# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-Q/A
(Amendment No. 1)

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

For the quarterly
period ended December 31, 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 | (IRS 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: 809-295-1422

_____________________________________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

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 |X| 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 February 9, 2007
|-------------------- | --------------------------------------
|Class A Common Stock |                                       
|Class B Common Stock |                                       
|Total                |                                       



---

# EXPLANATORY NOTE

This Amendment No. 1 to our
Quarterly Report on Form 10-Q (this Amendment No. 1) amends our Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 2006, originally
filed with the Securities and Exchange Commission on February 20, 2007 (the Original
Filing). We are filing this Amendment No. 1 to correct the math
footing errors and select disclosures set forth below.  These errors require the Company to revise its disclosure in Part I,
Item 1  Financial Statements, Item 2  Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 3 Quantitative and
Qualitative Disclosure about Mark Risk and Part II, Item 1A  Risk Factors of the Original
Filing.

# Condensed Consolidated Balance Sheets

|                        | June 30, 2006 | 
|----------------------- | ------------- | 
|
|Accrued royalty expense |               | 
|
|Line below Accumulated  |               | 
|comprehensive income    |               | 

# Condensed Consolidated Statement Of Operations
Three Months Ended December 31, 2006

|                                | Form 10Q |  | Form 10QA |           
|------------------------------- | -------- |  | --------- | ----------
|Development costs and royalties |          |  |           | 987,675   
|Operating loss                  |          |  |           | (1,385,878
|Other Income (expense)          |          |  |           | (20       
|Foreign currency gain(loss)     |          |  |           | 357,428   
|Provision for income taxes      |          |  |           | 3,360     

Additionally, the Company has added
disclosure in Note 11 to the financial statements and Managements
Discussion and Analysis of Financial Condition and Results of Operations regarding UK payroll taxes that are owed
by Empire Interactive plc, the Company's UK subsidiary.

In accordance with applicable
Securities and Exchange Commission rules, this Amendment No. 1 includes updated
certifications from the Companys principal executive officer and principal
financial officer.

For the convenience of the reader,
the remaining sections of the Original Filing, although not revised, are restated in this
Amendment. Accordingly, this Amendment continues to describe conditions as of the date of
the Original Filing, and should be read in conjunction with filings of the Company made
with the Securities and Exchange Commission subsequent to the Original Filing.

# PART I  FINANCIAL
INFORMATION

|Item 1 | Financial Statements                                                                                             
|------ | -----------------------------------------------------------------------------------------------------------------
|       | Condensed Consolidated Balance Sheets at December 31, 2006 (Unaudited) and June 30, 2006                         
|       | Condensed Consolidated Statements of Operations (Unaudited) for the three months ended December 31, 2006 and 2005
|       | Condensed Consolidated Statements of Operations (Unaudited) for the six months ended December 31, 2006 and 2005  
|       | Condensed Consolidated Statements of Cash Flows (Unaudited) for six months ended December 31, 2006 and 2005      
|       | Notes to the Condensed Consolidated Financial Statements (Unaudited)                                             
|Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations                            
|Item 3 | Quantitative and Qualitative Disclosures About Market Risk                                                       
|Item 4 | Controls and Procedures                                                                                          

# PART II  OTHER
INFORMATION

|Item 1  | Legal Proceedings                                          
|------- | -----------------------------------------------------------
|Item 1A | Risk Factors                                               
|Item 2. | Unregistered Sales of Equity 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                                                   
|        | SIGNATURES                                                 

2



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

|ASSETS                                                                          | December 31,2006 | June 30,2006
|------------------------------------------------------------------------------- | ---------------- | ------------
|Current Assets:                                                                 |                  |             
|Cash and cash equivalents, includes restricted cash of                          |                  |             
|$735,209 and $647,797 respectively                                              |                  |             
|Cash restricted for foreign tax estimated liability                             |                  |             
|Accounts receivable, net                                                        |                  |             
|Inventories, net                                                                |                  |             
|Current portion of long-term notes receivable                                   |                  |             
|Prepaid expenses and other current assets                                       |                  |             
|                                                                                |                  |             
|Total current assets                                                            |                  |             
|                                                                                |                  |             
|Property, plant and equipment, net                                              |                  |             
|Investments in non-marketable securities                                        |                  |             
|Long-term notes receivable                                                      |                  |             
|Goodwill, net                                                                   |                  |             
|Intangible assets, net                                                          |                  |             
|Deferred tax asset                                                              |                  |             
|Deferred charges and other assets                                               |                  |             
|                                                                                |                  |             
|Total assets                                                                    |                  |             
|                                                                                |                  |             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                            |                  |             
|Current Liabilities:                                                            |                  |             
|Line of credit                                                                  |                  |             
|Current portion of long-term debt                                               |                  |             
|Notes payable - acquisition                                                     |                  |             
|Current portion of convertible secured debentures                               |                  |             
|Accounts payable                                                                |                  |             
|Accrued royalty expense                                                         |                  |             
|Accrued payroll expense                                                         |                  |             
|Accrued expenses                                                                |                  |             
|Estimated liability for foreign tax                                             |                  |             
|                                                                                |                  |             
|Total current liabilities                                                       |                  |             
|Long-term debt                                                                  |                  |             
|Convertible secured debentures                                                  |                  |             
|Potential liability - Empire earn out                                           |                  |             
|Obligation to issue common stock                                                |                  |             
|                                                                                |                  |             
|Total liabilities                                                               |                  |             
|                                                                                |                  |             
|Commitments, contingencies and other matters                                    |                  |             
|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; 9,189,154 |                  |             
|and 8,313,774 shares issued and outstanding, respectively                       |                  |             
|Common stock, Class B, $0.01 par value; 2,000,000 shares authorized;            |                  |             
|835,260 share issued and outstanding                                            |                  |             
|Common stock, FSAH Class B $0.001 par value; 10,000,000 shares authorized;      |                  |             
|2,671,087 shares issued and outstanding                                         |                  |             
|Additional paid-in capital                                                      |                  |             
|Accumulated deficit                                                             |                  |             
|Accumulated comprehensive income                                                |                  |             
|                                                                                |                  |             
|Total stockholders' equity                                                      |                  |             
|                                                                                |                  |             
|Total liabilities and stockholders' equity                                      |                  |             
|                                                                                |                  |             

3

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

|                                                                                   | Three Months Ended December 31, | 
|---------------------------------------------------------------------------------- | ------------------------------- | 
|
|Net Revenues                                                                       |                                 | 
|Operating expenses:                                                                |                                 | 
|Cost of sales                                                                      |                                 | 
|Development costs and royalties                                                    |                                 | 
|Selling, general and administrative                                                |                                 | 
|Amortization of intangibles                                                        |                                 | 
|Depreciation                                                                       |                                 | 
|                                                                                   |                                 | 
|                                                                                   |                                 | 
|Operating loss                                                                     |                                 | 
|Other income                                                                       |                                 | 
|Foreign currency gain (loss)                                                       |                                 | 
|Acquisition costs incurred                                                         |                                 | 
|Amortization of convertible debt discounts and issuance costs                      |                                 | 
|Interest expense                                                                   |                                 | 
|Interest income                                                                    |                                 | 
|                                                                                   |                                 | 
|Loss from continuing operations before income taxes                                |                                 | 
|Provision for income taxes                                                         |                                 | 
|                                                                                   |                                 | 
|Loss from continuing operations                                                    |                                 | 
|                                                                                   |                                 | 
|Discontinued operations:                                                           |                                 | 
|Income from discontinued operations net of Income taxes of $0 and $0, respectively |                                 | 
|                                                                                   |                                 | 
|Net loss                                                                           |                                 | 
|                                                                                   |                                 | 
|Income (loss) per share:                                                           |                                 | 
|Basic                                                                              |                                 | 
|Continuing operations                                                              |                                 | 
|Discontinued operations                                                            |                                 | 
|                                                                                   |                                 | 
|Net loss                                                                           |                                 | 
|                                                                                   |                                 | 
|Diluted                                                                            |                                 | 
|Continuing operations                                                              |                                 | 
|Discontinued operations                                                            |                                 | 
|Net loss                                                                           |                                 | 
|Basic                                                                              |                                 | 
|                                                                                   |                                 | 
|Diluted                                                                            |                                 | 
|                                                                                   |                                 | 

4



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

|                                                                                   | Six Months Ended December 31, | 
|---------------------------------------------------------------------------------- | ----------------------------- | 
|
|Net Revenues                                                                       |                               | 
|Operating Expenses:                                                                |                               | 
|Cost of sales                                                                      |                               | 
|Development costs and royalties                                                    |                               | 
|Selling, general and administrative                                                |                               | 
|Amortization of intangibles                                                        |                               | 
|Depreciation                                                                       |                               | 
|                                                                                   |                               | 
|Operating loss                                                                     |                               | 
|Other income (loss)                                                                |                               | 
|Foreign currency gains                                                             |                               | 
|Acquisition costs incurred                                                         |                               | 
|Amortization of convertible debt discounts and issuance costs                      |                               | 
|Interest expense                                                                   |                               | 
|Interest income                                                                    |                               | 
|Loss from continuing operations before income taxes                                |                               | 
|Provision for income taxes                                                         |                               | 
|                                                                                   |                               | 
|Loss from continuing operations                                                    |                               | 
|Discontinued operations:                                                           |                               | 
|Income from discontinued operations net of Income taxes of $0 and $0, respectively |                               | 
|                                                                                   |                               | 
|Net loss                                                                           |                               | 
|Income (Loss) per share:                                                           |                               | 
|Basic                                                                              |                               | 
|Continuing operations                                                              |                               | 
|Discontinued operations                                                            |                               | 
|                                                                                   |                               | 
|Net loss                                                                           |                               | 
|                                                                                   |                               | 
|Diluted                                                                            |                               | 
|Continuing operations                                                              |                               | 
|Discontinued operations                                                            |                               | 
|                                                                                   |                               | 
|Net loss                                                                           |                               | 
|                                                                                   |                               | 
|Basic                                                                              |                               | 
|                                                                                   |                               | 
|Diluted                                                                            |                               | 
|                                                                                   |                               | 

5



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

|                                                                 | Six Months Ended December 31, | 
|---------------------------------------------------------------- | ----------------------------- | 
|
|Cash flows from operating activities:                            |                               | 
|Net (loss) from operations                                       |                               | 
|Depreciation and amortization                                    |                               | 
|Loss on disposal of fixed assets                                 |                               | 
|Stock-based compensation                                         |                               | 
|Stock issued for services                                        |                               | 
|Unrealized foreign currency gains                                |                               | 
|Accrued interest income on notes receivable                      |                               | 
|Changes in operating assets and liabilities, net                 |                               | 
|Increase in other assets                                         |                               | 
|Increase in other liabilities                                    |                               | 
|Net changes in assets and liabilities of discontinued operations |                               | 
|                                                                 |                               | 
|Net cash provided by( used in) operating activities              |                               | 
|                                                                 |                               | 
|Cash flows from Investing activities:                            |                               | 
|Acquisition expenses capitalized                                 |                               | 
|Cost paid for acquisition of Empire Interactive                  |                               | 
|Proceeds from sale of fixed assets                               |                               | 
|Purchase of fixed assets                                         |                               | 
|Proceeds from repayment of long-term note receivable             |                               | 
|                                                                 |                               | 
|Net cash provided by (used) in investing activities              |                               | 
|                                                                 |                               | 
|Cash flows from financing activities:                            |                               | 
|Short term borrowings (repayments), net                          |                               | 
|Increase in deposits held in escrow                              |                               | 
|Increase in bank overdraft                                       |                               | 
|Net proceeds from convertible debenture                          |                               | 
|Repayment of long term debt                                      |                               | 
|Proceeds from private placement sales of common stock            |                               | 
|Proceeds from the exercise of stock options                      |                               | 
|Net cash provided by discontinued  operations                    |                               | 
|                                                                 |                               | 
|Net cash provided by financing activities                        |                               | 
|                                                                 |                               | 
|Effect of exchange rates on cash                                 |                               | 
|Net increase (decrease) in cash and cash equivalents             |                               | 
|Cash and cash equivalents, beginning of period                   |                               | 
|                                                                 |                               | 
|Cash and cash equivalents, end of period                         |                               | 
|                                                                 |                               | 
|Supplemental cash flow information:                              |                               | 
|Cash paid for interest                                           |                               | 
|                                                                 |                               | 

See notes to condensed
consolidated financial statements.

6



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# SILVERSTAR HOLDINGS,
LTD. AND SUBSIDIARIESNOTES 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 Empire Interactive PLC (Empire), a leading worldwide
publisher of interactive entertainment software for all game platforms, as well as
Strategy First Inc. (Strategy First), a leading 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. LIQUIDITY
CONSIDERATIONS

We currently do not have sufficient
cash on hand to meet our short and long term obligations. While in the past, the Company
has succeeded in meeting its cash flow requirements through the raising of additional debt
or equity, the sale of assets or through operating cash flow, there is no guarantee that
it may be successful in doing so going forward. The Companys failure to do so will
raise substantial doubt as to its ability to continue as a going concern.
Managements plans to alleviate this uncertainty are as follows:

| |  |  | raise
additional capital through the sale of equity or additional debt. To this end management
has received various indications of interest from investors to raise additional capital
either through subordinated debt, preferred stock or a placement of common stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | generate
significant short term operating earnings and cash flow primarily through its newly
acquired subsidiary Empire Interactive. PLC. Empire currently has substantially completed
the first Next Generation version of its best selling Flat Out franchise. The company
anticipates that the launch of this game, along with Empires ongoing business will
generate operating profits and cash flow in the short term.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Company has approximately $2.6 million restricted cash in South Africa set aside to match
its current South African tax assessment. The Company is vigorously seeking to set this
assessment aside and if it does so these resources will be available for general
corporate purposes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
the event the Company is unsuccessful in any of the above measure, it may seek to
renegotiate some of the terms of its larger short term liabilities, primarily related to
the acquisition of Empire Interactive and its outstanding convertible debentures
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Management believes that the actions
that will be taken by the Company provide the opportunity for the Company to improve
liquidity and achieve profitability. However there can be no assurance that such events
will occur.

The accompanying unaudited condensed
consolidated financial statements have been prepared assuming that the Company will
continue as a going concern. The unaudited condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this uncertainty.

7



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# NOTE 3. 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 December 31, 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 December 31, 2006 totaled $735,209, which is used as
collateral on the Companys line of credit.

# Reclassifications

Royalty expenses for the three and
six months ending December 31, 2005 totaling $325,878 and $442,683, respectively,
have been reclassified from cost of sales to development costs and royalties 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 six month periods ending December 31, 2006 and December 31,
2005 the Company recognized expenses of $77,585 and $17,094, respectively, for employee
stock options that vested during fiscal years 2007 and 2006. Based on existing unvested
option agreements

8



---

the Company anticipates an additional
expense of approximately $74,070 in fiscal 2007 which could increase if additional options
are granted during the fiscal year. As of December 31, 2006, $178,344 of total
unrecognized compensation costs related to non-vested options is scheduled to be
recognized over a weighted average period of 1.72 years.

The weighted average grant date fair
value of options granted during the six months ended December 31, 2006 and the significant
assumptions used in determining the underlying fair value of each option grant on the date
of the grant utilizing the Black Scholes option pricing model are noted in the following
table. Expected volatility is based on historical volatility data of the Companys
stock. The expected term of stock options granted is based on historical data and
represents the period of time that stock options are expected to be outstanding. The
risk-free rate of the stock options is based on the United States Treasury rate in effect
at the time of grant. For the six months ended December 31, 2005, the Company did not
grant stock options.

|                                                          | 2006      
|--------------------------------------------------------- | ----------
|Weighted average grant-date fair value of options granted | $1.04     
|Assumptions:                                              |           
|Risk free interest rate                                   | 4.65-4.71%
|Expected life                                             | 2-4 years 
|Expected volatility                                       | 48-95%    
|Expected dividend yield                                   | 0.00      

As of December 31, 2006, the Company
had 1,297,405 stock options outstanding, of which 1,138,635 are fully vested. A summary of
the activity in the Companys stock option plans is as follows for the six months
ended December 31, 2006:

|                               | Share
Options Outstanding | Weighted
Average
Exercise
|------------------------------ | ------------------------- | -------------------------
|Outstanding, beginning of year |                           |                          
|Granted                        |                           |                          
|Forfeited                      |                           |                          
|Exercised                      |                           |                          
|                               |                           |                          
|Outstanding December 31, 2006  |                           |                          
|                               |                           |                          

# NOTE 4. INTANGIBLE ASSETS

| | The
following table presents details of the purchase of finite-life intangibles as part of the
acquisitions of Strategy First and Empire Interactive.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | Estimated
Useful Life |  | Gross Carrying
Amount |  | Accumulated
Amortization |   | Total      | 
|-------------------------------- | --------------------- |  | --------------------- |  | ------------------------ | - | ---------- | 
|Covenant not to compete          |                       |  | 3 years               |  |                          | $ | 42,867     | 
|Game titles - Empire Interactive |                       |  | 5 years               |  |                          |   | 31,357,466 | 
|Game titles - Strategy First     |                       |  | 10 years              |  |                          |   | 1,485,374  | 
|                                 |                       |  |                       |  |                          |   |            | 
|Balance on December 31, 2006     |                       |  |                       |  |                          | $ | 32,885,707 | 
|                                 |                       |  |                       |  |                          |   |            | 
|
|Covenant not to compete          |                       |  | 3 years               |  |                          | $ | 44,638     | 
|Game titles - Strategy First     |                       |  | 10 years              |  |                          |   | 1,546,773  | 
|                                 |                       |  |                       |  |                          |   |            | 
|Balance on June 30, 2006         |                       |  |                       |  |                          | $ | 1,591,411  | 
|                                 |                       |  |                       |  |                          |   |            | 

9



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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.

The Covenant not to compete and the
Game titles acquired as part of the acquisition of Strategy First are both amortized using
the straight-line method. The Game titles of Empire are amortized over a five-year period
based on weighted average expected sales from the date the title is launched. For titles
that have not yet been launched as of December 31, 2006 a launch date was estimated to
project future amortization.

Amortization expense for intangible
assets for the six months periods ended December 31, 2006 and 2005 were $673,188 and
$68,702, respectively. Estimated amortization expense for the rest of fiscal 2007 and for
the succeeding five fiscal years is as follows:

|           |            
|---------- | -----------
|2007       | $4,006,928 
|2008       | 10,078,834 
|2009       | 7,430,481  
|2010       | 6,069,414  
|2011       | 2,273,383  
|2012       | 1,160,930  
|Thereafter | 1,024,818  
|           |            
|           | $32,044,788
|           |            

# NOTE 5. ACQUISITIONS

On December 4, 2006, the Company
announced that it had achieved more than 90% acceptance of its offer to acquire the shares
of Empire Interactive PLC. Based on these acceptances, the Company announced a formal
closing of the officer to Empire shareholders and took control effective December 1, 2006.

The offer provided for either a cash
payment of approximately $.13 per share (£.07 p), or an earn-out alternative, where
the initial payment was approximately $.09 per share (£.049 p), with a further $.094
per share (£.05 p) in loan notes payable in October 2007. Additionally, there is an
earn-out payable in April 2008. The earn-out is based on a formula of Empires EBITDA
for the fiscal year ended June 30, 2007. The acquisition was recorded assuming the earn
out targets will be fully achieved and the Companys December 31, 2006 Balance Sheet
includes a liability of £6,177,548 p, or $12,102,434 USD based on the December 31,
2006 foreign exchange rate of 1.959 US dollar to the British pound.

The aggregate purchase price for
Empires stock, assuming the full earn out threshold is met, will be approximately
$26.1 million or £13.4 million based on the December 1, 2006 foreign exchange rate
of 1.9508 US dollar to the UK pound of which amount approximately $5.2 million are loan
notes which mature October 31, 2007, and $12.1 million are loan notes payable in April
2008 if earnings targets are achieved. $.7 million of the acquisition expenses were paid
by the issuance of 406,180 shares of Silverstars Class A common stock. Of this
amount 350,000 shares were issued to a consultant to the Company as a finders fee
for the transaction pursuant to his consulting contract. The consultant was subsequently
appointed Chairman of the Board of Empire Interactive PLC. Of the remaining $8.1 million
of the purchase price approximately $7.6 million has been paid by utilizing the
Companys internal cash resources. The remaining $.5 million has been accrued as a
short-term liability.

The purchase price was allocated on
the basis of the estimated fair values of the assets acquired and liabilities assumed. The
acquisition was accounted for as a purchase. The final purchase price allocation will
be completed after the Companys valuation is finalized. The intangible assets
identified in connection with the acquisition were recorded and are being amortized in
accordance with the provisions of SFAS No. 141 and 142.

10



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|Purchase price:      |            
|-------------------- | -----------
|Net assets acquired: |            
|Current assets       | $3,226,230 
|Fixed assets         | 898,804    
|Intangible assets    | 31,224,616 
|Other assets         | 608,650    
|                     |            
|Total assets         | 35,958,300 
|Total liabilities    | (9,856,885)
|                     |            
|                     | $26,101,415
|                     |            

The following unaudited proforma
summary presents consolidated financial information as if the acquisition of Empire
Interactive had occurred effective July 1, 2006 and 2005, respectively. The proforma
information does not necessarily reflect the actual results that would have occurred, nor
is it necessarily indicative of future results of operations of the consolidated entities.

|                        | Six Months Ended December 31, | 
|----------------------- | ----------------------------- | 
|
|Net Revenues            |                               | 
|Net Loss                |                               | 
|Income (loss) per share |                               | 
|Basic and diluted       |                               | 
|Continuing operations   |                               | 
|Discontinued operations |                               | 
|Net loss                |                               | 

# NOTE 6. 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 related to
Fantasy Sports has been included in discontinued operations in the companys
consolidated statements of operations.

The following summarizes the
operating results of the discontinued operations.

|Three Months Ended December 31, | Six Months Ended December 31,
|------------------------------- | -----------------------------
|
|Revenue                         | $        -                   
|Net income                      | $        -                   

11



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# NOTE 7. CASH FLOWS

Changes in operating assets and
liabilities consist of the following:

|                                                                                                | Six Months Ended December 31, | 
|----------------------------------------------------------------------------------------------- | ----------------------------- | 
|
|Increase (decrease) in accounts receivable                                                      |                               | 
|Increase (decrease) in inventories                                                              |                               | 
|Increase in prepaid expenses and current assets                                                 |                               | 
|Increase in accounts payable                                                                    |                               | 
|Increase (decrease) in accrued expenses                                                         |                               | 
|Increase in deferred revenue                                                                    |                               | 
|                                                                                                |                               | 
|                                                                                                |                               | 
|                                                                                                |                               | 
|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                                                         |                               | 
|                                                                                                |                               | 
|Non-cash investing and financing activities were as follows:                                    |                               | 
|Issuance of stock as payment for acquisition expenditures                                       |                               | 
|Issuance of Notes payable to former Empire shareholders                                         |                               | 
|Issuance of notes payable to former Empire shareholders contingent on earn out targets achieved |                               | 

12



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# NOTE 8. 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
 interactive entertainment software. 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 periods ended December 31, 2005.

The operations of the interactive
entertainment software segment are focused on the development and publishing of software
games for all game platforms. The interactive entertainment software segment is composed
of the operations of Empire Interactive and Strategy First. Empire Interactive is a
leading publisher of interactive entertainment software that is headquartered in the
United Kingdom with offices in the United States, Germany, France and Spain. The company
develops and publishes a varied range of titles for all current game platforms in North
America, Europe and Asia.

Strategy First is headquartered in
Montreal Canada and is a worldwide publisher of strategy based interactive entertainment
software for the PC.

# NOTE 9. 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 December 31,
2006, the prime rate was 8.25%. The balance outstanding under this line of credit at
December 31, 2006, and June 30, 2006 was $735,209 and $647,797, respectively.

Empire Interactive has an expired
line of credit secured by its receivables, inventory, real property and intangible assets.
As of December 31, 2006 the amount outstanding under this facility was £1,109,347
($2,173,322). The line of credit accrues interest at an annual rate of 7.25%. The facility
expired on December 31, 2006 and its renewal is currently being negotiated

13



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# Other Debt

Other 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 December 31, 2006 was 6%. The loan matures in April 2007.
The balance outstanding as of December 31, 2006 was $59,834.

# NOTE 10. 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 December 31,
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 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 trading days based upon the 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

14



---

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.

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.

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. As of December 31, 2006 no debentures have been
converted. 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 $52,378 which is presented as a discount on the convertible note and
amortized over the term of the note.

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. As of December 31, 2006, no payments have been made.

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 per month, plus accrued but unpaid interest and
liquidated damages, commencing on March 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 certain amounts in cash as
liquidated damages. The Company has filed a registration statement in this regard and
anticipates it becoming effective within the specified time period.

15



---

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.

As consideration, the Company reduced
the exercise price of the warrants $.10 to $1.7986 per share. The fair value for the
reduction in the exercise price of 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 4.37%, dividend yields of 0% and a volatility factor of the
expected market price of the Common Stock of 106.66%. 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 exercise price reduction and allocated $10,490 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 notes as of
December 31, 2006 and June 30, 2006, net of unamortized discounts was as follows:

|                                                 | December 31,2006 |  | June 30,2006 |           
|------------------------------------------------ | ---------------- |  | ------------ | ----------
|Principal amount of notes                        |                  |  | $            | 5,000,000 
|Discounts for beneficial conversion features     |                  |  |              | (84,127   
|Discounts for fair value of warrants and options |                  |  |              | (220,157  
|                                                 |                  |  |              |           
|Balance , net of unamortized discounts           |                  |  | $            | 4,695,716 
|Less current portion                             |                  |  |              | (2,743,632
|                                                 |                  |  |              |           
|Long-term portion                                |                  |  | $            | 1,952,084 
|                                                 |                  |  |              |           

Scheduled maturities of the
convertible debentures as of December 31, 2006 and June 30, 2006 were as follows:

|               | December 31, 2006 |  | June 30, 2006 |          
|-------------- | ----------------- |  | ------------- | ---------
|1 Year or less |                   |  | $             | 2,743,632
|1-2 Years      |                   |  |               | 2,256,368
|               |                   |  |               |          
|Total          |                   |  | $             | 5,000,000
|               |                   |  |               |          

Interest expense related to the notes
amounted to $185,854 and $101,500 during the six and three months ending December 31,
2006, respectively.

Amortization of discounts for the
beneficial conversion features and warrant resulted in charges to Amortization of
Convertible Debt Discounts and Issuance Costs totaling $140,129 during the six months
ended December 31, 2006. The Company also incurred loan costs of $897,084 directly related
to securing these notes, which included $500,000, ($250,000 annually) paid for a personal
guarantee on the outstanding balances. The loan costs are being amortized over the term of
the notes while the guarantee fees of $500,000 are being amortized at the rate of $250,000
per year. Amortization expenses of $190,403 are included in Amortization of Convertible
Debt Discounts and Issuance Costs during the six months ended December 31, 2006.

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

|      | 
|----- | 
|2007  | 
|2008  | 
|2009  | 
|      | 
|Total | 
|      | 

16



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# NOTE
11.   COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS

# Legal Matters

In 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 issued a tax assessment for
approximately $3.2 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 $618,000
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. A judgment
is anticipated within the next few months.

In March 2006 an action was brought
against Empire Interactive, PLC and Empire Interactive Inc. by a financial advisory firm
seeking damages of approximately $700,000 relating to an alleged breach of a business
development agreement with Empire Interactive, PLC. On February 13, 2007, the case was
settled with Empire agreeing to pay an amount of $230,000 due on April 19, 2007

In June 2006, Empire Interactive,
Inc. commenced litigation against Take Two Interactive Inc. (Take Two) in
regard to the accounting and reporting of sales of various products by Take Two. To this
point, Empire has received payments of approximately $1,416,000 from Take Two. Empire
believes that there are still significant amounts due from Take Two and continues to
pursue its claims in the London commercial courts.

# 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 developers as of December 31, 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 revenues in the event they exceed
$500,000 through December 31, 2008. As of December 31, 2006 net revenues earned under this
agreement were approximately $196,000.

At December 31, 2006, Empire owed
£531,865 ($1,041,977) for UK payroll taxes of which £441,483 ($864,909) was
past due. If UK payroll tax liabilities for the year ending March 31, 2007 are not
remitted in full by April 19, 2007, interest will automatically be charged for the period
following April 19, 2007. As of December 31, 2006, the interest rate in effect for late
tax deposits was 7.5%. In addition, the UK tax authorities have the power to charge this
rate of interest on overdue payroll taxes in respect to periods prior to April 19, 2007;
however in practice, this is rare. We therefore do not believe that we will be assessed
for interest on the overdue amounts in respect of the periods ending December 31, 2006.

17



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# NOTE 12. 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 September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosure about fair value
measurements, and is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The Company is
currently evaluating the effect that the adoption of this Statement will have on its
consolidated results of operations and financial condition.

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

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.

18



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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 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).

19



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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.

On December 4, 2006, the Company
announced that it had achieved more than 90% acceptance of its offer to acquire the shares
of Empire Interactive PLC. Based on these acceptances, the Company announced a formal
closing of the officer to Empire shareholders effective December 1, 2006. The Company paid
consideration to the shareholders as follows: approximately $6.8 million paid on closing;
an additional $5.1 million in loan notes payable October 31, 2007; and further contingent
consideration based on Empires EBIDTA for the 12 months ended June 30, 2007. Founded
in 1989, Empire develops and publishes software games for all game platforms. Some of its
popular games include the FlatOut franchise, the Ford Racing franchise, Big Mutha
Truckers, Taito Legends, Starsky & Hutch, Starship Troopers, and International Cricket
Captain.

20



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# Quarter Ended December
31, 2006 As Compared to Quarter Ended December 31, 2005

All financial data in the following
discussion and analysis included the results of operations of Empire Interactive PLC for
the month of December 2006 only.

# Revenues

Net revenues increased to
approximately $2,961,000 as compared to approximately $983,000 in the comparable quarter
of the previous year due to acquisition of Empire Interactive which generated revenues of
approximately $2,041,000.

# Cost of Sales:

Cost of sales was
approximately $1,252,000 in the second fiscal quarter 2007, or 42.2% of total
revenues. Cost of sales for Empire Interactive was approximately $968,000 or 47.4%
of Empires revenues while cost of sales for Strategy First was $284,000 or
30.9% of Strategy Firsts revenues. For the quarter ending December 31, 2005,
cost of sales was approximately $148,000 or 15.1%. This increase in gross
margin is primarily the result of lower gross margins for console games, which make up
the majority of Empires sales, as opposed to PC products. In 2005 a significant
portion of Strategy Firsts sales were generated through foreign royalty sales which
had no associated cost of sales

# Development Costs and
Royalties:

Development costs and royalties were
approximately $988,000 in the second fiscal quarter 2007, or 33.4% of total
revenues. Development Costs and royalties for Empire Interactive totaled
approximately $872,000 or 42.7% of Empires revenues. Royalty costs for
Strategy First were approximately $116,000 or 12.6% as compared to
approximately $326,000 or 33.2% during the same period in the prior fiscal year.
Strategy First does not expend significant amounts on development while Empire Interactive
typically budgets large amounts for annual development. In 2005 a significant portion of
Strategy Firsts sales were generated through foreign royalty sales, which had no
associated royalty costs

# Selling, General and
Administrative Expenses

Selling, general and administrative
expenses for the quarter ended December 31, 2006 were approximately $1,451,000.
Selling, general and administrative expenses for Empire Interactive were
approximately $696,000 while selling, general and administrative expenses for
Strategy First were approximately $473,000. Corporate overhead was approximately
$282,000. In the quarter ended December 31, 2005 selling, general and
administrative expenses were approximately $728,000 of which Strategy First
accounted for approximately $478,000 with corporate overhead accounting for
approximately $250,000 .

# Amortization and
Depreciation

Amortization of intangible assets
increased to approximately $631,000 in the second quarter of fiscal 2007 as
compared to approximately $35,000 in the comparable period last year. This increase
is primarily due to the amortization of intangible assets acquired in the Empire
Interactive transaction of approximately $589,000. Depreciation expenses were
approximately $25,000 for the second quarter of fiscal 2007 and
approximately $8,000 in fiscal 2006. Depreciation expense for Empire Interactive
was approximately $17,000 during the quarter ended December 31, 2006.

# Foreign Currency Gains
(Losses)

Foreign currency gains or losses are
primarily related to the financial assets remaining in South Africa.
 Foreign currency gains during the second quarter of 2007
were approximately $357,000.Gains of approximately $263,000 related to the
remaining assets from the sale of discontinued South African

21



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operations.
          Empire realized foreign currency gains of approximately $132,000 and
          Strategy First realized foreign currency losses of approximately
          $38,000. The foreign currency losses during the second quarter of fiscal 2006
          wereapproximately $16,000. The functional currency of Empire
          Interactive is the British pound and its products are sold throughout the world.
          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.

# Acquisition Costs
Incurred

During fiscal year 2006 the Company
incurred approximately $209,000 of expenses pursuing the unsuccessful acquisition of
JoWood Software Productions AG. These costs consisted primarily of legal and travel
expenses. During the six months ended December 31, 2005 the Company expensed these
previously capitalized costs when it became apparent that the acquisition would not occur.
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. A judgment is anticipated within the next few months.

# Amortization of
Convertible Debt Discounts and Issuance Costs

Amortization of convertible debt
discounts and issuance costs were approximately $171,000 in the second quarter
fiscal 2007 as compared to approximately $123,000 in the comparable period last
year. In fiscal 2006 we recorded two months amortization as compared to three months in
the current period

# Interest Income

Interest income of
approximately $159,000 was recorded during the three months ended December 31,
2006 as compared to interest income of approximately $105,000 in the prior
year. The increase of approximately $54,000 is primarily the result of the
Companys increase in the average cash balances held during the quarter ended
December 31, 2006 as compared to December 31, 2005.

# Interest Expense

Interest expense of
approximately $258,000 was recorded during the second quarter of fiscal 2007 as
compared to approximately $88,000 in the same period of the prior year. Empire
Interactive incurred interest expenses of approximately $126,000 for the three
months ending December 31, 2006.

# Provision for Income
Taxes

We are registered in Bermuda, where
no income tax laws are applicable. Two of our subsidiaries are subject to US income taxes,
four subsidiaries are subject to United Kingdom 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 with the exception of approximately $611,000 carried as a long-term asset that
will be offset against future taxable earnings of Empire interactive in the U.K.

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 $3.0 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.

22



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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 $618,000 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 $618,000 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 liability in the future.

# Discontinued Operations

During the second quarter of fiscal
2006, we recognized gains of approximately $119,000 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
approximately $1,302,000 during the second quarter fiscal 2007 compared to a net
loss of approximately $455,000 during the same period in the prior fiscal year
primarily as the result of losses incurred by Empire Interactive during the quarter ending
December 31, 2006.

23



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# Six Months Ended
December 31, 2006 As Compared to Six Months Ended December 31, 2005

# Revenues

Net revenues increased to
approximately $3,240,000 as compared to approximately $1,354,000 in the comparable period
of the previous year, due to the acquisition of Empire Interactive which generated
revenues of approximately $2,041,000 while Strategy First generated revenues of
approximately $1,199,000.

# Cost of Sales:

Cost of sales was
approximately $1,372,000 in the first six months of fiscal 2007, or 42.3% of total
revenues. Cost of sales for Empire Interactive was approximately $968,000 or 47.4% of
Empires revenues while cost of sales for Strategy First was approximately $404,000
or 33.7% of Strategy Firsts revenues. For the six months ended December
31, 2005, cost of sales was $193,000 or 14.2%. This increase in gross margin is primarily
the result of lower gross margins for console games, which make up the majority of
Empires sales, as opposed to PC products. In 2005 a significant portion of Strategy
Firsts sales were generated through foreign royalty sales, which had no associated
cost of sales.

# Development Costs and
Royalties:

Development costs and royalties were
approximately $1,056,000 in the first two quarters of fiscal 2007, or 33.1% of
total revenues. Development costs and royalties for Empire Interactive totaled
approximately $905,000 or 44.3% of Empires revenues. Royalty costs for
Strategy First were 184,000 or 15.3% of Strategys revenues as compared to
443,000 or 36.9% during the same period in the prior fiscal year. Strategy First does not
expend significant amounts on development while Empire Interactive typically budgets large
amounts for annual development. In 2005 a significant portion of Strategy Firsts
sales were generated through foreign royalty sales, which had no associated royalty costs

# Selling, General and
Administrative Expenses

Selling, general and
administrative expenses for the six months ended December 31, 2006 were approximately
$2,065,000. Selling, general and administrative expenses for Empire Interactive were
approximately $696,000 while selling, general and administrative expenses for Strategy
First were approximately $845,000. Corporate overhead was approximately $524,000. For the
six months ended December 31, 2005, selling general and administrative expenses were
approximately $1,315,000 of which Strategy First accounted for approximately $838,000 with
corporate overhead accounting for approximately $477,000. The increase in corporate
overhead was primarily the result of increased professional fees and stock based on
compensation expense during the six months ended December 31, 2006.

# Amortization and
Depreciation

Amortization of intangible assets
increased to approximately $673,000 during the first six months of fiscal 2007 as
compared to approximately $68,000 in the comparable period last year. This increase is
primarily due to the amortization of intangible assets acquired in the Empire Interactive
transaction of approximately $589,000. Depreciation expenses were
approximately $33,000 for the six months ending December 31, 2006 and
approximately $16,000 in fiscal 2006. Depreciation expense for Empire Interactive
was approximately $17,000 during the six months ended December 31, 2006.

# Foreign Currency Gains
(Losses)

Foreign currency gains or losses are
primarily related to the financial assets remaining in South Africa. Foreign currency
gains during the first six months of fiscal 2007 were approximately $95,000.
Approximately $10,000 of the gains related to the remaining assets from the sale of
discontinued South African operations. Empire realized foreign currency gains of
approximately $132,000 and Strategy First realized foreign currency

24



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losses of  approximately  $47,000.
The foreign currency gains during the first six months offiscal 2006 wereapproximately $18,000, consisting of foreign currency gains of
approximately $44,000 related to the remaining assets from the sale of discontinued
South African operations, approximately $2,000 in gains recognized by Strategy First
and approximately $28,000 in losses recognized by the parent company.

# Amortization of
Convertible Debt Discounts and Issuance Costs

Amortization of convertible debt
discounts and issuance costs were approximately $331,000 in the first two quarters
of fiscal 2007 as compared to approximately $123,000 in the comparable period last
year. In fiscal 2006 we recorded two months amortization as compared to six months in the
Fiscal 2007.

# Interest Income

Interest income of approximately
$315,000 was recorded during the six months ended December 31, 2006 as compared
to interest income of approximately $189,000 in the prior years comparable
period. The increase of approximately $126,000 is primarily the result of the
Companys increase in the average cash balances held during the six months ended
December 31, 2006 as compared to December 31, 2005.

# Interest Expense

Interest expense of
approximately $361,000 was recorded during the first two quarters of fiscal 2007 as
compared to approximately $95,000 in the same period of the prior year. Empire
Interactive incurred interest expenses of approximately $126,000 for the six months
ended December 31, 2006. Interest expense also increased as a result of significant
increases in debt obligations that occurred during the six months ended December 31, 2006
as compared to the comparable period of last year.

# Discontinued Operations

During the first six months of fiscal
2006, we recognized gains of approximately $357,000 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
approximately $2,243,000 during the first two quarters of fiscal 2007 compared to a
net loss of approximately $503,00 during the same period in the prior fiscal year.
Operating earnings (loss) before Interest Depreciation and Amortization
(EBITDA) was approximately ($1,253,000) for the first two quarters of
2007 as compared to ($594,000) in fiscal 2006.

# Financial Condition,
Liquidity and Capital Resources

Cash decreased by
approximately $5,530,000 from $12,009,000 at June 30, 2006 to approximately
$6,480,000 at December 31, 2006.

The cash balances are being held for
acquisitions and working capital purposes. Included in this amount is approximately
$3,758,000 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.

25



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Working capital decreased by
approximately $20,533,000 from approximately $9,575,000 at June 30, 2006 to
a deficit of approximately $10,958,000 at December 31, 2006. This decrease is
primarily due to the result of the acquisition of Empire Interactive on December 1, 2006,
which resulted in significant decreases to the cash balance and significant increases in
current liabilities. Current liability increases related to the acquisition of Empire
Interactive, consist of approximately a $5,248,000 note payable to the former Empire
Interactive shareholders, approximately $3,832,000 in accounts payable, approximately
$6,122,000 in accrued expenses, and Empires line of credit of approximately
$2,173,000. The current portion of our convertible secured debentures increased to
approximately $2,743,000 at December 31 as compared to $900,000 at June 30, 2006.

At December 31, 2006, Empire owed
£531,865 ($1,041,977) for UK payroll taxes of which £441,483 ($864,909) was
past due. If UK payroll tax liabilities for the year ending March 31, 2007 are not
remitted in full by April 19, 2007, interest will automatically be charged for the period
following April 19, 2007. As of December 31, 2006, the interest rate in effect for late
tax deposits was 7.5%. In addition, the UK tax authorities have the power to charge this
rate of interest on overdue payroll taxes in respect to periods prior to April 19, 2007;
however in practice, this is rare. We therefore do not believe that we will be assessed
for interest on the overdue amounts in respect of the periods ending December 31, 2006.

At December 31, 2006 we had
borrowings of approximately $2,968,000, which consisted of approximately
$2,173,000 in Empires line of credit, approximately $735,000 advances against
the corporate line of credit, secured by the Companys cash, and term loans of
approximately $60,000. Additionally, we have two outstanding debentures issued to
DKR Oasis, with a combined face value of $5,000,000 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 conversion of this debenture, principal payments will start on
February 1, 2007 with the loan being amortized monthly through December 2008. We also have
note obligations to Empire shareholders of $5,248,000 that accrue interest at an annual
rate of 4% and are payable in full on October 31, 2007. Additionally, there is an earn-out
payable to former Empire shareholders. The earn-out is based on a formula of Empires
EBITDA for the fiscal year ended June 30, 2007. The maximum amounts under the earn out
formula could reach $12,100,000 and would be due to former Empire shareholders on April
30, 2008.

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.

We currently do not have
sufficient cash on hand to meet our short and long term obligations. While in the
past, the Company has succeeded in meeting its cash flow requirements through the raising
of additional debt or equity, the sale of assets or through operating cash flow, there is
no guarantee that it may be successful in doing so going forward. The Companys
failure to do so will raise substantial doubt as to its ability to continue as a
going concern. Managements plans to alleviate this uncertainty are as follows:

| |  |  |  | raise
additional capital through the sale of equity or additional debt. To this end management
has received various indications of interest from investors to raise additional
capital either through subordinated debt, preferred stock or a placement of common
stock.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | generate
significant short term operating earnings and cash flow primarily through its newly
acquired subsidiary Empire Interactive. PLC. Empire currently has substantially
completed the first Next Generation version of its best selling Flat Out
franchise. The company anticipates that the launch of this game, along with Empires
ongoing business will generate operating profits and cash flow in the short term.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | The
Company has approximately $2.6 million restricted cash in South Africa set aside to match
its current South African tax assessment. The Company is vigorously seeking to set
this assessment aside and if it does so these resources will be available for
general corporate purposes.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26



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| |  |  |  | In
the event the Company is unsuccessful in any of the above measure, it may seek to
renegotiate some of the terms of its larger short term liabilities, primarily related to
the acquisition of Empire Interactive and its outstanding convertible debentures.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
believes that the actions that will be taken by the Company provide the opportunity
for the Company to improve liquidity and achieve profitability. However there can be no
assurance that such events will occur.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Critical Accounting
Policies

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

# Revenue Recognition

Empire Interactive and Strategy First
distribute the majority of their products through third-party software distributors to
mass-merchant and major retailers and directly to certain entertainment software
retailers, all of which have traditionally sold consumer entertainment software products.
Additionally, the companies may license their 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,
the companies record a provision for product returns and price markdowns as a reduction of
gross sales at the time the product passes to these distributors or retailers.

The provision for anticipated product
returns and price markdowns is primarily based upon the company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. The companies review the adequacy of their respective
allowances for product returns and price markdowns and if necessary make adjustments.

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

# Development Costs

In the past, Empire Interactive has
incurred significant software development expenses in connection with the production of
their products. Under SFAS No. 86 an analysis needs to be conducted as to when commercial
feasibility of a product is reached, thereafter development expenses are amortized. There
are differing industry determinations in regard to commercial viability of an interactive
entertainment software product. Historically, Empires management has taken the
position that commercial feasibility is reached very late in the development process and
therefore has not capitalized any development costs in regard to their products.
The Company is currently evaluating the appropriateness of this position and will make its
own determination in this regard once it has completed its analysis.

# 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,

27



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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 December 31, 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 and
Empire game titles are stated on the basis of cost and are amortized on a
straight-line basis over estimated lives of three to ten years. Empire game titles are
amortized over a five-year period based on weighted average expected sales from the date
the title is launched. For titles that have not yet been launched as of December 31, 2006
a launch date was estimated to project future amortization

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.

28



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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

On December 31, 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 December 31,
2006, the Company had two convertible notes outstanding with a combined balance of $5
million. The interest on these convertible notes 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 $50,000 change in annual interest expense.

In addition to the convertible
debentures the Company had a secured line of credit facility at December 31, 2006. Based
on the December 31, 2006 balance on this facility, a hypothetical 100 basis point
change in interest rates would result in an approximately $7,400 change in annual interest
expense.

Empire Interactive has an expired
line of credit secured by its receivables, inventory, real property and intangible assets.
As of December 31, 2006, the amount outstanding under this facility was approximately
$2,173,000. The line of credit accrues interest at an annual rate of 7.25%. A hypothetical
100 basis point change in interest rates would result in an approximately $21,400 change
in annual interest expense.

# Foreign Currency Risk

Empire Interactive, PLC is
incorporated in the United Kingdom. Empire sells products throughout the world. Its
functional currency is the Pound Sterling. This has exposed it to market risk with respect
to fluctuations in the relative value of the major currencies particularly the Euro,
British Pound, and the US dollar.

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 December 31, 2006, we had assets
denominated in South African Rand of R 35.2 million ($ 5.0 million).

29



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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.

30



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# 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 $3.0 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
$618,000 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. A judgment
is anticipated within the next few months

In March 2006 an action was brought
against Empire Interactive, PLC and Empire Interactive Inc. by a financial advisory firm
seeking damages of approximately $700,000 relating to an alleged breach of a business
development agreement with Empire Interactive, PLC. On February 13, 2007, the case was
settled with Empire agreeing to pay an amount of $230,000 due on April 19, 2007.

In June 2006, Empire Interactive,
Inc. commenced litigation against Take Two Interactive Inc. (Take Two) in
regard to the accounting and reporting of sales of various products by Take Two. To this
point, Empire has received payments of approximately $1,416,000 from Take Two. Empire
believes that there are still significant amounts due from Take Two and continues to
pursue its claims in the London commercial courts.

# ITEM 1A. RISK FACTORS

There have been no material
changes in the risk factors disclosed in Part I, Item 1 of the Companys Annual
Report on Form 10-K for the year ended June 30, 2006 apart from the following:

If we are unsuccessful in raising
additional capital in the future, we may not be able to continue to operate or grow our
business.

The acquisition of Empire
Interactive on December 4, 2006 has resulted in the Company assuming significant
short-term liabilities related both to payments owed under the terms of the
acquisition agreement as well as to the operations of Empire. The Company currently does
not have adequate cash resources to meet these obligations. Managements plans to
alleviate this uncertainty are discussed in MD&A under the Financial Condition,
Liquidity and Capital Resources caption and Note 2 to the unaudited condensed
consolidated financial statements. Management believes that the actions that will be taken
by the Company provide the opportunity for the Company to improve liquidity and achieve
profitability. However, there can be no assurance that such events will occur. Should the
Company fail in its efforts as detailed in the MD&A this will raise substantial doubt
as to its ability to continue as a going concern.

31



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# 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.

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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            | Registration Rights Agreement, dated October 19, 2006, between the Registrant and the purchaser named therein(4)                                
|10.1           | Securities Purchase Agreement, dated as of October 19, 2006 among the Registrant and each purchaser identified on the signature pages hereto (4)
|31.1           | Certificate Pursuant to Section 302 of the Sarbanes Oxley Act of 2002(3)                                                                        
|32.1           | Certification Pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3)                           

_________________

|(1) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated
by reference to the Registrants Current Report on Form 8-K           filed October
24, 2006.
|--- |  | ----------------------------------------------------------------------------------------------------------

|(3) |  | Filed
herewith.
|--- |  | ---------------

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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:  March 2, 2007

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

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