**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




|X|
      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
              Incorporation
                or Organization)
            (IRS
                Employer Identification No.)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
      |X|





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





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, 2007Class
                A Common Stock
            9,352,577Class
                B Common Stock
            814,786Total
            10,167,363









**PART
      I - FINANCIAL INFORMATION**




Item
                1
            Financial
                StatementsCondensed
                Consolidated Balance Sheets at December 31, 2006 (Unaudited) and
                June 30,
                2006Condensed
                Consolidated Statements of Operations (Unaudited) for the three months
                ended December 31, 2006 and 2005Condensed
                Consolidated Statements of Operations (Unaudited) for the six months
                ended
                December 31, 2006 and 2005Condensed
                Consolidated Statements of Cash Flows (Unaudited) for six months
                ended
                December 31, 2006 and 2005Notes
                to the Condensed Consolidated Financial Statements
                (Unaudited)Item
                2
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                OperationsItem
                3
            Quantitative
                and Qualitative Disclosures About Market RiskItem
                4
            Controls
                and Procedures**PART
                II - OTHER INFORMATION**Item
                1
            Legal
                ProceedingsItem
                1A
            Risk
                FactorsItem
                2.
            Unregistered
                Sales of Equity Securities and Use of ProceedsItem
                3.
            Defaults
                upon Senior SecuritiesItem
                4.
            Submission
                of Matters to a Vote of Security HoldersItem
                5.
            Other
                InformationItem
                6
            ExhibitsSIGNATURES




2




**SILVERSTAR
      HOLDINGS, LTD. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(UNAUDITED)**





**December
                31,**
            
            **June
                30,**ASSETS
            
            **2006**
            
            ******2006**Current
                Assets:Cash
                and cash equivalents, includes restricted cash of$735,209
                and $647,797 respectively
            
            $
            3,456,757
            
            $
            9,075.259Cash
                restricted for foreign tax estimated liability
            
            
            3,022,734
            
            
            2,933,342Accounts
                receivable, net
            
            
            2,808,955
            
            
            637,135Inventory
            
            
            926,564
            
            
            58,732Current
                portion of long-term notes receivable
            
            
            191,580
            
            
            164,548Prepaid
                expenses and other current assets
            
            
            517,082
            
            
            292,805Total
                current assets
            
            
            10,923,672
            
            
            13,161,821Property,
                plant and equipment, net
            
            
            928,282
            
            
            77,985Investments
                in non-marketable securities
            
            
            1,143,566
            
            
            1,143,566Long-term
                notes receivable
            
            
            363,426
            
            
            458,670Goodwill,
                net
            
            
            808,314
            
            
            841,726Intangible
                assets, net
            
            
            32,044,788
            
            
            1,412,854Deferred
              tax
              asset
            
            
            611,239
            
            
            -Deferred
                charges and other assets
            
            
            490,716
            
            
            441,367Total
                assets
            
            $
            47,314,003
            
            $
            17,537,989LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Line
                of credit
            
            
            2,908,531
            
            
            647,797Current
                portion of long-term debt
            
            
            59,834
            
            
            180,323Notes
                payable - acquisition
            
            
            5,248,151
            
            
            -Current
                portion of convertible secured debentures
            
            
            2,743,632
            
            
            900,000Accounts
                payable
            
            
            4,180,637
            
            
            304,088Accrued
                Royalty expense
            
            
            2,329,384
            
            
            82,643Accrued
                Payroll taxes
            
            
            1,427,228
            
            
            49,846Accrued
                expenses
            
            
            2,365,883
            
            
            822,463Estimated
                liability for foreign tax
            
            
            618,285
            
            
            600,000Total
                current liabilities
            
            
            21,881,565
            
            
            3,587,160Long-term
                debtConvertible
                secured debentures
            
            
            1,952,084
            
            
            2,318,455Contingent
                liability - Empire earn out
            
            
            12,102,434
            
            
            -Obligation
                to issue common stock
            
            
            256,892
            
            
            231,892Total
                liabilities
            
            $
            36,192,975
            
            $
            6,137,507Commitments,
                contingencies and other mattersStockholders’
                equity:Preferred
                stock, $0.01 par value; 5,000,000 shares authorized;no
                shares issued and outstandingCommon
                stock, Class A, $0.01 par value, 50,000,000 shares authorized; 9,189,154and
                8,313,774 shares issued and outstanding, respectively
            
            
            91,892
            
            
            83,138Common
                stock, Class B, $0.01 par value; 2,000,000 shares authorized;835,260
                share issued and outstanding
            
            
            8,353
            
            
            8,353Common
                stock, FSAH Class B $0.001 par value; 10,000,000 shares authorized;2,671,087
                shares issued and outstanding
            
            
            600
            
            
            600Additional
                paid-in capital
            
            
            67,193,297
            
            
            65,573,387Accumulated
                deficit
            
            
            (56,633,467
            )
            
            (54,390.357
            )Accumulated
                comprehensive income
            
            
            460,353
            
            
            125,361Total
                stockholders’ equity
            
            
            11,121,028
            
            
            11,400,482Total
                liabilities and stockholders’ equity
            
            $
            47,314,003
            
            $
            17,537,989















**SILVERSTAR
      HOLDINGS, LTD. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**








Three
                Months Ended December 31,2006
            
            2005Net
                Revenues
            
            $
            2,960,789
            
            $
            983,434Operating
                expenses:Cost
                of sales
            
            
            1,252,001
            
            
            147,664Development
                costs and royalties
            
            
            987,675
            
            
            325,878Selling,
                general and administrative
            
            
            1,451,216
            
            
            727,982Amortization
                of intangibles
            
            
            630,827
            
            
            34,784Depreciation
            
            
            24,948
            
            
            8,2204,346,668
            
            
            1,244,528Operating
                loss
            
            
            (1,385,878
            )
            
            (261,094
            )Other
                income (expense)
            
            
            (20
            )
            
            17,468Foreign
                currency gain (loss)
            
            
            357,428
            
            
            (15,697
            )Acquisition
                costs incurred
            
            
            -
            
            
            (209,342
            )Amortization
                of convertible debt discounts and issuance costs
            
            
            (171,425
            )
            
            (123,169
            )Interest
                expense
            
            
            (257,896
            )
            
            (87,701
            )Interest
                income
            
            
            159,480
            
            
            105,179Loss
                from continuing operations before income taxes
            
            
            (1,298,311
            )
            
            (574,356
            )Provision
                for income taxes
            
            
            3,360
            
            
            -Loss
                from continuing operations
            
            
            (1,301,671
            )
            
            (574,356
            )Discontinued
                operations:Income
                from operations net of Income taxes of $0 and $0,
                respectively
            
            
            _________
            
            
            119,393Net
                loss
            
            
            ($1,301,671
            )
            
            ($454,963
            )Income
                (loss) per share:BasicContinuing
                operations
            
            
            ($.14
            )
            
            ($0.06
            )Discontinued
                operations
            
            
            -
            
            $
            .01Net
                loss
            
            
            ($.14
            )
            
            ($0.05
            )DilutedContinuing
                operations
            
            
            ($.14
            )
            
            ($0.06
            )Discontinued
                operations
            
            
            -
            
            
            .01Net
                loss
            
            
            ($.14
            )
            
            ($0.05
            )Basic
            
            
            9,431,657
            
            
            9,076,518Diluted
            
            
            9,431,657
            
            
            9,548,425














**SILVERSTAR
      HOLDINGS, LTD. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**





Six
                Months Ended December 31,2006
            
            2005Net
                Revenues
            
            $
            3,239,534
            
            $
            1,354,143Operating
                Expenses:Cost
                of sales
            
            
            1,371,570
            
            
            192,733Development
                costs and royalties
            
            
            1,055,716
            
            
            442,863Selling,
                general and administrative
            
            
            2,065,171
            
            
            1,315,326Amortization
                of intangibles
            
            
            673,188
            
            
            68,702Depreciation
            
            
            32,678
            
            
            16,2275,198,323
            
            
            2,035,851Operating
                loss
            
            
            (1,958,789
            )
            
            (681,708
            )Other
                income (loss)
            
            
            (9
            )
            
            41,338Foreign
                currency gains
            
            
            95,355
            
            
            17,540Acquisition
                costs incurred
            
            
            -
            
            
            (209,342
            )Amortization
                of convertible debt discounts and issuance costs
            
            
            (330,532
            )
            
            (123,169
            )Interest
                expense
            
            
            (360,722
            )
            
            (94,836
            )Interest
                income
            
            
            314,948
            
            
            189,293Loss
                from continuing operations before income taxes
            
            
            (2,239,749
            )
            
            (860,884
            )Provision
                for income taxes
            
            
            (3,360
            )
            
            -Loss
                from continuing operations
            
            
            (2,243,109
            )
            
            (860,884
            )Discontinued
                operations:Income
                from operations net of Income taxes of $0 and $0,
                respectively
            
            
            -
            
            
            357,623Net
                loss
            
            
            ($2,243,109
            )
            
            ($503,261
            )Income
                (Loss) per share:BasicContinuing
                operations
            
            
            ($0.24
            )
            
            ($0.10
            )Discontinued
                operations
            
            $
            -
            
            $
            .04Net
                loss
            
            
            ($0.24
            )
            
            ($0.06
            )DilutedContinuing
                operations
            
            
            ($0.24
            )
            
            ($0.09
            )Discontinued
                operations
            
            $
            -
            
            $
            .04Net
                loss
            
            
            ($0.24
            )
            
            ($0.06
            )Basic
            
            
            9,290,346
            
            
            9,072,551Diluted
            
            
            9,290,346
            
            
            9,586,842















**SILVERSTAR
      HOLDINGS, LTD. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOW**


**(UNAUDITED)**




Six
                Months Ended December 31,2006
            
            2005Cash
                flows from operating activities:Net (loss)
                from operations
            
            $
            (2,243,109
            )
            $
            (503,261
            )Depreciation
                and amortization
            
            
            1,036,398
            
            
            208,097Loss
                on disposal of fixed assets
            
            
            10,195Stock-based
                compensation
            
            
            77,585
            
            
            34,188Stock
                issued for services
            
            
            58,740Unrealized
                foreign currency gains
            
            
            (113,913
            )
            
            (71,657
            )Accrued
                interest income on notes receivable
            
            
            (14,453
            )
            
            (120,031
            )Changes
                in operating assets and liabilities, net
            
            
            1,609,063
            
            
            (399,287
            )Increase
                in other assets
            
            
            (10,932
            )Increase
                in other liabilities
            
            
            25,000Net
                changes in assets and liabilities of discontinued operations
            
            
            -
            
            
            (628,028
            )Net
                cash provided by( used in) operating activities
            
            
            434,574
            
            
            (1,479,979
            )Cash
                flows from Investing activities:Acquisition
                expenses capitalized
            
            
            -
            
            
            (3,322
            )Cost
                paid for acquisition of Empire Interactive
            
            
            (8,072,070
            )Proceeds
                from sale of fixed assets
            
            
            11,008Purchase
                of fixed assets
            
            
            (3,971
            )
            
            (1,896
            )Proceeds
                from repayment of long-term note receivable
            
            
            99,281
            
            
            48,164Net
                cash provided by (used) in investing activities
            
            
            (7,965,752
            )
            
            42,946Cash
                flows from financing activities:Short
                term borrowings (repayments), net
            
            
            (258,502
            )
            
            628,412Increase
                in deposits held in escrow
            
            
            -
            
            
            (1,184,450
            )Increase
                in bank overdraft
            
            
            -
            
            
            65,865Net
                proceeds from convertible debenture
            
            
            1,129,714
            
            
            4,373,301Repayment
                of long term debt
            
            
            -
            
            
            (89,303
            )Proceeds
                from private placement sales of common
                stock
            
            
            650,000
            
            
            -Proceeds
                from the exercise of stock options
            
            
            56,472
            
            
            22,500Net
                cash provided by discontinued operations
            
            
            -
            
            
            277,864Net
                cash provided by financing activities
            
            
            1,577,684
            
            
            4,094,189Effect
                of exchange rates on cash
            
            
            334,992
            
            
            66,289Net
                increase (decrease) in cash and cash equivalents
            
            
            (5,618,502
            )
            
            2,723,445Cash
                and cash equivalents, beginning of period
            
            
            9,075,259
            
            
            4,865,291Cash
                and cash equivalents, end of period
            
            $
            3,456,757
            
            $
            7,588,736Supplemental
                cash flow information:Cash
                paid for interest
            
            $
            296,404
            
            $
            50,815








See
      notes
      to condensed consolidated financial statements .





**SILVERSTAR
      HOLDINGS, LTD. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**








**NOTE
      1. FINANCIAL INFORMATION**





The
      Company is a holding company that seeks to acquire businesses fitting a
      predefined investment strategy. The Company is the parent company of 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.








**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 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 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.




2006Weighted
                average grant-date fair value of options granted
            
            $
            1.04Assumptions:Risk
                free interest rate
            
            
            4.65-4.71
            %Expected
                life
            
            
            2-4
                yearsExpected
                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
                Subject
              Options
              Outstanding
            
            Weighted
              Average
              ExerciseOutstanding,
                beginning of year
            1,287,405
            
            2.17Granted
            170,000
            
            1.85Forfeited
            (95,000)
            
            .74Exercised
            65,000
            
            .87Outstanding
                December 31, 2006
            1,297,405
            
            2.29





**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
              
              Gross
                  Carrying
              
              AccumulatedUseful
                  Life
              
              Amount
              
              Amortization
              
              TotalCovenant
                  not to compete
              
              
              3
                  years
              
              $
              42,867
              
              
              ($23,813
              )
              $
              19,054Game
                  titles - Empire Interactive
              
              
              5
                  years
              
              $
              31,357,466
              
              
              (588,025
              )
              $
              30,769,441Game
                  titles - Strategy First
              
              
              10
                  years
              
              $
              1,485,374
              
              
              (229,081
              )
              $
              1,256,293Balance
                  on December 31, 2006
              
              
              
              
              $
              32,885,707
              
              $
              (840,919
              )
              $
              32,044,788Estimated
              
              
              Gross
                  Carrying
              
              
              AccumulatedUseful
                  Life
              
              
              Amount
              
              
              Amortization
              
              
              TotalCovenant
                  not to compete
              
              
              3
                  years
              
              $
              44,638
              
              
              ($17,356
              )
              $
              27,282Game
                  titles - Strategy First
              
              
              10
                  years
              
              
              1,546,773
              
              
              (161,201
              )
              
              1,385,572Balance
                  on June 30, 2006
              
              
              
              
              $
              1,591,411
              
              $
              (178,557
              )
              $
              1,412,854







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
            
            $
            4,006,9282008
            
            
            10,078,8342009
            
            
            7,430,4812010
            
            
            6,069,4142011
            
            
            2,273,3832012
            
            
            1,160,930Thereafter
            
            
            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 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.







Purchase
      price:




Net
                assets acquired:Current
                assets
            
            $
            3,226,230Fixed
                assets
            
            
            898,804Intangible
                assets
            
            
            31,224,616Other
                assets
            
            
            608,650Total
                assets
            
            
            35,958,300Total
                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 Dec 31,2006Silverstar
            
            Empire
            
            ProformaNet
                Revenues
            
            $
            1,198,844
            
            $
            12,475,102
            
            $
            13,673,946Operating
                Expenses:Cost
                of sales
            
            
            403,322
            
            
            3,331,229
            
            
            3,734,551Development
                costs and royalties
            
            
            184,005
            
            
            4,366,175
            
            
            4,550,180Selling,
                general and administrative
            
            
            1,369,322
            
            
            3,830,537
            
            
            5,199,859Amortization
                of intangibles
            
            
            84,061
            
            
            3,229,476
            
            
            3,313,537Depreciation
            
            
            15,315
            
            
            108,106
            
            
            123,4212,056,025
            
            
            14,865,523
            
            
            16,921,548Operating
                loss
            
            
            (857,181
            )
            
            (2,390,421
            )
            
            (3,247,602
            )Other
                expense
            
            
            (9
            )
            
            (311,317
            )
            
            (311,326
            )Foreign
                currency loss
            
            
            (37,154
            )
            
            (34,061
            )
            
            (3,093
            )Amortization
                of convertible debt discounts and issuance
              Costs
            
            
            (330,532
            )
            
            -
            
            
            (330,532
            )Interest
                expense
            
            
            (235,174
            )
            
            (155,543
            )
            
            (390,717
            )Interest
                income
            
            
            313,452
            
            
            1,496
            
            
            314,948Loss
                from continuing operations before income taxes
            
            
            (1,146,598
            )
            
            (2,821,724
            )
            
            (3,968,322
            )Income
                tax expense
            
            
            -
            
            
            26,669
            
            
            26,669Net
                loss
            
            
            (1,146,598
            )
            
            (2,848,393
            )
            
            (3,994,991
            )Loss
                per share
            
            
            
            
            
            
            
            $
            (.42
            )Basic
                and diluted:









Six
                Months Ended Dec 31,2005Silverstar
            
            Empire
            
            ProformaNet
                Revenues
            
            $
            1,354,143
            
            $
            12,896,061
            
            $
            14,250,004Operating
                Expenses:Cost
                of sales
            
            
            192,733
            
            
            4,443,858
            
            
            4,636,591Development
                costs and royalties
            
            
            442,863
            
            
            5,007,823
            
            
            5,450,686Selling,
                general and administrative
            
            
            1,315,326
            
            
            4,417,749
            
            
            5,733,075Amortization
                of intangibles
            
            
            68,702
            
            
            5,321,293
            
            
            5,389,995Depreciation
            
            
            16,227
            
            
            
            
            
            16,2272,035,851
            
            
            19,190,723
            
            
            21,226,574Operating
                loss
            
            
            (681,708
            )
            
            (6,294,662
            )
            
            (6,796,370
            )Other
                income
            
            
            41,338
            
            
            
            
            
            41,338Foreign
                currency loss
            
            
            17,540
            
            
            
            
            
            17,540Acquisition
                costs incurred
            
            
            (209,342
            )
            
            
            
            
            (209,342
            )Amortization
                of convertible debt discounts and issuance
              Costs
            
            
            (123,169
            )
            
            
            
            
            (123,169
            )Interest
                expense
            
            
            (94,836
            )
            
            (85,343
            )
            
            (180,179
            )Interest
                income
            
            
            189,293
            
            
            
            
            
            189,293Loss
                from continuing operations, net of income taxes of $0
            
            
            (860,884
            )
            
            (6,380,005
            
            
            (7,240,889
            )Discontinued
                operations:
              Income
                from operations, net of income taxes of $0
            
            
            357,623
            
            
            
            
            
            357,623Net
                loss
            
            
            (503,261
            )
            
            (6,380,005
            )
            
            (6,883,266
            )Income
                (loss) per shareBasicContinuing
                operations
            
            
            
            
            
            
            
            $
            (.77
            )Discontinued
                operations
            
            
            
            
            
            
            
            
            04Net
                loss
            
            
            
            
            
            
            
            $
            0.73DilutedContinuing
                operations
            
            
            
            
            
            
            
            $
            (.74
            )Discontinued
                operations
            
            
            
            
            
            
            
            
            .04Net
                loss
            
            
            
            
            
            
            
            $
            0.69








**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 31,2006
            
            2005
            
            
            
            2006
            
            2005Revenue
            
            $
            -
            
            $
            553,380
            
            
            Revenue
            
            $
            -
            
            $
            1,149,108Net
                income
            
            $
            -
            
            $
            119,393
            
            
            Net
                Income
            
            $
            -
            
            $
            357,623











**NOTE
      7. CASH FLOWS**





Changes
      in operating assets and liabilities consist of the following:








Six
                Months Ended December 31,2006
            
            
            2005Increase
                (decrease) in accounts receivable
            
            
            111,813
            
            
            ($654,418
            )Increase
                (decrease) in inventories
            
            
            12,483
            
            
            (52,251
            )Increase
                in prepaid expenses and current assets
            
            
            (149,128
            )
            
            (219,311
            )Increase
                in accounts payable
            
            
            43,151
            
            
            92,173Increase
                (decrease) in accrued expenses
            
            
            990,744
            
            
            (51,490
            )Increase
                (decrease) in deferred revenue
            
            
            -
            
            
            486,010($1,609,063
            )
            
            ($399,287
            )Cash
                flows from operating activities - discontinued operations:Changes
                in net assets and liabilities of discontinued operationsDepreciation
                and amortization
            
            
            -
            
            $
            (
                3,856
            )Changes
                in operating accounts
            
            
            -
            
            
            598,958Changes
                in cash (included in) from net assets and from discontinued
                operations
            
            
            -
            
            
            32,926Changes
                in net assets and liabilities of discontinued operations
            
            
            -
            
            $
            628,028Cash
                flows from financing activities - discontinued operations:Short-term
                borrowings (repayments), net
            
            
            -
            
            $
            277,864


**Non-cash
      investing and financing activities were as follows:**





Issuance
                of stock as payment for acquisition expenditures
            
            $
            723,000
            
            
            -Issuance
                of Notes payable to former Empire shareholders
            
            $
            5,208,502
            
            
            -Issuance
                of Notes payable to former Empire shareholderscontingent
                on earn out targets being achieved
            
            $
            12,051,061
            
            
            -





**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





**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 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.








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
                30,2006Principal
                amount of notes
            
            $
            5,000,000
            
            $
            3,600,000Discounts
                for beneficial conversion features
            
            
            (84,127
            )
            
            (60,122
            )Discounts
                for fair value of warrants and options
            
            
            (220,157
            )
            
            (321,423
            )Balance
                , net of unamortized discounts
            
            $
            4,695,716
            
            $
            3,218,455Less
                current portion
            
            
            (2,743,632
            )
            
            (900,000
            )Long-term
                portion
            
            $
            1,952,084
            
            $
            2,318,455




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




December
                31, 2006
            
            June
                30, 20061
                Year or less
            
            $
            2,743,632
            
            $
            900,0001-2
                Years
            
            
            2,256,368
            
            
            2,700,000Total
            
            $
            5,000,000
            
            $
            3,600,000




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
              
              $
              334,8692008
              
              
              302,1632009
              
              
              12,461Total
              
              $
              649,493










**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.





**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.








**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”).







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.











**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 $2,961,000 as compared to $983,000 in the comparable
      quarter of the previous year. For the period, Empire Interactive’s revenues were
      $2,041,000 while Strategy First’s revenues were $920,000.





**Cost
      of Sales** :





Cost
      of
      sales was $1,252,000 in the second fiscal quarter 2007, or 42.2% of total
      revenues. Cost of sales for Empire Interactive was $968,000 or 47.4% while
      cost
      of sales for Strategy First was $284,000 or 30.9%. For the quarter ending
      December 31, 2005, cost of sales was $148,000 or 15.1%. This increase 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 $980,000 in the second fiscal quarter 2007, or 33.1%
      of
      total revenues. Development Costs and royalties for Empire Interactive totaled
      $872,000 or 42.7%. Royalty costs for Strategy First were $116,000 or 12.6%
      as
      compared to $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
      $1,451,000. Selling, general and administrative expenses for Empire Interactive
      were $696,000 while selling, general and administrative expenses for Strategy
      First were $473,000. Corporate overhead was $282,000. In the quarter ended
      December 31, 2005 selling general and administrative expenses were $728,000
      of
      which Strategy First accounted for $478,000 with corporate overhead accounting
      for $250,000 .





**Amortization
      and Depreciation**





Amortization
      of intangible assets increased to $631,000 in the second quarter of fiscal
      2007
      as compared to $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. Depreciation expenses were $25,000 for the second
      quarter of fiscal 2007 and $8,000 in fiscal 2006. Depreciation expense for
      Empire Interactive was $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. Proforma foreign currency gains during the second quarter
      of
      2007 were $357,000.Gains of $263,000 related to the remaining assets from the
      sale of discontinued South African operations. Empire realized foreign currency
      gains of $132,000 Strategy First realized foreign currency losses of $38,000.
      The foreign currency losses during the second quarter of fiscal 2006
      were **** $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 $171,000 in the second
      quarter fiscal 2007 as compared to $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 $159,000 was recorded during the three months ended December 31,
      2007
      as compared to interest income of $105,000 in the prior year. The increase
      of
      $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 $258,000 was recorded during the second quarter of fiscal 2007 as
      compared to $88,000 in the same period of the prior year. Empire Interactive
      incurred interest expenses of $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.








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 $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 $1,246,000 during the second quarter fiscal 2007
      compared to a net loss of $455,000 during the same period in the prior fiscal
      year primarily as the result of losses incurred in starting to amortize the
      intangible game assets acquired in the Empire Interactive transaction during
      the
      quarter ending December 31, 2006.









**Six
      Months Ended December 31, 2007 As Compared to Six Months Ended December 31,
      2006**


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




**Revenues**





Net
      revenues increased to $3,240,000 as compared to $1,354,000 in the comparable
      period of the previous year. For the period, Empire Interactive’s revenues were
      $2,041,000 while Strategy First’s revenues were $1,199,000.





**Cost
      of Sales** :





Cost
      of
      sales was $1,372,000 in the first six months of fiscal 2007, or 42.3% of total
      revenues. Cost of sales for Empire Interactive was $968,000 or 47.4% while
      cost
      of sales Strategy First was $404,000 or 36.1%. For the six months ending
      December 31, 2005, cost of sales was $193,000 or 14.2%. This increase 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 $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 $872,000 or 42.7%. Royalty costs for Strategy First were 184,000 or
      15.3% 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 $2,065,000. Selling, general and administrative expenses for Empire
      Interactive were $696,000 while selling, general and administrative expenses
      for
      Strategy First were $845,000. Corporate overhead was $524,000. For the six
      months ended December 31, 2005 selling general and administrative expenses
      were
      $1,315,000 of which Strategy First accounted for $705,000 with corporate
      overhead accounting for $610,000. .





**Amortization
      and Depreciation**





Amortization
      of intangible assets increased to $673,000 during the first six months of fiscal
      2007 as compared to $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. Depreciation expenses were $33,000 for the six months
      ending December 31, 2006 and $16,000 in fiscal 2006. Depreciation expense for
      Empire Interactive was $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 $95,000. $10,000 of the gains related to the remaining assets from
      the
      sale of discontinued South African operations. Empire realized foreign currency
      gains of $132,000 and Strategy First realized foreign currency losses of
      $47,000. The foreign currency gains during the first six months of fiscal 2006
      were **** $18,000.
      Foreign currency gains of $44,000 were related to the remaining assets from
      the
      sale of discontinued South African operations. Strategy First recognized $2,000
      in gains and $28,000 in losses were recognized by the parent company.








**Amortization
      of Convertible Debt Discounts and Issuance Costs**





Amortization
      of convertible debt discounts and issuance costs were $331,000 in the first
      two
      quarters of fiscal 2007 as compared to $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 $313,000 was recorded during the six months ended December 31, 2007
      as
      compared to interest income of $189,000 in the prior year’s comparable period.
      The increase of $54,000 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 $361,000 was recorded during the first two quarters of fiscal 2007
      as
      compared to $95,000 in the same period of the prior year. Empire Interactive
      incurred interest expenses of $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 $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 $2,188,000 during the first two quarters of fiscal
      2007
      compared to a net loss of $503,00 during the same period in the prior fiscal
      year. Operating earnings (loss) before Interest Depreciation and Amortization
      (“EBITDA”) was ($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 $5,530,000 from $12,009,000 at June 30, 2006 to $6,480,000 at
      December 31, 2006.





The
      cash
      balances are being held for acquisitions and working capital purposes. Included
      in this amount is $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.





Working
      capital decreased by $20,533,000 from $9,575,000 at June 30, 2006 to a deficit
      of $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. The majority of these liabilities relate to the
      $5,248,00 note payable to the Empire Interactive shareholders, $4,276,000 in
      accounts payable at Empire Interactive, $6,027,000 in accrued expenses primarily
      royalties at Empire Interactive, Empire Bank Overdraft Facility of $2,173,000
      and an increase in the current portion of our convertible secured debenture
      to
      $2,743,000







At
      December 31, 2006 we had borrowings of $2,968,000 which consisted of $2,173,000
      in Empire’s Bank Overdraft Facility, $735,000 advances against the lines of
      credit, secured by the Company’s cash, and term loans of $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
      conversions of these 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 which 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.





We
      currently do not have sufficient cash on hand to meet our short and long term
      obligations. In order to meet these obligations, we will need to raise
      additional capital through the sale of equity or additional debt. There is
      however no guarantee that we will be successful in this regard.





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 it’s
        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.


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




**Forward-Looking
      Information**




We
      make
      numerous forward-looking statements throughout this report including statements
      with respect to our expected income, acquisitions and other growth
      opportunities, performance of investments that we have made, and operating
      expenses. Frequently these statements are introduced with words such as
“expect,” “likely,” “will,” “believe,” “estimate,” “project,” “anticipate,” or
“predict.” Actual results may differ materially from those suggested by the
      forward-looking statements that we make for a number of reasons including those
      described in Part II, Item 1A, “Risk Factors” of our report on Form 10-K
      for the year ended June 30, 2006.




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







**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
      approximate $7,400 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).









**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 procedure s
      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.









**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.


**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.









**ITEM
      6. EXHIBITS**




Exhibit
                  Number
              Description3.1
              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
                  ands
                  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.










**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:
      February 20, 2007











SILVERSTAR
      HOLDINGS, LTD.













/s/
      Clive
      Kabatznik


Clive
      Kabatznik


Chief
      Executive Officer


Chief
      Financial Officer