**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM        10-Q**

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

For the quarterly period ended December 31, 2007

OR

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

For the transition period from ______________to ______________

Commission File Number0-27494

 

| SILVERSTAR HOLDINGS, LTD.

(Exact name of registrant as specified in its                        charter)                                                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Bermuda                                                                                                                                                                      | Not Applicable |
| (State or other jurisdiction ofincorporation or organization)                                                                                                                | (IRS Employer Identification No.) |
| Clarendon House, Church Street, Hamilton HM CX,                        Bermuda(Address of principal executive offices with zip                        code)                  |
| 809-295-1422Registrant’s telephone number, including area                        code                                                                                  |
| _____________________________________________________________________Former name, former address and former fiscal year, if                        changed since last report |

         

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

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 o Accelerated        filer o Non-accelerated filerx

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

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 o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

         

| Title of Class       | Shares Outstanding on February 7, 2008 |
|----------------------|----------------------------------------|
| Class A Common Stock | 19,799,066                             |

 

 

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*SILVERSTAR HOLDINGS LTD - 10-Q*

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**PART I        – FINANCIAL INFORMATION**

| Item 1 | Financial Statements |
|--------|----------------------|

Condensed Consolidated Balance Sheets at December 31, 2007 (Unaudited) and        June 30, 2007

Condensed Consolidated Statements of Operations (Unaudited) for the three        months ended December 31, 2007 and 2006

Condensed Consolidated Statements of Operations (Unaudited) for the six        months ended December 31, 2007 and 2006

Condensed Consolidated Statements of Cash Flows (Unaudited) for six months        ended December 31, 2007 and 2006

Notes to the Condensed Consolidated Financial Statements        (Unaudited)

| Item 2 | Management’s Discussion and Analysis of Financial                        Condition and Results of Operations |
|--------|--------------------------------------------------------------------------------------------------------------------|

| Item 3 | Quantitative and Qualitative Disclosures About Market                        Risk |
|--------|-----------------------------------------------------------------------------------|

| Item 4 | Controls and Procedures |
|--------|-------------------------|

**PART II – OTHER INFORMATION**

| Item 1 | Legal Proceedings |
|--------|-------------------|

| Item 1A | Risk Factors |
|---------|--------------|

| Item 2 | Unregistered Sales of Equity Securities and Use of                        Proceeds |
|--------|------------------------------------------------------------------------------------|

| Item 3 | Defaults upon Senior Securities |
|--------|---------------------------------|

| Item 4 | Submission of Matters to a Vote of Security                        Holders |
|--------|----------------------------------------------------------------------------|

| Item 5 | Other Information |
|--------|-------------------|

| Item 6 | Exhibits |
|--------|----------|

SIGNATURES

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**SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

|                                                                                                                                                                                                                              |   | December 31, |   | June 30,    |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|-------------|--------|
|                                                                                                                                                                                                                              |   | 2007         |   | 2007        |   |
|                                                                                                                                                                                                                              |   | Unaudited    |   |        |   |
| ASSETS                                                                                                                                                                                                                            |   |         |   |        |   |
| Current assets:                                                                                                                                                                                                                   |   |         |   |        |   |
| Cash and cash equivalents (includes restricted cash of                        $731,675 and $590,990)                                                                                                                              |   | $3,239,660   |   | $3,693,149  |   |
| Cash restricted for foreign tax estimated                        liability                                                                                                                                                        |   | 787,009      |   | 1,064,040   |   |
| Accounts receivable, net                                                                                                                                                                                                          |   | 4,554,001    |   | 6,908,846   |   |
| Inventories, net                                                                                                                                                                                                                  |   | 936,464      |   | 900,128     |   |
| Current portion of long term notes receivable                                                                                                                                                                                     |   | 366,988      |   | 256,982     |   |
| Prepaid expenses and other current assets                                                                                                                                                                                         |   | 406,088      |   | 669,730     |   |
| Assets available for sale                                                                                                                                                                                                         |   | —      |   | 505,650     |   |
| Total current assets                                                                                                                                                                                                              |   | 10,290,210   |   | 13,998,525  |   |
| Property, plant and equipment, net                                                                                                                                                                                                |   | 437,076      |   | 488,031     |   |
| Software development costs, net                                                                                                                                                                                                   |   | 6,714,238    |   | 5,183,033   |   |
| Investments in non-marketable securities                                                                                                                                                                                          |   | 1,131,066    |   | 1,143,566   |   |
| Long term notes receivable                                                                                                                                                                                                        |   | 25,351       |   | 214,222     |   |
| Goodwill, net                                                                                                                                                                                                                     |   | 924,874      |   | 890,038     |   |
| Intangible assets, net                                                                                                                                                                                                            |   | 16,672,898   |   | 20,611,189  |   |
| Deferred tax asset                                                                                                                                                                                                                |   | 623,158      |   | 625,217     |   |
| Deferred charges and other assets                                                                                                                                                                                                 |   | 156,960      |   | 631,843     |   |
| Total assets                                                                                                                                                                                                                      |   | $36,975,831  |   | $43,785,664 |   |
| LIABILITIES                                                                                                                                                                                                                       |   |         |   |        |   |
| Liabilities and stockholders’ equity:                                                                                                                                                                                       |   |         |   |        |   |
| Current liabilities:                                                                                                                                                                                                              |   |         |   |        |   |
| Lines of credit                                                                                                                                                                                                                   |   | $2,172,176   |   | $2,875,472  |   |
| Notes payable- acquisition                                                                                                                                                                                                        |   | 94,061       |   | 5,475,179   |   |
| Earn out notes payable – acquisition                                                                                                                                                                                        |   | 3,916,851    |   | 3,847,426   |   |
| Accounts payable                                                                                                                                                                                                                  |   | 4,177,405    |   | 6,959,835   |   |
| Accrued royalty expense                                                                                                                                                                                                           |   | 2,627,035    |   | 2,937,887   |   |
| Accrued expenses                                                                                                                                                                                                                  |   | 2,792,851    |   | 3,355,852   |   |
| Deposits on July 2007 private placement                                                                                                                                                                                           |   | —      |   | 630,403     |   |
| Estimated liability for foreign tax                                                                                                                                                                                               |   | 324,768      |   | 616,458     |   |
| Total current liabilities                                                                                                                                                                                                         |   | 16,105,147   |   | 26,698,512  |   |
| Convertible secured debenture                                                                                                                                                                                                     |   | 1,347,087    |   | 4,790,779   |   |
| Other long-term liabilities                                                                                                                                                                                                       |   | 419,753      |   | 412,363     |   |
| Total liabilities                                                                                                                                                                                                                 |   | $17,871,987  |   | $31,901,654 |   |
| Liabilities and 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; 18,990,857 (1,496,700 shares in treasury) and 9,621,891                        shares issued and outstanding, respectively |   | 198,060      |   | 96,218      |   |
| Common stock, Class B, $0.01 par value; 2,000,000 shares                        authorized; 0 shares and 835,260 issued and outstanding,                        respectively                                                 |   | 0            |   | 8,353       |   |
| Common stock, FSAH Class B $0.001 par value; 10,000,000                        shares authorized; 0 and2,671,087 shares issued and outstanding,                        respectively                                               |   | 0            |   | 600         |
| Additional paid-in capital                                                                                                                                                                                                        |   | 81,015,079   |   | 67,843,919  |   |
| Accumulated deficit                                                                                                                                                                                                               |   | (62,757,787  | )      | (56,796,978 | )      |
| Other comprehensive income                                                                                                                                                                                                        |   | 648,492      |   | 731,898     |   |
| Total stockholders’ equity                                                                                                                                                                                                  |   | 19,103.844   |   | 11,884,010  |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                  |   | $36,975,831  |   | $43,785,664 |   |

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**SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

|                                                                                 |   | Three Months Ended December 31, |   |
|--------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                 |   | 2007                            |   |   | 2006 |   |
| Net revenues                                                                         |   | $10,796,896                     |   |   | $2,960,789 |   |
| Operating expenses:                                                                  |   |                            |   |   |   |   |
| Cost of sales                                                                        |   | 4,217,780                       |   |   | 1,252,001 |   |
| Development costs and royalties                                                      |   | 401,603                         |   |   | 987,676 |   |
| Selling, general and administrative                                                  |   | 4,193,808                       |   |   | 1,451,216 |   |
| Amortization of software development costs                                           |   | 958,526                         |   |   | — |   |
| Amortization of acquired intangibles                                                 |   | 2,322,596                       |   |   | 630,827 |   |
| Depreciation                                                                         |   | 47,173                          |   |   | 24,948 |   |
|                                                                                 |   | 12,141,486                      |   |   | 4,346,668 |   |
| Operating loss                                                                       |   | (1,344,590                      | )      |   | (1,385,879 | ) |
| Other income                                                                         |   | 100                             |   |   | — |   |
| Foreign currency (loss) gain                                                         |   | (80,770                         | )      |   | 357,409 |   |
| Gain on sale of fixed assets                                                         |   | 90,348                          |   |   | — |   |
| Amortization of convertible debt discounts and issuance                        costs |   | (123,747                        | )      |   | (171,425 | ) |
| Interest expense                                                                     |   | (133,005                        | )      |   | (257,896 | ) |
| Interest income                                                                      |   | 76,356                          |   |   | 159,480 |   |
| Loss before income taxes                                                             |   | (1,515,308                      | )      |   | (1,298,311 | ) |
| Benefit (provision) for income taxes                                                 |   | 1,006                           |   |   | (3,360 | ) |
| Net loss                                                                             |   | ($1,514,302                     | )      |   | ($1,301,671 | ) |
|                                                                                 |   |                            |   |   |   |   |
|                                                                                 |   |                            |   |   |   |   |
| Loss per share:                                                                      |   |                            |   |   |   |   |
| Basic and diluted                                                                    |        | ($.08                           | )      |  | ($.14 | ) |
| Weighted average common stock outstanding:                                           |   |                            |   |   |   |   |
| Basic and diluted                                                                    |   | 19,771,824                      |   |   | 9,431,657 |   |

See notes to condensed consolidated financial statements

 

4

 

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***SILVERSTAR        HOLDINGS LTD - 10-Q***

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**SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

|                                                                                 |   | Six Months Ended December 31, |        |
|--------------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                                 |   | 2007                          |        | 2006 |   |
| Net revenues                                                                         |   |                          | $14,675,573 |   |   | $3,239,534 |   |
| Operating expenses:                                                                  |   |                          |        |   |   |   |   |
| Cost of sales                                                                        |   |                          | 5,816,582   |   |   | 1,371,570 |   |
| Development costs and royalties                                                      |   |                          | 1,015,107   |   |   | 1,055,716 |   |
| Selling, general and administrative                                                  |   |                          | 7,152,188   |   |   | 2,065,171 |   |
| Amortization of software development costs                                           |   |                          | 1,548,632   |   |   | — |   |
| Amortization of acquired intangibles                                                 |   |                          | 4,434,262   |   |   | 673,188 |   |
| Depreciation                                                                         |   |                          | 90,827      |   |   | 32,678 |   |
|                                                                                 |   |                          | 20,057,598  |   |   | 5,198,323 |   |
| Operating loss                                                                       |   |                          | (5,382,025  | ) |   | (1,958,789 | ) |
| Other loss                                                                           |   |                          | (12,395     | ) |   | (9 | ) |
| Foreign currency gains                                                               |   |                          | 53,028      |   |   | 95,355 |   |
| Gain on sale of fixed assets                                                         |   |                          | 90,348      |   |   | — |   |
| Amortization of convertible debt discounts and issuance                        costs |   |                          | (554,916    | ) |   | (330,532 | ) |
| Interest expense                                                                     |   |                          | (301,462    | ) |   | (360,722 | ) |
| Interest income                                                                      |   |                          | 145,605     |   |   | 314,948 |   |
| Loss before income taxes                                                             |   |                          | (5,961,817  | ) |   | (2,239,749 | ) |
| Provision for income taxes                                                           |   |                          | 1,006       |   |   | (3,360 | ) |
| Net loss                                                                             |   |                          | ($5,960,811 | ) |   | ($2,243,109 | ) |
|                                                                       |        |                               |             |  |  |  |  |
| Loss per share:                                                                      |        |                               |        |   |  |   |   |
| Basic and diluted                                                                    |        |                               | ($.35       | ) |  | ($.24 | ) |
| Weighted average common stock outstanding:                                           |        |                               |             |  |  |  |  |
| Basic and diluted                                                                    |        |                               | 16,931,654  |  |  | 9,290,346 |  |

 

See notes to condensed consolidated financial statements

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*SILVERSTAR HOLDINGS        LTD - 10-Q*

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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)

 

|                                                                                                                                                                       |   | Six Months Ended December 31, |        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                                                                                                                       |   | 2007                          |        | 2006 |   |
|                                                                                                                                                                       |   |                          |        |   |   |   |   |
| Cash flows from operating activities:                                                                                                                                      |   |                          |        |   |   |   |   |
| Net (loss) from operations                                                                                                                                                 |        |                          | ($5,960,811 | ) |   | ($2,243,109 | ) |
| Depreciation and amortization                                                                                                                                              |   |                          | 6,631,637   |   |   | 1,036,398 |   |
| Loss on disposal of marketable securities                                                                                                                                  |   |                          | 12,500      |   |   | — |   |
| (Gain) loss on disposal of fixed assets                                                                                                                                    |   |                          | (90,348     | ) |   | 10,195 |   |
| Stock-based compensation                                                                                                                                                   |   |                          | 234,631     |   |   | 77,585 |   |
| Stock issued for services                                                                                                                                                  |   |                          | 24,391      |   |   | 58,740 |   |
| Unrealized foreign currency gains                                                                                                                                          |   |                          | (191,497    | ) |   | (113,913 | ) |
| Accrued interest income on notes receivable                                                                                                                                |   |                          | (12,958     | ) |   | (14,453 | ) |
| Changes in operating assets and liabilities, net                                                                                                                           |   |                          | (4,870,574  | ) |   | 1,609,063 |   |
| Decrease in estimated liability for foreign tax                                                                                                                            |   |                          | (291,829    | ) |   | — |   |
| (Increase) decrease in other assets                                                                                                                                        |   |                          | 77,795      |   |   | (10,932 | ) |
| Increase in other liabilities                                                                                                                                              |   |                          | —     |   |   | 25,000 |   |
| Net cash provided by (used in) operating activities                                                                                                                        |   |                          | (4,437,063  | ) |   | 434,574 |   |
| Cash flows from investing activities:                                                                                                                                      |   |                          |        |   |   |   |   |
| Cost paid for acquisition of Empire Interactive                                                                                                                            |   |                          | —     |   |   | (8,072,070 | ) |
| Proceeds from sale of fixed assets                                                                                                                                         |   |                          | 660,896     |   |   | 11,008 |   |
| Purchase of fixed assets                                                                                                                                                   |   |                          | (95,309     | ) |   | (3,971 | ) |
| Purchase of intangible assets                                                                                                                                              |   |                          | (435,465    | ) |   | — |   |
| Proceeds from repayment of long-term note receivable                                                                                                                       |   |                          | 96,537      |   |   | 99,281 |   |
| Decrease in cash restricted for foreign tax estimated                    liability                                                                                         |   |                          | 274,171     |   |   | — |   |
| Net cash provided by (used) in investing activities                                                                                                                        |   |                          | 500,830     |   |   | (7,965,752 | ) |
| Cash flows from financing activities:                                                                                                                                      |   |                          |        |   |   |   |   |
| Short term repayments, net                                                                                                                                                 |   |                          | (5,917,901  | ) |   | (258,502 | ) |
| Net proceeds from convertible debenture                                                                                                                                    |   |                          | —     |   |   | 1,129,714 |   |
| Proceeds from exercise of warrants                                                                                                                                         |   |                          | 1,397,937   |   |   | — |   |
| Proceeds from private placement sales of common stock, net of                    offering      costs of $1,084,731 and                    $0 |   |                          | 7,915,264   |   |   | 650,000 |   |
| Proceeds from the exercise of stock options                                                                                                                                |   |                          | 170,850     |   |   | 56,472 |   |
| Net cash provided by financing activities                                                                                                                                  |   |                          | 3,566,150   |   |   | 1,577,684 |   |
| Effect of exchange rates on cash                                                                                                                                           |   |                          | (83,406     | ) |   | 334,992 |   |
| Net decrease in cash and cash equivalents                                                                                                                                  |   |                          | (453,489    | ) |   | (5,618,502 | ) |
| Cash and cash equivalents, beginning of period                                                                                                                             |   |                          | 3,693,149   |   |   | 9,075,259 |   |
| Cash and cash equivalents, end of period                                                                                                                                   |   | $                             | 3,239,660   |   | $ | 3,456,757 |   |
| Supplemental cash flow information:                                                                                                                                        |   |                          |        |   |   |   |   |
| Cash paid for interest                                                                                                                                                     |   | $                             | 467,758     |   | $ | 296,404 |   |
| Cash paid for income taxes                                                                                                                                                 |   | $                             | 800         |   |   | — |   |

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*SILVERSTAR            HOLDINGS LTD - 10-Q*

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**NOTE 1. FINANCIAL INFORMATION**

 

Silverstar Holdings, Ltd. (the “Company”) is the parent company        of Empire Interactive, PLC (“Empire”), a leading worldwide publisher of        interactive entertainment software for all game platforms, and 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**

Historically, the Company has met its cash flow requirements through the        sale of debt or equity securities, 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. In order to meet its current short term deficiency, the        Company’s plans are as follows:

|      •      | Raise additional capital through the exercise of existing                        warrants and the sale of equity or debt securities. The Company currently                        has approximately 4.65 million warrants outstanding with exercise prices                        ranging from $1.55 to $2.50. The Company has a continuing relationship with                        an investment banking firm to assist it should it decide to raise                        additional capital in the future. During the last three months                        approximately 892,178 of options and warrants were exercised totaling                        $1,462,402.                                                                                                     |
|--------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      •      | Generate significant short term operating earnings and cash                        flow primarily through its Empire subsidiary. Empire’s title release                        schedule for the next 12 months includes several multi-platform games most                        notably Hello Kitty and PipeMania. The Company anticipates that the launch                        of these games, along with Empire’s ongoing business will generate                        operating profits and cash flow in the short term. Empire continues to                        explore US distribution agreements with major entertainment publishers                        which would provide significant short term cash flow to the                        Company. |
|                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      •      | The Company has approximately $787,000 of                        restricted cash set aside to match its current South African tax                        assessment. The Company believes that it has strong arguments to set aside                        this assessment. If this assessment is set aside, this cash would be                        available for operations.                                                                                                                                                                                                                                                                                                                                                                                                 |

The Company believes that these actions and others to be taken by it will        provide the opportunity for it to meet its short term deficiency, improve liquidity and        achieve positive cash flow. However, there can be no assurance that any of these events        will occur.

**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 inter-company 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 December 31, 2007 and the results of operations and cash        flows for the interim periods of the fiscal year ending June 30, 2008 (“fiscal        2008”) and the fiscal year ended June 30, 2007 (“fiscal 2007”) 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, 2007.

         

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**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 common        shares, stock options, warrants and convertible debentures for all periods presented are        computed utilizing the treasury stock method. The dilutive effect of shares to be issued in        connection with the obligations related to prior acquisitions is computed using the average        market price for the quarter. 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 the Company’s        cash balances are held in liquid accounts at two highly rated financial institutions. While        these deposits are not insured, the quality of such financial institutions is such that the        risks of loss on these funds are minimal. Restricted cash balances at December 31, 2007        totaled $731,675 which is used as collateral on the Company’s line of        credit.

**Software Development Cost**

Historically, Empire has incurred significant software development expenses        in connection with the production of its products. Pursuant to Statement of Financial        Accounting Standards (“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 some other companies do, 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 quarter ending        March 31, 2007. 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 now capitalizes research and development expenses after concept        approval.

**Stock-Based Compensation**

In December 2004, the Financial Accounting Standards Board        (“FASB”) issued SFAS No. 123R, “Share-Based Payment.” This standard        replaced SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes        Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock        Issued to Employees.” The standard requires companies to recognize all share-based        payments to employees, including grants of employee stock options, in the financial        statements based on their fair values on the grant date and is effective for annual periods        beginning after June 15, 2005. In accordance with the revised statement, the Company        recognizes the expenses attributable to stock options granted or vested subsequent to July        1, 2005. During the six month periods ended December 31, 2007 and 2006 the Company        recognized expenses of $234,631 and $77,585 respectively, for employee stock options and        restricted shares that vested. Based on existing unvested option agreements the Company        anticipates an additional expense of approximately $182,185 in fiscal 2008 which could        increase if additional options are granted during the fiscal year. As of December 31, 2007,        $690,175 of total unrecognized compensation costs related to non-vested options is        scheduled to be recognized over a weighted average period of 2.57 years.

The weighted average grant date fair value of options granted during the six        months ended December 31, 2007 and December 31, 2006 and the significant assumptions used        in determining the underlying fair value of each option grant on the date of the grant        utilizing the Black Scholes option pricing model are noted in the following table. Expected        volatility is based on historical volatility data of the Company’s stock. As a result        of the acquisition of Empire which significantly changed the size and complexity of the        Company, the volatility of options granted after March 31, 2007 were computed using the        average volatility of competitor companies in the entertainment software industry.        Historical stock prices would not be indicative of their future prices, since the Company        itself is so different from what it was historically. SFAS 123(R)

         

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requires the use of expected volatility in the calculation of the        compensation expense of a stock option. While it allows the use of historical volatility in        calculating expected volatility, it does not require the use of historical volatility and        encourages the use of other factors. 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.

|                                                                             | 2007       | 2006       |
|----------------------------------------------------------------------------------|------------|------------|
| Weighted average grant-date fair value of options                        granted | $.65       | $1.04      |
| Assumptions:                                                                     |       |       |
| Risk free interest rate                                                          | 4.11-5.08% | 4.65-4.71% |
| Expected life                                                                    | 3-5 years  | 2-4 years  |
| Expected volatility                                                              | 40-41%     | 48-95%     |
| Expected dividend yield                                                          | 0%         | 0%         |

 

As of December 31, 2007 the Company had 2,172,500 stock options outstanding        of which 1,044,445 are fully vested. A summary of the activity in the Company’s stock        option plans is as follows for the six months ended December 31, 2007:

 

|                           |   | Share OptionsOutstanding |   | Weighted AverageExercise |   |
|--------------------------------|--------|--------------------------|--------|--------------------------|--------|
| Outstanding, beginning of year |   | 1,510,000                |   | 1.72                     |   |
| Granted                        |   | 805,000                  |   | 1.93                     |   |
| Exercised                      |   | (122,500                 | )      | 1.39                     |   |
| Forfeited                      |   | (20,000                  | )      | .16                      |   |
| Outstanding December 31, 2007  |   | 2,172,500                |   | 1.83                     |   |

         

**NOTE 4. SOFTWARE DEVELOPMENT COSTS**

As of December 31, 2007, and June 30, 2007, net capitalized software        development costs totaled $6,714,238 and $5,183,033, respectively. Total costs capitalized        during the six and three months ended December 31, 2007 were $3,079,923 and $1,840,217,        respectively. Accumulated amortization at December 31, 2007 and June 30, 2007 totaled        $1,859,384 and $341,260, respectively. 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 components of amortizable intangible assets as of December 31, 2007 and        June 30, 2007 are as follows:

 

|                         | EstimatedUseful                        Life | Gross CarryingAmount | AccumulatedAmortization | Total       |
|------------------------------|---------------------------------------------|----------------------|-------------------------|-------------|
| Game titles - Strategy First | 10 years                                    | 1,699,568            | (432,097)               | 1,267,471   |
| Game titles – Empire   | 5 years                                     | 23,220,690           | (7,815,263)             | 15,405,427  |
| Balance on December 31, 2007 |                                        | $24,920,258          | ($8,247,360)            | $16,672,898 |
|                         | EstimatedUseful                        Life | Gross CarryingAmount | AccumulatedAmortization | Total       |
| Game titles - Strategy First | 10 years                                    | 1,635,552            | (334,032)               | 1,301,520   |
| Game titles – Empire   | 5 years                                     | 23,437,099           | (4,127,430)             | 19,309,669  |
| Balance on June 30, 2007     |                                        | $25,072,651          | ($4,461,462)            | $20,611,189 |

 

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Amortization expense for intangible assets for the three and six month        periods ended December 31, 2007 were $2,322,596 and $4,434,262, respectively. Amortization        expense for intangible assets for the three and six month periods ended December 31, 2006        were $630,827 and $673,188, respectively. Estimated amortization expense for the rest of        fiscal 2008 and for the succeeding five fiscal years is as follows:

| 2008       | $2,245,680  |
|------------|-------------|
| 2009       | 4,271,077   |
| 2010       | 4,364,958   |
| 2011       | 3,050,063   |
| 2012       | 1,430,559   |
| 2013       | 690,711     |
| Thereafter | 619,850     |
|       | $16,672,898 |

**NOTE 6. CASH FLOWS**

 

|                                                                                      | Six Months Ended December 31, |       |
|-------------------------------------------------------------------------------------------|-------------------------------|------------|
| Changes in operating assets and liabilities                    consist of the following:  | 2007                          |       | 2006 |   |
| Decrease in accounts receivable                                                           | $                             | 2,378,479  |   | $ | 111,813 |   |
| (Increase) decrease in inventories                                                        |                          | (36,695    | ) |   | 12,483 |   |
| Decrease (increase) in prepaid expenses and current                    assets             |                          | 263,756    |   |   | (149,128 | ) |
| Software development costs capitalized                                                    |                          | (3,079,923 | ) |   | — |   |
| (Decrease) increase in accounts payable                                                   |                          | (2,809,953 | ) |   | 643,151 |   |
| Decrease in refundable deposits                                                           |                          | (630,403   | ) |   | — |   |
| Decrease in accrued expenses                                                              |                          | (955,835   | ) |   | 990,744 |   |
|                                                                                      |                          | (4,870,574 | ) | $ | 1,609,063 |   |
| Issuance of shares of common stock for debt repayment                                     | $                             | 3,600,000  |   |   | — |   |
| Issuance of shares of common stock for payment of acquisition                    expenses |                          | —    |   | $ | 723,000 |   |
| Issuance of notes payable to former Empire                    shareholders                |                          | —    |   | $ | 5,208,502 |   |
| Contingent on earn out targets being achieved                                             |                          | —    |   | $ | 12,051,061 |   |

 

**Empire Interactive**

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 was based on a formula of Empire’s EBITDA (as defined) for the fiscal year        ended June 30, 2007. The earn out has been calculated and the Company’s December 31,        2007 balance sheet includes a liability of approximately $3.8 million (£1.96 million)        (excluding interest) based on the December 31, 2007 foreign exchange rate of $1.9973 US        dollars to the British pound.

The aggregate purchase price for Empire’s stock was approximately        $17.98 million (£9.22 million) (after adjusting for the actual earn out payable)        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 matured October 31, 2007 (of        which $5.1 million had been repaid as of December 31, 2007) and $3.8 million are loan notes        payable in April 2008 (of which $0.00 had been repaid as of December 31, 2007). $.7 million        of the acquisition expenses were paid by the issuance of 406,180 shares of        Silverstar’s Class A common stock. Of this amount 350,000 shares were issued to a        consultant to the Company as a finder’s fee for the transaction pursuant to his        consulting contract. The consultant was subsequently appointed Chairman of the Board of        Empire. Of the remaining $8.3 million of the purchase price approximately $7.9 million has        been paid by utilizing the Company’s internal cash resources. The remaining $.4        million has been accrued as a short-term liability.

The purchase price was allocated on the basis of the estimated fair values        of the assets acquired and liabilities assumed.

         

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*SILVERSTAR HOLDINGS        LTD - 10-Q*

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The fair value of the assets acquired and liabilities assumed exceeded the        purchase price and, therefore, the excess was allocated as a pro-rata reduction of        non-current assets, specifically intangible assets. The acquisition was accounted for as a        purchase. The intangible assets identified in connection with the acquisition were recorded        and are being amortized in accordance with the provisions of SFAS No. 141 and        142.

Purchase price:

| Net assets acquired: |   |   |       |   |
|----------------------|--------|--------|------------|--------|
| Current assets       |   | $      | 3,226,228  |   |
| Fixed assets         |   |   | 898,804    |   |
| Intangible assets    |   |   | 23,238,073 |   |
| Other assets         |   |   | 608,650    |   |
| Total assets         |   |   | 27,971,755 |   |
| Total liabilities    |   |   | (9,987,976 | )      |
|                 |   | $      | 17,983,779 |   |

 

 

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

 

|              |   | Six Months Ended                        December 31, |
|-------------------|--------|------------------------------------------------------|
|              |   | 2006                                                 |   |
| Net revenues      |   | $13,673,946                                          |   |
| Net loss          |   | ($3,994,991                                          | ) |
| Loss per share:   |   |                                                 |   |
| Basic and diluted |   | ($0.42                                               | ) |

**NOTE 8. DEBT**

**Lines of Credit**

In June 2002, the Company obtained a secured line of credit facility for        borrowings up to $1.0 million, which is fully secured by cash balances held in the        Company’s account. This liability is due on demand and has a floating interest rate        that is based on the prime rate minus 1.75%. On December 31, 2007, the prime rate was        7.25%. The balance outstanding under this line of credit at December 31, 2007 and June 30,        2007 was $731,675 and $590,990 respectively.

Empire has a line of credit secured by its receivables, inventory, and        intangible assets. As of December 31, 2007 and June 30, 2007 the amount outstanding under        this facility was $1,440,501 (£721,224) and $2,284,482 (£1,140,018),        respectively. The line of credit accrues interest at an annual rate of 8.75%.

**Notes Payable**

On December 31, 2007 the Company owed $94,061 in notes payable to former        shareholders of Empire pursuant to the offer made for the acquisition of Empire. The        Company owed $5,475,179 on these notes at June 30, 2007. This amount accrued interest at 4%        per annum and was payable on October 31, 2007. All note holders who have tendered their        notes have been paid in full.

The Company owed $3,916,851 as of December 31, 2007 as earn out        consideration based on Empire’s EBITDA for the fiscal year ended June 30, 2007 and is        payable on April 30, 2008. The balance on these notes at June 30, 2007 was $3,847,426.        Interest accrued at 4 % per annum beginning November 1, 2007.

**NOTE 9. CONVERTIBLE SECURED DEBENTURE**

On October 31, 2005, the Company 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 the 2005 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”).

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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. During the six months ended December        31, 2007, the Purchaser converted the remaining $3,600,000 outstanding principal amount of        the 2005 Debenture for 2,164,899 shares of Class A common stock. The Company paid 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%.

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        the option of the Purchaser, into shares of common stock at a conversion price of $1.738        per share.

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 Purchaser and the Company amended the terms of the 2006 Debenture in        June 2007. Under the terms of the amendment (i) the maturity date of the 2005 Debenture was        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 is subject to volume requirements.

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 for entering into the amendment, 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 2005 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. As a result of the June 2007 debt modification the        remaining fair values of the Warrant is being amortized on a straight line method through        April 30, 2010.

During the six months ending December 31, 2007, the Purchaser converted an        aggregate amount of $3,600,000 of their 2005 Debenture in exchange for 2,164,899 shares of        Class A common stock, 479,062 of these shares with a conversion value of $750,000 were        converted during the quarter ended December 31, 2007.

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

 

|                                             |   | December 312007 |      | June 30,2007 |   |
|--------------------------------------------------|--------|-----------------|-----------|--------------|--------|
| Principal amount of notes                        |   | $               | 1,400,000 |         | $      | 5,000,000 |   |
| Discounts for beneficial conversion features     |   |            | (14,861   | )            |   | (58,765 | ) |
| Discounts for fair value of warrants and options |   |            | (38,052   | )            |   | (150,456 | ) |
| Balance, net of unamortized discounts            |   | $               | 1,347,087 |         | $      | 4,790,779 |   |
| Less current portion-                            |   |            | —   |         |   | — |   |
| Long-term portion                                |   | $               | 1,347,087 |         | $      | 4,790,779 |   |

 

| 1 Year or less |   | $      | —   |   |
|----------------|--------|--------|-----------|--------|
| 1-3 Years      |   |   | 1,400,000 |   |
| Total          |   | $      | 1,400,000 |   |

Interest expense related to the notes amounted to $78,184 and $185,754 for        the six months ended December 31, 2007 and December 31, 2006 and $14,292 and $101,500        during the quarters ended December 31, 2007 and 2006 respectively.

 

 

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Amortization of        discounts for the beneficial conversion features and warrant resulted in charges to        Amortization of Convertible Debt Discounts and Issuance Costs totaling $156,308 and        $140,129 for the six months ended December 31, 2007 and December 31, 2006 and $29,114 and        $74,721 during the fiscal quarters ended December 31, 2007 and 2006. The Company also        incurred loan costs of $1,269,119 directly related to securing these notes, which includes        $570,000, (5% of maturity balance charged annually) paid for a personal guarantee on the        outstanding balances. The loan costs were originally amortized over the term of the notes.        As a result of the June 2007 debt modification the remaining loan issuance costs are being        amortized on a straight line method through April 30, 2010.

 

The annual guarantee fees are amortized over twelve months. Amortization        expenses for the guarantee and debt issuance costs totaled $398,608 and $190,403 for the        six months ended December 31, 2007 and December 31, 2006 and $94,633 and $96,704 for the        fiscal quarters ending December 31, 2007 and 2006 are included in Amortization of        Convertible Debt Discounts and Issuance Costs.

**NOTE 10.** **COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS**

In April 2006, the Company’s 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 and had vigorously defended its position in this regard. The Company had        retained an amount of cash equal to the assessments in South Africa to satisfy any        potential liability that may arise.

In May 2007, the Company through an arbitration procedure with SARS reached        an agreement whereby SARS agreed in principle to drop the larger of its two assessments.        The Company conceded the principle of SARS second assessment. On August 31, 2007, the        Company paid approximately $300,000 to SARS in regard to this assessment. The Company is        vigorously disputing a further amount of approximately $770,000 and believes it has strong        arguments in this regard based on among other factors, computational errors made by SARS in        its assessment. Based on its payments to SARS, the Company has reduced its estimated        liability to approximately $325,000. The Company believes its remaining liability to SARS        is lower than this amount, however, in the event its arguments are unsuccessful, it may be        forced to increase this liability.

In August 2007, Empire was served with a lawsuit brought by a former        distributor in Portugal. The lawsuit claims that Empire had no right to utilize other        distributors in Portugal and seeks 630,000 euros (approximately $919,989 based on the        December 31, 2007 foreign exchange rate of $1.4603 US dollars to one Euro) in damages.        Empire believes this claim has no merit as its distribution agreements are tailored for        individual products only and do not give blanket distribution rights to outside        distributors. Empire intends to vigorously defend        itself.

**Commitments and Contingencies**

During the first quarter of fiscal 2006, the Company entered into agreements        with two of Strategy First’s game developers to guarantee certain of their royalty        payments. The guarantee is limited to $100,000. Royalties owed to these developers as of        December 31, 2007 are less than $20,000.

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

On March 29, 2006, Strategy First entered into an agreement to acquire        certain intellectual property rights for $200,000 in cash and the issuance of options to        acquire 100,000 shares of the Company’s common stock at an exercise price of $1.50.        The options vest when net sales, as defined in the purchase agreement, exceed $750,000 and        expire on December 31, 2008. The agreement also provides for commissions of twenty-five        percent of net sales in the event they exceed $500,000 through December 31, 2008. As of        December 31, 2007 revenues earned since inception under this agreement totaled        approximately $360,000.

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On December 4, 2006, the Company announced that it had achieved more than        90% acceptance of the Company’s offer to acquire the shares of Empire. Based on these        acceptances, the Company announced a formal closing of the offer to Empire shareholders        effective December 1, 2006. The Company paid consideration to the shareholders as follows:        approximately $6.8 million paid at closing; an additional $5.5 million in loan notes        payable on October 31, 2007; and further contingent consideration of $3.9 million based on        Empire’s EBIDTA for the 12 months ended June 30, 2007 and due on April 30, 2008. As        of December 31, 2007 all amounts have been satisfied except for the April 30, 2008 payment        of approximately $3.9 million and approximately $0.1 million on the loan notes payable that        were due October 31, 2007.

**NOTE 11. NEW ACCOUNTING PRONOUNCEMENTS**

On February 15, 2007, the 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 instrument, (b) is irrevocable unless a        new election date occurs, and (c) must be applied to the entire instrument and not to 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. The Company is currently        evaluating the impact of SFAS 159, if any, on its consolidated financial        statements.

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        de-recognition, 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 evaluated the potential impact of FIN 48 on its        consolidated financial statements and has not identified any material uncertain tax        positions requiring disclosure under this interpretation.

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 December 2007, the FASB issued SFAS No. 141(R), Business        Combinations, or SFAS 141(R). SFAS 141(R) establishes principles and requirements for how        the acquirer of a business recognizes and measures in its financial statements the        identifiable assets acquired, the liabilities assumed, and any non-controlling interest in        the acquiree. SFAS 141(R) also provides guidance for recognizing and measuring the goodwill        acquired in the business combination and determines what information to disclose to enable        users of the financial statements to evaluate the nature and financial effects of the        business combination. The provisions of SFAS 141(R) are effective for financial statements        issued for fiscal years beginning after December 15, 2008. We are currently assessing        the financial impact of SFAS 141(R) on our consolidated financial statements.

 

 

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*SILVERSTAR HOLDINGS        LTD - 10-Q*

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In December 2007, the FASB issued SFAS 160, Non-controlling Interests in        Consolidated Financial Statements — An Amendment of ARB No. 51, or SFAS 160.        SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial        Statements,” or ARB 51, to establish accounting and reporting standards for the        non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This        statement also amends certain of ARB 51’s consolidation procedures for consistency        with the requirements of SFAS 141(R). In addition, SFAS 160 also includes expanded        disclosure requirements regarding the interests of the parent and its non-controlling        interest. The provisions of SFAS 160 are effective for fiscal years beginning March 1,        2009. Earlier adoption is prohibited. We are currently assessing the financial impact of        SFAS 160 on our consolidated financial statements.

**NOTE 12. PRIVATE PLACEMENT**

Pursuant to a purchase agreement, dated July 2, 2007, by and among the        Company and certain accredited investors, the Company sold an aggregate of 6,206,891 shares        (the “Shares”) of its common stock and warrants (the “Warrants”) to        purchase up to 4,344,826 shares of its common stock at an exercise price of $2.10 per        share, at a price per unit of $1.45.

The sale an issuance of the Shares and Warrants was structured to close in        two closings. The first closing was completed on July 5, 2007, pursuant to which the        Company sold and issued an aggregate of 2,057,495 Shares and Warrants to purchase up to an        aggregate of 1,440,234 shares of its common stock. The second closing was completed on        September 6, 2007, pursuant to which the Company sold and issued an aggregate of 4,149,396        shares of its common stock and Warrants to purchase up to 2,904,592 shares of its common        stock at the second closing. Net proceeds received from the sale of the Shares and Warrants        under this agreement totaled $7,915,264 which consisted of gross proceeds from the sale of        stock and warrants of $8,995,995 less issuance costs of $1,084,731.

**NOTE 13. SALE OF REAL PROPERTY**

Empire Interactive (Europe), Ltd. owned a freehold commercial business        premises at Unit 2, Kings Meadow, Olney Mead, Oxford OX2 0ES. The premises occupy 3,514        square feet and were vacant since November 2006. The sale of this property was finalized on        November 30, 2007. The property was recorded on the balance sheet as a current asset at        June 30, 2007 in accordance with SFAS 144. Net proceeds from the sale of this property were        $646,973 and the gain recognized totaled $93,918.

| **NOTE 14.** | **SUBSEQUENT EVENTS** |
|--------------|-----------------------|

None

 

 

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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 the        Company’s condensed consolidated financial statements and the related notes included        therein and the Company’s Annual Report on Form 10-K for the year ended June 30,        2007.

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, 2007.

**Background and History**

We were incorporated in September 1995. Our business plan is to actively        manage and grow our presence in the interactive software entertainment industry both        organically and through acquisitions.

We sold our last remaining South African operations in November 2000        although 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 South African Rand against the US dollar        and, therefore, as long as we hold assets denominated in South African Rand we will        continue to record income statement gains or losses to the extent that the South African        Rand’s value fluctuates relative to the US dollar.

On April 21, 2005, we acquired Strategy First, a leading worldwide publisher        of entertainment software for the PC. We acquired Strategy First through the jurisdiction        of the Montreal bankruptcy court. Pursuant to the approved plan of arrangement, we paid (i)        cash consideration to the creditors of Strategy First of $609,000; (ii) issued 377,000        shares of our common stock; (iii) issued warrants to purchase 200,000 shares of our common        stock; and (iv) assumed approximately $400,000 in existing bank debt, as well as contingent        consideration based on the future profitability of Strategy First.

On December 4, 2006, we announced that we had achieved more than 90%        acceptance of our offer to acquire the shares of Empire. Based on these acceptances, we        announced a formal closing of the offer to Empire shareholders effective December 1, 2006.        We paid consideration to the shareholders as follows: approximately $6.8 million paid at        closing and an additional $5.5 million in loan notes which were paid in full during this        quarter. Additionally, further contingent consideration of approximately $3.8 million based        on Empire’s EBIDTA for the 12 months ended June 30, 2007 and this is due on April 30,        2008.

         

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**Quarter Ended December 31, 2007 As Compared to Quarter Ended December 31,        2006**

**Revenues**

Revenues increased $7.836 million to $10.797 million during the second        quarter of fiscal 2008 as compared to $2,961 million in the comparable quarter of the        previous year. This increase was primarily the result of the acquisition of Empire        Interactive PLC during our last fiscal year. Of this increase $8.178 million is due to the        Empire acquisition. Empire’s revenue included in the comparable quarter was for only        one month and was $2.040 million as compared to $10.219 for this quarter. Empire’s        revenue is derived primarily from sales of console games and PC games while Strategy First        solely sells PC games.

**Cost of Sales**

The cost of sales was $4.218 million in the second quarter of fiscal 2008,        or 39.1% of total revenues. For the comparable quarter of the previous year, cost of sales        was $1.252 million or 42.3% of revenues. This increase was primarily the result of the        inclusion of Empire’s cost of sales of $3.998 million for the full quarter as        compared to $.968 for one month in the comparable quarter last year. Cost of goods sold        consists primarily of the actual tangible costs of the product along with any labor and        overhead costs.

**Development and Royalties**

Development and royalty costs decreased $.586 million for the second quarter        of fiscal 2008 over the comparable quarter in the previous year. This was primarily due to        a change in accounting policies which the Company implemented in the third quarter of 2007.        After the acquisition of Empire the Company analyzed when technical feasibility of        Empire’s products was reached under SFAS #86. Based on its analysis, the Company        determined to it’s satisfaction that there is a clearly defined decision point early        in development process where a product passes from concept to commercial feasibility. The        Company therefore decided to capitalize software development costs after approval. As a        result the Company expensed $693,268 in development costs in the comparable quarter last        year which would have been capitalized had the new accounting policy been in place at that        time. The development and royalty expense consists primarily of royalty expenses due to        third party holders of intellectual property rights. Additionally it includes certain        development costs which are not capitalized. These costs are primarily related to the        oversight and quality control of development projects. These costs are primarily reflected        in the Company’s payroll expenses.

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses for the second quarter of        fiscal 2008 were $4.194 million, or 38.8% of sales, as compared to $1.451 million, or 49.0%        of sales, for the comparable quarter of the previous year. Of this variance $2.515 million        was due to the inclusion of Empire for a full quarter versus one month in the comparable        quarter last year. Empire’s SG&A consists mostly of administrative, marketing and        sales staff primarily in the United Kingdom. Corporate overhead expenses increased $.296        million primarily as the result of increased non-cash compensation, and increased payroll        expenses as we have added management level employees to oversee our significantly increased        business.

**Amortization and Depreciation**

Amortization of software development costs and intangible assets in the        second quarter of fiscal 2008 increased $2.650 million over the comparable quarter of the        previous year due to the inclusion of $2.280 of amortization of intangible assets acquired        in the Empire acquisition and $.959 million of Empire’s software development costs        amortized in this period as opposed to $.631 million of amortization of intangibles and no        amortization of software development costs in the comparable period last year. Depreciation        expense was $38 thousand for the second quarter of fiscal 2008 and $25 thousand in the        comparable quarter of the previous year, an increase of $22 thousand. This was due to        including depreciation of Empire’s assets for a full quarter versus one month in the        comparable quarter. Empire’s assets comprise primarily of computers and furniture and        fixtures.

         

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**Foreign Currency Gains (Losses)**

Foreign currency gains or losses are the result of        subsidiaries of the Company using different functional currencies and arise from        fluctuations of the subsidiaries base currency against the US dollar. The functional        currency of Empire interactive and Strategy First are the British pound and the        Canadian dollar respectively. Gains (losses) from discontinued South African operations are        the result of fluctuations of the South African Rand against the US dollar. Foreign        currency losses during the second quarter of fiscal 2008 were $0.081 million and consisted        of gains of $0.022 million related to the remaining assets from the sale of discontinued        South African operations and losses of $ 0.104 million recognized by our operating        subsidiaries. Foreign currency gains during the second quarter of fiscal 2007 were $0.357        million and consisted of gains of $0.263 million related to the remaining assets from the        sale of discontinued South African operations and gains of $0.094 million recognized by our        operating subsidiaries.

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

Amortization of convertible debt discounts and issuance costs were $.124        million in the second quarter fiscal 2008 as compared with $.171 million during the        comparable quarter in the previous year. These expenses relate to the issuance of our $5        million convertible debenture to DKR SoundShore Oasis in October 2005. The decrease of        $48,000 is due primarily to the conversion of $3.6 million of debentures into approximately        2,150,000 shares of common stock.

**Interest Income**

Interest income of $76,000 was recorded for the second quarter of fiscal        2008 as compared to interest income of $159,000 for the comparable quarter of the previous        year. The decrease of $83,000 is primarily the result of the Company’s lower average        cash balances.

**Interest Expense**

Interest expense of $133,000 was recorded for the second quarter of fiscal        2008 as compared to $258,000 in the comparable quarter of the previous year. Interest        expense decreased primarily as the result of lower interest charges on the convertible        debenture security due to lower principal amounts outstanding.

**Provision for Income Taxes**

We are registered in Bermuda, where no income tax laws are applicable. Three        of our subsidiaries are subject to US income taxes, three 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 significant taxable income and        overall the Company 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 $623,000 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 and had        vigorously defended its position in this regard. The Company had retained an amount of cash        equal to the assessments in South Africa to satisfy any potential liability that may        arise.

In May, 2007, the Company through an arbitration procedure with SARS reached        an agreement whereby SARS agreed in principle to drop the larger of its two assessments.        The Company conceded the principle of SARS second assessment. On August 31, 2007, the        Company paid approximately $300,000 to SARS in regard to this assessment. The Company is        vigorously disputing a further amount of approximately $770,000 and believes it has strong        arguments in this regard based on among other factors, computational errors made by SARS in        its assessment. Based on its payments to SARS, the Company has reduced its estimated        liability to approximately $325,000. The Company believes its remaining liability to SARS        is lower than this amount, however, in the event its arguments are unsuccessful, it may be        forced to increase this liability.

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**Net Loss**

We have recognized a net loss of $1.514 million during second        quarter fiscal 2008 compared to a net loss of $1.302 million during the same comparable        quarter in the previous year. The operating loss for the three months ending December 31,        2007 was $1.345 million as compared to $1.386 million for the comparable period in the        prior year which only included Empire’s results of operations for one month. The        major component of this operating loss was amortization of acquired intangibles and        software development costs of $3.281 million. There was non-cash stock compensation        of$0.133 million as well as common shares issued for services of        $0.024 million. Operating EBITDA Income (loss) was $2.140 million for the quarter ended        December 31, 2007 and ($0.616) million for the three months ending December 31,        2006.

|                                          |  

                         

Quarters Ended December 31, |         |
|-----------------------------------------------|---------------------------------------------------------------------|--------------|
|                                          | 2007                                                                |         | 2006 |   |
| Operating EBITDA reconciliation:              |                                                                |         |   |   |
| Operating loss                                | ($1,344,590                                                         | )            | ($1,385,879 | ) |
| Depreciation                                  | 47,173                                                              |         | 24,948 |   |
| Amortization of intangibles                   | 2,322,596                                                           |         | 630,827 |   |
| Amortization of software development costs    | 958,526                                                             |         | — |   |
| Stock -based compensation                     | 132,793                                                             |         | 54,400 |   |
| Shares issued for services                    | 24,391                                                              |         | 58,740 |   |
| Operating EBITDA                              | $2,140,889                                                          |         | ($616,964 | ) |
| Operating EBITDA per share                    | $0.11                                                               |         | $0.07 |   |
|                                     |                                                           |    |    |  |
| Weighted average number of shares outstanding | 19,771,824                                                          |         | 9,431,657 |   |

See Note 4 to the financial statements for the amount of software        development costs capitalized during the period.

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

**Revenues**

Revenues increased $11.436 million to $14.676 million during the first six        months of fiscal 2008 as compared to $3.240 million in the comparable six months of the        previous year. This increase was primarily the result of the acquisition of Empire        Interactive PLC during our last fiscal year. Of this increase $11.544 million is due to the        Empire acquisition. Empire’s revenue included in the comparable six months was for        only one month and was $2.040 million as compared to $13.634 million for six months.        Empire’s revenue is derived primarily from sales of console games and PC games while        Strategy First solely sells PC games.

**Cost of Sales**

The cost of sales was $5.817 million for the first six months of fiscal        2008, or 39.6% of total revenues. For the comparable six months of the previous year, cost        of sales was $1.372 million or 42.3% of revenues. This increase was primarily the result of        the inclusion of Empire’s cost of sales of $4.470 million for the six months quarter        as compared to $.968 million for one month in the comparable period last year. Cost of        goods sold consists primarily of the actual tangible costs of the product along with any        labor and overhead costs.

**Development and Royalties**

Development and royalty costs decreased $40,000 for the first six months of        fiscal 2008 over the comparable period in the previous year. This was primarily due to a        change in accounting policies which the Company implemented in the third quarter of 2007.        After the acquisition of Empire the Company analyzed when technical feasibility of        Empire’s products was reached under SFAS #86. Based on its analysis, the Company        determined to it’s satisfaction that there is a clearly defined decision point early        in development process where a product passes from concept to commercial feasibility. The        Company therefore decided to capitalize software development costs after approval. As a        result the Company expensed $693,268 in development costs in the comparable period last        year which would have been capitalized had the new accounting policy been in place at that        time. The development and royalty expense consists primarily of royalty expenses due to        third party holders of intellectual property rights. Additionally it includes certain        development costs which are not capitalized. These costs are primarily related to the        oversight and quality control of development projects. These costs are primarily reflected        in the Company’s payroll expenses

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses for the first six months of        fiscal 2008 were $7.152 million, or 48.7% of sales, as compared to $2.065 million, or 63.7%        of sales, for the comparable period of the previous year. Of this variance $4.634 million        was due to the inclusion of Empire for six months versus one month in the comparable period        last year. Empire’s SG&A consists mostly of administrative, marketing and sales        staff primarily in the United Kingdom. Corporate overhead expenses increased $.514 million        primarily as the result of increased non-cash compensation, and increased payroll expenses        as we have added management level employees to oversee our significantly increased        business.

**Amortization and Depreciation**

Amortization of software development costs and intangible assets in the        first six months quarter of fiscal 2008 increased $5.310 million over the comparable period        of the previous year due to the inclusion of $4.350 million of amortization of intangible        assets acquired in the Empire acquisition and $1.549 million of Empire’s software        development costs amortized in this period as opposed to $.631 million of amortization of        intangibles and no amortization of software development costs in the comparable period last        year. Depreciation expense was $91,000 for the first six months of fiscal 2008 and $33,000        in the comparable period of the previous year, an increase of $58,000. This was due to        including depreciation of Empire’s assets for a full quarter versus one month in the        comparable quarter. Empire’s assets comprise primarily of computers and furniture and        fixtures.

**Foreign Currency Gains (Losses)**

Foreign currency gains or losses are the result of subsidiaries of the        Company using different functional currencies and arise from fluctuations of the        subsidiaries base currency against the US dollar. The functional currency of Empire        interactive and Strategy First are the British pound and the Canadian dollar respectively.        Gains (losses) from discontinued South African operations are the result of fluctuations of        the South African Rand against the US dollar. Foreign currency gains during the six months        ending December 31, 2007 were $0.053 million and consisted of gains of $0.067 million        related to the remaining assets from the sale of discontinued South African operations and        losses of $ 0.014 million recognized by our operating subsidiaries. Foreign currency gains        during the six months ending December 31, 2007 were $0.095 million and consisted of gains        of $0.010 million related to the remaining assets from the sale of discontinued South        African operations and gains of $ 0.085 million recognized by our operating        subsidiaries.

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

Amortization of convertible debt discounts and issuance costs were $.555        million in the first six months of fiscal 2008 as compared with $.331 million during the        comparable period in the previous year. These expenses relate to the issuance of our $5        million convertible debenture to DKR SoundShore Oasis in October 2005. The increase of        $.224 million is due primarily to the accelerated amortization upon the conversion of $3.6        million of debentures in to approximately 2,150,000 shares of common stock.

**Interest Income**

Interest income of $146 thousand was recorded for the first six months of        fiscal 2008 as compared to interest income of $314 thousand for the comparable six months        of the previous year. The decrease of $168 thousand is primarily the result of the        Company’s average lower cash balances.

**Interest Expense**

Interest expense of $.301 million was recorded for the first six months        of fiscal 2008 as compared to $.361 million in the comparable six months of the previous        year. Interest expense decreased primarily as the result of lower interest charges on the        convertible debenture security due to lower principal amounts outstanding.

**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, one subsidiary is subject to Canadian        income taxes and one is subject to South African income taxes. Up to this date, none of        them has had taxable income as they have incurred losses for tax purposes. The deferred tax        asset generated by the tax losses and temporary differences has been fully        reserved.

In 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 and had        vigorously defended its position in this regard. The Company had retained an amount of cash        equal to the assessments in South Africa to satisfy any potential liability that may        arise.

In May, 2007, the Company through an arbitration procedure with SARS reached        an agreement whereby SARS agreed in principle to drop the larger of its two assessments.        The Company conceded the principle of SARS second assessment. On August 31, 2007, the        Company paid approximately $300,000 to SARS in regard to this assessment. The Company is        vigorously disputing a further amount of approximately $770,000 and believes it has strong        arguments in this regard based on among other factors, computational errors made by SARS in        its assessment. Based on its payments to SARS, the Company has reduced its estimated        liability to approximately $325,000. The Company believes its remaining liability to SARS        is lower than this amount, however, in the event its arguments are unsuccessful, it may be        forced to increase this liability.

**Net Loss**

We have recognized a net loss of $5.961 million during the first two        quarters of fiscal 2008 compared to a net loss of $2.243 million during the comparable        period in the previous year. Net operating loss for the six months ending December 31, 2007        was $5.382 million as compared to $1.959 million for the comparable period in the prior        year which only included Empire’s results of operations for one month. The major        component of this operating loss was amortization of acquired intangibles and software        development costs of $5.983 million. There was non-cash stock compensation $0.234 million        as well as common shares issued for services of $0.024 million. Operating EBITDA Income        (loss) was $.950 million for the six months ended December 31, 2007 and ($1.117) million        for the six months ending December 31, 2006.

         

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|                                          |         | Quarters Ended December 31 |         |
|-----------------------------------------------|--------------|----------------------------|--------------|
|                                          |         | 2007                       |         | 2006 |   |
| Operating EBITDA reconciliation:              |         |                       |         |   |   |
| Operating loss                                |         | ($5,382,025                | )            | ($1,958,789 | ) |
| Depreciation                                  |         | 90,827                     |         | 32,678 |   |
| Amortization of intangibles                   |         | 4,434,262                  |         | 673,188 |   |
| Amortization of software development costs    |         | 1,548,632                  |         | — |   |
| Stock-based compensation                      |         | 234,631                    |         | 77,585 |   |
| Shares issued for services                    |         | 24,391                     |         | 58,740 |   |
| Operating EBITDA                              |         | $950,718                   |         | ($1,116,598 | ) |
| Operating EBITDA per share                    |         | $0.06                      |         | ($0.12 | ) |
|                                     |    |                  |    |    |  |
| Weighted average number of shares outstanding |         | 16,931,654                 |         | 9,290,346 |   |

See Note 4 to the financial statements for the amount of software        development costs capitalized during the period.

**Financial Condition, Liquidity and Capital Resources**

Cash decreased by approximately $.730 million from $4.757 million at June        30, 2007 to $4.027 million at December 31, 2007 as a result of paying down short term        liabilities.

The cash balances are being held for acquisitions and working capital        purposes. Included in this amount is $1.519 million 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 deficit decreased by $6.885 million from a deficit $12.700        million at June 30, 2007 to a deficit of $5.814 million at December 31, 2007. This decrease        is primarily due to the result of net proceeds from a closing of a financing of        approximately $8.000 million as well as repayment of a portion of notes payable to former        Empire shareholders.

At December 31, 2007 we had net borrowings of $2.172 million which consisted        of advances against the two lines of credit one secured by the Company’s cash the        other secured by substantially all of Empires assets. Additionally, we have $1.400 million        face amount outstanding in our convertible debenture issued to DKR SoundShore Oasis. The        carrying value of this debenture at December 31, 2007 net of unamortized warrants and stock        conversion features is approximately $1.347 million. We currently pay monthly interest on        this amount at a rate of prime plus 1.5%. However, there is an offset of this interest        based on share price. During December 2007 the nominal interest rate was approximately        8.25%. The Company also had seller note obligations of approximately $3.9 million at        December 31, 2007.

Historically, the Company has met its cash flow requirements through the        sale of debt or equity securities, 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. In order to meet its current short term deficiency, the        Company’s plans are as follows:

|   | • | Raise additional capital through the exercise of existing                        warrants and the sale of equity or debt securities. The Company currently                        has approximately 4.65 million warrants outstanding with exercise prices                        ranging from $1.55 to $2.50. The Company has a continuing relationship with                        an investment banking firm to assist it should it decide to raise                        additional capital in the future. During the last three months                        approximately 892,178 of options and warrants were exercised totaling                        $1,462,402. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Generate significant short term operating earnings and cash                        flow primarily through its Empire. Empire’s title release schedule                        for the next 12 months includes several multi-platform games most notably                        Hello Kitty and PipeMania. The Company anticipates that the launch of these                        games, along with Empire’s ongoing business will generate operating                        profits and cash flow in the short term. Empire continues to explore US                        distribution agreements with major entertainment publishers which would                        provide significant short term cash flow to the Company. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | The Company has approximately $787,000 of restricted cash                        set aside to match its current South African tax assessment. The Company                        believes that it has strong arguments to set aside this assessment. If this                        assessment is set aside, this cash would be available for                        operations. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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The Company believes that these actions and others to be taken by it will        provide the opportunity for it to meet its short term deficiency, improve liquidity and        achieve positive cash flow. However, there can be no assurance that any of these events        will occur.

**Critical Accounting Policies**

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

**Revenue Recognition**

The company distributes the majority of its products through third-party        software distributors to mass-merchant and major retailers and directly to certain PC        software retailers, all of which have traditionally sold consumer entertainment software        products. Additionally, the Company may license its products to distributors in exchange        for royalty payments. The distribution of products is governed by purchase orders,        distribution agreements or direct sale agreements, most of which allow for product returns        and price markdowns. On a product by product basis, based on historical data the Company        records a provision from 4% to 30% 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 Company will review the adequacy of its allowance for product returns and price        markdowns and if necessary will make adjustments to this allowance on a quarterly basis. In        the case of royalty income, the Company will record this income when earned based on sales        reports from its distributors. In many cases, the company receives 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**

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 (“commercial feasibility). The Company has 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. To date, 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.

At December 31, 2006 the Company was performing an analysis to determine        when technical feasibility is achieved. December 2006 software development costs of        $693,268 were expensed during the quarter ended December 31, 2006. Upon completion of the        analysis during the quarter ended March 31, 2007, the Company capitalized these December        2006 software 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.

 

|                                                                              |   |   |   | Six Months  |   | Quarter     |   | Quarter   |   |
|-----------------------------------------------------------------------------------|--------|--------|--------|-------------|--------|-------------|--------|-----------|--------|
|                                                                              |   |   |   | Ended       |   | Ended       |   | Ended     |   |
|                                                                              |   |   |   | 12/31/2006  |   | 12/31/2006  |   | 9/30/2006 |   |
| Net loss as reported                                                              |   |   |   | ($2,243,109 | )      | ($1,301,671 | )      | ($941,438 | )      |
| Effect of change in estimate                                                      |   |   |   | 693,268     |   | 693,268     |   | 0         |   |
| Net loss assuming capitalization starting December 1,                        2006 |   |   |   | ($1,549,841 | )      | ($608,403   | )      | ($941,438 | )      |
| Loss per share as reported:                                                       |   |   |   |        |   |        |   |      |   |
| Basic and diluted                                                                 |   |   |   | ($0.24      | )      | ($0.14      | )      | ($0.10    | )      |
| Basic and diluted                                                                 |   |   |   | ($0.17      | )      | ($0.06      | )      | ($0.10    | )      |

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**Goodwill Valuation**

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

The Company reviews goodwill annually (or more frequently under certain        conditions) for impairment in accordance with SFAS No. 142, goodwill and other intangible        assets. The Company performed its annual impairment test of goodwill as of June 30, 2007        and determined that goodwill was not impaired. While the Company believes that no        impairment existed as of December 31, 2007, there can be no assurances that future economic        or financial developments might not lead to an impairment of goodwill.

I**ntangible Assets**

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

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.

 

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**ITEM 3      QUANTITATIVE AND QUALITATIVE        DISCLOSURES ABOUT MARKET RISK**

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

**Interest Rate Risk**

At December 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 December 31, 2007, the Company had a convertible note        outstanding amounting to $1,400,000. The interest on the convertible note is based on a        floating rate equal to prime plus 1.5%. A hypothetical 100 basis point change in interest        rates would result in an approximately $14,000 change in annual interest        expense.

Approximately $2.2 million of our debt accrues interest at rates that vary        with changes in the US and UK prime rates. We estimate that, at our current level of debt,        for each 1% increase in the average annual prime interest rate, our annual interest expense        would increase by approximately $22,000.

 

**Foreign Currency Risk**

Empire is incorporated in the United Kingdom and sells products throughout        Europe, the United States and Canada. Its functional currency is the British pound. This        has exposed the Company to market risk with respect to fluctuations in the relative value        of the Euro, the Canadian dollar, 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.

The Company currently does not hedge its South African Rand exposure. At        December 31, 2007, we had assets denominated in South African Rand of R 17.4 million ($2.5        million).

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**ITEM 4.      ****CONTROLS AND PROCEDURES**

At the end of the period covered by this report, the Company carried out an        evaluation, with the participation of management of the Company, including the        Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness        of the design and operation of the Company’s disclosure controls and procedures.        Based on the Company’s evaluation, the Company’s Chief Executive Officer and        Chief Financial Officer concluded that the Company’s disclosure controls and        procedures were effective. There was no change in the Company’s internal control over        financial reporting during the quarter ended December 31, 2007 that has materially        affected, or is reasonably likely to materially affect, the Company’s 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. 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 had retained an amount of cash        equal to the assessments in South Africa to satisfy any potential liability that may        arise.

In May, 2007, the Company through an arbitration procedure with SARS reached        an agreement whereby SARS agreed in principle to drop the larger of its two assessments.        The Company conceded the principle of SARS second assessment. On August 31, 2007, the        Company paid approximately $300,000 to SARS in regard to this assessment. The Company is        vigorously disputing a further amount of approximately $770,000 and believes it has strong        arguments in this regard based on among other factors, computational errors made by SARS in        its assessment. Based on its payments to SARS, the Company has reduced its estimated        liability to approximately $325,000. The Company believes its remaining liability to SARS        is lower than this amount, however, in the event its arguments are unsuccessful, it may be        forced to increase this liability.

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. On October 4, 2008 the Vienna        Municipal Court dismissed the Company’s claims against Jowood. The Company has        decided not to file an appeal in this matter.

In August 2007, Empire was served with a lawsuit brought by a former        distributor in Portugal. The lawsuit claims that Empire had no right to utilize other        distributors in Portugal and seeks 630,000 euros (approximately $919,989 based on the        December 31, 2007 foreign exchange rate of $1.4603 US dollars to one Euro) in damages.        Empire believes this claim has no merit as its distribution agreements are tailored for        individual products only and do not give blanket distribution rights to outside        distributors. Empire intends to defend itself vigorously.

**ITEM 1A. RISK FACTORS**

There have been no material changes in the risks facing the Company as        described in the Company’s Form 10-K for the year ended June 30, 2007.

**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.

 

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**ITEM 5. OTHER INFORMATION**

None.

**ITEM 6. EXHIBITS**

 

| Exhibit Number | Description                                                                                                                                  |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1           | Rule 13a-14(a) Certification                        of Chief Executive Officer                                                               |
| 31.2           | Rule 13a-14(a) Certification                        of Chief Financial Officer                                                               |
| 32.1           | Section 1350 Certification                        of Chief Executive Officer                                                                 |
| 32.2           | Section 1350 Certification                        of Chief Financial Officer

                         

                          |

 

 

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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: February 14, 2008

SILVERSTAR HOLDINGS, LTD.

               /s/Clive        Kabatznik                

                  Clive        Kabatznik

            Chief        Executive Officer

              /s/Lawrence        Litowitz               

                Lawrence        Litowitz

              Chief        Financial Officer

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