# SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

# FORM 10-Q

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

For the quarterly
period ended March 31, 2007

OR

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

| | For
the transition period from ______________to ______________
| | --------------------------------------------------------------

Commission File Number
0-27494

SILVERSTAR HOLDINGS,
LTD. (Exact name of
Registrant as Specified in Its Charter)

|                                |                                  
|------------------------------- | ---------------------------------
|Bermuda                         | Not Applicable                   
|                                |                                  
|(State or Other Jurisdiction of | (IRS Employer Identification No.)
|Incorporation or Organization) 

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

Registrants
Telephone Number, Including Area Code: 809-295-1422

---

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes     No

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

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



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

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

APPLICABLE ONLY TO
CORPORATE ISSUERS:

|Title of Class       | Shares Outstanding
on May 7, 2007
|-------------------- | ---------------------------------
|Class A Common Stock | 9,384,172                        
|Class B Common Stock | 814,786                          
|                     |                                  
|Total                | 10,198,958                       

---

# SILVERSTAR HOLDINGS,
LTD.

# INDEX TO QUARTERLY
REPORT ON FORM 10-Q Quarter Ended March
31, 2007

|PART I  FINANCIAL INFORMATION
|------------------------------
|                              
|Item 1                        
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|Item 2                        
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|Item 3                        
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|Item 4                        
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|PART II  OTHER INFORMATION   
|                              
|Item 1                        
|                              
|Item 1A                       
|                              
|Item 2.                       
|                              
|Item 3.                       
|                              
|Item 4.                       
|                              
|Item 5.                       
|                              
|Item 6                        
|                              
|                              

2



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

|ASSETS                                                                                         | March 31,
2007 |               | June 30,
2006 |               
|---------------------------------------------------------------------------------------------- | -------------- | ------------- | ------------- | --------------
|
|Current Assets:                                                                                |                |               |               |               
|Cash and cash equivalents, includes restricted cash of                                         |                |               |               |               
|$747,465 and $647,797 respectively                                                             |                | $   2,032,242 |               | $   9,075,259 
|Cash restricted for foreign tax estimated liability                                            |                | 2,930,118     |               | 2,933,342     
|Accounts receivable, net                                                                       |                | 2,420,531     |               | 637,135       
|Inventories, net                                                                               |                | 722,943       |               | 58,732        
|Current portion of long-term notes receivable                                                  |                | 211,609       |               | 164,548       
|Prepaid expenses and other current assets                                                      |                | 566,832       |               | 292,805       
|                                                                                               |                |               |               |               
|Total current assets                                                                           |                | $   8,884,275 |               | 13,161,821    
|                                                                                               |                |               |               |               
|Property, plant and equipment, net                                                             |                | 943,421       |               | 77,985        
|Software development costs, net                                                                |                | 2,521,838     |               | -             
|Investments in non-marketable securities                                                       |                | 1,143,566     |               | 1,143,566     
|Long-term notes receivable                                                                     |                | 280,487       |               | 458,670       
|Goodwill, net                                                                                  |                | 815,656       |               | 841,726       
|Intangible assets, net                                                                         |                | 30,171,545    |               | 1,412,854     
|Deferred tax asset                                                                             |                | 612,299       |               | -             
|Deferred charges and other assets                                                              |                | 397,786       |               | 441,367       
|                                                                                               |                |               |               |               
|Total assets                                                                                   |                | $ 45,770,873  |               | $ 17,537,989  
|                                                                                               |                |               |               |               
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                           |               
|Current Liabilities:                                                                           |                |               |               |               
|Lines of credit                                                                                |                | $   3,099,825 |               | $      647,797
|Current portion of long-term debt                                                              |                | -             |               | 180,323       
|Notes payable - acquisition                                                                    |                | 5,309,662     |               | -             
|Current portion of convertible secured debentures                                              |                | 2,679,996     |               | 900,000       
|Accounts payable                                                                               |                | 4,666,280     |               | 304,088       
|Accrued royalty expense                                                                        |                | 3,026,215     |               | 82,643        
|Accrued payroll expense                                                                        |                | 1,549,486     |               | 49,846        
|Accrued expenses                                                                               |                | 1,495,294     |               | 822,463       
|Estimated liability for foreign tax                                                            |                | 599,340       |               | 600,000       
|                                                                                               |                |               |               |               
|Total current liabilities                                                                      |                | 22,426,098    |               | 3,587,160     
|                                                                                               |                |               |               |               
|Long-term debt                                                                                 |               
|Convertible secured debentures                                                                 |                | 2,092,322     |               | 2,318,455     
|Potential liability - Empire earn out                                                          |                | 12,123,438    |               | -             
|Other long-term liabilities                                                                    |                | 396,584       |               | 231,892       
|                                                                                               |                |               |               |               
|Total Liabilities                                                                              |                | $ 37,038,442  |               | $   6,137,507 
|                                                                                               |                |               |               |               
|Commitments, contingencies and other matters                                                   |                |               |               |               
|Stockholders' equity:                                                                          |               
|Preferred stock, $0.01 par value; 5,000,000 shares authorized;                                 |               
|no shares issued and outstanding                                                               |               
|Common stock, Class A, $0.01 par value, 50,000,000 shares authorized; 9,361,749 [1,496,700     |               
|shares in treasury] and 8,313,774 shares issued and outstanding, respectively                  |                | 93,617        |               | 83,138        
|Common stock, Class B, $0.01 par value; 2,000,000 shares authorized;  835,260 share issued and |               
|outstanding                                                                                    |                | 8,353         |               | 8,353         
|Common stock, FSAH Class B $0.001 par value; 10,000,000 shares authorized;  2,671,087 shares   |               
|issued and outstanding                                                                         |                | 600           |               | 600           
|Additional paid-in capital                                                                     |                | 67,543,718    |               | 65,573,387    
|Accumulated deficit                                                                            |                | (59,384,494   | )             | (54,390,357   
|Accumulated comprehensive income                                                               |                | 470,637       |               | 125,361       
|                                                                                               |                |               |               |               
|Total stockholders' equity                                                                     |                | 8,732,431     |               | 11,400,482    
|                                                                                               |                |               |               |               
|Total liabilities and stockholders' equity                                                     |                | $ 45,770,873  |               | $ 17,537,989  
|                                                                                               |                |               |               |               

See notes to condensed
consolidated financial statements

3



---

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

|                                                              | Three Months Ended March 31, |            
|------------------------------------------------------------- | ---------------------------- | -----------
|
|Net Revenues                                                  |                              | $4,603,017 
|Operating expenses:                                           |                             
|Cost of sales                                                 |                              | 1,782,905  
|Development costs and royalties                               |                              | 399,609    
|Selling, general and administrative                           |                              | 2,689,716  
|Amortization of software development costs                    |                              | 53,617     
|Amortization of acquired intangibles                          |                              | 1,929,917  
|Depreciation                                                  |                              | 62,458     
|                                                              |                              | 6,918,222  
|                                                              |                              |            
|                                                              |                              |            
|Operating (loss) income                                       |                              | (2.315,205 
|                                                              |                              |            
|Other (expense) income                                        |                              | (426       
|Foreign currency loss                                         |                              | (88,212    
|Acquisition costs incurred                                    |                              | -          
|Amortization of convertible debt discounts and issuance costs |                              | (172,990   
|Interest expense                                              |                              | (254,155   
|Interest income                                               |                              | 89,697     
|                                                              |                              |            
|Loss from continuing operations before income taxes           |                              | (2,741,291 
|Provision for income taxes                                    |                              | (9,737     
|                                                              |                              |            
|                                                              |                              |            
|Loss from continuing operations                               |                              | (2,751,028 
|                                                              |                              |            
|Discontinued operations:                                      |                             
|Loss from discontinued operations net of Income taxes of $0   |                             
|and $0, respectively                                          |                              | -          
|                                                              |                              |            
|Net loss                                                      |                              | ($2,751,028
|                                                              |                              |            
|Loss per share:                                               |                             
|Basic and diluted                                             |                              |            
|Continuing operations                                         |                              | ($.27      
|Discontinued operations                                       |                              | -          
|                                                              |                              |            
|Net loss                                                      |                              | ($.27      
|                                                              |                              |            
|                                                              |                              |            
|Weighted average common stock outstanding:                    |                             
|Basic and diluted                                             |                              | 10,119,834 
|                                                              |                              |            

See notes to condensed
consolidated financial statements

4



---

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

|                                                              | Nine Months Ended March 31, |            
|------------------------------------------------------------- | --------------------------- | -----------
|
|Net Revenues                                                  |                             | $7,842,551 
|Operating Expenses:                                           |                            
|Cost of sales                                                 |                             | 3,154,475  
|                                                              |                            
|Development costs and royalties                               |                             | 1,455,325  
|Selling, general and administrative                           |                             | 4,754,887  
|Amortization of software development costs                    |                             | 53,617     
|Amortization of acquired intangibles                          |                             | 2,603,105  
|Depreciation                                                  |                             | 95,136     
|                                                              |                             |            
|                                                              |                             | 12,116,545 
|                                                              |                            
|Operating loss                                                |                             | (4,273,994 
|                                                              |                            
|Other income (expense)                                        |                             | (434       
|Foreign currency gains (losses)                               |                             | 7,143      
|Acquisition costs incurred                                    |                             | -          
|Amortization of convertible debt discounts and issuance costs |                             | (503,522   
|Interest expense                                              |                             | (614,878   
|Interest income                                               |                             | 404,645    
|                                                              |                             |            
|Loss from continuing operations before income taxes           |                             | (4,981,040 
|                                                              |                            
|Provision for income taxes                                    |                             | (13,907    
|                                                              |                             |            
|Loss from continuing operations                               |                             | (4,994,137 
|                                                              |                            
|Discontinued operations:                                      |                            
|Income from discontinued operations net of income taxes of $0 |                            
|and $0, respectively                                          |                             | -          
|                                                              |                             |            
|                                                              |                            
|Net loss                                                      |                             | ($4,994,137
|Income (loss) per share:                                      |                             |            
|Basic and diluted                                             |                            
|Continuing operations                                         |                             | ($.52      
|Discontinued operations                                       |                             | -          
|                                                              |                             |            
|Net loss                                                      |                             | ($.52      
|                                                              |                             |            
|Weighted average common stock outstanding:                    |                            
|Basic and diluted                                             |                             | 9,566,842  
|                                                              |                             |            

See notes to condensed
consolidated financial statements

5



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

|                                                                            | Nine Months Ended March 31, |            
|--------------------------------------------------------------------------- | --------------------------- | -----------
|
|Cash flows from operating activities:                                       |                             |            
|Net loss                                                                    |                             | ($4,994,137
|Adjustments to reconcile net loss to net cash used in operating activities: |                            
|Depreciation and amortization                                               |                             | 3,255,380  
|Loss on disposal of fixed assets                                            |                             | 10,195     
|Stock-based compensation                                                    |                             | 196,824    
|Stock issued for services                                                   |                             | 308,740    
|Bad debt expense                                                            |                             | 80,801     
|Unrealized foreign currency gains                                           |                             | (19,215    
|Accrued interest income on notes receivable                                 |                             | (20,782    
|Changes in operating assets and liabilities, net                            |                             | (119,006   
|Increase in other assets                                                    |                             | (14,675    
|Increase in other liabilities                                               |                             | 173,025    
|Net changes in assets and liabilities of discontinued operations            |                             | -          
|                                                                            |                             |            
|Net cash used in operating activities                                       |                             | ($1,142,850
|                                                                            |                             |            
|                                                                            |                            
|Cash flows from investing activities:                                       |                             |            
|Acquisition expenses capitalized                                            |                             | -          
|Cash paid for acquisition of Empire                                         |                             | (8,072,070 
|Proceeds from sale of fixed assets                                          |                             | 11,008     
|Investment in marketable securities                                         |                             | -          
|Purchase of intangible assets                                               |                             | -          
|Purchase of fixed assets                                                    |                             | (80,503    
|Proceeds from repayment of long-term note receivable                        |                             | 151,662    
|                                                                            |                             |            
|Net cash used in investing activities                                       |                             | ($7,989,903
|                                                                            |                             |            
|                                                                            |                            
|Cash flows from financing activities:                                       |                             |            
|Short term borrowings (repayments), net                                     |                             | (66,302    
|Net proceeds from convertible debenture                                     |                             | 1,129,714  
|Repayment of long term debt                                                 |                             | -          
|Proceeds from private placement sales of common stock                       |                             | 650,000    
|Proceeds from the exercise of stock options                                 |                             | 56,472     
|Purchase of treasury stock                                                  |                             | (25,424    
|Issuance of common stock                                                    |                             | -          
|Net cash provided by discontinued operations                                |                             | -          
|                                                                            |                             |            
|Net cash provided by financing activities                                   |                             | $1,744,460 
|                                                                            |                             |            
|                                                                            |                            
|Effect of exchange rates on cash                                            |                             | 345,276    
|Net increase (decrease) in cash and cash equivalents                        |                             | (7,043,017 
|Cash and cash equivalents, beginning of period                              |                             | 9,075,259  
|                                                                            |                             |            
|Cash and cash equivalents, end of period                                    |                             | $2,032,242 
|                                                                            |                             |            
|Supplemental cash flow information:                                         |                            
|Cash paid for interest                                                      |                             | $550,560   
|                                                                            |                             |            
|Cash paid for income taxes                                                  |                             | $10,025    
|                                                                            |                             |            

See notes to condensed
consolidated financial statements

6



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

# NOTE 1.     FINANCIAL
INFORMATION

Silverstar Holdings, Ltd. (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. Historically, the Company has
met its cash flow requirements through the sale of debt or equity, the sale of assets or
through operating cash flow. However, there is no guarantee that the Company will be
successful in meeting its cash flow requirements going forward. Managements plans to
meet its ongoing cash requirement as follows:

| |  |  | Raise
additional capital through the sale of equity or additional debt. To this end the Company
has retained an investment banking firm to assist the Company in its capital raise.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Company is in the process of amending the terms of its Secured Convertible Debentures
with DKR Soundshore Oasis. Under the terms of the proposed amendment (i) the maturity
dates of the Debentures will be extended to April 30, 2010; (ii) there will be no
amortization of principal under the Debentures and (iii) the Debentures will be
mandatorily convertible if the closing sale price of the Companys common stock
equals or exceeds $3.48 per share. The mandatory conversion will be subject to volume
requirements. The formal approval of the amendment is subject to the Company completing a
sale of its equity or debt referred to above.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Generate significant short term
operating earnings and cash flow primarily through its newly acquired subsidiary Empire.
Empire 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. Empire recently signed a US distribution agreement with a major entertainment
publisher for Flat Out Ultimate Carnage. The terms of the agreement are confidential but
provide significant short term cash flow to the Company. This short term cash flow is
subject to certain conditions and requirements standard in contracts of this nature. Since
the title is substantially completed, with the lead Xbox 360 version due for European
release in June, Empire has effectively met most of these requirements.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Company has approximately $2.9 million of restricted cash in South Africa set aside to
match its current South African tax assessment. The Company participated in an
arbitration meeting with the South African Revenue Service (SARS) in which
SARS agreed in principle to drop the larger of its two assessments against the Company.
Pending formal approval of this decision, the Company will have access to approximately
$1.7 million of its restricted cash.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



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Management believes that these
actions and others to be taken by the Company will provide the opportunity for it to
improve liquidity and achieve profitability. However, there can be no assurance that any of these
 events will occur.

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 of the Company as of March 31, 2007 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 shares of common stock
outstanding. Diluted net income or loss per share is computed by dividing net income or
loss by the weighted average number of shares of common stock outstanding and dilutive potential
shares of common stock reflecting the dilutive effect of stock options, warrants, convertible
debentures and shares to be issued in connection with prior acquisitions. Dilutive
potential shares of common stock, 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. Common equivalent shares are
excluded from the calculation where a loss is reported because their effect would be
anti-dilutive.

# 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 March 31, 2007 totaled $747,465 which is used as collateral on
the Companys line of credit.

# Reclassifications

Royalty expenses for the three and
nine months ending March 31, 2007 totaling $456,286 and $900,889, respectively, have been
reclassified from cost of sales to development costs and royalties to conform to the
fiscal 2007 presentation.

8



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# Software Development Cost

Historically, Empire has incurred
significant software development expenses in connection with the production of its
products. Pursuant to SFAS No. 86 an analysis must be conducted to determine when
commercial feasibility of a product is reached. Once commercial feasibility of a product
is reached, development expenses should start to be capitalized and then the amortization
process begins. There is no consensus in the interactive entertainment software industry
with respect to commercial feasibility of a product. Empires management took the
position that commercial feasibility was reached toward the end of the development process
and not as come other companies do, i.e. at the beginning of the process. As a result
Empire has not capitalized any development costs with respect to its products. As
previously disclosed, the Company undertook an evaluation and analysis of the
appropriateness of this position. This analysis was completed during the current quarter.
Based on this evaluation and analysis, the Company determined that there is a clearly
defined decision point early in the development process where a product evolves from
concept to commercial feasibility. This decision point is either reached with the consent
of third parities or through an internal process where management decides to move forward
with a products development once a game concept has been approved. The Company also
concluded those instances in which concept approval had been given and a game did not
become a commercial product did not have a material adverse effect on the Company. As a
result, the Company has now decided to capitalize research and development expenses after
concept approval.

During the quarter ended December 31,
2006, $693,268 (£353,209 based on the December, 2006 foreign exchange rate of
$1.96277 US dollars to the UK pound) of software development costs were expensed. This
will have the effect of reducing the current quarters loss by $690,242
(£353,209 based on the quarter ended March 31, 2007 foreign exchange rate of 1.95449
US dollars to the UK pound) and represents the amount of software development cost
expensed during the quarter ended December 31, 2006, capitalized during the current
quarter. During the quarter ended March 31, 2007, the Company capitalized $2,575,675 in
research and development costs.

The table sets forth below the effect
on the quarterly earnings had the Company capitalized its software development costs
starting on December 1, 2006.

|                                       | Nine Months Ended
March 31, 2007 |             | Quarter Ended March
31, 2007 |             | Quarter Ended
December 31,
2006 |             | Quarter Ended
September 30, 2006 |          
|-------------------------------------- | -------------------------------- | ----------- | ---------------------------- | ----------- | ------------------------------- | ----------- | -------------------------------- | ---------
|Net loss as reported                   |                                  | ($4,994,137 | )                            | ($2,751,028 | )                               | ($1,301,671 | )                                | ($941,438
|Effect of change                       |                                  | 3,026       |                              | (690,242    | )                               | 693,268     |                                  | 0        
|                                       |                                  |             |                              |             |                                 |             |                                  |          
|Net loss assuming capitalization       |                                 
|starting December 1, 2006              |                                  | ($4,991,111 | )                            | ($3,441,270 | )                               | ($608,403   | )                                | ($941,438
|                                       |                                  |             |                              |             |                                 |             |                                  |          
|Loss per share as reported:            |                                 
|Basic and diluted                      |                                  | ($0.52      | )                            | ($0.27      | )                               | ($0.14      | )                                | ($0.10   
|                                       |                                  |             |                              |             |                                 |             |                                  |          
|Loss per share assuming capitalization |                                 
|starting December 1, 2006:             |                                 
|Basic and diluted                      |                                  | ($0.52      | )                            | ($0.34      | )                               | ($0.06      | )                                | ($0.10   
|                                       |                                  |             |                              |             |                                 |             |                                  |          

# 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

9



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expenses attributable to stock
options granted or vested subsequent to July 1, 2005. During the nine month periods ending
March 31, 2007 and March 31, 2006 the Company recognized expenses of $155,157 and $51,282
respectively, for employee stock options that vested during fiscal years 2007 and 2006.
The company also recognized expenses of $41,667 and $0 for the vesting of 37,955
restricted shares that were granted in the fourth quarter of the fiscal year ended June
30, 2006. Based on existing unvested option agreements the Company anticipates an
additional expense of approximately $37,000 in fiscal 2007 which could increase if
additional options are granted during the fiscal year. As of March 31, 2007, $141,308 of
total unrecognized compensation costs related to non-vested options is scheduled to be
recognized over a weighted average period of 1.47 years.

The weighted average grant date fair
value of options granted during the nine months ended March 31, 2007 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 nine months ended March 31, 2006, the Company did not grant
stock options.

|                                                          | 2007 |           
|--------------------------------------------------------- | ---- | ----------
|Weighted average grant-date fair value of options granted |      | $.71      
|                                                          |     
|Assumptions:                                              |     
|Risk free interest rate                                   |      | 4.65-4.82%
|Expected life                                             |      | 2-5 years 
|Expected volatility                                       |      | 48-111%   
|Expected dividend yield                                   |      | 0%        

As of March 31, 2007, the Company had
1,435,000 stock options outstanding, of which 1,243,373 are fully vested. A summary of the
activity in the Companys stock option plans is as follows for the six months ended
March 31, 2007:

|                               | Share Options Outstanding |           | Weighted Average Exercise |     
|------------------------------ | ------------------------- | --------- | ------------------------- | ----
|Outstanding, beginning of year |                           | 1,287,405 |                           | 2.17
|Granted                        |                           | 307,595   |                           | 1.80
|Forfeited                      |                           | (95,000   | )                         | .74 
|Exercised                      |                           | (65,000   | )                         | .87 
|                               |                           |           |                          
|Outstanding March 31, 2007     |                           | 1,435,000 |                           | 2.24
|                               |                           |           |                          

# NOTE 4.     SOFTWARE
DEVELOPMENT COSTS

As of March 31, 2007 and June 30,
2006 net capitalized software development costs totaled $2,521,838 and $0 respectively.
Total costs capitalized during the nine months ending March 31, 2007 were $2,575,675.
Accumulated amortization at March 31, 2007 totaled $53,837. Capitalized software
development costs are amortized over a five-year period based on weighted average expected
sales from the date the title is launched

# NOTE 5.     INTANGIBLE ASSETS

The following table presents details
of the purchase of finite-life intangibles as of March 31, 2007 that were acquired as part
of the acquisitions of Strategy First and Empire.

10



---

|                                         | Estimated Useful Life |          | Gross Carrying Amount |             | Accumulated
Amortization |             | Total |            
|---------------------------------------- | --------------------- | -------- | --------------------- | ----------- | ------------------------ | ----------- | ----- | -----------
|Covenant not to compete - Strategy First |                       | 3 years  |                       | $43,256     |                          | ($27,635    | )     | $15,621    
|Game titles - Strategy First             |                       | 10 years |                       | 1,498,867   |                          | (268,639    | )     | 1,230,228  
|Game titles - Empire                     |                       | 5 years  |                       | 31,411,887  |                          | (2,486,191  | )     | 28,925,696 
|                                         |                       |          |                       |             |                          |             |      
|Balance on March 31, 2007                |                       |          |                       | $32,954,010 |                          | ($2,782,465 | )     | $30,171,545
|                                         |                       |          |                       |             |                          |             |      
|                                         |                      
|                                         | Estimated Useful Life |          | Gross Carrying Amount |             | Accumulated
Amortization |             | Total |            
|Covenant not to compete - Strategy First |                       | 3 years  |                       | $44,638     |                          | ($17,356    | )     | $27,282    
|Game titles - Strategy First             |                       | 10 years |                       | 1,546,773   |                          | (161,201    | )     | 1,385,572  
|                                         |                       |          |                       |             |                          |             |      
|Balance on June 30, 2006                 |                       |          |                       | $1,591,411  |                          | ($178,587   | )     | $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 been launched as of March 31, 2007 a launch date was estimated to project
future amortization.

Amortization expense for intangible
assets for the nine months periods ended March 31, 2007 and 2006 were $2,603,105 and
$104,052, respectively. Estimated amortization expense for the rest of fiscal 2007 and for
the succeeding five fiscal years is as follows:

|           | 
|---------- | 
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|2011       | 
|2012       | 
|Thereafter | 
|           | 
|           | 
|           | 

# NOTE 6.     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. Based on these acceptances, the Company announced a formal closing of the offer
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 March 31, 2007 Balance Sheet
includes a liability of £6,177,548, or $12,123,438 USD based on the March 31, 2007
foreign exchange rate of 1.9625 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

11



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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 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. 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 was accrued as a
short-term liability.

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

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

The following unaudited proforma
summary presents consolidated financial information as if the acquisition of Empire 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.

|                        | Nine Months Ended March 31, |            
|----------------------- | --------------------------- | -----------
|
|Net revenues            |                             | $18,276,963
|Net (loss)              |                             | ($6,746,019
|Income (loss) per share |                             |            
|Basic and diluted:      |                            
|Continuing operations   |                             | ($.71      
|Discontinued operations |                             | -          
|                        |                             |            
|Net loss                |                             | ($.71      
|                        |                             |            

# NOTE 7.     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.

12



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The following summarizes the
operating results of the discontinued operations.

|         | Three Months Ended March 31, |   |  | Nine Months Ended March 31, |  
|-------- | ---------------------------- | - |  | --------------------------- | -
|
|Revenue  |                              | - |  | $298,614                    |  
|Net loss |                              | - |  | $(206,812                   | )
|         |                              |   |  |                             |  

# NOTE 8.     CASH FLOWS

Changes in operating assets and
liabilities consist of the following:

|                                                                                                | Nine Months Ended March 31, |            
|----------------------------------------------------------------------------------------------- | --------------------------- | -----------
|
|(Increase) decrease in accounts receivable                                                      |                             | $412,338   
|(Increase) decrease in inventories                                                              |                             | 217,043    
|(Increase) in prepaid expenses and current assets                                               |                             | (202,085   
|Software development costs capitalized                                                          |                             | (2,575,675 
|Increase in accounts payable                                                                    |                             | 1,097,961  
|Increase in accrued expenses                                                                    |                             | 931,412    
|                                                                                                |                             |            
|                                                                                                |                             | ($119,006  
|                                                                                                |                             |            
|Cash flows from operating activities - discontinued operations:                                 |                            
|Changes in net assets and liabilities of discontinued operations                                |                            
|Depreciation and amortization                                                                   |                             | -          
|Loss on disposal of fixed assets                                                                |                             | -          
|Changes in operating accounts                                                                   |                             | -          
|Changes in cash (included in) from net assets and from discontinued operations                  |                             | -          
|                                                                                                |                             |            
|Changes in net assets and liabilities of discontinued operations                                |                             | -          
|                                                                                                |                             |            
|Cash flows from financing activities - discontinued operations:                                 |                            
|Short-term borrowings (repayments), net                                                         |                             | -          
|                                                                                                |                             |            
|Non-cash investing and financing activities were as follows:                                    |                            
|Issuance of stock as payment for acquisition expenditures                                       |                             | $723,000   
|Issuance of Notes payable to former Empire shareholders                                         |                             | $5,208,052 
|Issuance of notes payable to former Empire shareholders contingent on earn out targets achieved |                             | $12,051,061

# NOTE 9.     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 period ended March 31, 2006.

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 and Strategy First. Empire 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. Empire develops and publishes a
varied range of titles for all current game platforms in North America, Europe and Asia.

13



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

# NOTE 10.     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 March 31,
2007, the prime rate was 8.25%. The balance outstanding under this line of credit at March
31, 2007 and June 30, 2006 was $747,465 and $647,797 respectively.

Empire has a line of credit secured
by its receivables, inventory, real property and intangible assets. As of March 31, 2007
the amount outstanding under this facility was £1,198,655 ($2,352,360). The line of
credit has a floating interest rate that is based on the base rate plus 3.50%.
On March 31, 2007, the base rate was 5.25%.

# NOTE 11.     CONVERTIBLE
SECURED DEBENTURE

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

The Company pays monthly interest on
the outstanding principal amount of the 2005 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 decreases by 2% to the extent that the volume weighted average trading
price of the Company's common stock for the five 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 2005 Debenture
shall entail a late fee at a rate of 18% per annum.

The 2005 Debenture was convertible
into shares of 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 2005 Debenture and the Warrant provide for
an additional 1,100,403 shares of the Companys common stock to be issued upon the
conversion of the 2005 Debenture or the exercise of the Warrant 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 2005 Debenture and amortized over the term of the 2005
Debenture.

The principal amount of the 2005
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. The terms of the 2005 Debenture were amended in June 2006 and
February 2007 and now require redemption at the rate of $180,000 per month commencing on
May 1, 2007. As of March 31, 2007, no principle payments have been made. The Company has
the option, at any time, to redeem some or all of the outstanding 2005 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

14



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liquidated damages (the 2005
Optional Redemption Amount). However, the Company may pay up to 15% of the principal
amount comprising of a portion of the 2005 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 did not pay the initial
$180,000 redemption amount on May 1, 2007. The Purchaser and the Company are in the
process of amending the terms of the 2005 Debenture. Under the terms of the proposed
amendment (i) the maturity date of the 2005 Debenture will be extended to April 30, 2010;
(ii) there will be no amortization of principal under the Debenture; and (iii) the
Debenture will be mandatorily convertible if the closing sale price of the Companys
common stock equals or exceeds $3.48 per share. This mandatory conversion will be subject
to volume requirements. The formal approval of the amendment is subject to the successful
financing referred to in Note 2 above.

The Companys obligations under
the 2005 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 2005 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
2005 Debenture the Company issued to the holder the Warrant. The fair value for
the Warrant 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 2005 Debenture 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 another Securities Purchase Agreement with the Purchaser,
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 2006 Debenture).

The 2006 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.

15



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The Company pays monthly interest on
the outstanding principal amount of the 2006 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 decreases by 2% to the extent that the volume weighted average trading
price of the common stock for the five 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 2006 Debenture
shall entail a late fee at a rate of 18% per annum.

The principal amount of the 2006 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 terms of the 2006 Debenture were amended
in February 2007 and now requires redemption at a rate of $63,636 per month commencing on May 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 2006 Debenture (the 2006 Optional Redemption Amount)
(provided, however, the Company may pay up to 15% of the principal amount comprising a
portion of the 2006 Optional Redemption Amount in shares of the Companys common
stock if certain conditions are satisfied).

The Company did not pay the initial $63,636 redemption amount on May 1, 2007.
The Company and the Purchaser are in the process of amending the terms of the 2006 Debenture.
Under the terms of the
proposed amendment (i) the maturity date of the 2006 Debenture will be extended to April
30, 2010; (ii) there will be no amortization of principal under the 2006 Debenture; and
(iii) the 2006 Debenture will be mandatorily convertible if the closing sale price of the
Companys common stock equals or exceeds $3.48 per share. This mandatory conversion
will be subject to volume requirements. The formal approval of the amendment is subject to
the successful financing referred to in Note 2.

The Companys obligations under
the 2006 Debenture are secured by a lien on all assets of the Company in favor of the
Purchaser, and guaranteed by all the subsidiaries of the Company. In addition, the
obligations of the Company under the 2006 Debenture are personally guaranteed by Mr.
George Karfunkel. Mr. Karfunkel is compensated in the amount of 5% of the current
principal outstanding amount of the 2006 Debenture per annum.

As consideration, the Company reduced
the exercise price of the Warrant $.10 to $1.7986 per share. The fair value for the
reduction in the exercise price of the Warrant 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 Companys 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 exercise price reduction and allocated
$10,490 of the proceeds from the 2005 Debenture to the Warrant, which is presented as a discount on
the 2005 Debenture, net of amortization to be taken over term of the 2005 Debenture
using the effective interest method.

16



---

The balance of the notes as of March
31, 2007 and June 30, 2006, net of unamortized discounts was as follows:

|                                                 | March 31,
2007 |            | June 30,
2006 |           
|------------------------------------------------ | -------------- | ---------- | ------------- | ----------
|Principal amount of notes                        |                | $5,000,000 |               | $3,600,000
|Discounts for beneficial conversion features     |                | (36,275    | )             | (60,122   
|Discounts for fair value of warrants and options |                | (191,407   | )             | (321,423  
|                                                 |                |            |               |           
|Balance , net of unamortized discounts           |                | $4,772,318 |               | $3,218,455
|Less current portion                             |                | (2,679,996 | )             | (900,000  
|                                                 |                |            |               |           
|Long-term portion                                |                | $2,092,322 |               | $2,318,455
|                                                 |                |            |               |           

Scheduled maturities of the
convertible debentures as of March 31, 2007 and June 30, 2006 were as follows:

|               | March 31,
2007 |            | June 30,
2006 |           
|-------------- | -------------- | ---------- | ------------- | ----------
|1 Year or less |                | $2,679,996 |               | $900,000  
|1-2 Years      |                | 2,320,004  |               | 2,700,000 
|               |                |            |               |           
|Total          |                | $5,000,000 |               | $3,600,000
|               |                |            |               |           

Interest expense related to the notes
amounted to $307,629 and $121,875 during the nine and three months ending March 31, 2007,
respectively.

Amortization of discounts for the
beneficial conversion features and warrant resulted in charges to Amortization of
Convertible Debt Discounts and Issuance Costs totaling $216,731 during the nine months
ended March 31, 2007. The Company also incurred loan costs of $896,985 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 $286,791 are included in Amortization of Convertible
Debt Discounts and Issuance Costs during the nine months ended March 31, 2007.

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  | $146,217
| | 2008  | 297,920 
| | 2009  | 32,367  
| |       |         
| | Total | $476,504
| |       |         

# NOTE 12.     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 two tax assessments for
approximately $2.9 million. The Company had contended that its South African tax filings
were in full compliance with all applicable laws and had vigorously defended its position
in this regard. The Company has retained an amount of cash equal to the assessments in
South Africa to satisfy any potential liability that may arise. On May 4, 2007, the
Company attended and arbitration meeting with SARS. At this

17



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meeting  SARS  agreed  in  principle
 to  drop  the  larger  of its two assessments.           Pending the anticipated formal
approval of this decision within the next few           weeks, the Company will have
access to approximately $1.7 million of its           restricted cash. The Company
conceded the principle of SARS second assessment           but will continue to negotiate
the ultimate liability due under this assessment.           The Company has recorded an
estimated liability of approximately $599,000 in           this regard but may be forced
to increase this amount should it fail to           negotiate a lower assessment amount.

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 June 2006, Empire commenced
litigation against Take Two Interactive Inc. (Take Two) in regard to the
accounting and reporting of sales of various products by Take Two. Through March 31, 2007
Empire had received payments of approximately $1,632,000 from Take Two, including $216,000
received during the third quarter of fiscal 2007. On May 10, 2007, Empire settled
this litigation for a final payment of $350,000 plus expense reimbursements of $140,000.

# 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 March 31, 2007 are less than $25,000.

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 March 31, 2007 net revenues earned under this
agreement were approximately $200,000.

On March 31, 2007, Empire owed
£575,231 ($1,128,891) for UK payroll taxes of which £490,379 ($962,368) was
past due. Of this amount, £75,000 ($147,188) was paid at the start of April and a
further £75,000 ($147,188) was paid at the start of May (in accordance with an
agreed upon payment schedule. In addition, a payment schedule for all remaining amounts
has now been finalized.). As of March 31, 2007, the interest rate in effect for late tax
payments was 7.5%. Interest will automatically be charged for the period following April
19, 2007 on the amount that was still due at that date. In addition, the UK tax
authorities have the power to charge this rate of interest on overdue payroll taxes in
respect to periods prior to April 19, 2007; however in practice, this is rare. We,
therefore, do not believe that we will be assessed for interest on the overdue amounts in
respect of the periods ending March 31, 2007.

# NOTE 13.     NEW ACCOUNTING
PRONOUNCEMENTS

On February 15, 2007, the Financial
Account Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities  Including an Amendment of FASB Statement No. 115 (FASB
159). This standard permits an entity to measure financial instruments and certain
other items at the estimated fair value. Most of the provisions of SFAS No. 159 are
elective; however, the amendment to FASB No. 15, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities that own trading and
available-for-sale securities. The fair value option created by SFAS 159 permits an entity
to measure eligible items at fair value as of specified election dates. The fair value
option (a) may generally be applied instrument by

18



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instrument,  (b) is irrevocable unless a new election date occurs, and (c) must
be applied to the entire instrument
and not t only a portion of the instrument. SFAS 159 is effective as of the beginning of
the first fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of the previous fiscal year provided that the entity (i) makes that
choice in the first 120 days of that year, (ii) has not yet issued financial statements
for any interim period of such year, and (iii) elects to apply the provisions of FASB 157.
We are currently evaluating the impact of SFAS 159, if any, on our consolidated financial
statements.

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.

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

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

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

# Background and History

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

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

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

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

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

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

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

On October 31, 2005, we consummated a
transaction pursuant to a Securities Purchase Agreement, dated October 21, 2005 with DKR
SoundShore Oasis Holding Fund Ltd. (the
Purchaser).  Pursuant to which 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).

20



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In May 2006, the Company repaid
$1,400,000 of the outstanding principal balance along with an early payment penalty of
approximately $210,000. On October 19, 2006, the Company entered into another 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.

On December 4, 2006, the Company
announced that it had achieved more than 90% acceptance of its offer to acquire the shares
of Empire. 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.

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# Quarter Ended March
31, 2007 As Compared to Quarter Ended March 31, 2006

All financial data in the following
discussion and analysis includes the results of operations of Empire for the quarter ended
March 31, 2007. Since comparative information for Empires operations prior to its
acquisition are unavailable there are no direct prior year comparisons for purposes of
this section.

# Revenues

Net revenues increased to
approximately $4,603,000 in the first quarter of 2007 as compared to approximately $1,495,000
 in the comparable quarter
of 2006 This increase was due to the operations of Empire which generated revenues of
approximately $3,630,000. During the comparable quarter of 2006 revenues were generated by
the operations of Strategy First alone.

# Cost of Sales:

Cost of sales was approximately
$1,783,000 in the third fiscal quarter of 2007, or 38.7% of total revenues. Cost of sales for
Empire Interactive was approximately $1,612,000, or 44.4% of Empires sales, while cost
of sales for Strategy First was $171,000 or 17.6% of related sales. For the quarter ended
March 31, 2006, cost of sales was approximately $238,017, or 15.9% of revenues. This
decrease in gross margin is primarily the result of lower gross margins for console games,
which make up the majority of Empires sales, as opposed to PC products.

# Development Costs and
Royalties:

Development costs and royalties were
approximately $399,000 for the three months ended March 31, 2007 (net of December
development software costs of approximately $693,000 that were capitalized in the third
fiscal quarter 2007). Royalty costs for Strategy First were approximately $262,000 as
compared to approximately $456,000 during the same period in the prior fiscal year. Total
development expenditures capitalized during the quarter were approximately $2,576,000.
Development costs are incurred by Empire. To date, Strategy First has outsourced
development in exchange for future distribution rights. Amortization of development costs
during the quarter ended March 31, 2007 was approximately $54,000.

# Selling, General and
Administrative Expenses

Selling, general and administrative
expenses for the quarter ended March 31, 2007 were approximately $2,690,000. Expenses for
Empire were approximately $1,847,000; expenses for Strategy First were approximately
$432,000 and corporate overhead expenses were approximately $411,000. During the quarter
ended March 31, 2006 selling; general and administrative expenses were approximately
$745,000 of which Strategy First accounted for approximately $471,000 with corporate
overhead totaling approximately $274,000. The decrease of approximately $39,000 for
Strategy First includes significant reductions in payroll and related payroll costs.
Increases in compensation costs and professional fees make up the majority of the
approximately $137,000 increase in corporate overhead expenses.

# Amortization and
Depreciation

Amortization of acquired intangible
assets increased to approximately $1,930,000 in the third quarter of fiscal 2007 as
compared to approximately $35,000 in the comparable period last year. This increase is
primarily due to the amortization of intangible assets acquired in the Empire transaction
of approximately $1,889,000. Depreciation expenses were approximately $62,000 for the
third quarter of fiscal 2007 and approximately $8,000 in the third quarter of fiscal 2006.
Depreciation expense for Empire was approximately $55,000 during the quarter ended March
31, 2007.

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# Foreign Currency Gains
(Losses)

Foreign currency gains or losses are
primarily related to the financial assets remaining in South Africa. Foreign currency
losses during the third quarter of 2007 were approximately $88,000. Losses of
approximately $93,000 related to the remaining assets from the sale of discontinued South
African operations. Empire realized foreign currency losses of approximately $5,000 and
Strategy First realized foreign currency gains of approximately $10,000. The foreign
currency losses during the third quarter of fiscal 2006 wereapproximately
$165,000. The functional currency of Empire 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 the quarter ending March 31,
2006 the Company incurred approximately $75,000 of expenses pursuing the unsuccessful
acquisition of JoWood Software Productions AG. These costs consisted primarily of legal
and travel expenses. In January 2006, we brought an action against JoWood Software
Productions AG seeking damages in the amount of approximately $850,000 for expenses
incurred in connection with our unsuccessful acquisition of shares of JoWood. The case is
being heard in the Vienna Commercial Court in Austria. A judgment is anticipated within
the next few months.

# Amortization of
Convertible Debt Discounts and Issuance Costs

Amortization of convertible debt
discounts and issuance costs were approximately $173,000 in the third quarter fiscal 2007
as compared to approximately $185,000 in the comparable period last year

# Interest Income

Interest income of approximately
$90,000 was recorded during the three months ended March 31, 2007 as compared to interest
income of approximately $135,000 during the third quarter of fiscal 2006.  The decrease of
approximately $45,000 is primarily the result of the Companys decrease in the
average cash balances held during the quarter ended March 31, 2007 as compared to March
31, 2006.

# Interest Expense

Interest expense of approximately
$255,000 was recorded during the third quarter of fiscal 2007 as compared to approximately
$124,000 in the same period of the prior year. The increase of approximately $101,000 is
primarily the result of the Companys increase in the average debt balances held
during the quarter ended March 31, 2007 as compared to March 31, 2006. This increase is
partially attributable to the Empire line of credit which stood at approximately
$2,352,000 on March 31, 2007.

# 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. None of them has had
 taxable income because each of them has 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 $612,000 carried as a long-term asset that
will be offset against future taxable earnings of Empire in the UK.

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 two tax assessments for
approximately $2.9 million. The Company had contended that its South African tax filings
were in full compliance with all applicable laws

23



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and had vigorously defended its position
in this regard.  The Company has retained an amount of cash equal to the assessments in South Africa to
satisfy any potential liability that may arise. On May 4, 2007, the Company attended and
arbitration meeting with SARS. At this meeting SARS agreed in principle to drop the larger
of its two assessments. Pending the anticipated formal approval of this decision which may
occur within the next few weeks, the Company will have access to approximately $1.7
million of its restricted cash. The Company conceded the principle of SARS second
assessment but will continue to negotiate the ultimate liability due under this
assessment. The Company has recorded an estimated liability of approximately $599,000 in
this regard but may be forced to increase this amount should it fail to negotiate a lower
assessment amount.

# Discontinued Operations

During the third quarter of fiscal
2006, we recognized a loss of approximately $207,000 from the discontinued operations of
Fantasy Sports, Inc. On April 7, 2006, the Company sold all the assets and certain
liabilities of Fantasy Sports, Inc. to FUN Technologies, LLC for approximately $4.4
million, including $3.85 million paid in cash at closing.

# Net Loss

We have recognized a net loss of
approximately $2,751,000 during the third quarter fiscal 2007 compared to a net loss of
approximately $688,000 during the same period in the prior fiscal year. The increase in
the net loss of $2,063,000 was primarily caused by operating losses incurred by Empire of
approximately $1,965,000 which included approximately $1,889,000 of amortization of
intangible assets related to its acquisition by the Company and decreases in the operating
income of Strategy First of approximately $228,000.

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# Nine Months Ended
March 31, 2007 As Compared to Nine Months Ended March 31, 2006

# Revenues

Net revenues increased to
approximately $7,843,000 for the first nine months of fiscal 2007 as compared to
approximately $2,849,000 in the comparable period
of the previous year. This increase was due to the operations of Empire which generated
revenues of approximately $5,671,000. During the comparable period in 2006 revenues were
generated by the operations of Strategy First alone.

# Cost of Sales:

Cost of sales was approximately
$3,154,000 in the first nine months of fiscal 2007, or 40.2% of total revenues. Cost of
sales for Empire Interactive was approximately $2,580,000, or 45.5% of related sales, while
cost of sales for Strategy First was approximately $574,000, or 26.5% of related sales. For
the nine months ended March 31, 2006, cost of sales was $431,000, or 15.2% of sales. This
decrease in gross margin is primarily the result of lower gross margins for console games,
which make up the majority of Empires sales, as opposed to PC products. In 2006 a
significant portion of Strategy Firsts sales were generated through foreign royalty
sales, which had no associated cost of sales

# Development Costs and
Royalties:

Development costs and royalties were
approximately $1,455,000 in the first three quarters of fiscal 2007, Development costs and
royalties for Empire totaled approximately $1,009,000 (net of December software costs of
approximately $690,000 that were capitalized in the third fiscal quarter 2007). Royalty
costs for Strategy First were approximately $446,000 as compared to approximately $899,000
during the same period in the prior fiscal year. Development expenditures capitalized
during the quarter were approximately $2,576,000Development costs are incurred by Empire.
To date Strategy First has outsourced development in exchange for future distribution
rights. Amortization of development costs during the quarter ending March, 31, 2007 was
approximately $54,000

# Selling, General and
Administrative Expenses

Selling, general and administrative
expenses for the nine months ended March 31, 2007 were approximately $4,755,000. Selling,
general and administrative expenses for Empire Interactive were approximately $2,543,000
while selling, general and administrative expenses for Strategy First were approximately
$1,277,000. Corporate overhead was approximately $935,000. For the nine months ended March
31, 2006, selling general and administrative expenses were approximately $2,060,000 of
which Strategy First accounted for approximately $1,307,000 with corporate overhead
accounting for approximately $753,000. The increase in corporate overhead was primarily
the result of increased professional fees and stock based compensation expense during the
nine months ended March 31, 2007.

# Amortization and
Depreciation

Amortization of acquired intangible
assets increased to approximately $2,603,000 during the first nine months of fiscal 2007
as compared to approximately $104,000 in the comparable period last year. This increase is
primarily due to the amortization of intangible assets acquired in the Empire transaction
of approximately $2,478,000. Depreciation expenses were approximately $95,000 for the nine
months ending March 31, 2007 and approximately $24,000 in the same period last year.
Depreciation expense for Empire was approximately $72,000 during the nine months ended
March 31, 2007.

# 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 nine months of fiscal 2007 were approximately $7,000.

25



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Approximately $83,000 of the losses related to the remaining
assets from the sale of discontinued South African operations. Empire realized foreign
currency gains of approximately $128,000 and Strategy First realized foreign currency
losses of approximately $38,000. The foreign currency losses during the first nine months
of fiscal 2006 wereapproximately $148,000, consisting of foreign currency losses
of approximately $188,000 related to the remaining assets from the sale of discontinued
South African operations, approximately $24,000 in gains recognized by Strategy First and
approximately $16,000 in gains recognized by the parent company.

# Amortization of
Convertible Debt Discounts and Issuance Costs

Amortization of convertible debt
discounts and issuance costs were approximately $504,000 in the first three quarters of
fiscal 2007 as compared to approximately $308,000 in the comparable period last year. We
began amortizing convertible debt discounts and amortization costs during the second
quarter of fiscal 2006 which resulted in lower amortization as compared to nine
months of amortization for the period ending March 31, 2007.

# Interest Income

Interest income of approximately
$405,000 was recorded during the nine months ended March 31, 2007 as compared to interest
income of approximately $325,000 in the prior years comparable period. The increase
of approximately $80,000 is primarily the result of the Companys increase in the
average cash balances held during the nine months ended March 31, 2007 as compared to the
same period last year.

# Interest Expense

Interest expense of approximately
$615,000 was recorded during the first three quarters of fiscal 2007 as compared to
approximately $218,000 in the same period of the prior year. Empire incurred interest
expenses of approximately $184,000 for the nine months ended March 31, 2006. Interest
expense also increased as a result of significant increases in debt obligations that
occurred during the nine months ended March 31, 2006 as compared to the comparable period
of last year. This increase is partially attributable to the Empire line of credit which
stood at approximately $2,352,000 on March 31, 2007.

# Discontinued Operations

During the first nine months of
fiscal 2006, we recognized gains of approximately $151,000 from the discontinued
operations of Fantasy Sports, Inc. On April 7, 2006, the Company sold all the assets and
certain liabilities of Fantasy Sports, Inc. to FUN Technologies, LLC for approximately
$4.4 million, including $3.85 million paid in cash at closing.

# Net Loss

We have recognized a net loss of
approximately $4,994,000 during the first three quarters of fiscal 2007 compared to a net
loss of approximately $1,111,000 during the same period in the prior fiscal year. The
increase in the net loss of $3,883,000 was primarily caused by operating losses incurred
by Empire of approximately $3,066,000 which included approximately $2,478,000 of
amortization of intangible assets related to its acquisition by the Company and decreases
in the operating income of Strategy First of approximately $366,000.

# Financial Condition,
Liquidity and Capital Resources

Cash decreased by approximately
$7,047,000 from $12,009,000 at June 30, 2006 to approximately $4,962,000 at March 31,
2007. This decrease is primarily the result of the acquisition cost incurred in the
purchase of Empire Interactive for which utilized approximately $7,500,000 of cash during
the nine months ended March 31, 2007.

26



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The cash balances are being held for
acquisitions and working capital purposes. Included in this amount is approximately
$3,678,000 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
approximately $23,117,000 from approximately $9,575,000 at June 30, 2006 to a deficit of
approximately $13,542,000 on March 31, 2007. The decrease is primarily due to the result
of the acquisition of Empire in December, 2006, which resulted in significant decreases to
the cash balance and significant increases in current liabilities. Current liability
increases related to the acquisition of Empire consist of approximately a $5,310,000 note
payable to the former Empire shareholders, approximately $4,405,000 in accounts payable,
approximately $4,725,000 in accrued expenses, and Empires line of credit of
approximately $2,353,000. The current portion of our convertible secured debentures
increased to approximately $2,680,000 at March 31, 2007 as compared to $900,000 at June
30, 2006. We anticipate that the short term liabilities related to the convertible secured
debentures will transfer to long tem liabilities (see Note 2).

On March 31, 2007, Empire owed
£575,231 ($1,128,891) for UK payroll taxes of which £490,379 ($962,368) was
past due. Of this amount, £75,000 ($147,188) was paid at the start of April and a
further £75,000 ($147,188) was paid at the start of May (in accordance with an
agreed upon payment schedule. In addition, a payment schedule for all remaining amounts
has now been finalized.). As of March 31, 2007, the interest rate in effect for late tax
payments was 7.5%. Interest will automatically be charged for the period following April
19, 2007 on the amount that was still due at that date. In addition, the UK tax
authorities have the power to charge this rate of interest on overdue payroll taxes in
respect to periods prior to April 19, 2007; however in practice, this is rare. We,
therefore, do not believe that we will be assessed for interest on the overdue amounts in
respect of the periods ending March 31, 2007.

At March 31, 2007 we had borrowings
of approximately $3,100,000, which consisted of approximately $2,353,000 in Empires
line of credit and approximately $747,000 advances against the corporate line of credit,
secured by the Companys cash. 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%.
We also have note obligations to Empire shareholders of $5,310,000 that accrue interest at
an annual rate of 4% and are payable in full on October 31, 2007. Additionally, there is
an earn-out payable to former Empire shareholders. The earn-out is based on a formula of
Empires EBITDA for the fiscal year ended June 30, 2007. The maximum amounts under
the earn-out formula could reach $12,123,000 and would be due to former Empire
shareholders on April 30, 2008. However, based on Empires EBITDA through March 31,
2007 we anticipate that the final earn-out amounts will be substantially lower.

We currently do not have sufficient
cash on hand to meet our short and long term obligations. Historically, the Company has
met its cash flow requirements through the sale of debt or equity, the sale of assets or
through operating cash flow. However, there is no guarantee that the Company will be
successful in meeting its cash flow requirements going forward. Managements plans to
meet its ongoing cash requirement as follows:

| |  |  | Raise
additional capital through the sale of equity or additional debt. To this end the Company
has retained an investment banking firm to assist the Company in its capital raise
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Company is in the process of amending the terms of its Secured Convertible Debentures
with DKR Soundshore Oasis. Under the terms of the proposed amendment (i) the maturity
dates of the Debentures will be extended to April 30, 2010; (ii) there will be no
amortization of principal under the Debentures and (iii) the Debentures will be
mandatorily convertible if the closing sale price of the Companys common stock
equals or exceeds $3.48 per share. The mandatory conversion will be subject to volume
requirements. The formal approval of the amendment is subject to the Company completing a
sale of its equity or debt referred to above.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Generate significant short term
operating earnings and cash flow primarily through its newly acquired subsidiary Empire.
Empire 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. Empire recently signed a US distribution agreement with a major entertainment
publisher for Flat Out Ultimate Carnage. The terms of the agreement are confidential but
provide significant short term cash flow to the Company. This short term cash flow is
subject to certain conditions and requirements standard in contracts of this nature. Since
the title is substantially completed, with the lead Xbox 360 version due for European
release in June, Empire has effectively met most of these requirements.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Company has approximately $2.9 million of restricted cash in South Africa set aside to
match its current South African tax assessment. The Company participated in an
arbitration meeting with the South African Revenue Service (SARS) in which
SARS agreed in principle to drop the larger of its two assessments against the Company.
Pending formal approval of this decision the Company will have access to approximately
$1.7 million of its restricted cash.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Critical Accounting
Policies

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

# Revenue Recognition

Empire and Strategy First distribute the
majority of their products through third-party software distributors to mass-merchant and
major retailers and directly to certain entertainment software retailers, all of which
have traditionally sold consumer entertainment software products. Additionally, the
companies may license their products to distributors in exchange for royalty payments. The
distribution of products is governed by purchase orders, distribution agreements or direct
sale agreements, most of which allow for product returns and price markdowns. For product
shipments to these software distributors or retailers, the companies record a provision
for product returns and price markdowns as a reduction of gross sales at the time the
product passes to these distributors or retailers.

The provision for anticipated product
returns and price markdowns is primarily based upon the companys analysis of
historical product return and price markdown results. Should product sell-through results
at retail store locations fall significantly below anticipated levels the adequacy of this
allowance may be insufficient. The companies review the adequacy of their respective
allowances for product returns and price markdowns and if necessary make adjustments.

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

# Development Costs

In the past, Empire has incurred
significant software development costs in connection with the production of their
products. Under SFAS No. 86 software development cost should be capitalized once technical
feasibility is achieved. In the case of Empire this would be when the product is
commercially viable

28



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(commercial feasibility).
Empires management had taken
the position that commercial feasibility is reached very late in the development process
and therefore had not capitalized any development costs in regard to their products. As
reported in the Companys Form 10-Q/A for the quarter ended December 31, 2006, the
Company was in the process of evaluating the appropriateness of this position by
performing its own analysis to determine as to when commercial feasibility is reached.
This analysis was completed during the current quarter. Based on this analysis, the
Company determined to its satisfaction that there is a clearly defined decision point
quite early in development where a product passes from concept to commercial feasibility.
This decision point is either reached with the consent of outside parties such as Sony or
Microsoft or through an internal process where management decides to move forward with a
products development once a game concept has been approved. The Company also found
that there has been no material instance where concept approval has been given and a game
has not become a commercial product. The Company has, therefore, decided to capitalize
software development costs after concept approval.

During the quarter ended December 31,
2006, $693,268 (£353,209 based on the December, 2006 foreign exchange rate of
$1.96277 US dollars to the UK pound) of software development costs were expensed. This
will have the effect of reducing the current quarters loss by $690,242
(£353,209 based on the quarter ended March 31, 2007 foreign exchange rate of 1.95449
US dollars to the UK pound) and represents the amount of software development cost
expensed during the quarter ended December 31, 2006, capitalized during the current
quarter. During the quarter ended March 31, 2007, the Company capitalized $2,575,675 in
research and development costs.

The table sets forth below the effect
on the quarterly earnings had the Company capitalized its software development costs
starting on December 1, 2006.

|                                       | Nine Months Ended
3/31/2007 |             | Quarter Ended 
3/31/2007 |             | Quarter Ended
12/31/2006 |             | Quarter Ended
9/30/2006 |          
|-------------------------------------- | --------------------------- | ----------- | ------------------------ | ----------- | ------------------------ | ----------- | ----------------------- | ---------
|Net loss as reported                   |                             | ($4,994,137 | )                        | ($2,751,028 | )                        | ($1,301,671 | )                       | ($941,438
|Effect of change in estimate           |                             | 3,026       |                          | (690,242    | )                        | 693,268     |                         | 0        
|Net loss assuming capitalization       |                            
|starting December 1, 2006              |                             | ($4,991,111 | )                        | ($3,441,270 | )                        | ($608,403   | )                       | ($941,438
|                                       |                             |             |                          |             |                          |             |                         |          
|Loss per share as reported:            |                            
|Basic and diluted                      |                             | ($0.52      | )                        | ($0.27      | )                        | ($0.14      | )                       | ($0.10   
|                                       |                             |             |                          |             |                          |             |                         |          
|Loss per share assuming capitalization |                            
|starting December 1, 2006:             |                            
|Basic and diluted                      |                             | ($0.52      | )                        | ($0.34      | )                        | ($0.06      | )                       | ($0.10   
|                                       |                             |             |                          |             |                          |             |                         |          

# 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.

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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 March 31, 2007, there can be no
assurances that future economic or financial developments might not lead to an impairment
of goodwill.

# Intangible Assets

Intangible assets include software
game titles and non-competition agreements. Intangible assets, excluding goodwill and
Empire game titles are stated on the basis of cost and are amortized on a straight-line
basis over estimated lives of three to ten years. Empire game titles are amortized over a
five-year period based on weighted average expected sales from the date the title is
launched. For titles that have not yet been launched as of March 31, 2007 a launch date
was estimated to project future amortization

Intangible assets with indefinite
lives are not amortized but are evaluated for impairment annually unless circumstances
dictate otherwise. Management periodically reviews intangible assets for impairment based
on an assessment of undiscounted future cash flows, which are compared to the carrying
value of the intangible assets. Should these cash flows not equal or exceed the carrying
value of the intangible, a discounted cash flow model is used to determine the extent of
any impairment charge required.

# Forward-Looking
Information

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

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

30



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

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

# Interest Rate Risk

On March 31, 2007, 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 March 31, 2007, 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 March 31, 2007. Based on
the March 31, 2007 balance on this facility, a hypothetical 100 basis point change in
interest rates would result in an approximately $7,500 change in annual interest expense.

Empire has a line of credit secured
by its receivables, inventory, real property and intangible assets. As of March 31, 2007,
the amount outstanding under this facility was approximately $2,353,000. The line of
credit accrues interest at an annual rate of 8.75%. A hypothetical 100 basis point change
in interest rates would result in an approximately $23,500 change in annual interest
expense.

# Foreign Currency Risk

Empire 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 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.

At March 31, 2007, we had assets
denominated in South African Rand of R 25.8 million ($ 3.5 million).

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

# Evaluation of Disclosure
Controls and Procedures

Our Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)) as of March 31, 2007, have concluded that, as
of such date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms.

The Companys management,
including the Chief Executive Officer and the Chief Financial Officer, does not expect
that the Companys disclosure controls or the Companys will prevent all errors
and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in a cost effective control system, misstatements due
to error or fraud may occur and not be detected.

# Changes in Internal
Control Over Financial Reporting

There were no changes in our internal
control over financial reporting identified in connection with the evaluation described
above that occurred during the three months ended March 31, 2007 that have materially
affected or are reasonably likely to materially affect our internal control over financial
reporting.

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# PART II. OTHER
INFORMATION

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

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

In April 2006, our First South
African subsidiary received a letter from the South African Revenue Service
(SARS) challenging certain tax treatment of dividends and operating loss carry
forwards for the years 2002 through 2004. Subsequently SARS issued two tax assessments for
approximately $2.9 million. We contended that our South African tax filings were in full
compliance with all applicable laws and had vigorously defended our position in this
regard. We retained an amount of cash equal to the assessments in South Africa to satisfy
any potential liability that could arise. On May 4, 2007, we had an arbitration meeting
with SARS. At this meeting SARS agreed to drop the larger of its two assessments. Once we
receive formal approval of this agreement by SARS which we expect within the next few
weeks, we will have access to approximately $1.7 million of restricted cash. We conceded
the principle of SARS second assessment but will continue to negotiate the ultimate
liability due under this assessment. We have recorded an estimated liability of
approximately $599,000 in this regard but may be forced to increase this amount should we
fail to negotiate a lower assessment amount.

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 June 2006, Empire  commenced litigation
 against Take Two Interactive Inc. (Take Two) in
regard to the accounting and reporting of sales of various products by Take Two. Through
March 31, 2007 Empire had received payments of approximately $1,632,000 from Take Two,
including $216,000 received during the third quarter of fiscal 2007. On May 10, 2007,
Empire settled this litigation for a final payment of $350,000 plus expense reimbursements
of $140,000.

|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 unable to successfully
integrate acquisitions, our revenue growth and future profitability may be negatively
impacted.

The process of integrating an
acquired business, technology or product may result in unforeseen operating difficulties
and expenditures and may absorb significant management attention and capital that would
otherwise be available for ongoing development of our business. In addition, we may not be
able to maintain the levels of operating efficiency that any company we may acquire
achieved or might have achieved separately. As a result of difficulties associated with
combining operations, we may not be able to achieve cost savings and other benefits that
we might expect to achieve with these acquisitions. Future acquisitions could result in
potentially dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities with restrictive covenants or adversely affect our operating results and
financial condition.

33



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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 in December
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. Although management intends to alleviate this uncertainty as discussed above
in Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition, Liquidity and Capital Resources we cannot
assure you that any of the actions that management intends to take will succeed. If we
fail in our efforts to alleviate this uncertainty we may not be able to continue as a
going concern.

34

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

None.

|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.

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

None.

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

None.

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

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

_________________

(3)    
          Filed herewith.

35



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# SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned duly authorized.

Date: May 15, 2007

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

36