expectations that involve risks and uncertainties. The Company’s actual results could differ materially from those set forth in these forward-looking statements as a result of a number of factors, including those set forth in this Form 10-KSB under the heading "Risk Factors."

The Company is a technology company operating in the area of interactive entertainment, primarily focused on Government Sponsored Lotteries and Internet Games. The Company also provides a wide array of products and services to the domestic lottery markets.

The Company owns the following games and entertainment sites:

www.gameland.com,www.skillmoney.com, andwww.cards.com. On December 31, 2003, Games entered into an Asset Purchase Agreement, Assignment and License Agreement (“Asset Purchase Agreement”) to purchase from Atari, Inc., (“Atari”), (i) the www.Games.com domain name, (“URL”) and certain related assets for a purchase price of $1,125,000 payable in $100,000 cash and 10,250 shares of Series AA Preferred Stock valued at $1,025,000 (See Note H), and in connection therewith entered into a five (5) year royalty agreement which provides initial consideration of 20,000 shares of Series AA Preferred Stock valued at $2,000,000. Furthermore, the Company is committed to additional minimum royalty payments over the five year term of the agreement of $3,000,000 for total consideration of $5,000,000, (“Prepaid Royalty”). Royalties are subdivided into two types: (a) royalties against which the Company may recoup against the Prepaid Royalty and (b) royalties that the Company pays, throughout the 5 year term of the agreement, beginning with the first dollar of net sales against which the Company may not apply against the Prepaid Royalty. Net sales from Licensed Products, (defined below), modified by the Company, will have an 8% recoupment-eligible royalty and, in addition, a 2% recoupment-ineligible royalty. On net Sales from Atari-provided Licensed Products, the Company shall pay an 18% recoupment-eligible royalty and, in addition, a 2% recoupment-ineligible royalty. The Asset Purchase Agreement in its entirety $6,025,000 has been guaranteed by CWP.

As a result of the Judgment, the assets, which include the Games.com URL and the Licensed Products, which had been classified as a long-term assets as “deposit on Games.com assets” were considered impaired. Accordingly, the Company recorded a charge for impairment expense in the amount of $3,214,583 for the year ended June 30, 2005.

At September 30, 2005, the liabilities related to this litigation recorded on the balance sheet consisted of the following:

Series AA Preferred Stock immediately redeemable

$2,025,000

Series AA Preferred Stock redeemable December 29, 2005

1,000,000

Accrued interest at 9% from April 30, 2004

198,727

Total Series AA Preferred Stock recorded as a current liability

3,223,727

Court order immediately payable to Atari

3,154,258

Accrued interest at 9% from April 30, 2004

399,876

Accrued litigation and judgments

3,554,134

Total liability recorded to Atari, Inc. at September 30, 2005

$6,777,861

On June 30, 2005 Games Inc. filed to appeal the case to the Second Circuit Court of Appeals. Games is prepared to pursue all legal remedies against Atari and its officers to effect its ownership of this property and these exclusive game rights, (see Legal Proceedings and Note C to our June 30, 2005 financial statements).

The Company also owns the following lottery site:www.lottery.com.

The Company’swww.Lottery.com website currently reports information on all state and provincially-sponsored Lotteries and redistributes this information to other larger portals. Revenues are driven by online advertising on all sites along with lottery administrative services, content provision and subscription services.

The Company believes recent advances in technology and security will ultimately lead to government lotteries choosing to distribute their products via the Internet and other wireless devices. The Company believes it has developed and operates secure, integrated Internet lottery distribution systems. The Internet systems provide for the electronic sale and support of both periodic and instant draw lottery games and instant electronic "scratch-off” games. Using the Company's software, systems and technology, lotteries will be able to electronically distribute lottery tickets for both instant and periodic draw lottery games over the Internet through the Company's website, Lottery.com, or through an association of traditional lottery retailers that have licensed the Company’s software. The Company believes that the electronic distribution of lottery tickets through these systems will increase sales for lotteries becaus e the systems make the purchase of tickets more easily accessible and because they make use of technology to enhance and enliven the lottery gaming experience.

Electronic distribution of lottery products will allow lotteries to offer access to their customers 24/7 in a secure, easy to use environment. The Company believes that its Internet lottery distribution systems will encourage potential lottery patrons to play more frequently and will also attract new lottery customers that do not currently purchase lottery tickets because the current retail system does not provide for easy accessibility.

In recent years, lotteries have been faced with jackpot fatigue and an aging demographic. Enabling electronic fulfillment of lottery products will open this market to a younger more affluent demographic that is comfortable with making purchases over the Internet. The graphic capabilities available over the Internet will also enhance the play value of the instant ticket games and will offer the customer a higher play value. Underage play is a significant concern to both the Company and to government-sponsored lotteries. The Company has developed systems that will ensure that lottery products are not accessible to minors.

The Company believes that the combination of the advantages of Internet commerce and the Company's ability to customize its systems will result in the Company becoming an agent and leading provider of products and services to the lottery industry.

Governments have authorized lotteries primarily as a means of generating non-tax revenues. Lottery revenues are often a means to offset tax increases and are frequently set aside for particular public purposes, such as education, construction of new schools, college scholarships, and special purpose economic development projects. As lottery ticket sales have become a significant source of funding for such programs, many jurisdictions have come to rely on these revenues.

In 2004 the average spending per capita on lottery in the US and Canada was $183.70 and $262.30 respectively. The US lotteries revenues have increased at approximately 5% CAGR over the past 10 years. Currently, lottery tickets are primarily purchased in convenience stores and gas stations. With the popularity of “pay at the pump” services, customers no longer enter the convenience stores to pay for their gas and are not reminded to purchase their lottery tickets. A stop at a “convenience store” to pick up those tickets is often “inconvenient.”

The Company believes the ability to securely purchase lottery products via the Internet or a wireless hand held device would significantly increase sales. Instant lottery tickets are currently sold only in physical paper form and must be manually “scratched-off" to play the game. The Company believes that electronically delivered lottery games are a superior product due to their (i) faster play, (ii) lower operating and product costs resulting from their virtual nature and (iii) greater entertainment value.

Currently, detailed information on lottery customers is not tracked by the lotteries. The Company believes that this information would be valuable to the lotteries in interfacing with their customers and new product development. According to the National Association of State and Provincial Lotteries (NASPL) the average per capita annual lottery spending in the US ranges from a low $65 in Arizona to a high of $1,370 in Rhode Island, with the average

being $262. In most states, lottery ticket purchase is the only government sponsored activity that is not offered over the Internet. Most states allow you to pay taxes, renew licenses and pay other fees over the Internet. Lottery ticket sales are the next logical extension given the improvement in technology that will ensure the lottery and the customer that this a secure transaction, made within state boundaries.

To the Company’s knowledge, none of the current lottery providers have successfully developed and operated technology similar to that of the Company’s systems. On the contrary, these lottery providers have already committed significant capital to traditional paper-based lottery distribution and manufacturing systems. While the Company realizes that the decision of any government jurisdiction to allow the sale of lottery products over the Internet will engender competition, the Company believes that its ability to be “first to market” as well as its name recognition, i.e.,www.lottery.com, will establish the Company as the industry leader in this market. The Company currently operates the most well-known lottery information site on the web and it has content provision relationships with most of the other large Internet portals.

Games’ strategy is to capitalize on its proprietary Internet lottery distribution systems and become a lottery retailer and leading provider of products and services for the lottery industry. The Company expects to earn revenues primarily from five recurring sources: (i) game development and licensing fees (ii); advertising fees (iii) software and system licensing fees; (iv) account fees; and (v) lottery retailer sales commission fees. The Company plans to attain this goal through the following key strategies:

(i)

Game Development and licensing fees—The Company has developed and is continuing development work on new “on-line” lottery games which it will offer to lottery jurisdictions for a licensing fee. A provisional patent application has been filed for one game and a patent application is being explored for a second game.

(ii)

Advertising Services—The Company currently sells advertising on all of its websites. When lottery ticket sales over the Internet are enabled, this advertising space will become even more in demand.

73% of Americans play the lottery in any given year and represent the “middle American.” With the advent of electronic lottery ticket sales, the Company believes that lottery play will begin to attract a younger, more affluent demographic which will be even more attractive to advertisers. Further, the Company has the in-house expertise to deliver media-rich ads, track their performance and serve these ads through its on proprietary Ad-Bot^tm software.

(iii)

Software and System Licensing fees—The Company plans to offer its backend systems to large portals with whom they have already developed a relationship as well as to existing lottery retailers who would like to offer their customers an opportunity to purchase lottery products electronically. The

Company will also offer its backend services to a government lottery who might also want to offer ticket sales on their own site.

The Company has also initiated a service called “Win on the Web” (“WOW”). WOW offers free 2-page Internet sites to Lottery retailers. While the 2-page site gives the retailer a very basic presence on the Internet, enhanced services can be purchased for an additional monthly fee.

(iv)

Account Fees—Players who register to purchase lottery tickets through the Company’s software will be asked to set up an account prior to the purchase of these tickets. The Company would collect interest on the monies in the account.

(v)

Commission Fees—Lotteries currently pay 5%-6% commission to their on the sales of lottery products. The Company would seek to become a retailer in each lottery state and would be entitled to commissions on all lottery products sold through its systems.

In order to realize the economic benefits of its proprietary lottery distribution systems, the Company is actively pursuing strategic alliances with a third party marketing organization to increase its sales and marketing efforts. The Company plans to bring additional sales and marketing expertise to promote the Company’s product line and its services to state lotteries and lottery retailers. The Company regularly engages public affairs and governmental relations advisors, including lobbyists, in various jurisdictions to advise legislators and the public in connection with lottery legislation, to monitor potential lottery legislation and to advise the Company in connection with the Company's lottery products and systems.

A secure, easy to use commerce platform is necessary to enhance the Games service offering, leverage the unique characteristics of the Company's products, and support lottery operations. The Company's development group has expended and will continue to expend substantial efforts developing, acquiring and implementing technology-driven enhancements to its systems.

The Board of Directors of Games, Inc. voted on October 25, 2005 to spin off the shares of Lottery Corporation to its shareholders, both to better recognize the value inherent in those shares and to unlock shareholder value.

The Lottery Corporation shares will be distributed as a stock dividend, with each Games, Inc. shareholder receiving one share of Lottery for each four shares of Games Inc. held on the Record Date, rounded up to the nearest whole share, the Company has not set a record date for the transaction.

Company Internet Site and Availability of SEC Filings. Our corporate Internet site iswww.gamesinc.net. We make available on that site our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, and Current Reports on Form 8-K, as well as any amendments to those filings, and other reports we file electronically with the U.S. Securities

and Exchange Commission (“SEC”). The filings can be found in the Investor Relations section of our site, and are available free of charge. Information on our Internet site is not part of this Form 10-K. In addition to our Web site, the SEC maintains an Internet site atwww.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004

REVENUE

Revenue of $99,506 for the three months ended September 30, 2005 was $19,927 or approximately 25% greater than the same period in the prior year. The Company’s revenues are recognized as earned and tend to fluctuate based on contracts negotiated for advertising and services. Lottery subscription and fees fluctuate with traffic to the web site and increases as the payout for Powerball and Mega Millions, which are large multi-state lotteries in the United States, rises with larger jackpots and drops when they are reset restarting the cycle. The increase in advertising revenue is due to an increased customer base generating more contracts, revenue for lottery services and lottery subscription accounts being sold was relatively flat with an increase of $37 for lottery services and subscription sales declined by $822 from the same period in the prior year.


	Three months ended September 30, 2005		Three months ended September 30, 2004
Revenue Source	Amount	Percent of Total	Amount	Percent of Total
1. Advertising	$ 51,459	52%	$ 30,972	39%
2. Lottery services	35,840	36%	35,803	45%
3. Subscriptions and fees	12,207	12%	12,804	16%
Total	$ 99,506	100%	$79,579	100%

COSTS AND EXPENSES

During the three months ended September 30, 2005, the cost of revenues decreased by $58,066 to $40,633 or approximately 59% less than the $98,699 for the three months ended September 30, 2004. This decrease is due to terminating a hosting and services contract the Company entered into for the Games.com website totaling $58,635 per quarter.

The Company incurred operating expenses of $671,405 for the three months ended September 30, 2005. This represents an increase of $17,994 or approximately 3% greater than operating expenses for the three months ended September 30, 2004 of $653,411. The increase is primarily due to increased amortization of $10,589 of game license cost, this was offset by a reduction in depreciation expense of $11,177. Depreciation and amortization expenses were $37,475 compared to $38,063 in the prior period, depreciation expenses were reduced due to assets being fully depreciated. Sales, general and administrative expenses were increased by $18,582 or approximately 3% greater than the three months ended September 30, 2004, as a result of increased professional fees and services.

Interest expense increased by $163,437 to $176,782 or approximately 1,225% for the three months ended September 30, 2005 compared to $13,345 for the three months ended September 30, 2004. The increase relates to approximately $46,000 for accrued payments due to investors for failing to meet certain registration obligations for the Series A Convertible Preferred Stock, which require certain cash damage payments to the investors

until the registration obligations are satisfied and $120,247 accrued interest for the Atari litigation, see Note C.

LIQUIDITY AND CAPITAL RESOURCES

Our success is highly dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing from related parties as may be required, and ultimately to attain profitability. Management expects to need and be able to attract additional capital for its operations. However, there can be no assurance that management’s plans will be executed as anticipated.

At September 30, 2005, the Company had a cash balance of $36,825. Current liabilities at September 30, 2005 were $8,702,167 with current assets of $72,784. Total assets at September 30, 2005 were $318,321 with total liabilities of $8,821,560.

The Company has $36,346 in amounts due to related parties as of September 30, 2005.

As of September 30, 2005, the Company had $547,917 of unpaid Federal and State payroll taxes (including interest and penalties) included in current liabilities. The Company is negotiating with the Internal Revenue Service (“IRS”) regarding a payment plan. There can be no assurance that the Company will be able to negotiate a payment plan with the IRS. If the Company is unable to negotiate a payment plan, the IRS could declare the Company in default of their fiduciary responsibility and could file a tax lien on the Company's assets or take other action against the Company and its responsible officers, which would have a material adverse effect on the Company's business.

Net cash used in operating activities was $608,093 for the three month period ended September 30, 2005 compared to $323,194 for the three month period ended September 30, 2004, an increase of $284,899. The cash used by operating activities during the three months ended September 30, 2005 was primarily related to a net loss of $789,314. This amount was partially offset by depreciation and amortization of $68,723, amortization of debt discount of $2,110, decreased accounts payable of $23,468, accrued officer’s salaries of $47,230 and common stock issued for services and deferred compensation in the amount of $17,437. Net operating cash was used by increased prepaid expenses of $15,037.

Net cash used in investing activities was $1,605 for the three months ended September 30, 2005 compared to none for the three month period ended September 30, 2004, an increase of $1,605. The Company acquired fixed assets of $1,605 during the period.

Net cash provided by financing activities of $636,450 for the three months ended September 30, 2005 included proceeds from the issuance of common stock of $200,000 for cash and an advance of $460,000 on a line of credit that the Company was negotiating during the period.

Our Outstanding Convertible Notes

The Company has $100,000 of 5% and 6% convertible promissory notes (the “Promissory Notes”) in varying amounts that were due October 31, 2004. The Company is in the process of attempting to extend the terms of these Promissory Notes or convert them to equity. The underlying Games, Inc. Common Stock is currently included in Registration Statement No.

333-116713 as the Company’s requirement to register the stock to allow the conversion of these notes at the holder’s option.

Under the Asset Purchase Agreement and License and Royalty Agreement, Games is committed to paying Atari, Inc. (i) $3,025,000 for the redemption of 30,250 shares of Series AA Convertible Redeemable Preferred Stock and (ii) $3,000,000 in cash for prepaid royalties. In the Amended Judgment in favor of Atari on June 20, 2005 the Company is also obligated to pay interest and other costs totaling $752,861 as of September 30, 2005. Chicago West Pullman, LLC has given Atari their guarantee to complete the funding if Games is unable to fund this obligation.

The Company is currently developing and refining its acquisition and expansion strategy. If the Company expands more rapidly than currently anticipated, if its working capital needs exceed its current expectations, or if the Company is able consummate an acquisition, the Company will need to raise additional capital from equity or debt sources. The Company cannot be sure that it will be able to obtain the additional financings to satisfy its cash requirements or to implement its growth strategy on acceptable terms or at all. The Company’s ability to raise capital in the future may be difficult. If the Company cannot obtain such financings on acceptable terms, its ability to fund its planned business expansion and to fund its on-going operations will be materially adversely affected. If the Company incurs debt, the risks associated with its business and with owning its common stock could increase. If the Company raises capital through the sale of eq uity securities, the percentage ownership of its stockholders will be diluted. In addition, any new equity securities may have rights, preferences, or privileges senior to those of the Company’s common stock.

Management believes that the Company will need the following cash to fund operations during the next 12 months:


Atari payments (See Note C)
Redemption of 30,250 shares of Series AA Preferred Stock	$ 3,223,727
Atari litigation	3,554,134

Cash needed to fund settlement of federal and state payroll taxes	547,917

Cash needed to fund operations	2,500,000

Total	$9,825,778

The majority shareholders of the Company have continued to fund the Company over time and are committed to seeing the Company’s business plan come to fruition and as such will continue to support the Company through capital investments until the Company reaches profitability. The Company has focused on attempting to obtain the necessary capital to maintain its operations however; additional financing will be necessary to sustain operations

and achieve the Company's business plan. The Company is attempting to obtain such additional financing. Management is also actively seeking one or more strategic investors to complete and acquisition and a strategic line extension in the games business.

However, there can be no assurance that the Company will be successful in its attempts to generate positive cash flows or raise sufficient capital essential to its survival. To the extent that the Company is unable to generate or raise the necessary operating capital, it will become necessary to curtail operations. Additionally, even if the Company does raise operating capital, there can be no assurance that the net proceeds will be sufficient to enable it to develop its business to a level where it will generate profits and positive cash flows.

These matters raise substantial doubt about the Company's ability to continue as a going concern. However, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

ITEM 3. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the period covered by this report in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms.

Additionally, there were no changes in the Company's internal controls that could materially affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any material deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken.

Our independent registered accounting firm Marcum & Kliegman, LLP (“M&K”), informed us and our Audit Committee of the Board of Directors that in connection with their audit of our financial results for the fiscal year ended June 30, 2005, M&K had discovered conditions which they deemed to be significant deficiencies, (as defined by standards established by the Public Company Accounting Oversight Board) in our financial statement closing process. A significant deficiency is a control deficiency where there is more than a remote likelihood that a misstatement of the company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. The significant deficiencies related to the performance of processes and procedures for the period end closing process and its review by internal accounting personnel and still existed at September 30, 2005. Management has

informed M&K and the Audit Committee that it will modify its controls over the financial statement closing process to prevent reoccurrences of this deficiency and will continue to monitor the effectiveness of these actions and will make any other changes or take such additional actions as management determines to be appropriate.

Management does not believe that the above significant deficiency affected the results of the quarter ended September 30, 2005 or any prior period.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Current Litigation

Games, Inc.

Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II, and Chicago West Pullman LLC

Company CEO from operating the Games.com site and Licensed Products and scheduled a preliminary injunction hearing prior to which, the Company agreed to the preliminary injunction. The Court signed an order granting the preliminary injunction pending the outcome of the case.

sale was for a total of $65 million cash and included a 7 year license to a Infogrames subsidiary, Atari Inc.of IP that is included in the December 31, 2003 Asset Purchase and License Agreement.

At September 30, 2005, the liabilities related to this litigation recorded on the balance sheet consisted of the following:

Series AA Preferred Stock immediately redeemable

$2,025,000

Series AA Preferred Stock redeemable December 29, 2005

1,000,000

Accrued interest at 9% from April 30, 2004

198,727

Total Series AA Preferred Stock recorded as a current liability

3,223,727

Court order immediately payable to Atari

3,154,258

Accrued interest at 9% from April 30, 2004

399,876

Accrued litigation and judgments

3,554,134

Total liability recorded to Atari, Inc. at September 30, 2005

$6,777,861

The Company intends to vigorously appeal and defend this action, management has indicted that they believe the Company will ultimately prevail on our claim that Atari, Inc. breached the Asset Purchase Agreement and our defense of Atari’s claims.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Common Stock

During the three months ended September 30, 2005, Games, Inc. issued 147,500 shares of common stock for compensation of the Board of Directors in the amount of $29,500.

During the three months ended September 30, 2005, Games, Inc. exchanged 4,500 shares of Series A Convertible Redeemable Preferred Stock for 244 shares of common stock for a total of 1,098,000 shares.

During the three months ended September 30, 2005, Games, Inc. cancelled 132,945 shares of common stock issued in 2002 that were issued for services that were never rendered.

During the three months ended September 30, 2005, Games, Inc. issued 115,840 shares of common stock to pay $39,733 in dividends on Series A Convertible Redeemable Preferred Stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

Exhibit 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

None

(B) REPORTS ON FORM 8-K


Current report, items 8.01 and 9.01	July 1, 2005
Current report, items 3.02 and 8.01	August 12, 2005
Current report, items 8.01 and 9.01	August 31, 2005
Current report, items 2.02 and 9.01	September 30, 2005
Current report, items 1.01 and 5.02	October 5, 2005
Current report, items 7.01 and 9.01	October 26, 2005

GAMES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by each of the undersigned thereunto duly authorized, who certify to their knowledge that this report fully complies with the requirements of Section 13(a) or 15(d) of that Act and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the registrant as of and for the period ended September 30, 2005.

GAMES, INC.

By: /s/ Roger W. Ach, II

Roger W. Ach, II

Chief Executive Officer

By: /s/ Myles S. Cairns

Myles S. Cairns

Chief Financial Officer

Date: November 22, 2005

Exhibit 31.1

CERTIFICATIONS

I, Roger W. Ach, II, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Games, Inc. and Subsidiary;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 22, 2005

/s/ Roger W. Ach, II

Roger W. Ach, II

Chief Executive Officer

Exhibit 31.2

I, Myles S. Cairns, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Games, Inc. and Subsidiary;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 22, 2005

/s/ Myles S. Cairns

Myles S. Cairns

Chief Financial Officer

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 filing of Games, Inc. and Subsidiary (the "Company") Quarterly Report on Form 10-QSB for the period ending September 30, 2005 with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roger W. Ach, II, Chief Executive Officer of the Company, certify, pursuant to the 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 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/ Roger W. Ach, II

Roger W. Ach, II

Chief Executive Officer

November 22, 2005

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 filing of Games, Inc. and Subsidiary (the "Company") Quarterly Report on Form 10-QSB for the period ending September 30, 2005 with the Securities and Exchange Commission on the date hereof (the "Report"), I, Myles S. Cairns, Chief Financial Officer of the Company, certify, pursuant to the 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 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/ Myles S. Cairns

Myles S. Cairns

Chief Financial Officer

November 22, 2005

Games (INQB) Inactive 10QSB2006 Q1 Quarterly report (small business)