UNITED STATES SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

OR

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

For the transition
period from _______________ to ______________________

Commission file number
0-27494

SILVERSTAR HOLDINGS,
LTD. (Exact name of Registrant as specified in its charter)

|Bermuda                         | Not Applicable                      
|------------------------------- | ------------------------------------
|(State or other jurisdiction of | (I.R.S. Employer Identification No.)
|incorporation or organization) 

|Clarendon House, Church Street, Hamilton HM CX, Bermuda
|-------------------------------------------------------
|(Address of Principal Executive Offices with Zip Code) 

Registrants
telephone number, including area code: 441-295-1422

Indicate by check mark whether the
registrant (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      No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.  Check one:  Large accelerated filer   
Accelerated filer    Non-accelerated filer

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

APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.   Yes    No

APPLICABLE ONLY TO
CORPORATE ISSUERS:

| | Title of Class | Shares Outstanding on November 6, 2006
| | -------------- | --------------------------------------
| |                | Class A Common Stock                  
| |                | Class B Common Stock                  
| |                | Total                                 

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INDEX

|                                                                                          |      | 
|----------------------------------------------------------------------------------------- | ---- | 
|                                                                                          | Page | 
|PART I  FINANCIAL INFORMATION                                                           
|                                                                                         
|Item  1     Financial Statements                                                          |     
|                                                                                         
|Condensed Consolidated Balance Sheets at September 30, 2006 (Unaudited) and June 30, 2006 | 1   
|                                                                                         
|Condensed Consolidated Statements of Operations (Unaudited) for the three months ended   
|September 30, 2006 and 2005                                                               | 2   
|                                                                                         
|Condensed Consolidated Statements of Cash Flows (Unaudited) for three months ended       
|September 30, 2006 and 2005                                                               | 3   
|                                                                                         
|Notes to the Condensed Consolidated Financial Statements (Unaudited)                      | 4   
|                                                                                         
|Item  2     Management's Discussion and Analysis of Financial Condition and Results      
|of Operations                                                                             | 11  
|                                                                                         
|Item  3     Quantitative and Qualitative Disclosures About Market Risk                    | 16  
|                                                                                         
|Item  4     Controls and Procedures                                                       | 17  
|                                                                                         
|PART II  OTHER INFORMATION                                                               | 18  
|                                                                                         
|Item  1      Legal Proceedings                                                            |     
|                                                                                         
|Item  1A   Risk Factors                                                                   | 18  
|                                                                                         
|Item  2.     Unregistered Sales of Equity Securities and Use of Proceeds                  | 18  
|                                                                                         
|Item  3.     Defaults upon Senior Securities                                              | 18  
|                                                                                         
|Item  4.     Submission of Matters to a Vote of Security Holders                          | 18  
|                                                                                         
|Item  5.     Other Information                                                            | 18  
|                                                                                         
|Item  6.     Exhibits                                                                     | 19  
|                                                                                         
|SIGNATURES                                                                                | 20  

i

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# SILVERSTAR HOLDINGS,
LTD. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)

|ITEM 1 |  | FINANCIAL STATEMENTS
|------ |  | --------------------

|ASSETS                                                                     |  | September 30,
2006 |   | June 30,
2006 |  
|-------------------------------------------------------------------------- |  | ------------------ | - | ------------- | -
|Current assets:                                                            |  |                    |   |               |  
|Cash and cash equivalents                                                  |  |                   
|(Includes restricted cash of $658,693 and $647,797, respectively)          |  |                    | $ | 8,822,680     |  
|Cash restricted for foreign tax estimated liability                        |  |                    |   | 2,760,607     |  
|Accounts receivable, net                                                   |  |                    |   | 188,382       |  
|Current portion of long term notes receivable                              |  |                    |   | 172,974       |  
|Prepaid expenses and other current assets                                  |  |                    |   | 500,990       |  
|                                                                           |  |                    |   |              
|Total current assets                                                       |  |                    |   | 12,445,633    |  
|                                                                           |  |                    |   |              
|Property, plant and equipment, net                                         |  |                    |   | 70,584        |  
|Investments in non-marketable securities                                   |  |                    |   | 1,143,566     |  
|Long term notes receivable                                                 |  |                    |   | 373,975       |  
|Goodwill, net                                                              |  |                    |   | 846,335       |  
|Intangible assets, net                                                     |  |                    |   | 1,377,964     |  
|Deferred charges and other assets                                          |  |                    |   | 653,189       |  
|                                                                           |  |                    |   |              
|Total assets                                                               |  |                    | $ | 16,911,246    |  
|                                                                           |  |                    |   |              
|                                                                           |  |                   
|Current liabilities:                                                       |  |                   
|Lines of credit                                                            |  |                    |   | 658,693       |  
|Current portion of long term debt                                          |  |                    |   | 121,894       |  
|Current portion of convertible secured debenture                           |  |                    |   | 1,440,000     |  
|Accounts payable                                                           |  |                    |   | 718,417       |  
|Accrued expenses                                                           |  |                    |   | 839,133       |  
|Estimated liability for foreign tax                                        |  |                    |   | 564,668       |  
|                                                                           |  |                    |   |              
|Total current liabilities                                                  |  |                    |   | 4,342,805     |  
|Convertible secured debenture, net of current portion                      |  |                    |   | 1,843,863     |  
|Obligation to issue common stock                                           |  |                    |   | 244,392       |  
|                                                                           |  |                    |   |              
|Total liabilities                                                          |  |                    | $ | 6,431,060     |  
|                                                                           |  |                    |   |              
|                                                                           |  |                   
|Stockholders' equity:                                                      |  |                   
|Preferred stock, $0.01 par value; 5,000,000 shares authorized;             |  |                   
|no shares issued and outstanding                                           |  |                   
|Common stock, Class A, $0.01 par value, 50,000,000 shares authorized;      |  |                   
|8,313,774 shares issued and outstanding                                    |  |                    |   | 83,138        |  
|Common stock, Class B, $0.01 par value; 2,000,000 shares authorized;       |  |                   
|835,260 shares issued and outstanding                                      |  |                    |   | 8,353         |  
|Common stock, FSAH Class B $0.001 par value; 10,000,000 shares authorized; |  |                   
|2,671,087 shares issued and outstanding                                    |  |                    |   | 600           |  
|Additional paid-in capital                                                 |  |                    |   | 65,584,072    |  
|Accumulated deficit                                                        |  |                    |   | (55,331,795   | )
|Other comprehensive income                                                 |  |                    |   | 135,818       |  
|                                                                           |  |                    |   |              
|Total stockholders' equity                                                 |  |                    |   | 10,480,186    |  
|                                                                           |  |                    |   |              
|Total liabilities and stockholders' equity                                 |  |                    | $ | 16,911,246    |  
|                                                                           |  |                    |   |              

See notes to
condensed consolidated financial statements

1

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# SILVERSTAR HOLDINGS,
LTD. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
(UNAUDITED)

|                                                                           | Three Months Ended September 30, | 
|-------------------------------------------------------------------------- | -------------------------------- | 
|
|Net Revenues                                                               |                                  | 
|Operating expenses:                                                        |                                  | 
|Cost of sales                                                              |                                  | 
|Selling, general and administrative                                        |                                  | 
|Amortization of intangibles                                                |                                  | 
|Depreciation                                                               |                                  | 
|                                                                           |                                  | 
|Total operating expenses                                                   |                                  | 
|                                                                           |                                  | 
|Operating loss                                                             |                                  | 
|Other income                                                               |                                  | 
|Foreign currency gain (loss)                                               |                                  | 
|Amortization of convertible debt discounts and issuance costs              |                                  | 
|Interest income                                                            |                                  | 
|Interest expense                                                           |                                  | 
|                                                                           |                                  | 
|Loss from continuing operations                                            |                                  | 
|                                                                           |                                  | 
|Discontinued operations:                                                   |                                  | 
|Income from operations, net of income taxes of $0.0 and $0.0, respectively |                                  | 
|Net Loss                                                                   |                                  | 
|                                                                           |                                  | 
|Income (loss) per share:                                                   |                                  | 
|Basic:                                                                     |                                  | 
|Continuing operations                                                      |                                  | 
|Discontinued operations                                                    |                                  | 
|                                                                           |                                  | 
|Net Loss                                                                   |                                  | 
|                                                                           |                                  | 
|Diluted:                                                                   |                                  | 
|Continuing operations                                                      |                                  | 
|Discontinued operations                                                    |                                  | 
|Net Loss                                                                   |                                  | 
|                                                                           |                                  | 
|Weighted average common stock outstanding:                                 |                                  | 
|Basic                                                                      |                                  | 
|                                                                           |                                  | 
|Diluted                                                                    |                                  | 
|                                                                           |                                  | 

See notes to condensed
consolidated financial statements.

2

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# SILVERSTAR HOLDINGS,
LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW 
(UNAUDITED)

|                                                                |  | Three Months Ended September 30, |  
|--------------------------------------------------------------- |  | -------------------------------- | -
|
|Cash flows from operating activities:                           |  |                                  |  
|Net Loss                                                        |  |                                  |  
|Depreciation and amortization                                   |  |                                  |  
|Stock-based compensation                                        |  |                                  |  
|Unrealized foreign currency (gains) losses                      |  |                                  |  
|Non-cash interest income on notes receivable                    |  |                                  |  
|Changes in operating assets and liabilities, net                |  |                                  |  
|Increase in other assets                                        |  |                                  |  
|Increase in other liabilities                                   |  |                                  |  
|Net change in assets and liabilities of discontinued operations |  |                                  |  
|                                                                |  |                                  |  
|Net cash provided by (used in) operating activities             |  |                                  |  
|                                                                |  |                                  |  
|                                                                |  |                                 
|Cash flows from investing activities:                           |  |                                 
|Acquisition costs capitalized                                   |  |                                  |  
|Proceeds from repayment of long-term note receivable            |  |                                  |  
|                                                                |  |                                  |  
|Net cash used in continuing operations                          |  |                                  |  
|                                                                |  |                                  |  
|Net cash used in discontinued operations                        |  |                                  |  
|                                                                |  |                                  |  
|Net cash used in investing activities                           |  |                                  |  
|                                                                |  |                                 
|Cash flows from financing activities:                           |  |                                 
|Short term borrowings, net                                      |  |                                  |  
|Repayment of long term debt                                     |  |                                  |  
|Net cash provided by (used in) continuing operations            |  |                                  |  
|Net cash provided by discontinued operations                    |  |                                  |  
|Net cash provided by (used in) financing activities             |  |                                  |  
|Effect of exchange rates in cash                                |  |                                  |  
|                                                                |  |                                  |  
|Net decrease in cash and cash equivalents                       |  |                                  |  
|Cash and cash equivalents, beginning                            |  |                                  |  
|                                                                |  |                                  |  
|Cash and cash equivalents, ending                               |  |                                  | $
|                                                                |  |                                  |  
|Supplemental disclosure of cash flow information:               |  |                                 
|Cash paid during the year for interest                          |  |                                  | $
|                                                                |  |                                  |  

See notes
to condensed consolidated financial statements.

3

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# SILVERSTAR HOLDINGS,
LTD. AND SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

# NOTE  1.   FINANCIAL
INFORMATION

The Company is a holding company that
seeks to acquire businesses fitting a predefined investment strategy. The Company is the
parent company of Strategy First Inc. (Strategy First), a leading developer
and worldwide publisher of entertainment software for the Personal Computer (PC). The
Company is also a minority shareholder in Magnolia Broadband Wireless, a development stage
company which is developing mobile wireless broadband products.

# NOTE  2.   BASIS OF
PREPARATION

The unaudited consolidated financial
statements include the accounts of the Company and all of its subsidiaries in which it has
a majority voting interest. Investments in affiliates are accounted for under the equity
or cost method of accounting. All significant intercompany accounts and transactions have
been eliminated in the consolidated financial statements.

Pursuant to the rules and regulations
of the Securities and Exchange Commission for Form 10-Q, the financial statements,
footnote disclosures and other information normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed.
The financial statements contained in this report are unaudited but, in the opinion of the
Company, reflect all adjustments, consisting of only normal recurring adjustments
necessary to fairly present the financial position as of September 30, 2006 and the
results of operations and cash flows for the interim periods of the fiscal year ending
June 30, 2007 (fiscal 2007) and the fiscal year ended June 30, 2006
(fiscal 2006) presented herein. The results of operations for any interim
period are not necessarily indicative of results for the full year. These financial
statements, footnote disclosures and other information should be read in conjunction with
the financial statements and the notes thereto included in the Companys annual
report on Form 10-K for the year ended June 30, 2006.

# Net Income or Loss Per
Share

Basic net income or loss per share is
computed by dividing net income or loss by the weighted average number of common shares
outstanding. Diluted net income or loss per share is computed by dividing net income or
loss by the weighted average number of common shares outstanding and dilutive potential
common shares reflecting the dilutive effect of stock options, warrants, convertible
debentures and shares to be issued in connection with prior acquisitions. Dilutive
potential common shares, stock options, warrants and convertible debentures for all
periods presented are computed utilizing the treasury stock method. The dilutive effect of
shares to be issued in connection with the obligations related to prior acquisitions is
computed using the average market price for the quarter.

# Cash and Cash Equivalents

Cash and cash equivalents consist of
cash and all highly liquid investments with original maturities of three months or less.
The vast majority of our cash balances are held in liquid accounts at two highly rated
financial institutions. While these deposits are not insured, the quality of such
financial institutions is such that the risks of loss on these funds are minimal.
Restricted cash balances at September 30, 2006 totaled $658,693, which is used as
collateral on the Companys line of credit.

4

---

# Reclassifications

Research and development expenses
totaling $60,973 for the quarter ending September 30, 2005 have been reclassified from
cost of sales to selling, general, and administrative expenses to conform to the fiscal
2007 presentation.

# Stock-Based Compensation

In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123R, Share-Based Payment. This standard
replaced SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. The standard requires companies to recognize all share-based
payments to employees, including grants of employee stock options, in the financial
statements based on their fair values on the grant date and is effective for annual
periods beginning after June 15, 2005. In accordance with the revised statement, the
Company recognizes the expenses attributable to stock options granted or vested subsequent
to July 1, 2005. During the quarters ending September 30, 2006 and September 30, 2005 the
Company recognized expenses of $10,685 and $17,094, respectively, for employee stock
options that vested during fiscal years 2007 and 2006. Based on existing unvested option
agreements the Company anticipates an additional expense of approximately $32,050 in
fiscal 2007 which could increase if additional options are granted during the fiscal year.
As of September 30, 2006, $67,664 of total unrecognized compensation costs related to
non-vested options is scheduled to be recognized over a weighted average period of 1.6
years.

As of September 30, 2006, the Company
had 1,217,405 stock options outstanding, of which 1,150,738 are fully vested. A summary of
the activity in the Companys stock option plans is as follows for the three months
ended September 30, 2006:

| |  | Share Subject
Options Outstanding |                                | Weighted
Average
Exercise | 
| |  | --------------------------------- | ------------------------------ | ------------------------- | 
| |  |                                   | Outstanding, beginning of year |                           | 
| |  |                                   | Granted                        |                           | 
| |  |                                   | Forfeited                      |                           | 
| |  |                                   | Exercised                      |                           | 
| |  |                                   |                                |                           | 
| |  |                                   | Outstanding September 30, 2006 |                           | 
| |  |                                   |                                |                           | 

For the three months ended September
30, 2006, the Company did not grant any stock options.

# NOTE  3.   INTANGIBLE ASSETS

The
components of amortizable intangible assets as of September 30, 2006 and June 30, 2006 are
as follows:

| |  | Gross Carrying
Amount |                               | Accumulated
Amortization |  | Total |          
| |  | --------------------- | ----------------------------- | ------------------------ |  | ----- | ---------
| |  |                       | Covenant not to compete       |                          |  | $     | 44,883   
| |  |                       | Game titles                   |                          |  |       | 1,555,243
| |  |                       |                               |                          |  |       |          
| |  |                       | Balance at September 30, 2006 |                          |  | $     | 1,600,126
| |  |                       |                               |                          |  |       |          
| |  |                      
|
| |  |                      
| |  |                       | Covenant not to compete       |                          |  | $     | 44,638   
| |  |                       | Game titles                   |                          |  |       | 1,546,773
| |  |                       |                               |                          |  |       |          
| |  |                       | Balance at June 30, 2006      |                          |  | $     | 1,591,411
| |  |                       |                               |                          |  |       |          

5

---

Intangible assets that are subject to
amortization are reviewed for potential impairment whenever events or circumstances
indicate that carrying amounts may not be recoverable. Assets not subject to amortization
are tested for impairment at least annually.

Amortization expense for intangible
assets for the three months periods ended September 30, 2006 and September 30, 2005 were
$42,361 and $33,918 respectively. Estimated amortization expense for the rest of fiscal
2007 and for the succeeding five fiscal years is as follows:

| |            |            
| | ---------- | -----------
| | 2007       | $   127,864
| | 2008       | 167,110    
| | 2009       | 155,524    
| | 2010       | 155,524    
| | 2011       | 155,524    
| | 2012       | 155,524    
| | Thereafter | 460,894    
| |            |            
| |            | $1,377,964 
| |            |            

# NOTE  4.   DISCONTINUED
OPERATIONS

On April 7, 2006, the Company sold
all the assets and certain liabilities of Fantasy Sports, Inc. (Fantasy
Sports) to FUN Technologies, LLC for approximately $4.4 million, including $3.85
million paid in cash at closing. The gain on disposal of this business segment was
reported during the quarter ended June 30, 2006.

In accordance with accounting
principles generally accepted in the United States of America, the net income and net
assets related to Fantasy Sports have been included in discontinued operations in the
companys consolidated statements of operations and consolidated balance sheets.

The following summarizes the
operating results of the discontinued operations.

|           | Three Months Ended September 30, | 
|---------- | -------------------------------- | 
|
|Revenue    |                                  | 
|Net income |                                  | 

# NOTE  5.   CASH FLOWS

Changes in operating assets and
liabilities consist of the following:

|                                                                                         | Three Months Ended September 30, | 
|---------------------------------------------------------------------------------------- | -------------------------------- | 
|
|Decrease in accounts receivable                                                          |                                  | 
|Increase in inventories                                                                  |                                  | 
|Increase in prepaid expenses and current assets                                          |                                  | 
|Increase (decrease) in accounts payable                                                  |                                  | 
|Increase (decrease) in accrued expenses                                                  |                                  | 
|                                                                                         |                                  | 
|                                                                                         |                                  | 
|                                                                                         |                                  | 
|Cash flows from operating activities - discontinued operations:                          |                                  | 
|Changes in net assets and liabilities of discontinued operations                         |                                  | 
|Depreciation and amortization                                                            |                                  | 
|Changes in operating accounts                                                            |                                  | 
|                                                                                         |                                  | 
|Changes in cash (included in) from net assets and from 
         discontinued operations |                                  | 
|                                                                                         |                                  | 
|Changes in net assets and liabilities of discontinued operations                         |                                  | 
|Cash flows from financing activities - discontinued operations:                          |                                  | 
|Short-term borrowings (repayments), net                                                  |                                  | 
|                                                                                         |                                  | 

6

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# NOTE  6.   BUSINESS SEGMENTS

As a result of the sale of all the
assets and certain liabilities of Fantasy Sports on April 7, 2006 the Company no longer
operates in the internet fantasy sports games segment and now only operates in one segment
 entertainment software. The operations of the entertainment software segment are
focused on the publishing of software games for the PC platform. The operations of Fantasy
Sports which fully comprised the Companys operations in the internet fantasy sports
games segment have been reported as discontinued operations for the quarter ending
September 30, 2005.

# NOTE  7.   DEBT

# Line of Credit

In June 2002, the Company obtained a
secured line of credit facility for borrowings up to $1.0 million, which is fully secured
by cash balances held in the Companys account. This liability is due on demand and
has a floating interest rate that is based on the prime rate minus 1.75%. On September 30,
2006, the prime rate was 8.25%. The balance outstanding under this line of credit at
September 30, 2006, and June 30, 2006 was $658,693 and $647,797 respectively.

# Long -Term Debt

Long-term debt consists of a term
loan assumed pursuant to the plan of arrangement related to the Companys acquisition
of Strategy First, payable in monthly principal installments of $22,000 Canadian plus
interest at an annual rate of the National Bank of Canadas prime rate plus 3.25%.
The Banks prime rate on September 30, 2006 was 6%. The loan matures in April 2007.

# NOTE  8.   CONVERTIBLE
SECURED DEBENTURE

On October 31, 2005, the Company
consummated a transaction pursuant to a Securities Purchase Agreement, dated October 21,
2005 (the Purchase Agreement), with DKR SoundShore Oasis Holding Fund Ltd.
(the Purchaser).Pursuant to the Purchase Agreement, the Company issued to the
Purchaser a $5,000,000 principal amount Variable Rate Secured Convertible Debenture due
October 31, 2008 (the Debenture) and a warrant to purchase 791,139 shares of
the Companys Common Stock at an exercise price of $1.896 per share (the
Warrant).

Interest accrues on the principal
balance of the note at an annual interest rate equal to prime plus 1.5%. On September 30,
2006 the interest rate was 9.75%. The note is convertible into common stock of the Company
at an initial conversion rate of $1.738 per share up to a maximum of 2,876,860 shares. The
agreement allows for an additional 1,100,403 shares to be issued upon the conversion of
the debentures or exercise of the warrants as a result of either conversion price
adjustments or exercise price adjustments. Based upon the closing price per share of the
Companys Common Stock on the date of issuance, there was an intrinsic value
associated with the beneficial conversion feature of $124,443, which is presented as a
discount on the convertible note and amortized over the term of the note.

The principal amount of the Debenture
was to be redeemed at the rate of $185,185 per month, plus accrued and unpaid interest,
commencing on July 6, 2006 and may be paid, at the Companys option (i) in cash or
(ii) in shares of the Companys Common Stock in an amount not to exceed 10% of the
total dollar trading volume of

7

---

the Common Stock during the 10
trading days immediately prior to the applicable monthly redemption date based on a
conversion price equal to 85% of the average of the lowest three volume weighted average
price during the 10 trading days immediately prior to the applicable monthly redemption
date. In June 2006, the terms of the debenture were amended to require redemption at the
rate of $180,000 per month commencing on February 1, 2007. The Company has the option, at
any time, to redeem some or all of the outstanding Debenture, in cash, in an amount equal
to the sum of (i) 115% of the principal amount of the Debenture outstanding, plus accrued
and unpaid interest and liquidated damages (the Optional Redemption Amount).
However, the Company may pay up to 15% of the principal amount comprising of a portion of
the Optional Redemption Amount in shares of the Companys Common Stock if certain
conditions are satisfied. In May 2006, the Company repaid $1,400,000 of the outstanding
principal balance along with an early payment penalty of approximately $210,000.

The Companys obligations under
the Debenture are secured by a lien on all assets of the Company in favor of the Purchaser
pursuant to a Security Agreement, dated October 31, 2005, among the Company, all of the
subsidiaries of the Company and the Purchaser, and guaranteed by all the subsidiaries of
the Company pursuant to a Subsidiary Guarantee, dated October 31, 2005, made by the
Companys subsidiaries in favor of the Purchaser. In addition, the obligations of the
Company under the Debenture are personally guaranteed by Mr. George Karfunkel pursuant to
a Personal Guarantee, dated October 31, 2005, between Mr. Karfunkel and the Purchaser. Mr.
Karfunkel is compensated in the amount of 5% of the current principal outstanding per
annum.

In connection with the convertible
note, the Company issued to the holder of the note a five-year warrant to purchase up to
791,139 shares of the Companys common stock at an exercise price of $1.896 per
share. The fair value for these warrants was estimated at the grant date using the
Black-Scholes option pricing model using the following weighted average assumptions:
risk-free interest rate of 4.50%, dividend yields of 0% and a volatility factor of the
expected market price of the Common Stock of 114.80%. Based upon the closing price per
share of the Companys common stock on the date of issuance, the Company estimated
the fair value of the warrant and allocated $665,295 of the proceeds from the note to the
warrant, which is presented as a discount on the convertible note, net of amortization to
be taken over the three-year term of the note using the effective interest method.

The balance of the note as of
September 30, 2006 and June 30, 2006, net of unamortized discounts was as follows:

|                                                          | September
30,  2006 |  | June 30,  2006 |           
|--------------------------------------------------------- | ------------------- |  | -------------- | ----------
|Principal amount of note                                  |                     |  | $              | 3,600,000 
|Discount for beneficial conversion features               |                     |  |                | (49,815   
|Discount for fair value of warrants and options           |                     |  |                | (266,322  
|                                                          |                     |  |                |           
|Balance as of June 30, 2006, net of unamortized discounts |                     |  | $              | 3,283,863 
|Less current portion                                      |                     |  |                | (1,440,000
|                                                          |                     |  |                |           
|Long-term portion                                         |                     |  | $              | 1,843,863 

Scheduled maturities of the
convertible debenture as of September 30, 2006 and June 30, 2006 were as follows:

| |  | September 30, 2006 |                | June 30, 2006 | 
| |  | ------------------ | -------------- | ------------- | 
| |  |                    | 1 Year or less |               | 
| |  |                    | 1-2 Years      |               | 
| |  |                    |                |               | 
| |  |                    | Total          |               | 

8

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Interest expense related to the note
amounted to $89,250 during the quarter ending September 30, 2006.

Amortization of discounts for the
beneficial conversion features and warrant resulted in charges to Amortization of
Convertible Debt Discounts and Issuance Costs totaling $65,408 during the quarter ended
September 30, 2006. The Company also incurred expenses of $626,699 directly related to
securing this note, which included $250,000, paid for a personal guarantee on the
outstanding balance. Expenses totaling $376,699 are being amortized over the term of the
note while the guarantee fee of $250,000 is being amortized over twelve months.
Amortization expenses of $93,699 were included in Amortization of Convertible Debt
Discounts and Issuance Costs during the quarter ended September 30, 2006.

Estimated amortization expense
related to the warrants, beneficial conversion feature, and costs related to securing this
note for the rest of fiscal 2007 through debt maturity is as follows:

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

# NOTE  9.   COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS

In April 2006, our First South
African subsidiary received a letter from the South African Revenue Service
(SARS) challenging certain tax treatment of dividends and operating loss carry
forwards for the years 2002 through 2004. Subsequently SARS issued a tax assessment for
approximately $2.7 million. The Company believes that its South African tax filings are in
full compliance with all applicable laws and is vigorously defending its position in this
regard. However, until such time as these issues are resolved, the Company will retain an
amount of cash equal to the assessment in South Africa to satisfy any potential liability
that may arise. The Company has recorded an estimated liability of approximately $565,000 in this regard but
may be forced to increase this amount should it receive adverse information as it
continues its appeal of the SARS assessment.

In January 2006, we brought an action
against JoWood Software Productions AG seeking damages in the amount of approximately
$850,000 for expenses incurred in connection with our unsuccessful acquisition of shares
of JoWood. The case is being heard in the Vienna Commercial Court in Austria. JoWood has
been unsuccessful in having the case dismissed. Further hearings and a judgment are
anticipated toward the end of 2007.

# Commitments and
Contingencies

During the first quarter of fiscal
2006, the Company entered into agreements with two of Strategy Firsts game
developers to guarantee certain of their royalty payments. The guarantee is limited to
$100,000.  Royalties owed to these deelopers as of September 30, 2006 are less than $30,000.

The Company anticipates that Strategy
First will pay the royalties due to its developers when earned and does not anticipate
having to make any payments under these guarantees.

On March 29, 2006, Strategy First
entered into an agreement to acquire certain intellectual property rights for $200,000 in
cash and the issuance of options to acquire 100,000 shares of the Companys common
stock at an exercise price of $1.50. The options vest when net sales, as defined in the
purchase agreement, exceed $750,000 and expire on December 31, 2008. The agreement also
provides for commissions of twenty-five percent of net sales in the event they exceed
$500,000 through December 31.2008. As of September 30, 2006 revenues earned under this
agreement were not significant.

# NOTE  10.   NEW ACCOUNTING
PRONOUNCEMENTS

In September 2006, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 requires that in evaluating the effects of prior
year errors on current year financial statements, SEC registrants must consider the effect
of the errors on both the current year statement of operations and the magnitude of the
errors on the current year balance sheet. As a result, SAB 108 could require prior year
financial statements to be corrected for errors that had previously been deemed
immaterial. SAB 108 is effective for fiscal years ending after November 15, 2006. The
Company has not determined the impact that this standard will have on its financial
position or results of operations.

In July 2006, the FASB issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The Interpretation
is effective for fiscal years beginning after December 15, 2006. The Company has not
yet analyzed the effect, if any, this interpretation may have on its financial condition,
results of operations, cash flows or disclosures.

In February 2006, the FASB issued
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of
FASB Statements No. 133 and 140. This statement permits fair value remeasurement for
any hybrid financial instrument that contains an embedded derivative that otherwise would
require bifurcation, and eliminates a restriction on the passive derivative instruments
that a qualifying special-purpose entity (SPE) may hold. The statement is effective for
fiscal years beginning after September 15, 2006. The Company does not believe this
standard will have a material effect on its financial position or results of operations.

9

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In June 2005, the FASB issued SFAS
No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces
Accounting Principles Board Opinion (APB) No. 20, Accounting Changes, and SFAS
No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes,
SFAS No. 154 requires that a voluntary change in accounting principle be applied
retroactively with all prior period financial statements presented on the basis of the new
accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that
(1) a change in method of depreciating or amortizing a long-lived non-financial asset must
be accounted for as a change in estimate (prospectively) that was affected by a change in
accounting principle, and (2) correction of errors in previously issued financial
statements should be termed a restatement. The new standard is effective for
accounting changes and correction of errors made in fiscal years beginning after December
15, 2005. The adoption of SFAS No. 154 did not have an effect on the Companys
financial position or results of operations.

# NOTE  11.   SUBSEQUENT
EVENTS

# Issuance of Convertible
Debenture

On October 19, 2006, the Company
entered into a Securities Purchase Agreement with DKR SoundShore Oasis Holding Fund Ltd.,
pursuant to which the Company issued to the Purchaser a Variable Rate Secured Convertible
Debenture in the principal amount of $1,400,000 due October 31, 2008. The Company and
Purchaser are parties to a prior Securities Purchase Agreement, dated October 21, 2005
(See Note 8).

The Debenture is convertible at any
time after December 19, 2006, at the option of the Purchaser, into shares of Common Stock
at a conversion price of $1.738 per share. The Company may prepay any portion of the
principal amount of the Debenture prior to December 19, 2006 without the prior written
consent of the Purchaser for 100% of the principal amount being prepaid plus any accrued
but unpaid interest thereon.

The Company shall pay monthly
interest on the outstanding principal amount of the Debenture at a rate per annum equal to
the prime rate for the applicable interest period plus 1.5%. The interest rate for any
interest period shall be decreased by 2% to the extent that the volume weighted average
trading price of the Common Stock for five (5) consecutive trading days immediately prior
to such interest period (the Trigger Price) exceeds the conversion price by
25% (and shall be decreased by an additional 2% for every successive 25% that the Trigger
Price exceeds the then applicable conversion price but in no event shall the interest rate
be less than 0%). All overdue accrued and unpaid interest to be paid under the Debenture
shall entail a late fee at a rate of 18% per annum.

The principal amount of the Debenture
is redeemable at the rate of $63,636.00 per month, plus accrued but unpaid interest and
liquidated damages, commencing on January 1, 2007. The Company has the option, at any time
after December 19, 2006, to redeem some or all of the then outstanding Debenture, in cash,
in an amount equal to the sum of (i) 115% of the principal amount of the Debenture then
outstanding, (ii) accrued but unpaid interest and (iii) all liquidated damages and other
amounts due in respect of the Debenture (the Optional Redemption Amount)
(provided, however, the Company may pay up to 15% of the principal amount comprising a
portion of the Optional Redemption Amount in shares of Common Stock if certain conditions
are satisfied).

The Company also entered into a
Registration Rights Agreement with the Purchaser pursuant to which, unless the Debenture
is paid in full on or prior to December 19, 2006, the Company agreed to prepare and file
with the Securities and Exchange Commission within 90 days of the date of the Agreement, a
shelf registration statement for the purpose of registering for the resale of 130% of all
the shares of Common Stock issuable upon conversion of the Debenture and cause such
registration statement to become effective under the Securities Act of 1933 within 150
days of the date of the Agreement.

If the registration statement is not
filed within 90 days after the date of the Agreement or declared effective within the
specified time, then the Company shall pay to the Purchaser an amount in cash, as partial
liquidated damages, equal to 1.5% of the aggregate purchase price paid by the Purchaser
for the Debenture. If the Company fails to pay any partial liquidated damages in full
within seven days after the date payable, the Company will pay interest at a rate of 18%
per annum to the Purchaser, accruing daily from the date such partial liquidated damages
are due until such amounts, plus all such interest, are paid in full.

The Companys obligations under
the Agreement, the Debenture and the Registration Rights Agreement are subject to a
security interest granted by the Company pursuant to that certain Security Agreement dated
October 21, 2005, by and among the Company, all of the subsidiaries of the Company and the
Purchaser.

# Offer to Acquire Empire
Interactive PLC

On October 30, 2006, the Company
announced that it had submitted a definitive offer to acquire all the shares of Empire
Interactive PLC.

The offer calls for either a cash
payment of 7p (approx. $0.13) per share on closing or an earn-out alternative where the
initial payment will be 4.9p (approx. $0.09) per share with a further 5.1p (approx.
$0.094) per share payable subject to certain conditions on October 31, 2007. The earn-out
alternative also includes further incentive payments subject to Empire achieving certain
earnings targets for the year ended June 30, 2007 as defined in the offer.

Should all Empire shareholders other
than management elect to receive the 7p cash payment, the maximum amount due on closing
will be approximately $7.2 million. Should all shareholders elect the earn- out
alternative, the maximum amount due on closing will be $6.15 million with an additional
$6.4 million due in a second payment on October 31, 2007 with further incentive payments
due on April 30, 2008 subject to Empire achieving certain earnings targets for the year
ended June 30, 2007 as defined in the offer.

Empires two principal
shareholders have given irrevocable undertakings to vote their 62% shareholdings in favor
of the earn-out alternative. The offer will be open to shareholders for 21 days. The
transaction is expected to close in late November.

On November 2, 2006, Silverstar
Holdings Ltd. (The Registrant) announced that Joe Abrams and Geoffrey Heath
agreed to become the non-executive Chairman and a non-executive Director of Empire
Interactive (Empire), respectively. Their appointments are subject to and will
take effect upon the closing of the acquisition of Empire by the Company which is
anticipated to occur in late November 2006.

10

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|ITEM 2 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------ |  | -------------------------------------------------------------------------------------

The following discussion should be
read in conjunction with our condensed consolidated financial statements and the related
notes included therein and our Annual Report on Form 10-K for the year ended June 30,
2006.

This Managements Discussion and
Analysis of Financial Condition and Results of Operations include forward-looking
statements. We have based these forward-looking statements on our current plans,
expectations and beliefs about future events. Actual results could differ materially
because of factors discussed in Risk Factors in Part I, Item 1A of our
Annual Report on Form 10-K for the year ended June 30, 2006.

# Background and History

We were incorporated in September
1995. Our business plan is to actively pursue acquisitions fitting a pre defined
investment strategy. Currently our strategy focuses on the following:

| |  |  | acquiring
controlling stakes in high quality electronic entertainment software businesses with
strong management teams that are positioned to use technology and Internet related
platforms to fuel above average growth;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Investing
in companies that show an ability to contribute, in the short to medium term, to earnings
per share through operating profit or capital appreciation; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | operating
in partnership with committed, incentivised, entrepreneurial management who show the
vision and ability to grow their businesses into industry or niche leaders.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We sold our last remaining South
African operations in November 2000. We still have significant assets that are denominated
in South African Rand. The assets include cash and notes receivables. Currently we do not
have a financial hedging program to protect against the depreciation of the SA Rand
against the US dollar and, therefore, as long as we hold assets in South Africa we will
continue to record income statement gains or losses to the extent that the Rands
value fluctuates relative to the US dollar.

On November 17, 2000, we acquired all
of the assets and certain liabilities of Fantasy Sports from GoRacing Interactive
Services, Inc. Founded in 1993, Fantasy Sports operates the fantasycup.com, website and
specializes in subscription based NASCAR, college football and other fantasy sports games.
On April 7, 2006, we disposed of substantially all the assets and liabilities of Fantasy
Sports.

On April 21, 2005, we acquired
Strategy First Inc. (www.strategyfirst.com), a leading developer and worldwide publisher
of entertainment software for the PC. We acquired the company through the jurisdiction of
the Montreal bankruptcy court. Pursuant to the approved plan of arrangement, we paid cash
consideration to the creditors of Strategy First of $609,000; we issued 377,000 shares of
our common stock; warrants to purchase 200,000 shares of our common stock; and assumed
approximately $400,000 in existing bank debt, as well as contingent consideration based on
the future profitability of Strategy First. Founded in 1990, Strategy First publishes
software games primarily for the PC platform. Some of its popular games include O.R.B, the
Disciples franchise, Sacred Lands, Kohan: Immortal Sovereigns, Steel Beasts, Galactic
Civilizations, and the Jagged Alliance franchise.

On October 31, 2005, we consummated a
transaction pursuant to a Securities Purchase Agreement, dated October 21, 2005 (the
Purchase Agreement), with DKR SoundShore Oasis Holding Fund Ltd. (the
Purchaser).Pursuant to the Purchase Agreement, we issued to the Purchaser a
$5,000,000 principal amount Variable Rate Secured Convertible Debenture due October 31,
2008 (the Debenture) and a warrant to purchase 791,139 shares of the our
common stock at an exercise price of $1.896 per share (the Warrant).

11

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In May 2006, the Company repaid
$1,400,000 of the outstanding principal balance along with an early payment penalty of
approximately $210,000. On October 19, 2006, the Company entered into a Securities
Purchase Agreement with DKR SoundShore Oasis Holding Fund Ltd., pursuant to which the
Company issued to the Purchaser a Variable Rate Secured Convertible Debenture in the
principal amount of $1,400,000 due October 31, 2008. The Company and Purchaser are parties
to a prior Securities Purchase Agreement, dated October 21, 2005.

# Quarter Ended September
30, 2006 As Compared to Quarter Ended September 30, 2005

# Revenues

Revenues decreased $92,000 to
$279,000 during the quarter ended September 30, 2006 as compared to $371,000 in the
comparable quarter of the previous year primarily as the result of Strategy First
releasing fewer game titles during the current quarter as compared to the comparable
period in 2005. Four new games were released by Strategy First in the first two weeks of
October 2006.

# Cost of Sales:

The cost of sales was $188,000 in the
first quarter of fiscal 2007, or 67.3% of total revenues. For the quarter ending September
30, 2005, cost of sales was 162,000 or 43.7% of revenues. This increase was primarily the
result of the mark down of the value of a slow moving product in the retail channel.
Strategy First significantly reduced the value of unsold games in the retail channel by
approximately $40,000 as opposed to no mark downs in the comparable period in 2005.

# Selling, General and
Administrative Expenses

Selling, general and administrative
expenses for the quarter ended September 30, 2006 were $614,000 as compared to $587,000
for the same period in the prior year. Corporate overhead expenses increased $13,000 to
$241,000 primarily as the result of increases in legal and other professional fees.
Expenses for Strategy First increased $12,000 to $373,000 from the same period in the
prior year.

# Amortization and
Depreciation

Amortization of intangible assets in
the first quarter of fiscal 2007 increased $8,000 over the same period in the prior year.
Depreciation expense was $8,000 for the first quarter of fiscal 2007 and fiscal 2006.

# Foreign Currency Gains
(Losses)

Foreign currency gains or losses are
primarily related to the financial assets remaining in South Africa. The foreign currency
losses during the first quarter of fiscal 2007 were$262,000 and consisted of
$253,000 related to the remaining assets from the sale of discontinued South African
operations and $ 9,000 recognized by Strategy First. The foreign currency gains during the
first quarter of fiscal 2006 were$33,000 and consisted of $27,000 related to the
remaining assets from the sale of discontinued South African operations and $6,000 recognized by
Strategy First. The functional currency of Strategy First is the Canadian dollar and its
products are sold throughout North America and Europe. Gains (losses) from discontinued
South African operations are the result of fluctuations of the South African Rand against
the US dollar. During the three months ended September 30, 2006 the Rand depreciated
approximately 6% against the US dollar while it depreciated approximately 5% in the
corresponding period last year. In Fiscal 2006 an increase in the market value of a Rand
put/US dollar call option offset these foreign currency losses thereby resulting in a net
gain for the period. These foreign currency gains or losses are non-cash items until
converted into US dollars, when any accumulated gains or losses will be converted to cash.

# Amortization of
Convertible Debt Discounts and Issuance Costs

Amortization of convertible debt
discounts and issuance costs were $159,000 in the first quarter fiscal 2007. There were no
charges of this nature in fiscal 2006. These expenses relate to the issuance of our $5
million convertible debenture to DKR Oasis in October 2005.

12

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# Interest Income

Interest income of $155,000 was
recorded during the three months ended September 30, 2006 as compared to interest income
of $84,000 in the prior year. The increase of $78,000 is primarily the result of the
Companys increase in cash balances at September 30, 2006 as compared to September
30, 2005.

# Interest Expense

Interest expense of $109,000 was
recorded during the first three months of fiscal 2007 as compared to $7,000 in the same
period of the prior year. Interest expense increased primarily as the result of interest
charges on the convertible debenture security.

# Provision for Income
Taxes

We are registered in Bermuda, where
no income tax laws are applicable. Two of our subsidiaries are subject to U.S. income
taxes, one subsidiary is subject to Canadian income taxes and one is subject to South
African income taxes. Up to this date, none of them has had taxable income as they have
incurred losses for tax purposes. The deferred tax asset generated by the tax losses and
temporary differences has been fully reserved.

In early April 2006, our subsidiary
First South African Holdings received a letter from the South African Revenue Service
(SARS) challenging certain tax treatment of dividends and operating loss carry
forwards for the years 2002 through 2004. Subsequently SARS has issued an assessment for
approximately $2.7 million.

We believe that our South African tax
filings are in full compliance with all applicable laws and are vigorously defending its
position in this regard. However, until such time as these issues are resolved, we will
retain cash in an amount approximately equal to the assessment in South Africa to satisfy
any potential liability that may arise.

Not withstanding the above and after
reviewing this potential liability with outside experts and conducting a further review
into the circumstances of the assessment, we have recorded an estimated liability of
approximately $565,000 at this time.

We will continue to vigorously defend
our position in this matter. However, circumstances may dictate that we increase this
liability as we proceed. There is, therefore, no assurance that the $565,000 amount will
be sufficient to offset the ultimate tax liability. Conversely, we believe that we have
strong defenses in this matter and we may ultimately obtain a ruling that results in a
lesser liability. As this is a fluid situation, we will assess our liability in this
regard on a quarterly basis and may adjust this $565,000 liability in the future.

# Discontinued Operations

During the first quarter of fiscal
2006, we recognized gains of $238,000 from the discontinued operations of Fantasy Sports,
Inc. On April 7, 2006, the Company sold all the assets and certain liabilities of Fantasy
Sports, Inc. to FUN Technologies, LLC for approximately $4.4
million, including $3.85 million paid in cash at closing.

# Net Loss

We have recognized a net loss of
$941,000 during first quarter fiscal 2007 compared to a net loss of $48,000 during the
same period in the prior fiscal year. Significant items that contributed to the increased
loss included an increase in operating losses to $583,000 in the first quarter of fiscal
2007 as compared to $421,000 in the first quarter of fiscal 2006. This increase was
primarily caused by decreases in sales recognized by Strategy First. Additionally, we
recognized Foreign Currency losses of $262,000 in the first quarter of fiscal 2007 as
compared to gains of $33,000 in the first quarter of fiscal 2006, and increases in
interest expense of $101,000 and debt amortization costs of $159,000 compared to the same
period in the prior fiscal year. The Company also recognized $238,000 of revenue from
discontinued operations during the quarter ended September 30, 2005.

13

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# Financial Condition,
Liquidity and Capital Resources

Cash decreased by $426,000 from
$12,009,000 at June 30, 2006 to $11,583,000 at September 30, 2006.

The cash balances are being held for
acquisitions and working capital purposes. Included in this amount is $3,419,000 which is
classified as restricted cash. This amount relates to cash used to secure borrowings of
our subsidiary, Strategy First, as well as money retained in South Africa to satisfy any
potential liability that may result from our tax dispute with the South African Revenue
Service.

Working capital decreased by
$1,472,000 from $9,575,000 at June 30, 2006 to $8,103,000 at September 30, 2006. This
decrease is primarily due to the result of an increase of $540,000 in the current portion
of the convertible debenture security as well as decreases in the US dollar valuation of
cash denominated in South African Rand and losses incurred from continuing operations.

At September 30, 2006 we had
borrowings of $781,000 which consisted of $659,000 advances against the lines of credit,
secured by the Companys cash, and term loans of $122,000. Additionally, we have
$3,600,000 face amount outstanding in our convertible debenture issued to DKR Oasis, net
of repayments or costs incurred. We currently pay monthly interest on this amount at a
rate of Prime plus 1.5%. Should there be no conversions of this debenture; principal
payments will start on February 1, 2007 with the loan being amortized monthly through
September 2008.

In the future we expect to meet our
short and long term obligations through our cash on hand. We expect to repatriate our
unrestricted funds held in South Africa to the United States. We believe that repatriation
of the full amount is allowable under current South African foreign currency regulations.
Over the last eight years, we have, from time to time, repatriated funds from South Africa
without restriction. However, there can be no guarantee that the South African foreign
currency regulations will not change in the future in a manner that might restrict our
ability to repatriate the remaining assets.

In the future we intend to add
additional operating subsidiaries that will produce revenues and net profits. We may
utilize a portion of the working capital in connection with the acquisition or
establishment of those operations. We may also be required to secure additional debt or
equity funding in connection with those future acquisitions. However, there is no
assurance that we will be able to secure additional indebtedness or raise additional
equity to finance future acquisitions on terms acceptable to management.

# Critical Accounting
Policies

The following is a discussion of the
accounting policies that we believe are critical to our operations:

# Revenue Recognition

Strategy First distributes the
majority of its 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. Additionally, Strategy First may
license its products to distributors in exchange for royalty payments. The distribution of
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, Strategy First records a 30% provision for
product returns and price markdowns as a reduction of gross sales at the time the product passes to these
distributors or retailers.

14

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The provision for anticipated product
returns and price markdowns is primarily based upon Strategys analysis of historical
product return and price markdown results. Should product sell-through results at retail
store locations fall significantly below anticipated levels the adequacy of this allowance
may be insufficient. Strategy will review the adequacy of its allowance for product
returns and price markdowns and if necessary will make adjustments to this allowance on a
quarterly basis.

In the case of royalty income,
Strategy will record this income when earned based on sales reports from its distributors.
In many cases, Strategy receives guaranteed royalty income and these revenues are recorded
upon signing of the royalty agreements.  These amounts are carried as accounts
receivable until paid.

# Goodwill Valuation

Goodwill represents the excess of the
purchase price over the fair market value of net assets acquired. The process of
determining goodwill requires judgment. Evaluating goodwill for impairment involves the
determination of the fair value of our reporting units. Inherent in such fair value
determinations are certain judgments and estimates, including the interpretation of
current economic indicators and market valuations, and our strategic plans with regard to
our operations. To the extent additional information arises or our strategies change, it
is possible that our conclusion regarding goodwill impairment could change, which could
have a material effect on our financial position and results of operations. For those
reasons, we believe that the accounting estimate related to goodwill impairment is a
critical accounting estimate.

The Company reviews goodwill annually
(or more frequently under certain conditions) for impairment in accordance with SFAS No.
142, goodwill and other intangible assets. The Company performed its annual impairment
test of goodwill as of June 30, 2006 and determined that goodwill was not impaired. While
the Company believes that no impairment existed as of September 30, 2006, there can be no
assurances that future economic or financial developments might not lead to an impairment
of goodwill.

# Intangible Assets

Intangible assets include software
game titles and non-competition agreements. Intangible assets, excluding goodwill, are
stated on the basis of cost and are amortized on a straight-line basis over estimated
lives of three to ten years. Intangible assets with indefinite lives are not amortized but
are evaluated for impairment annually unless circumstances dictate otherwise. Management
periodically reviews intangible assets for impairment based on an assessment of
undiscounted future cash flows, which are compared to the carrying value of the intangible
assets. Should these cash flows not equal or exceed the carrying value of the intangible,
a discounted cash flow model is used to determine the extent of any impairment charge
required.

# Forward-Looking
Information

We make numerous forward-looking
statements throughout this report including statements with respect to our expected
income, acquisitions and other growth opportunities, performance of investments that we
have made, and operating expenses. Frequently these statements are

introduced with words such as
expect, likely, will, believe,
estimate, project, anticipate, or predict.
Actual results may differ materially from those suggested by the forward-looking
statements that we make for a number of reasons including those described in Part II,
Item 1A, Risk Factors of our report on Form 10-K for the year ended June
30, 2006.

We expressly disclaim any obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.

15

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|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------

The Company does not ordinarily hold
market risk sensitive instruments for trading purposes. The Company does however recognize
market risk from interest rate and foreign currency exchange exposure.

# Interest Rate Risk

At September 30, 2006, our cash
resources earned interest at variable rates. Accordingly, the Companys return on
these funds is affected by fluctuations in interest rates. The Company also has
significant debt that is tied to interest rates and, therefore, any increase in interest
rates will have a negative effect on the Companys interest payments. At September
30, 2006, the Company had a $3.6 million convertible note outstanding. The interest on the
convertible note is based on a floating rate equal to prime plus 1.5%. A hypothetical 100
basis point change in interest rates would result in an approximate $36,000 change in
annual interest expense.

Approximately $4.2 million of our
debt accrues interest at rates that vary with changes in the U.S. prime rate. We estimate
that, at our current level of debt, for each 1% increase in the average annual prime
interest rate, our annual interest expense would increase by approximately $42,000.

# Foreign Currency Risk

Strategy First, Inc. is incorporated
in Canada and sells products throughout the United States and Europe. Its functional
currency is the Canadian Dollar. This has exposed the Company to market risk with respect
to fluctuations in the relative value of the Euro, British Pound, the Canadian
dollar, and the US dollar.

Certain of the Companys cash
balances and the remaining proceeds from the sale of its South African subsidiaries are
denominated in South African Rand. This has exposed the Company to market risk with
respect to fluctuations in the relative value of the South African Rand against the US
dollar.

On March 9, 2005, the Company
acquired a twelve-month Rand put/US dollar call option, at a strike price of R6.25 to the
US dollar. During its term, this option served as a partial protection against the
depreciation of the SA Rand versus the US dollar. The cost of the option was approximately
$200,000 and it was closed out in March 2006. The Company currently does not hedge its
South African Rand exposure.

At September 30, 2006, we had assets
denominated in South African Rand of R 35.5 million ($ 4.6million).

16

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|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------

We maintain disclosure controls and
procedures that are designed to ensure (1) that information required to be disclosed by us
in the reports we file or submit under the Securities Exchange Act of 1934, as amended
(the Exchange Act), is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange Commissions
(SEC) rules and forms, and (2) that this information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost benefit relationship
of possible controls and procedures.

Prior to the filing date of this
quarterly report, under the supervision and review of our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by
this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are effective.

In addition, there have been no
significant changes in our internal controls and procedures or in other factors that could
significantly affect those controls since our evaluation. We cannot assure you, however,
that our system of disclosure controls and procedures will always achieve its stated goals
under all future conditions, no matter how remote.

17

---

# PART II.   OTHER
INFORMATION

|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------

Other than as set forth below we are
not currently a party to any material legal proceedings. We may become from time to time
involved in legal proceedings in the ordinary course of business. We may not be successful
in defending these or other claims. Regardless of the outcome, litigation can result in
substantial expense and could divert the efforts of our management.

In April 2006, our First South
African subsidiary received a letter from the South African Revenue Service
(SARS) challenging certain tax treatment of dividends and operating loss carry
forwards for the years 2002 through 2004. Subsequently SARS issued a tax assessment for
approximately $2.7 million. The Company believes that its South African tax filings are in
full compliance with all applicable laws and is vigorously defending its position in this
regard. However, until such time as these issues are resolved, the Company will retain
cash in an amount approximately equal to the assessment in South Africa to satisfy any
potential liability that may arise. The Company has recorded an estimated liability of
$565,000 in this regard but may be forced to increase this amount should it receive
adverse information as it continues its appeal of the SARS assessment.

In January 2006, we brought an action
against JoWood Software Productions AG seeking damages in the amount of approximately
$850,000 for expenses incurred in connection with our unsuccessful acquisition of shares
of JoWood. The case is being heard in the Vienna Commercial Court in Austria. JoWood was
unsuccessful in having the case dismissed. Further hearings and a judgment are anticipated
toward the end of 2006.

|ITEM 1A |  | RISK FACTORS
|------- |  | ------------

There have been no material changes
in the risks facing the Company as described in the Companys Form 10-K for the year
ended June 30, 2006.

|ITEM 2. |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------------------------

None.

# ITEM 3. DEFAULTS UPON
SENIOR SECURITIES

None.

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

None.

|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------

None.

18

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|ITEM 6. |  | EXHIBITS
|------- |  | --------

| | Exhibit Number |  | Description
| | -------------- |  | -----------

| | 3.1 |  | Memorandum
of Association of the Registrant(2)
| | --- |  | ----------------------------------------------

| | 3.2 |  | Bye-Laws
of the Registrant(2)
| | --- |  | -----------------------------

| | 4.3 |  | Indenture
dated April 25, 1997 between the Registrant and American Stock Transfer & Trust
Company(1)
| | --- |  | ----------------------------------------------------------------------------------------------------

| | 4.6 |  | Stock
Option Agreement(3)
| | --- |  | -------------------------

| | 10.2 |  | Form
of FSAH Escrow Agreement(2)
| | ---- |  | --------------------------------

| | 10.3 |  | Form
of First Amended and Restated Employment Agreement of Clive Kabatznik(2)
| | ---- |  | -----------------------------------------------------------------------------

| | 10.4 |  | Form
of FSAM Management Agreement(2)
| | ---- |  | ------------------------------------

| | 10.5 |  | Form
of Consulting Agreement with Michael Levy(2)
| | ---- |  | -------------------------------------------------

| | 10.6 |  | 1995
Stock Option Plan(2)
| | ---- |  | -------------------------

| | 10.7 |  | Asset
purchase agreement by and among First South African Holdings Pty, Ltd. and minority
shareholders of First Lifestyle Holdings, Ltd., Ethos Private
Equity, Cornelius Roodt and certain other purchasers and the
Company, dated as of September 24, 2000(4)
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 |  | Fantasy
Sports Asset Acquisition Agreement dated as of November 17, 2000(5)
| | ---- |  | ---------------------------------------------------------------------------

| | 10.9 |  | Agreement
between Sports Team Analysis and Tracking Systems of Missouri, Inc. and Fantasy
Sports Enterprises dated October 7, 2002(5)
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 |  | Amendment
to Agreement dated July 21, 2003 between Fantasy Sports Enterprises, Inc. and
Sports Team Analysis and Tracking Systems of Missouri, Inc.(5)
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 |  | Employment
Agreement, dated as of December 31, 2004, between Clive Kabatznik and First
South Africa Management Corp. (6)
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------

| | 10.12 |  | Subscription
Agreement, dated February 24, 2005, between the Registrant and Strategy
First Inc. (7)
| | ----- |  | ---------------------------------------------------------------------------------------------------

| | 10.13 |  | 2004
Stock Incentive Plan (8)
| | ----- |  | -----------------------------

| | 31.1 |  | Certificate
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002(9)
| | ---- |  | ------------------------------------------------------------------------

| | 32.1 |  | Certification
Pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(9)
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------

_________________

|(1) |  | Incorporated
by reference to the Registrant's Current Report on Form 8-K filed September 10, 1997.
|--- |  | --------------------------------------------------------------------------------------------------

|(2) |  | Incorporated
by reference to the Registrant's  Registration  Statement on Form S-1 (No. 33-99180)
 filed on November          9, 1995,  as amended on Form S-1/A No. 1, Form S-1/A No. 2,
Form S-1/A No. 3 filed on  December  27,  1995,  January          16, 1996 and January
24, 1996, respectively and Form 10-Q for the fiscal quarter ended March 31, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated
by reference is the  Registrant's  Registration  Statement on Form S-1 (No.  333-33561)
filed on August          13,  1997 as amended on Form S-1/A No. 1, Form S-1/A No. 2 and
For S-1/A No. 3 filed on  December  9, 1997,  January          22, 1998 and February 11,
1998, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated
by reference to the Company's Current Report on Form 8-K filed on October 12, 2000.
|--- |  | ------------------------------------------------------------------------------------------------

|(5) |  | Incorporated
by reference to the Company's Current Report on Form 8-K filed on December 1, 2000.
|--- |  | ------------------------------------------------------------------------------------------------

|(6) |  | Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on April 26, 2005.
|--- |  | -------------------------------------------------------------------------------------------------

|(8) |  | Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on March 1, 2005.
|--- |  | ------------------------------------------------------------------------------------------------

|(9) |  | Filed
herewith.
|--- |  | ---------------

19

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# 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 the undersigned duly authorized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date:  
November 14, 2006

| |                          
| | -------------------------
| | SILVERSTAR HOLDINGS, LTD.
|
|
|
| | /s/ Clive Kabatznik      
| | Clive Kabatznik          
| | Chief Executive Officer  
| | Chief Financial Officer  

20