================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

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

                  For the quarterly period ended June 30, 2004


                                       or


|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the Transition Period From            to
                                     ----------     ------------

                         Commission File number 0-024828

                               ------------------

                            SPECTRE INDUSTRIES, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)



            NEVADA                                       98-0226032
(STATE OR OTHER JURISDICTION OF               (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)


                            45 Parker Avenue, Suite A
                            Irvine, California 92618
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)


                                 (949) 855-6688
                           (ISSUER'S TELEPHONE NUMBER)


                               ------------------


Check whether the Registrant  (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.


                                 Yes |_| No |X|


 As of August 16, 2004 there were 3,976,868. shares of Common Stock outstanding.

                  Transitional Small Business Disclosure Format


                                 Yes |_| No |X|

================================================================================

<PAGE>


                                      INDEX

PART I.   FINANCIAL INFORMATION.............................................  1

Item 1.   Consolidated Financial Statements: (unaudited)....................  1

          Consolidated Balance Sheet as of June 30, 2004 (unaudited)........  1

          Consolidated  Statements of Operations  for the three months
          ended June 30, 2004 and 2003 (unaudited)..........................  2

          Consolidated  Statements  of  Operations  for the six months
          ended June 30, 2004 and 2003 (unaudited)..........................  3

          Consolidated  Statements of Changes in Stockholder's  Equity
          (Deficiency) for the six months ended June 30, 2004 (unaudited)...  4

          Consolidated  Statements  of Cash  Flows for the six  months
          ended June 30, 2004 and 2003 (unaudited)..........................  5

          Notes to Consolidated Financial Statements (unaudited)............  6

Item 2.   Management's Discussion and Analysis or Plan of Operations........ 18

Item 3.   Controls and Procedures........................................... 26

PART II.  OTHER INFORMATION................................................. 27

Item 1.   Legal Proceeding.................................................. 27

Item 2.   Changes In Securities and Small Business Issuer Purchases of
          Equity Securities................................................. 27

Item 3.   Defaults Upon Senior Securities................................... 27

Item 4.   Submission Of Maters To a vote Of Security Holders................ 27

Item 5.   Other Information................................................. 27

SIGNATURES.................................................................. 28


<PAGE>


                                     PART I

                              FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS.

                            SPECTRE INDUSTRIES, INC.
                           CONSOLIDATED BALANCE SHEET
                            June 30, 2004 (unaudited)

ASSETS

CURRENT ASSETS:
     Cash                                                           $    40,087
     Accounts receivable                                                117,904
     Inventories, net                                                   212,446
     Prepaid expenses and other current assets                           45,666
     Assets of subsidiary held for disposition                           89,111
                                                                    -----------

             TOTAL CURRENT ASSETS                                       505,214

PROPERTY AND EQUIPMENT                                                  373,913

INVESTMENT IN AFFILIATED ENTITY                                              --

OTHER ASSETS                                                             54,112
                                                                    -----------
                                                                    $   933,239
                                                                    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES:
     Accounts payable and accrued expenses                          $   442,683
     Lines of credit                                                    132,984
     Due to shareholder                                                  13,000
     Due to investors                                                   367,002
     Notes payable to related party                                     222,666
     Current portion of obligations under capital leases                  7,372
     Liabilities of subsidiary held for disposition                     525,690
                                                                    -----------
             TOTAL CURRENT LIABILITIES                                1,711,397

LONG TERM LIABILITIES:
     Obligations under capital leases                                    38,014

COMMITMENTS AND CONTINGENCIES                                                --

STOCKHOLDERS' EQUITY (DEFICIENCY):
     Common stock: At June 30, 2004, $.001 par
      value;
         6,666,667 shares authorized, 3,976,868
      shares issued and outstanding                                       3,977
     Additional paid in capital                                       4,054,109
     Deferred compensation                                             (196,020)
     Accumulated deficit                                             (4,678,238)
                                                                    -----------
             TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)                   (816,172)
                                                                    -----------
                                                                    $   933,239
                                                                    ===========

          See accompanying notes to consolidated financial statements.


                                       1
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                         For Three Months Ended June 30,

                                              2004          2003
                                          -----------    -----------

REVENUE                                   $   196,197    $    98,068

COST OF SALES                                 104,976         60,104
                                          -----------    -----------
GROSS PROFIT                                   91,221         37,964

OPERATING EXPENSES:                           375,855        123,337
                                          -----------    -----------
LOSS FROM OPERATIONS                         (284,634)       (85,373)

OTHER INCOME (LOSS):
     Interest and dividend income                  --              2
     Miscellaneous income                      15,922             73
     Loss from assets held for disposal       (29,216)            --
                                          -----------    -----------
             TOTAL OTHER INCOME (LOSS)        (13,294)            75
                                          -----------    -----------

LOSS BEFORE PROVISION FOR
     INCOME TAXES                            (297,928)       (85,298)

PROVISION FOR INCOME TAXES                        800            800
                                          -----------    -----------
NET LOSS                                  $  (298,728)   $   (86,098)
                                          ===========    ===========
NET INCOME PER COMMON SHARE -
     Basic and diluted                    $     (0.10)   $     (0.03)
                                          ===========    ===========

WEIGHTED AVERAGE NUMBER OF COMMON
     SHARES OUTSTANDING -
     Basic and diluted                      3,048,862      2,466,868
                                          ===========    ===========


          See accompanying notes to consolidated financial statements.


                                       2
<PAGE>


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (Unaudited)
                          For Six Months Ended June 30,

                                                         2004           2003
                                                     -----------    -----------

REVENUE                                              $   303,476    $   214,751

COST OF SALES                                            205,533        157,933
                                                     -----------    -----------

GROSS PROFIT                                              97,943         56,818

OPERATING EXPENSES:                                      615,919        301,033
                                                     -----------    -----------
LOSS FROM OPERATIONS                                    (517,976)      (244,215)

OTHER INCOME (LOSS):
     Interest income                                        --                3
     Miscellaneous income                                 15,922            131
     Loss from assets held for disposal                  (29,216)          --
                                                     -----------    -----------
             TOTAL OTHER INCOME (LOSS)                   (13,294)           134
                                                     -----------    -----------

LOSS BEFORE PROVISION FOR
     INCOME TAXES                                       (531,270)      (244,081)

PROVISION FOR INCOME TAXES                                   800            800
                                                     -----------    -----------
NET LOSS                                             $  (532,070)   $  (244,881)
                                                     ===========    ===========
LOSS PER COMMON SHARE -
     Basic and diluted                               $     (0.19)   $     (0.10)
                                                     ===========    ===========

WEIGHTED AVERAGE COMMON AND
     DILUTIVE COMMON EQUIVALENT SHARES OUTSTANDING :
     Basic and diluted                                 2,816,883      2,466,868
                                                     ===========    ===========


          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>


<TABLE>
<CAPTION>

                                                      SPECTRE INDUSTRIES, INC.

                               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
                                                 For Six Months Ended June 30, 2004
                                                             (Unaudited)


                                                                    ADDITIONAL
                                              COMMON STOCK            PAID-IN       DEFERRED       ACCUMULATED
                                           SHARES        AMOUNT       CAPITAL      COMPENSATION      DEFICIT         TOTAL
                                        -------------  -----------  ------------  -------------   -------------  -------------
<S>                                     <C>            <C>          <C>           <C>             <C>             <C>
Balance, January 1, 2004                    2,584,905 $      2,585  $  4,212,864  $    (220,770)  $  (4,146,168) $    (151,489)

Transfer of Spectre stock at time of
merger and recapitalization                 1,391,872        1,392      (408,755)            --              --       (407,363)

Intrinsic value of common stock warrants
issued with notes payable                          --           --       250,000             --              --        250,000

Amortization of deferred compensation              --           --            --         24,750              --         24,750

 Net loss for six months
   ended June 30, 2004                             --           --            --                       (532,070)      (532,070)
                                        -------------  -----------  ------------  --------------  -------------  -------------

Balance, June 30, 2004                      3,976,777  $     3,977  $  4,054,109  $    (196,020)  $  (4,678,238) $    (816,172)
                                        =============  ===========  ============  ==============  =============  =============


                                    See accompanying notes to consolidated financial statements.


</TABLE>


                                                                        4
<PAGE>


                            SPECTRE INDUSTRIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                          For Six Months Ended June 30,


                           INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>

CASH FLOWS FROM OPERATING ACTIVITIES                                     2004         2003
                                                                      ---------    ---------
<S>                                                                   <C>          <C>
Net loss                                                              $(532,070)   $(244,881)
Adjustments to reconcile net loss to net
cash used in operating activities:
     Depreciation and amortization                                       57,363       56,910
     Amortization of discount cost on notes payable                     218,446           --
     Amortization of deferred compensation                               24,750           --
     Net loss from assets held for disposal                              29,216           --
     Changes in operating assets and liabilities:
         Accounts receivable                                            (50,366)     (33,823)
         Inventories                                                    (12,914)       5,017
         Accounts payable and accrued expenses                           80,050       80,379
         Prepaid expenses and other current assets                      (41,559)      (7,164)
                                                                      ---------    ---------

         NET CASH USED IN OPERATING ACTIVITIES                         (227,084)    (143,562)
                                                                      ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of equipment                                                   (51,927)          --
                                                                      ---------    ---------


CASH FLOWS FROM FINANCING ACTIVITIES

Line of credit                                                               --      124,100
Advances from shareholder and others                                     13,000       23,663
Proceeds from investor                                                  250,000           --
Capital leases                                                           45,386           --
                                                                      ---------    ---------

         NET CASH PROVIDED BY FINANCING ACTIVITIES                      308,386      147,763
                                                                      ---------    ---------

NET INCREASE IN CASH                                                     29,375        4,201

CASH AND CASH EQUIVALENTS,
     BEGINNING OF PERIOD                                                 10,712        5,716
                                                                      ---------    ---------

CASH AND CASH EQUIVALENTS, END OF PERIOD                              $  40,087    $   9,917
                                                                      =========    =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     Cash paid for:

         Interest                                                     $   6,110    $   2,588
         Taxes                                                        $     800    $     800

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

     Capital lease obligations incurred in purchase of equipment      $  45,386    $      --
     Merger

         Fair value of assets                                         $ 118,327    $      --
         Less: liabilities assumed                                      525,690           --
                                                                      ---------
         Merger, net                                                  $(407,363)          --
                                                                      =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

NOTE 1    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          (A)  ORGANIZATION AND DESCRIPTION OF BUSINESS

          On May 24, 2004, Spectre Industries,  Inc.,  (Spectre) a Nevada public
          corporation, entered into an agreement and plan of merger (the Merger)
          with Advanced Custom Sensors,  Inc. (ACSI,  the Company and accounting
          acquirer).  Spectre (the legal acquirer) issued  38,773,581  pre-split
          shares of common stock (2,584,905  post-split  shares) and warrants to
          purchase up to 79,535,549  pre-split shares of common stock (5,302,370
          post-split  shares)  to the  shareholders  of ACSI  (see  Note 12) and
          transferred  all of its assets to ACSI,  ACSI assumed all of Spectre's
          liabilities,  and ACSI became a wholly  owned  subsidiary  of Spectre.
          Immediately  prior to the  Merger,  Spectre  had  nominal  assets  and
          limited  business  operation  and  accordingly,  the Merger,  which is
          similar to a reverse acquisition of Spectre by ACSI, was accounted for
          as a  recapitalization.  The consolidated  financial  statements as of
          June 30,  2004,  and for the periods  then ended are those of ACSI for
          all periods  presented  and those of Spectre  since the date of merger
          and recapitalization.

          ACSI,  incorporated  in the State of California on June 21, 1996, is a
          manufacturer  and  assembler  of sensors  and micro  systems,  and its
          products  include thin film sensors,  thin film  pressure  sensors and
          micro-machined  pressure  sensors,  and micro systems that may include
          sensors, signal conditioning circuits, LCD display, computer interface
          and molded housing specifically designed to the customers needs.

          (B)  BASIS OF PRESENTATION

          The accompanying financial statements have been prepared in conformity
          with accounting  principles generally accepted in the United States of
          America,  which  contemplate  continuation  of the  Company as a going
          concern.  However,  for six months  ended June 30,  2004,  the Company
          suffered a loss of $532,070 and utilized cash in operating  activities
          of $227,084,  and has a working capital deficiency of $1,206,183 and a
          stockholders'  deficiency  of  $816,172  as of June  30,  2004.  These
          factors  raise  substantial  doubt  about  the  Company's  ability  to
          continue  as  a  going  concern.  Without  realization  of  additional
          capital,  it would be unlikely  for the Company to continue as a going
          concern.  These  financial  statements do not include any  adjustments
          relating to the  recoverability  and  classification of recorded asset
          amounts,  or amounts  and  classification  of  liabilities  that might
          result from this uncertainty.

          Management  believes that actions are presently  being taken to revise
          the Company's operating and financial requirements in order to improve
          the Company's financial position and operating results. However, given
          the levels of its cash  resources  and working  capital  deficiency at
          June 30, 2004,  management believes cash to be generated by operations
          will not be  sufficient  to meet  anticipated  cash  requirements  for
          operations, working capital, and capital expenditures during 2004. The
          Company completed a reverse merger on with Spectre Industries, Inc., a
          public  company,  to gain  access to the United  States  and  European
          capital markets,  but there can be no assurances that the Company will
          ultimately be successful in this regard.



                                       6
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

          (C)  USE OF ESTIMATES

          The preparation of financial  statements in conformity with accounting
          principles  requires management to make estimates and assumptions that
          affect the reported amounts of assets and  liabilities,  disclosure of
          contingent  assets  and  liabilities  at the  date  of  the  financial
          statements,  and the reported  amounts of revenues and expenses during
          the  reporting   period.   Actual  results  could  differ  from  those
          estimates.

          (D)  REVENUE RECOGNITION

          The Company  recognizes revenue when goods are shipped and invoiced to
          the customer.

          (E)  CONCENTRATION OF CREDIT RISK

          The Company's financial instruments that are exposed to concentrations
          of credit risk consist principally of cash and trade receivables.  The
          Company  places  its  cash  in what it  believes  to be  credit-worthy
          financial  institutions.  However,  cash  balances  may have  exceeded
          federally insured levels at various times during the year. The Company
          has not experienced any losses in such accounts and believes it is not
          exposed  to  any  significant   risk  in  cash.  The  Company's  trade
          receivables  result  primarily  the  sale  of its  products,  and  the
          concentration   of  credit  risk  includes  a  customer  base  located
          throughout North America and Asia.

          Approximately  90% the  Company's  sales  were to  customers  in North
          America  in the three and six  months  ended  June 30,  2004 and 2003,
          respectively.

          (F)  INVENTORIES

          Inventories  are  stated  at the  lower of cost  (first-in,  first-out
          method) or market.

          (G)  PROPERTY AND EQUIPMENT

          Property and equipment is stated at cost.  Depreciation is provided at
          the time  property  and  equipment  is  placed  in  service  using the
          straight-line  method over the  estimated  useful lives of the assets,
          which range from three to seven years.


                                       7
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

          (H)  INCOME TAXES

          The Company  accounts for income  taxes using the asset and  liability
          method  whereby  deferred  income  taxes  are  recognized  for the tax
          consequences of temporary  differences by applying statutory tax rates
          applicable  to future years to the  differences  between the financial
          statement  carrying  amounts  and the tax bases of certain  assets and
          liabilities.  Changes in deferred tax assets and  liabilities  include
          the impact of any tax rate changes enacted during the year.

          (I)  FAIR VALUE OF FINANCIAL INSTRUMENTS

          The Company  believes  that the carrying  value of its cash,  accounts
          receivable, accounts payable, accrued liabilities, line of credit, due
          to investors,  due to shareholder,  and notes payable to related party
          as of June 30, 2004,  approximates their respective fair values due to
          the demand or short-term nature of those instruments.

          (J)  RECLASSIFICATIONS

          The  Company  has  reclassified  certain  accounts  in the prior  year
          financial  statements  to conform to the  presentation  of the current
          year financial statements.

          (K)  STOCK BASED COMPENSATION

          As described in Note 12, the Company has elected to follow  Accounting
          Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
          Employees," for stock-based  compensation and to furnish the pro forma
          disclosures  required under SFAS No. 148,  "Accounting for Stock-Based
          Compensation - Transition and Disclosure".

          (L)  EARNINGS (LOSS) PER SHARE

          Basic earnings (loss) per common share (EPS) are based on the weighted
          average  number of  common  shares  outstanding  during  each  period.
          Diluted  earnings  per  common  share are based on shares  outstanding
          (computed as under basic EPS) and potentially  dilutive common shares.
          As of June 30, 2004,  the Company had granted  employee  stock options
          for 146,500  shares of common  stock in ACSI and  warrants to purchase
          565,666 shares of common stock in ACSI that are  potentially  dilutive
          common  shares.  The  dilutive  effect of  common  stock  options  and
          warrants were not used to compute dilutive loss per share for 2004 and
          2003 because the result of their inclusion would be anti-dilutive.


                                       8
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

          (M)  NOTE PAYABLE-DEBT DISCOUNT COST

          The Company has issued  warrants to an investor  and a related  party.
          The warrants are being treated as additional  consideration  for notes
          payable.  The  deferred  cost of the warrants  was  determined  as the
          difference  between the  exercise  price of the  warrants and the most
          recent issue price and is being amortized over the term of the related
          notes payable (see Notes 7 and 8).

          (N)  NEW ACCOUNTING PRONOUNCEMENTS

          In January  2003,  the  Financial  Accounting  Standards  Board (FASB)
          issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
          Interest  Entities,"  which  clarifies the  application  of Accounting
          Research  Bulletin  No.  51,  "Consolidated   Financial   Statements,"
          relating to consolidation of certain  entities.  In December 2003, the
          FASB issued a revised FIN 46 "46R" that  replaced the original FIN 46.
          FIN  46R  requires  identification  of a  company's  participation  in
          variable interest entities (VIEs),  which are defined as entities with
          a level of  invested  equity  that is not  sufficient  to fund  future
          activities to permit it to operate on a standalone basis. For entities
          identified as a VIE, FIN 46R sets forth a model to evaluate  potential
          consolidation  based on an  assessment  of which  party to the VIE (if
          any) bears a majority  of the  exposure  to its  expected  losses,  or
          stands to gain from a majority of its expected  returns.  FIN 46R also
          sets forth certain  disclosures  regarding  interests in VIEs that are
          deemed significant, even if consolidation is not required. The Company
          is not currently participating in, or invested in any VIEs, as defined
          in FIN 46R.

          In April  2003,  the FASB issued  Statement  of  Financial  Accounting
          Standards (SFAS),  No. 149,  "Amendment of Statement 133 on Derivative
          Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
          financial accounting and reporting for derivative instruments embedded
          in other  contracts  and for  hedging  activities  under SFAS No. 133.
          "Accounting for Derivative  Instruments and Hedging Activities." It is
          effective for contracts  entered into or modified after June 30, 2003,
          except  as  stated  within  the  statement,   and  should  be  applied
          prospectively.  Management  believes the  provisions  of this Standard
          currently  have no effect on our  financial  position  or  results  of
          operations.

          In May 2003,  the FASB issued SFAS No.  150,  "Accounting  for Certain
          Financial  Instruments  with  Characteristics  of both Liabilities and
          Equity."  SFAS  No.  150  establishes  standards  for  how  an  issuer
          classifies and measures in its statement of financial position certain
          financial  instruments  with  characteristics  of both liabilities and
          equity.  SFAS No. 150  requires  that an issuer  classify a  financial
          instrument  that is within  its scope as a  liability  (or an asset in
          some  circumstances)  because that  financial  instrument  embodies an
          obligation  of the issuer.  SFAS No. 150 is  effective  for  financial
          instruments  entered into or modified after May 31, 2003 and otherwise
          is effective at the  beginning of the first interim  period  beginning
          after June 15, 2003.  SFAS No. 150 is to be  implemented  by reporting
          the  cumulative  effect  of  a  change  in  accounting  principle  for
          financial instruments created before the issuance date of SFAS No. 150
          and still existing at the beginning of the interim period of adoption.
          Restatement  is not  permitted.  The Company  does not expect that the
          adoption  of SFAS  No.  150  will  have a  significant  effect  on the
          Company's financial statement presentation or disclosures.


                                       9
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

          O.   INTERIM CONSOLIDATED FINANCIAL STATEMENTS

          The consolidated  financial statements as of and for the three and six
          months ended June 30, 2004 and 2003 are  unaudited.  In the opinion of
          management,   such  consolidated   financial  statements  include  all
          adjustments   (consisting  only  of  normal   recurring   adjustments)
          considered  necessary for the fair  presentation  of the  consolidated
          financial  position and the  consolidated  results of operations  have
          been included.  The  consolidated  results of operations for the three
          and six months ended June 30, 2004 are not  necessarily  indicative of
          the results to be expected for the full year.

NOTE 2    INVENTORIES

          Inventories consist of the following as of June 30, 2004:

          Cable                                                       $  15,984
          Raw materials                                                 127,264
          Work in process                                                10,850
          Finished goods                                                 58,348
                                                                      ---------
                                                                      $ 212,446
                                                                      =========

NOTE 3    PROPERTY AND EQUIPMENT

          Property and equipment consists of the following as of June 30, 2004:

          Machinery and equipment                                     $ 587,417
          Office equipment                                                2,636
          Furniture and fixtures                                         17,398
          Leasehold improvements                                        143,637
          Property held under capital leases                             47,365
                                                                      ---------
                                                                        798,453

          Less accumulated depreciation and amortization
          (including $1,578 for property held under capital leases)     424,540
                                                                      ---------
                                                                      $ 373,913
                                                                      =========

          Depreciation  expense  of  $57,363 is  reflected  in the  accompanying
          Statement of Operations for the six months ended June 30, 2004.


                                       10
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

NOTE 4    INVESTMENT IN AFFILIATED ENTITY

          The  Company  owns 14.3% of  TransOptix,  Inc.  (TransOptix,  formerly
          Advanced  Optical  Mems,  Inc.),  a company  that is  involved  in the
          manufacture and  distribution of computer  peripheral  equipment.  The
          Company's Chief Executive  Officer is also the Chief Executive Officer
          of TransOptix and the officer also owns 15% of TransOptix. As a result
          of the combined  equity  holdings of TransOptix by the Company and its
          Chief  Executive  Officer,  the Company  accounts for this  investment
          under the equity method of accounting.  The Company initially invested
          $200,000 in TransOptix in 2000,  and  discontinued  using applying the
          equity method at December 31, 2002 when cumulative  losses reduced the
          Company's investment in TransOptix to zero.  Accordingly,  the Company
          did not record any loss from  TransOptix  for the three and six months
          periods ended June 30, 2004 and 2003.  The Company did not receive any
          distribution  from  TransOptix  in  2004  or  2003.  The  Company  and
          TransOptix  share the same office and facility  (see Note 10).  During
          the six months ended June 30, 2004, the Company advanced approximately
          $24,000 to TransOptix.  There were no other  transactions  between the
          Company and TransOptix in 2004 or 2003.

          Summarized  condensed unaudited financial  information for TransOptix,
          Inc. is as follows:

                                 BALANCE SHEETS
                                  DECEMBER 31,
                                   (Unaudited)

                                                                         2003
                                                                      ---------

          Current assets                                              $ 366,314
          Fixed assets, net                                             351,023
          Due from Advanced Custom Sensors, Inc.                            298
                                                                      ---------
                                                                      $ 717,635
                                                                      =========

          Current liabilities                                         $  51,108
          Note payable - stockholder                                     37,494
          Note payable                                                  809,334
          Stockholders' equity                                         (180,301)
                                                                      ----------
                                                                      $ 717,635
                                                                      =========

                                                                         2003
                                                                      ---------
          Revenues                                                    $  94,099
          Cost of revenues                                               26,893
                                                                      ---------
          Gross profit                                                   67,206
          Operating expenses                                          1,002,704
                                                                      ---------
                                                                       (935,498)
          Other income (expenses)                                           213
                                                                      ---------
          Net loss                                                    $(935,285)
                                                                      =========


                                       11
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

NOTE 5    SUPPLIERS

          As of June 30, 2004, the Company  maintained net assets  consisting of
          tooling of approximately  $160,000,  at their main supplier located in
          Taiwan.   Although   this  country  is  considered   politically   and
          economically  stable, it is possible that unanticipated events in this
          foreign  country could disrupt the  operations of the Company  because
          their main supplier is located  there,  has  possession of the tooling
          assets, and manufactures the products.

NOTE 6    LINES OF CREDIT

          The Company has the following lines of credit at June 30, 2004:

          Loan  agreement,  bank that  includes  two lines of  credit,
          secured by accounts  receivable  and  certain  assets of the
          Company, interest at 7.25% per annum, due on demand.        $  92,984

          Line of credit with a bank,  secured by accounts  receivable
          and certain  assets of the Company,  interest at 7.0972% per
          annum, due on demand.                                          40,000
                                                                      ---------
                                                                      $ 132,984
                                                                      =========

NOTE 7    NOTES PAYABLE TO INVESTORS

          The Company has the  following  notes payable to investors at June 30,
          2004:

          Note  payable,  convertible  to  common  stock,  secured  by
          accounts  receivable  and  certain  assets  of the  Company,
          interest  at 10% per annum,  due March 9, 2004.  The Company
          negotiated  a settlement  in  September,  2004,  whereby the
          Company  will repay the  lender  $90,000  and issue  200,000
          shares of common stock to the lender in satisfaction of this
          loan.                                                       $ 250,000

          Note  payable,  secured by accounts  receivable  and certain
          assets  of the  Company,  interest  10%  per  annum,  due on
          October 2, 2004. In 2003, in connection  with this loan, the
          Company issued  warrants to purchase 25,000 shares of ACSI's
          common stock at $.50 per share.  The intrinsic  value of the
          warrants  was valued at $25,000 in  accordance  with APB No.
          25. (a)                                                        25,000

          Note  payable,  secured by accounts  receivable  and certain
          assets of the Company,  interest at 10%, due on February 11,
          2005.  In  connection  with this loan,  the  Company  issued
          warrants to purchase  250,000  shares of ACSI's common stock
          at $.50 per share.  The intrinsic  value of the warrants was
          valued at $250,000 in accordance with APB No. 25. (a)         250,000

          Note payable-debt discount cost (a)                          (157,998)
                                                                      ---------
                                                                      $ 367,002
                                                                      =========


                                       12
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)


NOTE 8    NOTES PAYABLE TO RELATED PARTY

          The Company has the  following  notes payable to related party at June
          30, 2004:

          Note payable, related party (a)                               190,665
          Other operating advances (b)                                  100,000
          Note payable-debt discount cost (c)                           (67,999)
                                                                      ---------
                                                                      $ 222,666
                                                                      =========

          (a)  The Company was advanced  $190,665 by  TransOptix  in 2002 to pay
               for the  Company's  lease  deposit of $50,000  and for  leasehold
               improvements  of $140,665 to its leased  facility  (see Note 10).
               During  2003,  the  advances  made by  TransOptix  in  2002  were
               combined  into a promissory  note  payable to the assignee  dated
               July 1, 2003,  with  interest at 9.25% per annum due December 31,
               2004.  The note is  secured  by  substantially  all assets of the
               Company.

          (b)  Other  operating  advances  of  $100,000  were  made by the above
               related  party note  holder to the  Company as of  September  17,
               2003.  These  advances are  evidenced by a promissory  note dated
               September 17, 2003, with interest at 10% per annum, due September
               16, 2004.

          (c)  In connection  with the above notes  payable,  the Company issued
               warrants to purchase  290,665  shares of ACSI's  common  stock at
               $.50 per share.  The intrinsic  value of the warrants were valued
               at $290,665 in accordance with APB No. 25

NOTE 9    CAPITAL LEASE OBLIGATIONS

          The Company is the lessee of machinery  under  capital  leases,  which
          expire in March  2009.  The assets and  liabilities  under the capital
          leases are  recorded at the lower of the present  value of the minimum
          lease  payments or the fair market value of the asset.  The assets are
          depreciated  over their  estimated  useful lives.  Depreciation of the
          assets is included in depreciation expense.


                                       13
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

          Minimum future lease payments under the capital leases are as follows.

          Year Ended June 30,

                  2005                                                $  12,732
                  2006                                                   12,732
                  2007                                                   12,732
                  2008                                                   12,732
                  2009                                                    9,909
                                                                      ---------
          Total minimum lease payments                                   60,837
          Less amount representing interest                              15,451
                                                                      ---------
          Present value of net minimum lease payments                 $  45,386
                                                                      =========

NOTE 10   COMMITMENT AND CONTINGENCIES

          OPERATING LEASES

          The Company  leases its office and facility  through 2007 under a long
          term operating lease agreement.  Under terms of the lease, the Company
          pays the cost of repairs  and  maintenance.  The office and  warehouse
          facility is shared with  TransOptix (see Note 4), who signed the lease
          as co-tenant with the Company. The Company and TransOptix have entered
          into  an  agreement  stipulating  each  entities  share  of the  rent,
          however,  in  event  of  default  by  TransOptix,  the  Company  could
          contingently be liable for the full amount of the rent.

          Future minimum lease  commitments  for the Company's  share under this
          lease at June 30, 2004 are as follows:

          Year Ended June 30,

                  2005                                                $ 102,977
                  2006                                                  105,033
                  2007                                                  117,255
                                                                      ---------
                                                                      $ 325,265
                                                                      =========

          The total lease  commitment  as of June 30, 2004 for which the Company
          could be contingently  liable in the event of default of TransOptix is
          approximately $753,000. Rent expense for the six months ended June 30,
          2004 was $68,548.


                                       14
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

NOTE 11   INCOME TAXES

          As of December 31, 2003,  the Company had federal net  operating  loss
          carryforwards  of approximately  $2,499,000  expiring in various years
          through 2023,  which can be used to offset future taxable  income,  if
          any. No deferred tax asset benefit for these operating losses has been
          recognized in the financial  statements  due to the  uncertainty as to
          their realization in future periods.

          The  Company's  net  deferred  tax assets  (using a federal  corporate
          income rate of 34%) consisted of the following at June 30, 2004:

          Deferred tax asset, net operating loss carryforwards.       $ 850,000
          Less valuation allowance                                     (850,000)
                                                                      ---------
          Net deferred income tax asset                               $      --
                                                                      =========


          As a result of the Company's  significant  operating loss carryforward
          and the  corresponding  valuation  allowance,  no  federal  income tax
          expense (benefit) has been recorded at June 30, 2004.

NOTE 12   STOCKHOLDERS' DEFICIENCY

          Subsequent to the Merger,  on June 8, 2004, the Company had a 1 for 15
          reverse  stock  split  that was  approved  by the board of  directors.
          Retroactive  effect has been given to all share and per share  amounts
          that are presented in the accompanying financial statements.

          STOCK OPTION PLAN

          ACSI has a stock  option  plan,  which  provides  for the  granting of
          options to employees, independent representatives and directors of the
          Company.  ACSI is authorized to issue 200,000  shares of common stock.
          The exercise price is fixed by the plan administrator. Under a formula
          contained in the plan's  provisions,  the options vest over four years
          upon the completion of service.  The options expire ten years from the
          date of grant.

          The Company has applied the  disclosure  provisions  of  Statement  of
          Financial  Accounting  Standards No. 148,  "Accounting for Stock-Based
          Compensation  -  Transition  and  Disclosure  - An  Amendment  of FASB
          Statement  No.  123," for the six months  period  ended June 30, 2004.
          Issued in December 2002, SFAS No. 148 amends SFAS No. 123. "Accounting
          for  Stock-Based  Compensation"  to  provide  alternative  methods  of
          transition  for a voluntary  change to the fair value based  method of
          accounting for  stock-based  compensation.  In addition,  SFAS No. 148


                                       15
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

          amends  the  disclosure  requirements  of  SFAS  No.  123  to  require
          prominent  disclosures in both annual and interim financial statements
          about the method of accounting for stock-based  employee  compensation
          and the effect of the method  used on  reported  results.  For the six
          months ended June 30, 2004,  as there was no active  public  market or
          other  indication of the value of the shares  underlying  the options,
          the Company has not assigned any  additional  fair market value to the
          options in excess of it intrinsic value  calculated in accordance with
          APB No. 25.  Accordingly,  no supplemental  pro forma  disclosures are
          presented.  For the six months period ended June 30, 2004,  the 10,000
          of incentive  stock options  issued for ACSI common stock did not have
          any fair value using the  Black-Scholes  valuation model and therefore
          there are no pro forma compensation costs presented.

          The following schedule summarizes the status of options outstanding to
          purchase ACSI shares of common stock at June 30, 2004:

                                                                       AVERAGE
                                                                       EXERCISE
                                                           SHARES       PRICE
                                                         ----------   ---------

          Balance at January 1, 2004                        136,500   $     .50
          Granted                                            10,000   $     .50
          Exercised                                              --
          Cancelled                                              --
                                                         ----------   ---------
          Balance at June 30, 2004                          146,500   $     .50
                                                         ==========   =========
          Options exercisable at June 30, 2004               74,250   $     .50
                                                         ==========   =========

          WARRANTS

          During  the  period  ended  June 30,  2004,  in  conjunction  with the
          issuance of certain  notes payable (see Note 7) the board of directors
          approved  the  issuance  of  warrants  to  purchase a total of 250,000
          shares of ACSI's common stock.  The warrants are  exercisable  at $.50
          per share,  are fully  vested upon  issuance  and expire in five years
          from issuance. The warrants had a total fair value of $250,000,  which
          is being  accounted  for as notes  payable-debt  discount  cost and is
          being amortized over the life of the related debt.

          Outstanding at January 1, 2004                                315,666
          Issued during the period ended June 30, 2004                  250,000
          Exercised during the period ended June 30, 2004                    --
                                                                      ---------
          Outstanding at June 30, 2004                                  565,666
                                                                      =========


                                       16
<PAGE>


                            SPECTRE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                   (UNAUDITED)

          At June 30, 2004,  2004, all warrants  issued had an exercise price of
          $.50 per share. The warrants expired on various dates through February
          2009.

          In connection with the Merger, the Company agreed to adopt a plan at a
          later date that would provide an  equivalent  value to the warrant and
          option holders at the date of Merger.

NOTE 13   ASSETS AND LIABILITIES OF SUBSIDIARY HELD FOR DISPOSITION

          The Company has agreed that they will  "spin-off"  certain  assets and
          liabilities  that were acquired in  connection  with the Merger on May
          24, 2004.  These assets and liabilities will be rolled over to Spectre
          Holdings, Inc. (Specter Holdings, a new subsidiary) and a distribution
          in the form of a dividend of 1,391,872  post split shares  (20,878,082
          pre split shares) of common stock in Spectre  Holdings will be made to
          the shareholders of record of Spectre as of May 21, 2004 (prior to the
          Merger).


                                       17
<PAGE>


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

STATEMENTS IN THIS REPORT ON FORM 10-QSB THAT ARE  FORWARD-LOOKING  ARE BASED ON
CURRENT  EXPECTATIONS.  ACTUAL  RESULTS MAY DIFFER  MATERIALLY.  FORWARD-LOOKING
STATEMENTS INVOLVE NUMEROUS RISKS AND UNCERTAINTIES  INCLUDING,  BUT NOT LIMITED
TO, THE POSSIBILITY  THAT THE DEMAND FOR OUR PRODUCTS MAY DECLINE AS A RESULT OF
POSSIBLE  CHANGES IN GENERAL AND  INDUSTRY  SPECIFIC  ECONOMIC  CONDITIONS,  THE
EFFECTS OF  COMPETITIVE  PRICING AND SUCH OTHER RISKS AND  UNCERTAINTIES  AS ARE
DESCRIBED IN THIS REPORT ON FORM 10-QSB AND OTHER DOCUMENTS  PREVIOUSLY FILED OR
HEREAFTER  FILED  BY US FROM  TIME TO TIME  WITH  THE  SECURITIES  AND  EXCHANGE
COMMISSION.  ALL FORWARD-LOOKING  STATEMENTS SPEAK ONLY AS OF THE DATE MADE, AND
WE UNDERTAKE NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.

The following  discussion and analysis  should be read in  conjunction  with the
consolidated  financial  statements and the notes  thereto,  included as part of
this Quarterly Report.

OVERVIEW

      On May 24,  2004,  we acquired  all of the issued and  outstanding  equity
interests of Advanced Custom Sensors,  Inc ("ACSI").  Until we acquired ACSI, we
had only  nominal  assets  and  liabilities  and  limited  business  operations.
Although ACSI became our  wholly-owned  subsidiary  following  the  acquisition,
because the  acquisition  resulted in a change of control,  the  acquisition was
recorded as a "reverse  merger"  whereby ACSI is considered to be the accounting
acquirer. As such, the following results of operations are those of ACSI.

      ACSI was founded by an engineering  management  team with over 50 years of
Micro-electro-mechanical-systems  or "MEMS" transducer experience. Its objective
is to provide high quality  sensors and  transducers  at an economical  price by
employing innovative designs and creative  manufacturing  methods. ACSI offers a
variety of Digital  Pressure Gauges,  Pressure  Transducers,  Pressure  Sensors,
Force Beams, Load Cells, Strain Gauges and Sensor Kits.

      ACSI commenced  operations as a private company in September of 1996. ACSI
is headquartered in Irvine,  California where ACSI occupies a 25,000 square foot
facility  fully  equipped  with  fabrication  capability.  ACSI has fifteen (15)
employees  in  the  United  States,   and  utilizes  a  network  of  independent
contractors and consultants throughout the United States and Asia. ACSI produces
or supplies a family of nearly thirty (30) distinctive  products.  ACSI set up a
volume  production  line with an ISO 9000 partner in Taiwan in 2002. This allows
ACSI to penetrate high-volume consumer markets that are very price sensitive.


                                       18
<PAGE>


      ACSI's MEMS sensor  technology  is the result of a technology  development
work done at Rosemount  and Endevco.  ACSI  believes  that its  technology  will
enable it to become a global supplier of advanced  MEMS/Microelectronic products
in myriad  developing  markets.  ACSI's strategic plan is to focus on developing
custom MEMS pressure sensor devices and forming strategic partnerships where its
strategic  partners  dominate the sales  channels in industries  accepting  MEMS
sensor applications.

      In addition to its core  operational  assets  dedicated to the MEMS sensor
markets,  ACSI owns  approximately 12% of TransOptiX,  Inc.,  ("TransOptiX"),  a
business dedicated to the development and production of high performance optical
switches.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

REVENUES

      We  generated  revenues of $196,197  for the three  months  ended June 30,
2004,  which was $98,129 or a 100%  increase  from  $98,068 for the three months
ended June 30,  2003.  The  increase  is the result of the hiring of a full-time
sales manager and sales  representatives,  and an increase in our  manufacturing
capacity.

GROSS PROFIT

      Gross  profit for the three  months  ended June 30,  2004,  was $91,221 or
46.5% of revenues,  compared to $37,964 or 38.7% for the three months ended June
30, 2003.  The $53,257  increase in gross profit was  generated by a decrease in
cost of sales percentage of 7.7%, which was the result of increased productivity
and management's  efforts to reduce expenses by implementing  salary reductions,
offshore vendor qualification and production tooling improvements.

NET LOSS

      Net loss from  operations  increased  to  ($284,634)  for the three months
ended June 30, 2004  compared to  ($85,373)  for the three months ended June 30,
2003.  The loss as a  percentage  of income  increased  to 145.0%  for the three
months ended June 30, 2004 compared to 87.0% for the three months ended June 30,
2003,  primarily as a result of $157,834 in notes payable - debt discount costs.
The  difference  between the exercise  price of the warrants and the most recent
issue price is being amortized over the term of the notes.


                                       19
<PAGE>


INTEREST EXPENSE

      Interest  expense for the three months  ended June 30, 2004,  increased to
$18,864  compared to $1,802 for the three months ended June 30, 2003,  primarily
due to the accrual of interest on following promissory notes.

      $190,665.44  note to Tina Young with a due date of  December 31, 2004
      $100,000  note to Tina  Young  with a due date of  September  16, 2004
      $25,000 note to Pei Hen Hsu with a due date of October 2, 2004
      $250,000 note to Sino-American with a due date of February 11, 2005

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

REVENUES

      We generated  revenues of $303,476 for the six months ended June 30, 2004,
which was a $88,725 or a 41.3%  increase  from $214,751 for the six months ended
June 30,  2003.  The  increase is the result of the hiring of a full-time  sales
manager,  the addition of new sales  representatives and the introduction of new
products.

GROSS PROFIT

      Gross profit for the six months ended June 30, 2004,  was $97,943 or 32.2%
of  revenues,  compared  to $56,818  or 26.5% for the six months  ended June 30,
2003.  The $41,125  increase in gross profit was generated by a decrease in cost
of sales percentage of 5.7%, which was the result of increased  productivity and
management's efforts to reduce operating expenses by salary reductions, offshore
vendor qualifications, and production tooling improvements

NET LOSS

      Net loss  increased to  ($532,070)  for the six months ended June 30, 2004
compared to  ($244,881)  for the six months ended June 30,  2003.  The loss as a
percentage of income  increased to 175.3% for the six months ended June 30, 2004
from 114.0% for the six months  ended June 30,  2003,  primarily  as a result of
$218,446 of notes  payable - debt discount  costs.  The  difference  between the
exercise  price  of the  warrants  and the  most  recent  issue  price  is being
amortized over the term of the notes.

INTEREST EXPENSE

      Interest  expense for the six months  ended June 30,  2004,  increased  to
$33,078 compared to $2,588 for the six months ended June 30, 2003, primarily due
to the accrual of interest on following promissory notes.

      $190,665.44  note to Tina Young with a due date of  December  31,  2004
      $100,000  note to Tina  Young  with a due date of  September  16,  2004
      $25,000 note to Pei Hen Hsu with a due date of October 2, 2004
      $250,000 note to Sino-American with a due date of February 11, 2005


                                       20
<PAGE>


FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES

      We have relied  primarily on cash flow from  operations,  bank loans,  and
advances and  investments  from our  shareholders  for our capital  requirements
since inception.

          At June 30,  2004,  cash was $40,087 as compared to $9,917 at June 30,
2003.  The  increase  is due to the net cash from  promissory  notes.  We have a
substantial   working  capital  deficit.   We  require  $3,000,000  to  continue
operations for the next three years. We are in the process of raising capital in
the form of equity  and/or debt.  However,  there is no  guarantee  that we will
raise sufficient funds to execute our business plan. To the extent we are unable
to  raise   sufficient   funds,  our  business  plan  will  be  required  to  be
substantially   modified,   the   operations   curtailed  or  protection   under
bankruptcy/reorganization laws sought.

      We are addressing  our liquidity  requirements  by the following  actions:
Continue our programs for selling products;  continue to seek investment capital
through the public and private  markets.  However,  there is no  guarantee  that
these  strategies  will enable us to meet our  obligations  for the  foreseeable
future.

COMMITMENTS AND CONTINGENCIES

      We  have  the  following  material  contractual  obligations  and  capital
expenditure commitments:

      On February 11, 2004, ACSI signed a promissory note with  Sino-American to
form a joint  venture  for a sensor  production  facility in Wuhan,  China.  The
promissory note is for $500,000  payable in two  installments  of $250,000.  The
first payment was made on February 12, 2004.  The second  payment of $250,000 is
due on July 30, 2004.

      We signed an  exclusive  sensor  supplier  contract for a new product line
with a large  company in  commercial  cleaning and  sanitizing.  We will deliver
10,000 sensors annually in 2006.

      We signed a development  and production  contract with a major  automotive
parts supplier in China. This is to develop manifold pressure sensor modules for
diesel engine. We will transfer their production to our joint venture in China.

INFLATION AND CHANGING PRICES

      We doe not  foresee  any  adverse  effects on our  earnings as a result of
inflation or changing prices.

GOING CONCERN

      We have incurred  operating  losses since our inception and have a working
capital deficit and a significant  stockholders' deficit. These conditions raise
substantial doubt about our ability to continue as a going concern.  We need $3M
capital to sustain  operations  and continue  our  business  plan for the next 3
years.


                                       21
<PAGE>


CRITICAL ACCOUNTING POLICIES

      The  preparation  of  financial  statements  and  related  disclosures  in
conformity with accounting principles generally accepted in the United States of
America  requires  management to make judgments,  assumptions and estimates that
affect the amounts reported in the condensed  consolidated  financial statements
and the accompanying notes. The amount of assets and liabilities reported on the
balance sheet and the amounts of revenues and expenses  reported for each of the
fiscal  periods are affected by estimates and  assumptions,  which are used for,
but not limited to, the accounting for revenue recognition, accounts receivable,
doubtful  accounts  and  inventories.   Management  periodically  evaluates  the
estimates and assumptions  made.  Management bases its estimates and assumptions
on  historical  experience  and on  various  factors  that  are  believed  to be
reasonable  under the  circumstances.  Actual  results  could  differ from these
estimates as a result of different assumptions or conditions.

      The following critical accounting  policies are significantly  affected by
judgments,  assumptions  and estimates used in the  preparation of the financial
statements:

      REVENUE RECOGNITION

            We  recognize  revenue  when goods are shipped  and  invoiced to the
      customer

      CONCENTRATION OF CREDIT RISK

            Our  financial  instruments  that are exposed to  concentrations  of
      credit risk consist  principally of cash and trade  receivables.  We place
      our cash in what it believes to be credit-worthy  financial  institutions.
      However,  cash balances may have  exceeded FDIC insured  levels at various
      times during the year. The Company has not  experienced any losses in such
      accounts and believes it is not exposed to any  significant  risk in cash.
      The Company's trade receivables result primarily the sale of its products,
      and the  concentration  of credit risk  includes a customer  base  located
      throughout North America and Asia.

            Approximately  90% our sales were to customers  in North  America in
      the three and six months ended June 30, 2004 and 2003, respectively.

      INVENTORIES

            Inventories  are  stated at the lower of cost  (first-in,  first-out
      method) or market.


                                       22
<PAGE>


      PROPERTY AND EQUIPMENT

            Property and equipment is stated at cost.  Depreciation  is provided
      at the time  property  and  equipment  is  placed  in  service  using  the
      straight-line  method over the estimated useful lives of the assets, which
      range from three to seven years.

      INCOME TAXES

            We account  for income  taxes using the asset and  liability  method
      whereby  deferred income taxes are recognized for the tax  consequences of
      temporary differences by applying statutory tax rates applicable to future
      years to the differences  between the financial statement carrying amounts
      and the tax bases of certain assets and  liabilities.  Changes in deferred
      tax  assets and  liabilities  include  the impact of any tax rate  changes
      enacted during the year.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

            We believe that the carrying value of our cash, accounts receivable,
      accounts payable,  accrued liabilities,  line of credit, due to investors,
      due to  shareholder,  and notes  payable to  related  party as of June 30,
      2004,  approximates  their  respective  fair  values  due to the demand or
      short-term nature of those instruments.

      RECLASSIFICATIONS

            We have  reclassified  certain  accounts in the prior year financial
      statements to conform to the  presentation  of the current year  financial
      statements.

      STOCK BASED COMPENSATION

            As  described  in Note 12,  we have  elected  to  follow  Accounting
      Principles  Board (APB)  Opinion No. 25,  "Accounting  for Stock Issued to
      Employees,"  for  stock-based  compensation  and to furnish  the pro forma
      disclosures  required  under SFAS No.  148,  "Accounting  for  Stock-Based
      Compensation - Transition and Disclosure".

      EARNINGS (LOSS) PER SHARE

            Basic  earnings  (loss)  per  common  share  (EPS)  are based on the
      weighted average number of common shares  outstanding  during each period.
      Diluted  earnings  per  common  share  are  based  on  shares  outstanding
      (computed as under basic EPS) and potentially  dilutive common shares.  As
      of June 30, 2004, we had granted employee stock options for 146,500 shares
      of common stock in ACSI and warrants to purchase  315,666 shares of common
      stock in ACSI that are potentially  dilutive  common shares.  The dilutive
      effect of common  stock  options  and  warrants  were not used to  compute
      dilutive  loss per share  for 2004 and 2003  because  the  result of their
      inclusion would be anti-dilutive.


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<PAGE>


      NOTE PAYABLE-DEBT DISCOUNT COST

            We have  issued  warrants to an investor  and a related  party.  The
      warrants are being treated as additional  consideration for notes payable.
      The deferred cost of the warrants was determined as the difference between
      the exercise  price of the warrants and the most recent issue price and is
      being amortized over the term of the related notes payable.

      OTHER SIGNIFICANT ACCOUNTING POLICIES

            Other significant  accounting  policies not involving the same level
      of measurement  uncertainties  as those discussed  above, are nevertheless
      important to an  understanding of the financial  statements.  The policies
      related  to  consolidation  and  loss   contingencies   require  difficult
      judgments on complex matters that are often subject to multiple sources of
      authoritative  guidance.   Certain  of  these  matters  are  among  topics
      currently  under   reexamination  by  accounting   standards  setters  and
      regulators.  Although no specific  conclusions  reached by these standards
      setters  appear  likely  to  cause a  material  change  in our  accounting
      policies, outcomes cannot be predicted with confidence.

      NEW ACCOUNTING PRONOUNCEMENTS

            In January 2003,  the Financial  Accounting  Standards  Board (FASB)
      issued FASB  Interpretation  No. 46 (FIN 46),  "Consolidation  of Variable
      Interest Entities," which clarifies the application of Accounting Research
      Bulletin  No.  51,  "Consolidated   Financial   Statements,"  relating  to
      consolidation  of certain  entities.  In December  2003, the FASB issued a
      revised FIN 46 "46R" that  replaced  the original FIN 46. FIN 46R requires
      identification of a company's  participation in variable interest entities
      (VIEs), which are defined as entities with a level of invested equity that
      is not  sufficient to fund future  activities to permit it to operate on a
      standalone  basis. For entities  identified as a VIE, FIN 46R sets forth a
      model to evaluate potential  consolidation based on an assessment of which
      party to the VIE (if any) bears a majority of the exposure to its expected
      losses, or stands to gain from a majority of its expected returns. FIN 46R
      also sets forth certain  disclosures  regarding interests in VIEs that are
      deemed  significant,  even if  consolidation  is not required.  We are not
      currently  participating  in, or invested  in any VIEs,  as defined in FIN
      46R.

            In April 2003,  the FASB issued  Statement of  Financial  Accounting
      Standards  (SFAS),  No. 149,  "Amendment  of Statement  133 on  Derivative
      Instruments  and Hedging  Activities."  SFAS No. 149 amends and  clarifies
      financial accounting and reporting for derivative  instruments embedded in
      other contracts and for hedging activities under SFAS No. 133. "Accounting
      for Derivative  Instruments  and Hedging  Activities." It is effective for


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<PAGE>


      contracts  entered into or modified after June 30, 2003,  except as stated
      within the  statement,  and should be  applied  prospectively.  Management
      believes the  provisions of this Standard  currently have no effect on our
      financial position or results of operations.

            In May 2003, the FASB issued SFAS No. 150,  "Accounting  for Certain
      Financial   Instruments  with  Characteristics  of  both  Liabilities  and
      Equity." SFAS No. 150 establishes  standards for how an issuer  classifies
      and  measures in its  statement of financial  position  certain  financial
      instruments with  characteristics of both liabilities and equity. SFAS No.
      150 requires that an issuer classify a financial instrument that is within
      its scope as a liability (or an asset in some circumstances)  because that
      financial instrument embodies an obligation of the issuer. SFAS No. 150 is
      effective for financial instruments entered into or modified after May 31,
      2003 and  otherwise  is effective  at the  beginning of the first  interim
      period beginning after June 15, 2003. SFAS No. 150 is to be implemented by
      reporting the  cumulative  effect of a change in accounting  principle for
      financial instruments created before the issuance date of SFAS No. 150 and
      still  existing  at the  beginning  of the  interim  period  of  adoption.
      Restatement is not  permitted.  We do not expect that the adoption of SFAS
      No.  150  will  have  a  significant  effect  on our  financial  statement
      presentation or disclosures.


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<PAGE>


ITEM 3. CONTROLS AND PROCEDURES

      (a) Evaluation of Disclosure Controls and Procedures.

      Our Chief  Executive  Officer  and  Principal  Accounting  Officer,  after
evaluating our  disclosure  controls and procedures (as defined in the rules and
regulation of the Securities and Exchange  Commission  under the Exchange Act as
of the end of the period covered by this Quarterly  Report on Form 10-QSB,  have
concluded  that as of such date, our  disclosure  controls and  procedures  were
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed,  summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.

      (b) Changes in Internal Controls.

      During the period  covered by the Quarterly  Report on Form 10-QSB,  there
were no significant changes in our internal controls over financial reporting or
in other factors that have  materially  affected,  or are  reasonably  likely to
materially affect, our internal controls over financial reporting.


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<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS.

          None.

ITEM 2.   CHANGES IN SECURITIES  AND SMALL BUSINESS  ISSUER  PURCHASES OF EQUITY
          SECURITIES.

          On May  24,  2004,  the  Registrant  acquired  all of the  issued  and
outstanding  equity interests of ACSI. As consideration  for the shares of ACSI,
the Registrant issued 38,773,581 shares of common stock and warrants to purchase
up to 79,535,549  shares of common stock to the shareholders of ACSI. The shares
were issued pursuant to an exemption  provided by Section 4(2) of the Securities
Act of 1933,  as amended.  A report on Form 8-K related to this matter was filed
with the Securities and Exchange Commission on June 9, 2004.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES.

          None.

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

          None.

ITEM 5.   OTHER INFORMATION.

          On, the Board of Directors approved a one (1) for fifteen (15) reverse
stock split of the Company's outstanding shares of common stock. The stock split
was effected on June 8, 2004.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.

          (a)  Exhibits:

               31.1 Certification  pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002

               32.1 Certification  pursuant to Section 906 of the Sarbanes-Oxley
                    Act of 2002

          (b)  Reports on Form 8-K

          June 9, 2004 - Items 1, 2, 5, and 7


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<PAGE>


                                   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 thereunto duly authorized.



                                        SPECTRE INDUSTRIES, INC.
      Dated: September 17, 2004

                                        /s/ Michael Young
                                        ------------------------------------
                                        Name: Michael Young
                                        Title: Chief Executive Officer and
                                               Principal Accounting Officer




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