United
      States


Securities
      & Exchange Commission


Washington,
      D.C. 20549





FORM
      10-QSB





(Mark
      One)




x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIESEXCHANGE
                ACT OF 1934





For
      the
      quarterly period ended September 30, 2006





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
                ACT OF 1934





Commission
      file number 0-25764





Spectre
      Gaming, Inc.


(Exact
      name of small business issuer as specified in its charter)


Minnesota
            
            41-1675041(State
                or other
                jurisdiction
            
            (IRS
                Employerof
                incorporation or
                organization)
            
            Identification
                No.)





14200
      23 rd Avenue
      N.


Minneapolis,
      MN 55447


(Address
      of principal executive offices)





763-553-7601


(Issuer’s
      telephone number)





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





Check
      whether the issuer (1) filed all reports required to be filed by section 13
      or
      15(d) of the Exchange Act during the past 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 as to whether the Registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act): YES o NO x





APPLICABLE
      TO CORPORATE ISSUERS




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 15,690,024 shares of common stock outstanding
      as  of
      November 9, 2006, par value $.01 per share.





Transitional
      Small Business Disclosure Format (check one): YES o NO x





Spectre
      Gaming, Inc.


Form
      10-QSB


Quarter
      Ended September 30, 2006





Table
      of
      Contents


Page
                  No.PART
                  I
              Financial
                  Information
              
              2Item
                  1.
              Financial
                  Statements
                Balance
                  Sheets at September 30, 2006 (unaudited) and December 31, 2005
                  (audited)
              
              2Statements
                  of Operations for the three and nine months ended September 30,
                  2006 and
                  2005 (unaudited)
              
              3Statements
                  of Cash Flows for the nine months ended September 30, 2006 and
                  2005
                  (unaudited)
              
              4Notes
                  to Financial Statements
              
              5Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              
              23Item
                  3.
              Controls
                  and Procedures
              
              34PART
                  II
              Other
                  Information
              
              35Item
                  2.
              Unregistered
                  Sales of Equity Securities
              
              35Item
                  6.
              Exhibits
              
              35SIGNATURES
              
              
              37







**PART
          I - Financial Information**
 **Item
          1. Financial Statements**
 **Spectre
          Gaming, Inc**


**Balance
      Sheets**


As
                  of
                September
                  30, 2006
              
              As
                  of
                December
                  31, 2005Unaudited
              
              Audited***ASSETS***CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              1,452,830
              
              $
              1,656,831Accounts
                  Receivable
              
              
              43,679
              
              
              -Other
                  receivables
              
              
              1,875
              
              
              9,722Inventory
              
              
              2,282,298
              
              
              300,009Deposits
              
              
              10,939
              
              
              20,050Current
                  assets of discontinued operations
              
              
              138,203
              
              
              536,217Prepaid
                  expenses
              
              
              371,065
              
              
              57,566*Total
                  current assets:*
              
              
              4,300,889
              
              
              2,580,395Property,
                  equipment and leasehold improvements, net
              
              
              160,541
              
              
              66,231Leased
                  equipment, net
              
              
              4,221,520
              
              
              109,629Long-term
                  technology and distribution rights, net
              
              
              -
              
              
              4,397,849Prepaid
                  license fees
              
              
              -
              
              
              187,500Debt
                  issuance costs
              
              
              877,344
              
              
              -Prepaid
                  redemption product licenses
              
              
              1,132,600
              
              
              -Video
                  redemption game licenses
              
              
              213,333
              
              
              -Other
                  assets of discontinued operations
              
              
              -
              
              
              163,500Other
                  assets
              
              
              11,436
              
              
              11,436*Total
                  Assets:*
              
              $
              10,917,663
              
              $
              7,516,540***LIABILITIES
                  AND SHAREHOLDERS’ EQUITY (DEFICIT)***CURRENT
                  LIABILITIES:Current
                  portion of long-term debt
              
              $
              1,477,953
              
              $
              1,500,000Short-term
                  debt, net
              
              
              1,500,000
              
              
              1,500,000Accounts
                  payable
              
              
              331,338
              
              
              69,635Accrued
                  expenses
              
              
              544,562
              
              
              467,870Liabilities
                  of discontinued operations
              
              
              -
              
              
              303,228*Total
                  current liabilities:*
              
              
              3,853,853
              
              
              3,840,733Long-term
                  debt, less current portion
              
              
              4,732,606
              
              
              750,000Debentures
                  payable
              
              
              3,673,178
              
              
              -*Total
                  liabilities*
                
                SHAREHOLDERS’
                  EQUITY (DEFICIT)
              
              
              12,259,637
              
              
              4,590,733Capital
                  stock, par value $.01 per share, 100,000,000 shares
                  authorized:Series
                  A Convertible Preferred Stock, par value $.01 per share: Authorized
                  shares
                  -- 466,666:Issued and outstanding shares: 43,334 shares at September
                  30,
                  2006 andDecember
                  31, 2005 ($65,001 liquidation preference)
              
              
              433
              
              
              433Series
                  B Variable Rate Convertible Preferred Stock, par value $.01 per
                  share:Authorized
                  shares -- 30,000:Issued
                  and outstanding shares: 3,375 and 7,420 shares at September 30,
                  2006, and
                  December 31, 2005, respectively ($3,375,000 and $7,420,000 liquidation
                  preference at September 30, 2006 and December 31, 2005,
                  respectively)
              
              
              34
              
              
              74Common
                  stock, par value $.01 per share: Authorized shares - 99,503,334:
                  Issued
                  shares, 14,793,024 and 13,520,439 at September 30, 2006 and December
                  31,
                  2005, respectively; outstanding shares 14,693,024 and 13,520,439
                  at
                  September 30, 2006 and December 31, 2005, respectively
              
              
              146,930
              
              
              135,204Additional
                  paid-in capital
              
              
              43,053,614
              
              
              37,208,067Accumulated
                  deficit
              
              
              (44,474,701
              )
              
              (34,253,490
              )Deferred
                  equity compensation
              
              
              (68,284
              )
              
              (164,481
              )*Total
                  shareholders’ equity (deficit):*
              
              
              (1,341,974
              )
              
              2,925,807*Total
                  liabilities and shareholders’ equity (deficit):*
              
              $
              10,917,663
              
              $
              7,516,540




See
      accompanying notes to financial statements.




2




**Spectre
      Gaming, Inc.**


**Statements
      of Operations (Unaudited)**




For
                the Three Months Ended
              September
                30,
            
            For
                the Nine Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005Revenue
            
            $
            67,036
            
            $
            -
            
            $
            67,036
            
            $
            -Cost
                of revenue
            
            
            411,008
            
            
            -
            
            
            411,008
            
            
            -*Gross
                profit (loss)*
            
            
            (343,972
            )
            
            -
            
            
            (343,972
            )
            
            -OPERATING
                EXPENSES:Research
                and development
            
            
            250,965
            
            
            368,200
            
            
            1,365,888
            
            
            573,483Sales
                and marketing
            
            
            49,475
            
            
            -
            
            
            182,282
            
            
            -General
                and administrative
            
            
            1,346,688
            
            
            382,616
            
            
            2,629,501
            
            
            1,272,394Impairment
                of long-term technology and distribution rights and prepaid license
                fees
            
            
            -
            
            
            -
            
            
            1,707,582
            
            
            -Total
                operating expenses
            
            
            1,647,128
            
            
            750,816
            
            
            5,885,253
            
            
            1,845,877Operating
                loss
            
            
            (1,991,100
            )
            
            (750,816
            )
            
            (6,229,225
            )
            
            (1,845,877
            )OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            13,424
            
            
            1,851
            
            
            27,196
            
            
            15,425Interest
                expense
            
            
            (1,272,811
            )
            
            (936,353
            )
            
            (1,866,607
            )
            
            (1,721,299
            )Debt
                extinguishment
            
            
            (373,042
            )
            
            -
            
            
            (1,477,220
            )
            
            -Loss
                from continuing operations
            
            
            (3,623,529
            )
            
            (1,685,318
            )
            
            (9,545,856
            )
            
            (3,551,751
            )Loss
                from discontinued operations
            
            
            (12,933
            )
            
            (1,127,420
            )
            
            (212,735
            )
            
            (2,371,423
            )*Net
                loss*
            
            
            (3,636,462
            )
            
            (2,812,738
            )
            
            (9,758,591
            )
            
            (5,923,174
            )Preferred
                Stock Dividend
            
            
            138,210
            
            
            -
            
            
            462,620
            
            
            -*Net
                loss attributable to common shareholders*
            
            $
            (3,774,672
            )
            $
            (2,812,738
            )
            $
            (10,221,211
            )
            $
            (5,923,174
            )NET
                LOSS PER COMMON SHARE BASIC AND DILUTED:Loss
                from continuing operations
            
            $
            (0.26
            )
            $
            (0.13
            )
            $
            (0.69
            )
            $
            (0.27
            )Loss
                from discontinued operations
            
            
            (0.00
            )
            
            (0.08
            )
            
            (0.02
            )
            
            (0.18
            )Net
                loss
            
            
            (0.26
            )
            
            (0.21
            )
            
            (0.70
            )
            
            (0.45
            )NET
                LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
            
            
            (0.27
            )
            
            (0.21
            )
            
            (0.74
            )
            
            (0.45
            )WEIGHTED-AVERAGE
                NUMBER OF SHARES OUTSTANDING:Basic
                and diluted
            
            
            14,134,926
            
            
            13,404,701
            
            
            13,861,597
            
            
            13,213,178




See
      accompanying notes to financial statements.




3




**Spectre
      Gaming, Inc.**


**Statements
      of Cash Flows (Unaudited)**




For
                the nine months ended September 30,2006
            
            2005**Operating
                activities**Net
                loss
            
            $
            (9,758,591
            )
            $
            (5,923,174
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            199,529
            
            
            189,694Impairment
                of gaming equipment in inventory
            
            
            95,810
            
            
            530,527Impairment
                of leased gaming equipment
            
            
            -
            
            
            281,459Impairment
                of long-term technology and distribution rights
            
            
            1,707,582
            
            
            -Stock
                options and warrants issued for services
            
            
            73,540
            
            
            457,819Stock
                based compensation expense
            
            
            1,190,415
            
            
            -Loss
                on sale of property and equipment
            
            
            12,543
            
            
            -Amortization
                of original issue discount
            
            
            1,347,302
            
            
            521,388Amortization
                of debt issuance costs
            
            
            77,075
            
            
            861,512Amortization
                of long-term technology and distribution rights
            
            
            416,665
            
            
            352,151Debt
                extinguishment
            
            
            1,477,220
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (43,679
            )
            
            (14,994
            )Other
                receivables
            
            
            10,343
            
            
            (76,561
            )Inventory
            
            
            (3,389,388
            )
            
            (116,628
            )Prepaid
                redemption product licenses
            
            
            (2,100,000
            )
            
            -Deposits
            
            
            20,944
            
            
            15,319Prepaid
                expenses
            
            
            (305,287
            )
            
            (30,082
            )Accounts
                payable and accrued expenses
            
            
            87,989
            
            
            (242,893
            )Net
                cash used in operating activities:
            
            
            (8,879,988
            )
            
            (3,194,463
            )**Investing
                activities**Net
                proceeds from
                sale of property and equipment
            
            
            25,365
            
            
            -Purchases
                of property, equipment and leasehold improvements
            
            
            (162,928
            )
            
            (87,532
            )Purchase
                of video redemption game licenses
            
            
            (80,000
            )
            
            -Technology
                and distribution rights
            
            
            -
            
            
            (1,000,000
            )Net
                cash used in investing activities:
            
            
            (217,563
            )
            
            (1,087,532
            )**Financing
                activities**Debt
                financing costs
            
            
            (448,714
            )
            
            (105,000
            )Exercise
                of stock options
            
            
            3,975
            
            
            -Proceeds
                from sale of convertible debenture, net of issuance costs
            
            
            3,954,915
            
            
            -Proceeds
                from short-term debt
            
            
            1,230,000
            
            
            2,380,000Proceeds
                from long-term debt
            
            
            5,117,947
            
            
            -Payments
                on notes payable
            
            
            (663,916
            )
            
            (246,697
            )Preferred
                stock dividend
            
            
            (260,657
            )
            
            -Issuance
                costs from sale of preferred stock
            
            
            (40,000
            )
            
            -Net
                cash used by financing activities:
            
            
            8,893,550
            
            
            2,028,303Decreasein
                cash and cash equivalents
            
            
            (204,001
            )
            
            (2,253,692
            )Cash
                and cash equivalents at beginning of year
            
            
            1,656,831
            
            
            2,431,280Cash
                and cash equivalents at end of period:
            
            $
            1,452,830
            
            $
            177,588**Supplemental
                cash flow information**Cash
                paid for interest
            
            $
            392,046
            
            $
            318,354**Non-cash
                Investing and Financing Activities:**Common
                stock issued for payment on convertible notes payable
            
            
            -
            
            
            342,136Warrants
                issued for services relating to debt issuance
            
            
            -
            
            
            578,064Conversion
                of Series B convertible preferred stock to common stock
            
            
            1,030,000
            
            
            -Conversion
                of Series B convertible preferred stock to convertible
                debentures
            
            
            3,015,150
            
            
            -Conversion
                of preferred dividends to convertible debentures
            
            
            55,661
            
            
            -Inventory
                transferred to leased AWP equipment, net of reserve
            
            
            3,166,778
            
            
            523,775Note
                payable in exchange for inventory
            
            
            1,463,050
            
            
            -Redemption
                product licenses transferred to leased AWP equipment
            
            
            967,400
            
            
            -Accrued
                payable in exchange for long-term technology and distribution
                rights
            
            
            -
            
            
            812,567Unsecured
                promissory note in exchange for long-term technology and distribution
                rights
            
            
            -
            
            
            3,000,000Preferred
                stock dividends accrued
            
            
            166,491
            
            
            -Conversion
                of preferred dividends to common stock
            
            
            140,236
            
            
            -Conversion
                of preferred dividends to convertible debentures
            
            
            55,661
            
            
            -Issuance
                of warrants in connection with short-term and long-term
                debt
            
            
            5,026,636
            
            
            880,000Accrued
                expenses in exchange video redemption game licenses
            
            
            160,000
            
            
            -Conversion
                of short-term debt to convertible debentures
            
            
            730,000
            
            
            -Conversion
                of accrued interest on short-term debt to convertible
                debentures
            
            
            7,784
            
            
            -




See
      accompanying notes to financial statements.




4


Spectre
      Gaming, Inc.


Notes
      to
      Financial Statements


September
      30, 2006 and 2005


(unaudited)





**Note
      1. Business Description.**





Spectre
      Gaming, Inc. (the “Company” or “Spectre,” “we,” “us” or “ours”) was incorporated
      in Minnesota in June 1990 under the name MarketLink, Inc. At that time, the
      Company provided telecommunications-based business-intelligence services to
      client end users. In January 1997, the Company changed its name to OneLink
      Communications, Inc., and later in June 2000, changed its name to OneLink,
      Inc.
      In July 2002, the Company ceased operating its telecommunications-based
      business, and in December 2002 sold substantially all of its assets. In
      September 2003, the Company adopted a new business plan focused on providing
      interactive electronic games to the Native American and charitable gaming
      markets, and in January 2004 changed its name to Spectre Gaming, Inc. In early
      2005, the Company began placing its gaming machines on casino
      floors.





In
      May
      2005, the Company began the development of casino-style redemption or
      amusement-with-prize (AWP) games. The Company has begun the deployment of AWP
      games and plans to distribute the games to operators at various retail,
      commercial and entertainment venues in the United States which allow for such
      devices. In December 2005, the Company made the decision to focus its efforts
      exclusively in the AWP market.





The
      accompanying financial statements have been prepared on the basis that the
      Company will continue as a going concern. The Company had net losses for the
      three and nine months ended September 30, 2006 and the year ended December
      31,
      2005, and had an accumulated deficit at September 30, 2006. Currently, the
      Company believes it has cash sufficient to fund operations through at least
      November 2006. The Company is engaged in efforts to secure financing for its
      operations, and believes that it will secure such financing. Nevertheless,
      the
      Company may not be able to secure financing, if at all, on terms favorable
      or
      acceptable to the Company. In the absence of additional financing, the Company
      would likely be forced to consider a variety of strategic alternatives,
      including but not limited to liquidating some or all of the Company’s assets or
      discontinuing operations. Moreover, even if financing is obtained, the Company
      expects that its ability to continue operations in the future will be materially
      dependent on its ability to generate or raise sufficient additional working
      capital. The financial statements do not include any adjustments that might
      result from the outcome of this condition.








**Note
      2. Summary of Significant Accounting Policies.**





*Interim
      Financial Information* .
      The
      accompanying unaudited financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      and pursuant to the rules and regulations of the U. S. Securities and Exchange
      Commission (the “SEC”) for interim financial information. Accordingly, certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America have been omitted pursuant to such rules and
      regulations. Operating results for the three and nine months ended September
      30,
      2006 are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2006. The accompanying financial statements and related
      notes should be read in conjunction with the Company’s audited financial
      statements, and notes thereto, for the fiscal year ended December 31, 2005,
      contained in its Annual Report on Form 10-KSB/A for the year ended December
      31,
      2005.




5




The
      financial information furnished herein reflects, in the opinion of management,
      all adjustments, consisting of normal recurring accruals, necessary for a fair
      presentation of the results of the interim periods presented.





*Discontinued
      Operations.* In
      December 2005, the Company made the decision to exit the markets for its Class
      II and Class III gaming equipment. Shortly thereafter, the Company began efforts
      to close its facilities in Tulsa, Oklahoma and El Cajon, California, terminate
      its employees and dispose of its remaining inventory and fixed assets relating
      to those markets. In accordance with appropriate accounting rules, the Company
      has reclassified its previously reported financial results to exclude the
      results of the discontinued operations and these results are presented on a
      historical basis as a separate line item in the Company’s statement of
      operations and balance sheets entitled “Discontinued Operations.” All of the
      financial information in the financial statements and notes to the financial
      statements has been revised to reflect the results of continuing
      operations.





Based
      on
      discussions with potential buyers, industry operators, sales efforts and limited
      sales results, the Company determined that the assets of discontinued operations
      were impaired. The Company recognized impairment charges in 2005 of $1,361,594
      on its gaming equipment in inventory, and $907,058 on its previously leased
      gaming equipment and other fixed assets. During the nine-month period ended
      September 30, 2006, the Company recorded an additional impairment charge of
      $95,810 on its gaming equipment in inventory. The remaining assets of
      discontinued operations are classified as “Current assets of discontinued
      operations” and “Other assets of discontinued operations” on the balance sheet.
      Since the remaining value of those assets was estimated based on limited actual
      sales data and management’s best estimate, the Company cannot ensure that it
      will realize the remaining carrying value of those assets upon their
      disposition.





In
      accordance with the provisions of Statement of Financial Accounting Standards
      (“SFAS”) 144, the Company has not included the results of operations of its
      Class II and Class III business in the results from continuing operations.
      The
      results of operations for this business have been reflected as discontinued
      operations. The loss from discontinued operations for the three and nine months
      ended September 30, 2006 and 2005, respectively, consist of the
      following:




6




For
                the three months
              ended
                September 30,
            
            For
                the nine months
              ended
                September 30,2006
            
            2005
            
            2006
            
            2005REVENUE:Revenue
            
            $
            -
            
            $
            150,983
            
            $
            4,710
            
            $
            399,867Cost
                of revenues
            
            
            -
            
            
            94,961
            
            
            111,164
            
            
            270,051*Gross
                profit*
            
            
            -
            
            
            56,022
            
            
            (106,454
            )
            
            129,816OPERATING
                EXPENSES:Research
                and development
            
            
            -
            
            
            47,694
            
            
            -
            
            
            149,592Sales
                and marketing
            
            
            -
            
            
            139,453
            
            
            18,462
            
            
            973,263General
                and administrative
            
            
            11,466
            
            
            214,310
            
            
            75,276
            
            
            596,398Impairment
                of gaming equipment in inventory
            
            
            -
            
            
            500,527
            
            
            -
            
            
            500,527Impairment
                of leased gaming equipment
            
            
            -
            
            
            281,459
            
            
            -
            
            
            281,459Total
                Operating Expenses:
            
            
            11,466
            
            
            1,183,443
            
            
            93,738
            
            
            2,501,239*Operating
                loss:*
            
            
            (11,466
            )
            
            (1,127,420
            )
            
            (200,192
            )
            
            (2,371,423
            )Loss
                on sale of equipment
            
            
            (1,467
            )
            
            -
            
            
            (12,543
            )
            
            -Net
                loss from discontinuedoperations
            
            $
            (12,933
            )
            $
            (1,127,420
            )
            $
            (212,735
            )
            $
            (2,371,423
            )





Operating
      expenses included in discontinued operations are those costs which directly
      relate to Class II and Class III operations that will not be incurred in
      connection with continuing operations.





*Revenue
      Recognition.* The
      Company derives its revenues primarily in two ways: through fixed-rate leasing,
      and participation arrangements with its customers. Under both arrangements,
      the
      Company retains ownership of the equipment installed at a customer site and
      under the participation arrangements receives revenue based on a percentage
      of
      the hold per day generated by each gaming system, which is generally considered
      both realizable and earned at the end of each gaming day. The Company accounts
      for both types of agreements as operating leases.





In
      December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104,
“Revenue Recognition.” SAB No. 104 sets forth the SEC staff’s position regarding
      the point at which it is appropriate for a registrant to recognize revenue.
      The
      staff believes that revenue is realizable and earned when all of the following
      criteria are met: persuasive evidence of an arrangement exists, delivery has
      occurred or service has been rendered, the seller’s price to the buyer is fixed
      or determinable, and collectibility is reasonably assured. The Company used
      the
      above criteria to determine whether revenue could be recognized, and is
      recognizing revenue in accordance with SAB 104.




7




*Cash
      and Cash Equivalents* .
      The
      Company includes as cash and cash equivalents highly liquid, short-term
      investments with maturity of three months or less when purchased, which are
      readily convertible into known amounts of cash. The Company maintains its cash
      in high quality financial institutions. The balances, at times, may exceed
      federally insured limits.





*Accounts
      Receivable* . ** The
      Company reviews customers’ credit history before extending unsecured credit and
      establishes an allowance for uncollectible accounts based upon factors
      surrounding the credit risk of specific customers and other information.
      Accounts receivable over 30 days are considered past due. The Company does
      not
      accrue interest on past due accounts receivable. Receivables are written off
      only after all collection attempts have failed and are based on individual
      credit evaluation and specific circumstances of the customer. No allowance
      was
      considered necessary at September 30, 2006 and December 31, 2005,
      respectively.





The
      Company extended unsecured credit to customers in the normal course of
      business.





*Use
      of Estimates* . ** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions affecting the amounts reported in the financial
      statements and accompanying notes. Actual results could differ from these
      estimates.





*Inventory* . ** Inventory,
      which consists principally of amusement with prize products and related
      materials, is stated at the lower of cost (determined on the specific
      identification method) or market. At September 30, 2006, the Company had
      $282,942 of finished goods inventory and $1,999,356 of parts. At December 31,
      2005, the Company had $120,516 of finished goods inventory and $179,493 of
      spare
      parts and game cabinets.





*Prepaid
      License Fees* .
      Prepaid
      license fees were originally related to licenses associated with the themes
      of
      certain gaming machines which were to be licensed from Bally Gaming, Inc.
      Effective March 29, 2006, the Company entered into an agreement with Bally
      to
      apply these prepaid license fees to future royalty payments, relating to AWP,
      which were to become due in 2007 and 2008 under the Redemption Technology and
      Supply Agreement between the Company and Bally, dated May 24, 2005 (as amended).
      Effective June 28, 2006, the Company entered into a Termination and Settlement
      Agreement with Bally which resulted in an impairment charge of $187,500 for
      the
      balance of the prepaid license fees (Note 7).





*Debt
      Issuance Costs* .
      The
      Company capitalizes the costs associated with obtaining debt financing and
      it
      amortizes the costs over the term of the debt on a straight-line basis which
      approximates the efffective interest method. Amortization expense for the three
      and nine months ended September 30, 2006 was $77,075 and for the three and
      nine
      months ended September 30, 2005 was $613,154 and $861,512,
      respectively.





*Prepaid
      Redemption Product Licenses* .
      As of
      June 30, 2006, the Company had completed the purchase of 875 redemption
      technology licenses from Bally and recorded an asset for prepaid product
      licenses of $2,100,000. As the Company places its AWP machines that include
      Bally hardware, the cost of the license is added to the machine cost and
      depreciated over the life of the asset (Note 7). As of September 30, 2006,
      the
      Company has placed 445 AWP machines in service and has allocated $967,400 of
      license fees to those machines and transferred the value to leased equipment.




8




*Video
      Redemption Game License* . ** The
      Company has capitalized the cost of a video redemption game license, in the
      amount of $240,000, purchased from a third-party game-content provider and
      is
      amortizing that cost over the three-year term of the related
      agreement.





*Deposits* .
      Deposits primarily relate to deposits with utility companies and landlords,
      and
      deposits placed on corporate credit cards.





*Leased
      Equipment and Property, Equipment and Leasehold Improvements* .
      Leased
      equipment and property, and equipment and leasehold improvements are stated
      at
      cost. AWP machines placed with customers under participation arrangements are
      included in leased equipment. Depreciation of an asset is recognized on the
      straight-line basis over the asset’s estimated useful life ranging from three to
      five years. Leasehold improvements were amortized using the straight-line method
      over the shorter of the lease term or the estimated useful life. Maintenance,
      repairs and minor renewals are expensed when incurred. Sales and retirements
      of
      depreciable property were recorded by removing the related cost and accumulated
      depreciation from the accounts. Gains or losses on sales and retirements of
      property are reflected in the Company’s results of operations. Depreciation and
      amortization expense on leased equipment and property, equipment and leasehold
      improvements was $143,129 and $64,818 for the three months ended September
      30,
      2006 and 2005, respectively, and $199,529 and $189,694 for the nine months
      ended
      September 30, 2006 and 2005, respectively.





Management
      reviews long-lived assets for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to its fair value, which considers
      the future undiscounted cash flows expected to be generated by the asset. If
      such assets are considered to be impaired, the impairment recognized is measured
      by the amount by which the carrying amount of the assets exceeds their fair
      value. Assets to be disposed of are reported at the lower of the carrying amount
      or the fair value less costs of disposal. In connection with the change to
      focus
      the business on the AWP market, the Company recorded an impairment of $907,058
      for the year ended December 31, 2005. There was not an adjustment to the value
      of the long-lived assets during the nine months ended September 30, 2006 and
      2005.





In
      the
      second quarter of 2006, the Company determined that it would convert the
      remaining Class III gaming machines for use in its AWP business. The Company
      began the conversions and expects that it will incur additional amounts to
      convert those machines to AWP.





*Technology
      and Distribution Rights* . ** The
      Company’s technology and distribution rights related to a $5,000,000 fee for
      redemption technology licensed from Bally Gaming, Inc. The technology and
      distribution rights were being amortized over the five-year term of the
      agreement. (Note 7).




9




Management
      reviewed the technology and distribution rights for impairment in accordance
      with FAS 144 whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. There was not an adjustment
      to the value of the technology and distribution rights at December 31, 2005.
      Effective June 28, 2006, however, the Company entered into a Termination and
      Settlement Agreement with Bally. As a result, the Company has recorded an
      impairment charge of $1,520,082 for the unamortized balance of the technology
      and distribution rights asset, net of the note payable and other liabilities
      that will not be realized (Note 7).





*Fair
      Value of Financial Instruments* .
      The
      carrying amounts for all financial instruments approximate fair value. The
      carrying amounts for cash, accounts receivable, accounts payable, accrued
      expenses and short-term debt approximate fair value because of the short
      maturity of these instruments.





*Research
      and Development Costs* .
      Costs
      related to research, design and development of products are charged to research
      and development expense as incurred. Software development costs are capitalized
      beginning when a product’s technological feasibility has been established and
      ending when a product is available for general release to customers. The Company
      uses the working model approach to determine technological feasibility.
      Generally, the Company’s products are released soon after technological
      feasibility has been established. As a result, the Company has not capitalized
      any internal software development costs, since such costs have not been
      significant and the products are released shortly after technological
      feasibility. Research and development expense for continuing operations was
      $250,965 and $368,199 for the three months ended September 30, 2006 and 2005,
      respectively, and $1,365,888 and $573,483 for the nine months ended September
      30, 2006 and 2005, respectively.





*Net
      Loss Per Common Share* .
      Basic
      and diluted loss per common share is computed by dividing net loss by the
      weighted-average number of common shares outstanding for the reporting period.
      Dilutive common-equivalent shares have not been included in the computation
      of
      diluted net loss per share because their inclusion would be antidilutive.
      Antidilutive common-equivalent shares issuable based on future exercise of
      stock
      options, warrants, convertible debentures or convertible preferred stock
      totaling 48,322,454 and 6,149,972 shares as of September 30, 2006 and 2005,
      respectively, could potentially dilute basic loss per common share in subsequent
      years. All options and warrants outstanding were antidilutive for the three
      and
      nine months ended September 30, 2006 and 2005.





Employees





*Stock-Based
      Compensation* .
      On
      December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
      SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123 and
      supersedes Accounting Principles Board (“APB”) Opinion No. 25. SFAS No. 123(R)
      requires all share-based payments to employees, including grants of employee
      stock options, to be valued at fair value on the date of grant, and to be
      expensed over the applicable vesting period. Pro forma disclosure of the income
      statement effects of share-based payments is no longer an alternative. For
      the
      Company, SFAS No. 123(R) is effective for all share-based awards granted on
      or
      after January 1, 2006. In addition, companies must also recognize compensation
      expense related to any awards that are not fully vested as of the effective
      date. Compensation expense for the unvested awards will be measured based on
      the
      fair value of the awards previously calculated in developing the pro forma
      disclosures in accordance with the provisions of SFAS No. 123. We implemented
      SFAS No. 123(R) on January 1, 2006 using the modified prospective method. The
      amount of expense recorded for the three and nine months ended September 30,
      2006 was $662,224 and $1,190,414, respectively. Based on options and restricted
      stock grants outstanding at September 30, 2006, the Company estimates the
      expense to be $1,467,000 for the year ending December 31, 2006 with an estimated
      total amount of $2,210,000 from 2007 through 2010.




On
      September 12, 2006, the Company cancelled options for 1,550,000 shares held
      by
      certain officers and directors and reissued options for 1,900,000 shares at
      $0.88 per share to those same individuals. This cancellation and reissuance
      of
      stock options will result in additional expense of approximately $66,000 over
      the remaining vesting term of the stock options. In addition, in connection
      with
      a separation agreement entered into with the Company's former CEO, the Company
      cancelled an option for 600,000 shares and issued a new fully vested option
      for
      450,000 shares at $0.88. The Company accounted for these transactions as a
      modification of awards of equity instruments pursuant to SFAS No. 123(R) and
      has
      recognized additional compensation cost of $347,344 for the three and
      nine months ended September 30, 2006, for the change in fair values of
      the modified awards.




10




Prior
      to
      January 1, 2006, in accordance with APB Opinion No. 25 and related
      interpretations, the Company used the intrinsic value-based method for measuring
      stock-based compensation cost which measures compensation cost as the excess,
      if
      any, of the quoted market price of the Company’s common stock at the grant date
      over the amount the employee must pay for the stock. The Company’s general
      policy is to grant stock options and warrants at fair value at the date of
      grant. Options and warrants issued to employees are recorded at fair value,
      as
      required by SFAS No. 123 “Accounting for Stock Based Compensation,” using the
      Black-Scholes pricing model. The Company had adopted the disclosure only
      provision of SFAS No. 148, “Accounting for Stock Based
      Compensation.”





In
      prior
      years, we applied the intrinsic-value method prescribed in APB Opinion No.
      25,
“Accounting for Stock Issued to Employees,” to account for the issuance of stock
      incentives to employees and directors. No compensation expense related to
      employees’ and directors’ stock incentives were recognized in the prior year
      financial statements, as all options granted under the stock incentive plans
      had
      an exercise price equal to the market value of the underlying common stock
      on
      the date of grant. Had we applied the fair value recognition provisions of
      SFAS
      No. 123, “Accounting for Stock-Based Compensation,” to stock based employee
      compensation for the periods prior to fiscal year 2006, our net loss per share
      would have increased to the pro forma amounts indicated below:




Three
                Months Ended
              September
                30, 2005
            
            Nine
                Months Ended
              September
                30, 2005Net
                loss:As
                reported
            
            $
            (2,812,738
            )
            $
            (5,923,174
            )Pro
                forma
            
            
            (3,086,601
            )
            
            (6,641,343
            )Basic
                and diluted net loss per common shareAs
                reported
            
            $
            (0.21
            )
            $
            (0.45
            )Pro
                forma
            
            
            (0.23
            )
            
            (0.50
            )Stock-based
                compensationAs
                reported
            
            $
            -
            
            $
            -Pro
                forma
            
            
            273,863
            
            
            718,169




11




The
      following significant assumptions were utilized to calculate the fair value
      information presented utilizing the Black-Scholes pricing model:





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Risk
                Free interest rate
            
            
            4.71
            %
            
            4.17
            %
            
            4.77
            %
            
            3.96
            %Expected
                life
            
            
            4.0
                years
            
            
            4.0
                years
            
            
            4.0
                years
            
            
            4.3
                yearsExpected
                volatility
            
            
            184
            %
            
            162
            %
            
            183
            %
            
            148
            %Expected
                dividends
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %





The
      volatility factor is based on the Company’s historical stock price fluctuations
      for a period of approximately 2.75 years. This period is shorter than the
      expected life of the options but was deemed more relevant given the significant
      change in the Company’s business model and strategy. The Company has not issued
      and does not intend to issue, dividends; therefore, the dividend yield
      assumption is 0. The Company applied the risk-free interest rate based on the
      U.
      S. Treasury yield in effect at the time of the grant. The expected term of
      the
      option is based on the contractual period of the options granted. Based on
      the
      lack of history to calculate a forfeiture rate, the Company has not adjusted
      the
      calculated value of the options for the three and nine months ended September
      30, 2006.





Non-employees





Through
      September 30, 2006, the Company has outstanding options and warrants to purchase
      1,726,666 shares of the Company’s common stock to non-employees, mostly
      consultants, with exercise prices ranging from $0.75 per share to $2.50 per
      share and expiring at various times through June 2014. Pursuant to Emerging
      Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments that are
      Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
      Goods or Services,” the Company will value related to the options on the earlier
      of the date a performance commitment is met or the date the performance is
      complete and recognizes the estimated value of the awards over the service
      performance period. The Company recorded an expense of $1,508 and $78,986 for
      the three months ended September 30, 2006 and 2005, respectively, and an expense
      of $68,982 and $457,819 for the nine months ended September 30, 2006 and 2005,
      respectively, in accordance with EITF 96-18. During the nine months ended
      September 30, 2006, options for 175,000 shares of the Company’s common stock
      were cancelled.





*Recent
      Accounting Pronouncements* .
      The
      Financial Accounting Standards Board has published FASB Interpretation (FIN)
      No.
      48, ** “Accounting
      for Uncertainty in Income Taxes,” to address the noncomparability in reporting
      tax assets and liabilities resulting from a lack of specific guidance in FASB
      SFAS No. 109, ** “Accounting
      for Income Taxes,” on the uncertainty in income taxes recognized in an
      enterprise’s financial statements. Specifically, FIN No. 48 prescribes (a) a
      consistent recognition threshold and (b) a measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return, and provides related guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. FIN
      No.
      48 will apply to fiscal years beginning after December 15, 2006, with earlier
      adoption permitted .
      The
      Company does not expect FIN No. 48 to have a material effect on its financial
      statements.




12




In
      September 2006, the FASB has issued SFAS No. 157, ** “Fair
      Value Measurements,” to eliminate the diversity in practice that exists due to
      the different definitions of fair value and the limited guidance for applying
      those definitions in GAAP that are dispersed among the many accounting
      pronouncements that require fair value measurements. SFAS No. 157 retains the
      exchange price notion in earlier definitions of fair value, but clarifies that
      the exchange price is the price in an orderly transaction between market
      participants to sell an asset or liability in the principal or most advantageous
      market for the asset or liability. Moreover, SFAS No. 157 states that the
      transaction is hypothetical at the measurement date, considered from the
      perspective of the market participant who holds the asset or liability.
      Consequently, fair value is defined as the price that would be received to
      sell
      an asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date (an exit price).





SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition.




SFAS
      No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. The Company is currently evaluating the effect of
      adopting SFAS No. 157 on its financial statements.




13




**Note
      3. Shareholder’s Equity (Deficit)**





**Common
      Stock**





During
      the nine-month period ended September 30, 2006, the Company issued 127,487
      shares of its common stock as payment of dividends in lieu of cash to owners
      of
      its Series B Variable Rate Convertible Preferred Stock.





During
      the nine-month period ended September 30, 2006, the Company issued 75,000 shares
      of its common stock to replace a stock option, in satisfaction of a contractual
      obligation, noted in the terms of a consulting agreement issued in 2005. The
      value of the stock option was expensed in the year ended December 31, 2005.
      Based on accounting guidance from FAS 123(R) related to modifications of stock
      options, no additional expense was recorded since the fair value after
      modifications was less then the value immediately prior to the
      modification.





**Preferred
      Stock**





The
      Company has outstanding Series A Convertible Preferred Stock that has voting
      rights identical to common stock. In the event of liquidation, the holders
      of
      Series A Preferred Stock are entitled to receive a liquidation preference as
      provided in the Series A Convertible Preferred Stock Certificate of Designation
      on file with the Minnesota Secretary of State. Although no dividends are
      required with respect to the Series A Preferred Stock, the Certificate of
      Designation provides that no dividend shall be paid on any shares of common
      stock unless comparable dividends are paid on the Series A Preferred
      Stock.





The
      holders of Series A Convertible Preferred Stock may convert all or a portion
      of
      such shares into shares of the Company’s common stock in the manner set forth in
      the Series A Convertible Preferred Stock Certificate of Designation. After
      adjustment pursuant to the terms of the Certificate of Designation, each share
      of Series A Convertible Preferred Stock currently converts into 2.257 shares
      of
      the Company’s common stock.





During
      2005, holders of 163,333 shares of Series A Convertible Preferred Stock
      converted their preferred shares into 368,617 shares of common stock. At
      September 30, 2006 and December 31, 2005, there were outstanding 43,334 shares
      of Series A Convertible Preferred Stock (with a related liquidation preference
      of $65,001) which were convertible into an aggregate of 97,799 shares of the
      Company’s common stock.





On
      October 27, 2005, the Company sold an aggregate of 7,420 shares of Series B
      Variable Rate Convertible Preferred Stock, together with five-year warrants
      to
      purchase an aggregate of 4,637,500 shares of common stock at $1.84 per share,
      solely to accredited investors in a private placement exempt from the
      registration requirements of the Securities Act of 1933. In the event of
      liquidation, the holders of Series B Variable Rate Convertible Preferred Stock
      are entitled to receive a liquidation preference as provided in the Series
      B
      Variable Rate Convertible Preferred Stock Certificate of Designation on file
      with the Minnesota Secretary of State.




14




The
      Company is obligated to pay dividends on the Series B Variable Rate Convertible
      Preferred Stock on a quarterly basis, based on a *per
      annum* rate
      equal to the 6-month LIBOR on the day before the quarterly interest period,
      plus
      four percent. Under certain circumstances specified in the Certificate of
      Designation, the Company may pay the dividends with its common
      stock.





The
      holders of Series B Variable Rate Convertible Preferred Stock may convert all
      or
      a portion of such shares into shares of the Company’s common stock in the manner
      set forth in the Certificate of Designation. After adjustment pursuant to the
      terms of the Certificate of Designation, outstanding shares of Series B Variable
      Rate Convertible Preferred Stock are currently convertible into common stock
      at
      a conversion price of $1.00 per share.





Of
      the
      7,420 shares of Series B Variable Rate Convertible Preferred Stock sold,
      subscriptions for an aggregate of 1,230 shares were accepted, in lieu of cash,
      upon conversion of $1,230,000 in aggregate principal amount of nine unsecured
      short-term promissory notes issued by the Company. Sales of the Series B
      Variable Rate Convertible Preferred Stock and warrants raised an aggregate
      of
      $7,420,000 in gross proceeds (which figure includes the conversion of $1,230,000
      of principal amount of loans made to the Company) less approximately $615,000
      in
      sales commissions payable in cash. In addition to cash compensation, selling
      agents received five-year warrants to purchase an aggregate of 695,624 shares
      of
      the Company’s common stock at an exercise price of $1.84 per share.





The
      Company has determined that, using the Black-Scholes pricing model, the value
      of
      the 4,637,500 warrants issued with the Series B Variable Rate Convertible
      Preferred Stock exceeds the value of the preferred stock. Therefore, pursuant
      to
      EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,”
the Company recognized a deemed dividend in the embedded conversion feature
      of
      the preferred stock of $3,412,860 for the year ended December 31,
      2005.





In
      connection with the Series B Variable Rate Convertible Preferred Stock offering,
      the Company agreed to reserve $75,000 of the gross proceeds to make regularly
      scheduled interest payments on the Pandora Select Partners, L.P. and Whitebox
      Intermarket Partners, L.P. notes payable (see note 11). In addition, the Company
      agreed to sell its Class II and Class III gaming machines to an unaffiliated
      person on or before March 31, 2006. The Company was unable to dispose of the
      machines on or before March 31, 2006, which did not have an effect on the
      financial statements. As of the second quarter of 2006, the Company was no
      longer trying to dispose of the machines but was instead converting the machines
      for use in the AWP market (Note 2).





If
      a
      purchaser of the Series B Variable Rate Convertible Preferred Stock still owns
      such stock on the 36-month anniversary of the closing date (i.e., October 27,
      2008), the Company is obligated to issue such purchaser additional warrants
      to
      purchase up to a number of shares of common stock equal to 100% of the stated
      value of the Series B Variable Rate Convertible Preferred Stock then held by
      such purchaser divided by the lesser of then applicable conversion price or
      the
      average of the closing prices for the five trading days immediately prior to
      the
      additional warrant issuance date. The exercise price of any such warrants will
      be equal to the least of (i) the then applicable conversion price, (ii) the
      then
      applicable exercise price of any warrants held by such purchaser or (iii) 50%
      of
      the average of the closing prices for the five trading days immediately prior
      to
      the additional warrant issuance date, subject to adjustment therein (Note
      2).




15




On
      August
      18, 2006, owners of 3,015.15 shares of Series B Variable Rate Convertible
      Preferred Stock exchanged their preferred shares (together with related accrued
      dividends of $55,661) for an aggregate of $3,070,811 of the Company’s newly
      issued Variable Rate Convertible Debentures (Note 4).





During
      the three and nine-month period ended September 30, 2006, owners of an
      additional 780 and 1,030 shares, respectively, of Series B Variable Rate
      Convertible Preferred Stock converted those shares into an aggregate of 780,000
      and 936,250 shares of common stock, respectively.





**Note
      4. Convertible Debt Financing**





On
      August
      18, 2006, the Company offered and sold an aggregate of $8,242,549 in Variable
      Rate Convertible Debentures (“Debentures”), together with warrants to purchase
      an aggregate of 10,343,474 shares of the Company’s common stock, solely to
      accredited investors in a private placement exempt from registration under
      the
      Securities Act of 1933. Interest only payments on the debentures are due on
      a quarterly basis beginning January 1, 2007 and is based on a per annum rate
      equal to the 6-month LIBOR on the day before the quarterly interest period,
      plus
      four percent. The principal balance of the debentures is due February 18,
      2009.





In
      connection with the financing, the Company entered into a Securities Purchase
      Agreement with purchasers of the securities pursuant to which Debentures were
      offered and sold in exchange for cash subscriptions, the surrender and
      cancellation of certain bridge promissory notes, and the surrender and
      cancellation of certain shares of Series B Variable Rate Convertible Preferred
      Stock. The Debentures are convertible, immediately, into common stock at a
      conversion price of $1.00 per share, subject to adjustment. In the transaction,
      the Company received gross cash subscriptions aggregating $4,433,953,
      surrendered bridge promissory notes (plus accrued interest thereon) aggregating
      $737,784 (Note 5), and surrendered Series B Variable Rate Convertible Preferred
      Stock aggregating $3,070,811 in stated value (plus accrued dividends thereon)
      (Note 3).





As
      indicated above, the Company delivered five-year warrants to purchase an
      aggregate of 10,343,474 shares of the Company’s common stock at $1.10 per share
      to purchasers of the Debentures. The warrants contain customary provisions
      for
      adjustment to the exercise price in the event of stock splits, combinations
      and
      dividends, and include certain cashless-exercise provisions. The warrants also
      contain anti-dilution adjustments to the exercise price and number of common
      shares issuable upon exercise in the event of certain dilutive issuances of
      equity securities.





In
      connection with the financing, the Company entered into a Registration Rights
      Agreement with the purchasers of the securities, pursuant to which the Company
      agreed to file with the SEC a registration statement, covering the resale of
      shares of common stock underlying the Debentures and warrants, within 45 days
      of
      the closing and use its best efforts to obtain effectiveness of the registration
      statement thereafter. The Company filed the registration statement on October
      2,
      2006, but it has not yet been declared effective.




16




The
      gross
      proceeds were allocated based upon the relative fair value of the Debentures,
      warrants and the debenture conversion feature. The warrants were valued using
      the Black-Scholes pricing model. The
      allocation of the gross proceeds of the Debentures is summarized below as of
      September 30, 2006:





Debentures
                payable
            
            $
            8,242,548Value
                of warrants allocated to additional paid in capital
            
            
            (2,508,366
            )Value
                of beneficial conversion option allocated to paid in
                capital
            
            
            (2,301,497
            )Short-term
                debt, net of original issue discount
            
            
            3,432,685Amortization
                of original issue discount
            
            
            240,493Sub-total
                short-term debt, net
            
            $
            3,673,178




The
      sale
      of the Debentures with a conversion price of $1.00 triggered certain
      antidilution and repricing provisions with respect to 4,154.85 then outstanding
      shares of Series B Variable Rate Convertible Preferred Stock (Note 3)
      convertible into 2,596,781 common shares at $1.60 per share, and then
      outstanding warrants to purchase 10,053,125 common shares at various prices.
      After the transaction, the then outstanding shares of Series B Variable Rate
      Convertible Preferred Stock were convertible into 4,154,850 common shares at
      $1.00 per share, and the warrants became exercisable for 18,345,750 common
      shares at $1.00 per share.





**Note
      5. Short-term Debt**





On
      September 10, 2004, the Company issued two $750,000 promissory notes bearing
      interest at the rate of 10% *per
      annum* .
      One
      note was issued to Pandora Select Partners, L.P. and the other note was issued
      to Whitebox Intermarket Partners, L.P. The notes were payable in interest only
      through March 10, 2005, at which time principal was due. In connection with
      this
      financing, the Company paid a three percent origination fee, issued five-year
      warrants for the purchase of 50,000 shares of common stock at $3.00 per share
      to
      both Pandora and Whitebox, and granted Pandora and Whitebox a security interest
      in substantially all of the Company’s assets. The warrants contain provisions
      that provide for the exercise price to be adjusted downward if the Company
      issues additional common stock or common stock equivalents with a lower exercise
      price. The gross proceeds of $1,500,000 were allocated between the notes and
      the
      common stock warrants based on the relative fair values of the securities at
      the
      time of issuance. The common stock warrants were valued using the Black-Scholes
      pricing model. The resulting original issue discount and the fair value of
      the
      warrants was amortized over the life of the promissory notes using the
      straight-line method, which approximates the interest method. The value of
      the
      warrants was fully expensed during the year ended December 31, 2005. In
      connection with the financing, the Company agreed to file with the SEC a
      registration statement by February 1, 2005, covering the issuance or resale
      of
      the shares of common stock underlying the warrants issued to Pandora and
      Whitebox. The Company filed the registration statement on November 30, 2004,
      and
      the registration statement was declared effective on January 24,
      2005.




17




On
      March
      10, 2005, the Company signed amendments to the two $750,000 secured promissory
      notes issued to Pandora and Whitebox, extending the due date of the notes to
      June 10, 2005. The Company subsequently elected to further extend the due dates
      to September 10, 2005, pursuant to an option contained in the May 10, 2005
      amendments. As part of these amendments, the Company agreed to maintain assets
      whose value equals or exceeds the principal and interest amounts then owned
      under the notes. For purposes of valuing the assets for compliance under this
      provision, the Company’s cash is valued at 100%, the Company’s accounts
      receivable is valued at 80% and the Company’s inventory and fixed assets are
      valued at 50% of their respective book values. As consideration for the
      amendments, the Company paid Pandora and Whitebox each $18,750 and amortized
      the
      expense over the first extension period. In June 2005, the Company elected
      to
      extend the notes to September 10, 2005, and paid Pandora and Whitebox each
      $18,750 and amortized the expense over the second extension period. On September
      28, 2005, the Company entered into Forbearance and Extension Agreements with
      both Pandora and Whitebox extending the maturity dates of the two notes until
      September 30, 2006. Pursuant to these agreements, beginning October 10, 2005
      and
      on the tenth day of each month thereafter, the Company is required to pay the
      accrued interest on the notes.





On
      May
      12, 2006 the Whitebox and Pandora notes were assumed by Rockmore
      Investment Master Trust Ltd. and Parklane Associates LLC, respectively.  In
      connection with the note transfer, on May 25, 2006, the Company issued a
      five-year warrant to purchase up to 500,000 shares of common stock at a
      per-share price of $1.84 to each of Rockmore and Parklane. The 1,000,000
      warrants were issued in consideration for the agreement of such entities to
      subordinate the Company’s obligations under the acquired notes to the Company’s
      obligations under the Master Loan Agreement entered into with PDS Gaming
      Corporation (Note 6).  The Company determined the issuance of warrants in
      exchange for the subordination should be treated as a modification of debt.
      In
      accordance with EITF 96-19, “Debtor’s Accounting for a Modification of Exchange
      of Debt Instruments,” the Company accounted for the fair value of the warrants,
      using the Black-Scholes pricing model, as debt extinguishment and recorded
      an
      expense of $1,104,178 for the nine months ended September 30, 2006.





Effective
      July 28, 2006, the note acquired by Rockmore was further modified by extending
      the due date of that note until September 30, 2007. In connection with the
      note
      extension, the Company issued Rockmore a five-year warrant to purchase up to
      410,000 shares of common stock at a per-share price of $1.84.  The Company
      determined the issuance of warrants in exchange for the subordination should
      be
      treated as a modification of debt. In accordance with EITF 96-19, “Debtor’s
      Accounting for a Modification of Exchange of Debt Instruments,” the Company
      accounted for the warrants at fair value using the Black-Scholes pricing model,
      as debt extinguishment and recorded an expense of $373,042 for the three months
      ended September 30, 2006.





As
      of
      September 30, 2006 the Company had not made the payment due Parklane under
      the
      note it acquired from Pandora. Nevertheless, on November 3, 2006, the Company
      paid $375,000 of the amount due on the Parklane note and entered into a
      Forbearance and Extension Agreement with Parklane and Pandora, providing for
      (i)
      the remaining principal to be due on December 31, 2006, and (ii) an increased
      interest of 15% *per
      annum* for the
      remaining term.




18




On
      May 5,
      2006, the Company borrowed an aggregate of $300,000 and issued three short-term
      $100,000 promissory notes and on May 9, 2006, borrowed an additional $300,000
      and issued two short-term $150,000 promissory notes. The promissory notes were
      originally fully due and payable on July 31, 2006 and bore interest through
      such
      date at the per annum rate of prime plus one. As inducement to loan funds to
      the
      Company, the Company issued the lenders five-year warrants to purchase up to
      1,200,000 shares of common stock at the purchase price of $1.84 per share,
      subject to adjustment. One of the lenders in the May 9, 2006 transaction was
      D.
      Bradly Olah, the Company’s President. Mr. Olah loaned the Company $150,000 in
      exchange for a promissory note for that principal amount. The terms granted
      to
      Mr. Olah in the promissory note and warrant issued to him were the same terms
      as
      those granted to other lenders.




The
      promissory notes issued for these short-term borrowings provide the lenders
      with
      the right to convert their notes into: (i) Company securities issued in any
      private offering of equity securities of the Company (or its successor or
      parent) consummated prior to the July 31, 2006 maturity date, upon the terms
      and
      conditions of such offering, and at a conversion price equal to the purchase
      price paid by such investors in such offering; and/or (ii) common stock of
      the
      Company, at a conversion price equal initially to $1.84 per share, subject
      to
      adjustment. The warrants issued to the lenders in connection with the short-term
      borrowings contain provisions for the adjustment of their $1.84 per-share
      purchase price that are substantially similar to those contained in the
      promissory notes and described above.




Both
      the
      promissory notes and warrants granted the lenders piggyback registration rights
      in the event the Company or any of its security holders offers any Company
      securities.





The
      common stock warrants were valued using the Black-Scholes pricing model. The
      calculated value of the warrants and beneficial conversion feature were $190,760
      and $272,281, respectively. The resulting original issue discount and the fair
      value of the warrants were amortized over the life of the promissory notes
      using
      the straight-line method, which approximates the interest method.





The
      due
      date of each of the notes was extended until August 21, 2006. On August 18,
      2006, one of the notes, in the principal amount of $100,000, was exchanged
      for
      $100,000 of the Company’s newly issued Variable Rate Convertible Debentures
      (Note 4). On the same date, the remaining notes, plus accrued interest, were
      paid in full. As a result of the Debenture financing, the exercise price of
      the
      warrants issued to the short-term lenders adjusted to $1.00 per
      share.





On
      July
      7, 2006, the Company issued a secured short-term promissory note to Rockmore
      Investment Master Fund, Ltd. in exchange for $630,000. Proceeds from the
      financing were to be used for general working capital purposes. The promissory
      note accrued interest at the rate of 11% *per
      annum* ,
      and all
      principal and interest under the note was to be due on August 7, 2006 (or such
      earlier date as the Company may consummate the sale of securities aggregating
      at
      least $630,000). The promissory note (including accrued interest) was
      convertible, at the option of the noteholder, into any Company securities sold
      in a subsequent offering during such time as the note is outstanding. The
      promissory note was secured under the provisions of a Security Agreement
      pursuant to which the Company granted Rockmore a security interest in
      substantially all of the Company’s assets, subject to (i) existing indebtedness
      and liens and (ii) certain future indebtedness and associated liens incurred
      in
      purchase-money financing. The note was subsequently extended until August 21,
      2006.




19




In
      connection with the financing, the Company issued to Rockmore a five-year
      warrant to purchase up to 1,260,000 shares of the Company’s common stock at the
      per-share purchase price of $1.84. The warrants contain customary provisions
      for
      adjustment to the exercise price in the event of stock splits, combinations
      and
      dividends, and include cashless-exercise provisions. The warrants also contain
      anti-dilution adjustments to the exercise price and number of common shares
      issuable upon exercise in the event of certain dilutive issuances of equity
      securities. The common stock warrants were valued using the Black-Scholes
      pricing model. The calculated value of the warrants exceeded the promissory
      notes balances and the original issue discount was limited to the note balances.
      The resulting calculated fair value of the warrants were amortized over the
      life
      of the promissory note using the straight-line method, which approximates the
      interest method.





On
      August
      18, 2006, the Rockmore note, in the principal amount of $630,000 plus accrued
      interest of $7,784, was exchanged for $637,784 of the Company’s newly issued
      Variable Rate Convertible Debentures (Note 4). As a result of the Debenture
      financing, the exercise price of the warrants issued to Rockmore in connection
      with the short-term note adjusted to $1.00 per share.





Total
      short-term debt outstanding at September 30, 2006 was
      $1,500,000.





**Note
      6. Equipment Financing**





On
      May
      25, 2006, the Company entered into a Master Loan Agreement with PDS Gaming
      Corporation, a Minnesota corporation, providing for purchase-money
      amusement-with-prize machine financing in an amount aggregating up to $20
      million. Under the Master Loan Agreement, the Company has the right to request
      advances, from time to time, in amounts not to exceed $10 million or to be
      less
      than $650,000. Advance requests are subject to certain funding contingencies
      set
      forth in the agreement, and the discretion of PDS Gaming. On May 25, 2006,
      PDS
      Gaming advanced $1,464,104 to Spectre under the Master Loan Agreement. The
      Master Loan Agreement provides for interest on advanced funds in an amount
      equal
      to 13% *per annum*. Upon each advance under the Master Loan Agreement,
      the Company will deliver a promissory note in agreed form to PDS Gaming,
      providing for payments of interest first, and then principal, over a 36-month
      period. Promissory notes may not be prepaid for a period of 12 months after
      their issuance.





In
      connection with entering into the Master Loan Agreement, the Company issued
      PDS
      Gaming a five-year warrant to purchase 200,000 common shares at $1.84 per share.
      The Company valued the warrant at $220,290 using the Black-Scholes pricing
      model. The resulting fair value of the warrant was treated as original issue
      discount and will be amortized over the life of the promissory notes using
      the
      straight-line method, which approximates the interest method.




20




On
      June
      28, 2006 the Company entered into a Master Loan Agreement which replaced the
      May
      25, 2006 agreement. In addition, the Company entered into two new promissory
      notes in the amounts of $3,182,854 and $1,910,000. The promissory note dated
      May
      25, 2006 was cancelled, with the proceeds being rolled into the $3,182,854
      promissory note. Both notes bear interest at a rate of 13% *per
      annum* ,
      have
      48-month terms and may not be prepaid for a period of 12 months after their
      issuance. Proceeds of the notes are to fund the purchase of 875 redemption
      product licenses form Bally Gaming, Inc. (Note 7) and purchase AWP equipment.





On
      July
      25, 2006, the Company entered into a financing transaction for the purchase
      of
      inventory. Total indebtedness equaled $1,463,000 and provides for interest
      at
      14.5% *per
      annum* ,
      and
      payments computed on a 36-month amortization but with a balloon payment due
      after 24 months (i.e., on July 25, 2008).





The
      allocation of the gross proceeds of the long-term debt, less repayments made,
      is
      summarized below as of September 30, 2006:





Long-term
                debt, net of repayments
            
            $
            6,392,377Value
                of 200,000 warrants allocated to additional paid in
                capital
            
            
            (220,290
            )Long-term
                debt, net of original issue discount
            
            
            6,172,087Amortization
                of original issue discount
            
            
            13,768Long-term
                debt
            
            
            6,185,855Current
                portion of long-term debt
            
            
            (1,477,953
            )Long-term
                debt, net
            
            
            4,707,902Other
              long-term debt
            
            
            24,704Total
              long-term debt, net
            
            $
            4,732,606




**Note
      7. Redemption Technology and Supply Agreement**





On
      May
      24, 2005, the Company entered into a Redemption Technology and Supply Agreement
      with Bally Gaming, Inc., a Nevada corporation.





Under
      the
      Redemption Technology and Supply Agreement, Bally granted to the Company: (i)
      an
      exclusive license to market and distribute redemption games using equipment
      containing certain proprietary technology of Bally; (ii) an exclusive license
      to
      utilize the technology to develop redemption games and gaming systems; and
      (iii)
      a non-exclusive license to use the technology for purposes ancillary to the
      foregoing. In addition to obtaining the foregoing licenses, the agreement
      provided the Company with the right to exclusively license Bally-owned game
      themes for use with the Company’s redemption games and systems.





The
      Redemption Technology and Supply Agreement was subsequently amended on multiple
      occasions, which amendments altered the terms and financial commitments due
      Bally by the Company.




21




Effective
      on June 28, 2006, the Company entered into a Termination and Settlement
      Agreement with Bally, pursuant to which the parties terminated their respective
      obligations under the Redemption Technology and Supply Agreement, including
      but
      not limited to the elimination of the Company’s obligation to purchase 1,825
      gaming cabinets and pay royalties to Bally. Under the Termination and Settlement
      Agreement, the parties also agreed to (i) the mutual release of all claims
      between the parties, (ii) Bally’s forgiveness of an aggregate of $2,250,000 of
      outstanding principal, together with accrued but unpaid interest, under a
      promissory note dated September 5, 2005, originally delivered by the Company
      in
      favor of Bally in connection with the Redemption Technology and Supply
      Agreement, and the return and cancellation of such promissory note, (iii) the
      Company’s return to Bally of all “Enabling Technology,” as defined in the
      Redemption Technology and Supply Agreement (with certain limited exceptions),
      and (iv) the parties’ entry into a Technology Agreement (described below)
      governing the Company’s future use of certain technology licensed from
      Bally.





As
      a
      result of entering into the Termination and Settlement Agreement with Bally,
      the
      Company recorded an impairment charge of $1,707,582 for the unamortized balance
      of the long-term technology and distribution asset of $3,981,184 and prepaid
      license fees of $187,500. Offsetting these charges was the forgiveness of the
      balance of the note due Bally of $2,250,000 plus accrued interest and other
      accrued liabilities due to Bally.





Effective
      on June 28, 2006, and simultaneously with the above-described Termination and
      Settlement Agreement, the Company entered into a Technology Agreement that
      governs the Company’s use of intellectual property of Bally and certain related
      matters. In particular, the Technology Agreement provides that (i) Bally grants
      the Company a perpetual non-exclusive license to use certain proprietary
      technology of Bally in connection with up to a maximum of 875 “redemption
      product licenses,” (ii) “redemption product licenses” may be used with respect
      to any new or used gaming cabinet manufactured by Bally that will be used as
      AWP
      or redemption gaming machines, (iii) the Company purchased from Bally 175 gaming
      cabinets as of June 28, 2006, at a price of $8,250 per cabinet, (iv) the
      Company purchased from Bally 500 redemption product licenses as of June 28,
      2006, at a per-license cost of $3,000, and (v) the Company will order from
      Bally
      375 additional redemption product licenses on or prior to July 10, 2006 for
      an
      aggregate of $600,000.





As
      of
      June 30, 2006, the Company had completed the purchase of the 175 game cabinets
      and recorded $1,443,750 of inventory and the 875 redemption technology licenses
      from Bally and has recorded an asset for prepaid product licenses of $2,100,000.
      As the Company places its AWP machines that include Bally hardware, it will
      add
      the cost of a license to the machine cost and depreciate it over the life of
      the
      asset. The Company paid the amounts due Bally with proceeds from the notes
      payable to PDS Gaming Corporation (Note 6).




22


**Note
      8. Related Party Transactions**





The
      Company incurred expenses from a corporation, owned by a former director of
      the
      Company and employing another former director and officer of the Company, for
      rent and consulting services of approximately $0 and $21,000 during the three
      months ended September 30, 2006 and 2005, respectively, and $11,000 and $76,000
      during the nine months ended September 30, 2006 and 2005, respectively.





The
      Company incurred expenses from a corporation, partially owned by the former
      CEO
      and a director of the Company, for consulting services and expense
      reimbursements of approximately $0 and $94,000 during the three months ended
      September 30, 2006 and 2005, respectively, and $0 and $272,000 during the nine
      months ended September 30, 2006 and 2005, respectively. The Company’s former CEO
      also serves as a director of the corporation.





On
      May 9,
      2006, D. Bradly Olah, the Company’s President and CEO, loaned the Company
      $150,000 and was issued a convertible promissory note and a warrant to purchase
      300,000 shares of common stock for $1.84. The terms granted to Mr. Olah in
      the
      promissory note and warrant issued to him for the loan were the same terms
      as
      those granted to other lenders. (Note 5)





Effective
      August 2, 2006, the Company entered into an Equipment Revenue Share Agreement
      with Florida Arcade Corporation, an entity which is owned in part by a former
      director and a greater-than-five-percent shareholder of the Company.





**Note
      9. Significant Customers**





Revenues
      from five customers accounted for 100% of total revenues during the three and
      nine months ended September 30, 2006. Revenues to two customer accounted for
      77%
      of total revenues of discontinued operations during the three months ended
      September 30, 2005, and revenues to three customers accounted for 72% of total
      revenues of discontinued operations during the nine months ended September
      30,
      2005.





**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation**





The
      accompanying management’s discussion and analysis of the Company’s financial
      condition and results of operations should be read in conjunction with
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations and the Company’s audited financial statements, and notes thereto,
      for the fiscal year ended December 31, 2005, included in our Annual Report
      on
      Form 10-KSB/A for the year ended December 31, 2005.




23




**Results
      of Operations**





**Three
      and Nine Months Ended September 30, 2006 Compared to the Three and Nine Months
      Ended September 30, 2005**





*Revenues* .
      The
      Company’s revenues from continuing operations for the three and nine months
      ended September 30, 2006 were $67,036 compared to $0 for the three and nine
      months ended September 30, 2005. The increase was due to the fact that the
      Company is new to the AWP business and had no revenue-producing sales prior
      to
      the three and nine-month period ended September 30, 2006.





*Cost
      of Revenues* .
      The
      Company’s cost of revenues from continuing operations for the three and nine
      months ended September 30, 2006 were $411,008 compared to $0 for the three
      and
      nine months ended September 30, 2005. The increase was due to the fact that
      the
      Company is new to the AWP business and had no revenue-producing sales prior
      to
      the three and nine-month period ended September 30, 2006. Cost of sales was
      high
      relative to revenue due to initial installation costs.





*Research
      and Product Development Expenses* .
      Research and product development expenses for continuing operations for the
      three months ended September 30, 2006 was $250,965, compared to $368,199 for
      the
      three months ended September 30, 2005. Expenses for the nine months ended
      September 30, 2006 and 2005 was $1,365,888 and $573,483 respectively. The
      decrease in expense for the three-month period was due to $250,001 of
      amortization of long-term technology and distribution rights included in the
      2005 amount versus $0 in 2006. Without the difference accounted for by the
      amortization, the increase in both the three and nine-month periods was due
      to
      the Company beginning development of and increasing expenditures on its AWP
      products after the first quarter of 2005. Management expects that expenditures
      for research and product development may increase in future quarters as the
      Company continues placing its AWP machines in the market and continues to
      develop and broaden its product base.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses for the three months ended September 30, 2006 was
      $49,475, compared to $0 for the three months ended September 30, 2005. Sales
      and
      marketing expenses for the nine months ended September 30, 2006 was $182,282,
      compared to $0 for the nine months ended September 30, 2005. The **** increases
      in expense resulted from the Company commencing operations in the **** AWP
      market after 2005.




*General
      and Administrative Expenses* .
      General
      and administrative expenses from continuing operations for the three months
      ended September 30, 2006 was $1,346,688, compared to $382,616 for the three
      months ended September 30, 2005. General and administrative expenses from
      continuing operations for the nine months ended September 30, 2006 was
      $2,629,501, compared to $1,272,394 for the nine months ended September 30,
      2005.
      The increases for both periods was due primarily to the addition of corporate
      staff, increased professional fees and other corporate expenses as a result
      of
      starting in the AWP business after the first quarter of 2005. In addition,
      the
      three and nine months ended September 30, 2006 included $566,751 and $1,094,941,
      respectively, of expense related to employee stock options in connection with
      the adoption of FASB 123(R) which requires stock options to be expensed as
      they
      vest. This was partially offset by a reduction in consultant option expense
      of
      $72,031.




24




*Other
      Expense* .
      Other
      expense for the three months ended September 30, 2006 was $1,632,429, compared
      to $934,502 for the three months ended September 30, 2005. The increase in
      other
      expense is primarily due to an increase of $837,064 of amortization of original
      issue discount, $373,042 of debt extinguishment, offset in part by a decrease
      of
      $536,079 in the amortization of the debt issuance costs related to the Company’s
      borrowings. The remaining difference is attributable to an increase in interest
      expense, net of interest income. Other expense for the nine months ended
      September 30, 2006 was $3,316,631, compared to $1,705,874 for the nine months
      ended September 30, 2005. The increase in other expense is primarily due to
      an
      increase of $825,914 of amortization of original issue discount, $1,477,220
      of
      debt extinguishment, offset in part by a decrease of $784,437 in the
      amortization of the debt issuance costs. The remaining difference is
      attributable to an increase in interest expense, net of interest
      income.





*Loss
      From Discontinued Operations* . ** The
      loss
      from discontinued operations was $12,933 and $1,127,420 for the three months
      ended September 30, 2006 and 2005, respectively. The loss from discontinued
      operations was $212,735 and $2,371,423 for the nine months ended September
      30,
      2006 and 2005, respectively. The decrease in loss between the comparable periods
      was due to the Company’s decision to discontinue its Class II and Class III
      business in December 2005, which resulted in very little activity in the 2006.
      In addition, the 2005 periods included charges of $500,527 for impairment of
      gaming equipment in inventory and $281,459 for impairment of leased gaming
      equipment.





*Impairment
      of Long-Term Technology and Distribution Rights* .
      The
      Company recorded a charge for impairment of long-term technology and
      distribution rights of $1,707,582 for the nine months ended September 30, 2006.
      The charge was necessary due to the Company entering into a Termination and
      Settlement Agreement with Bally Gaming, Inc. whereby the Company agreed to
      return all technology and relinquish all distributions rights acquired from
      Bally. The charge reflects the unamortized balance of the technology and
      distribution rights asset of $3,981,184 and prepaid license fees of $187,500,
      less the note payable balance due Bally of $2,250,000 and accrued interest
      and
      other liabilities due Bally which relieved pursuant to the agreement.





*Net
      Loss* .
      The
      Company incurred a net loss of $3,636,462 for the three months ended September
      30, 2006, compared to a net loss of $2,812,738 for the three months ended
      September 30, 2005. The Company incurred a net loss of $9,758,591 for the nine
      months ended September 30, 2006, compared to a net loss of $5,923,174 for the
      nine months ended September 30, 2005. The increased net loss between the
      comparable periods is due primarily to the Company commencing AWP operations,
      the impairment of long-term technology and distribution rights, adoption of
      FASB
      123(R), debt extinguishment expense and increases in debt issuance costs, offset
      by the losses the Company incurred from its discontinued operations in the
      2005
      periods.





*Liquidity
      and Capital Resources* .
      The
      Company had working capital of $447,036 at September 30, 2006, and negative
      working capital of $1,260,338 at December 31, 2005. During the nine months
      ended
      September 30, 2006, cash used in operations was $8,879,988 and the primary
      uses
      of cash were to fund the Company’s net loss associated with developing AWP
      products, acquire inventory, and the payment of expenses. These uses were
      partially offset by non-cash charges related to stock options and warrants
      issued for services, amortization of original issue discount, stock based
      compensation expense, impairment charges, debt extinguishment expenses and
      other
      depreciation and amortization. For the nine months ended September 30, 2005,
      the
      cash used in operations was $3,194,463 and the primary use of cash was to fund
      the Company’s net loss. These uses were partially offset by non-cash charges
      related to stock options and warrants issued for services, amortization of
      original issue discount, stock based compensation expense, impairment charges
      and other depreciation and amortization.




25




Cash
      used
      in investing activities was $217,563 and $1,087,532 for the nine months ended
      September 30, 2006 and 2005, respectively, primarily to purchase redemption
      game
      licenses and fixed assets in 2006 and the purchase of technology and
      distribution rights for the 2005 period.





Cash
      provided in financing activities was $8,893,550 and $2,028,303 for the nine
      months ended September 30, 2006 and 2005, respectively. The 2006 amount included
      proceeds of $1,230,000 from short-term financing, proceeds from long-term
      equipment financing of $5,117,947, proceeds from the sale of convertible
      debentures of $3,954,923 offset by 448,714 of debt financing costs, $663,916
      of
      payments on notes payable and payment of preferred stock dividends of $260,657.
      The 2005 amount included proceeds of $2,380,000 form short-term financing,
      offset by $105,000 of debt financing costs and $246,697 of payments on notes
      payable.





On
      September 10, 2004, the Company issued two $750,000 promissory notes bearing
      interest at the rate of 10% *per
      annum* .
      One
      note was issued to Pandora Select Partners, L.P. and the other note was issued
      to Whitebox Intermarket Partners, L.P. These notes were payable in interest
      only
      through March 10, 2005, at which time the principal was due. On May 12, 2006,
      the Whitebox and Pandora notes were transferred to Rockmore Investment Master
      Trust Ltd. and Parklane Associates LLC, respectively. The notes were
      subsequently amended resulting in the Parklane note due on September 29, 2006
      and Rockmore note due on September 30, 2007. On November 3, 2006, the Company
      paid $375,000 of the amount due on the note acquired by Parklane, and entered
      into a Forbearance and Extension Agreement with Parklane and Pandora providing
      for the extension of the due date to December 31, 2006, and an increase in
      the
      interest rate to 15% *per
      annum* for the
      remaining term.





On
      May
      25, 2006, the Company entered into a Master Loan Agreement with PDS Gaming
      Corporation, a Minnesota corporation, for a $20 million credit facility to
      finance the purchase of AWP gaming equipment. The Master Loan Agreement was
      subsequently amended and restated as of June 29, 2006. Under the Master Loan
      Agreement, Spectre has the right to request advances, from time to time, in
      amounts not to exceed $10 million or be less than $650,000. Advance requests
      under the Master Loan Agreement are subject to certain funding contingencies
      set
      forth in the agreement, and the discretion of PDS Gaming. The Master Loan
      Agreement provides for interest on advanced funds in an amount equal to 13% *per
      annum* .
      Upon
      each advance under the Master Loan Agreement, the Company will deliver a
      promissory note in agreed form to PDS Gaming, providing for payments of interest
      first, and then principal, over a 36-month period. Promissory notes may not
      be
      prepaid for a period of 12 months after their issuance. As of the date of this
      report, the Company has received advances under the agreement and delivered
      promissory notes in the amounts of $3,182,854 and $1,910,000.




26




Pursuant
      to the rights included in the Series B Variable Rate Convertible Preferred
      Stock
      Certificate of Designation (as amended), the Company offered shares of the
      Company’s common stock in lieu of a cash payment for dividends payable on April
      1, 2006 to the holders of such preferred shares. For such payment, the Company’s
      board of directors approved a conversion rate of $1.10 per share. Shareholders
      representing 86% of the outstanding preferred shares elected to receive common
      shares in lieu of cash.





Between
      May 5 and May 9, 2006, the Company obtained a total of $600,000 of short-term
      loans for operating capital. In connection with these transactions, the Company
      issued promissory notes accruing interest at a *per
      annum* rate
      equal to one plus the prime rate, and originally due on July 31, 2006. The
      Company also issued the lenders five-year warrants for the purchase of an
      aggregate of 1,200,000 shares of common stock at $1.84 per share. On August
      18,
      2006, one of the notes was exchanged for $100,000 of the Company’s newly issued
      convertible debentures. The remaining notes and accrued interest were paid
      in
      cash.





On
      July
      7, 2006, the Company issued a secured short-term promissory note to Rockmore
      Investment Master Fund, Ltd. in exchange for a total of $630,000 to be used
      for
      operating capital. The promissory note accrued interest at the rate of 11% *per
      annum* ,
      with
      all principal and interest under the note originally due no later than August
      7,
      2006. The Company also issued the lender a five-year warrant to purchase up
      to
      1,260,000 shares of common stock at $1.84 per share. At the noteholder’s option,
      the promissory note (including accrued interest) was convertible into any
      Company securities sold in a subsequent offering consummated during the time
      the
      note was outstanding. All principal and interest under this note was eventually
      converted into convertible debentures on the August 18, 2006, pursuant to a
      Securities Purchase Agreement dated August 17, 2006 (see below).




On
      July
      25, 2006 the Company entered into a financing transaction for the purchase
      of
      inventory. Total indebtedness equaled $1,463,000 and provides for interest
      at
      14.5% *per
      annum* ,
      and
      payments computed on a 36-month amortization but with a balloon payment due
      after 24 months (i.e., on July 25, 2008).





On
      August
      18, 2006, Spectre offered and sold an aggregate of $8,242,549 in Variable Rate
      Convertible Debentures (the “Debentures”), together with warrants to purchase an
      aggregate of 10,343,474 shares of common stock at $1.10 per share, solely to
      accredited investors in a private placement offering exempt from registration
      under the Securities Act of 1933. In connection with this transaction, the
      Company entered into a Securities Purchase Agreement pursuant to which
      securities were offered and sold in exchange for cash subscriptions, the
      surrender and cancellation of certain bridge promissory notes, and the surrender
      and cancellation of certain shares of Series B Variable Rate Convertible
      Preferred Stock. At the holder’s option, the Debentures are convertible into
      common stock at a conversion price of $1.00 per share, subject to adjustment.
      In
      the transaction, the Company received gross cash subscriptions aggregating
      $4,433,953, surrendered bridge promissory notes (plus accrued interest thereon)
      aggregating $737,784, and surrendered Series B Variable Rate Convertible
      Preferred Stock (plus accrued dividends thereon) aggregating
      $3,070,811.




27




The
      Company anticipates that it will expend significant resources in 2006 acquiring
      machines to be placed in amusement centers on either a fixed lease or a
      participation basis. Once placed in service, these machines are transferred
      to
      fixed assets. In addition, the Company expects that research and product
      development, sales and marketing, and general and administrative expenses will
      also increase as the Company adds additional personnel and incurs other costs
      associated with placing and marketing its AWP products and for other corporate
      purposes. Over the next 12 months, the Company expects to spend a significant
      amount on capital equipment purchases primarily for AWP machines, and for such
      purpose expects to seek financing to purchase such equipment.





Currently,
      the Company believes it has cash sufficient to fund operations through at least
      through November 2006. The Company is engaged in efforts to secure financing
      for
      its operations, and believes that it will secure such financing. Nevertheless,
      the Company may not be able to secure financing, if at all, on terms favorable
      or acceptable to the Company. In the absence of additional financing, the
      Company would likely be forced to consider a variety of strategic alternatives,
      including but not limited to liquidating some or all of the Company’s assets or
      discontinuing operations. Moreover, even if financing is obtained, the Company
      expects that its ability to continue operations in the future will be materially
      dependent on its ability to generate or raise sufficient additional working
      capital.




*License-Related
      Obligations* .
      On May
      24, 2005, the Company entered into a Redemption Technology and Supply Agreement
      with Bally Gaming, Inc., a Nevada corporation, pursuant to which the Company
      acquired a license for certain AWP technology, including exclusive distribution
      rights to that technology and follow-on exclusive distribution rights for video
      lottery terminals, should such terminals become legal. This agreement and the
      license were to last for an initial term of five years, subject to extension
      if
      the Company met certain performance targets. Under the agreement, the Company
      was obligated to pay an upfront $5 million licensing fee. Of this amount, the
      Company paid $2 million in cash, and on September 9, 2005 delivered an unsecured
      two-year promissory note for the remaining $3 million.





Effective
      June 28, 2006, Spectre entered into a Termination and Settlement Agreement
      with
      Bally, pursuant to which the parties terminated their respective obligations
      under the Redemption Technology and Supply Agreement, as amended. As a result
      of
      entering into the Termination and Settlement Agreement, the Company recorded
      an
      impairment charge for the unamortized balance of the long-term technology and
      distribution asset of $3,981,184 and prepaid license fees of $187,500.
      Offsetting these charges was the balance of the note due Bally of $2,250,000
      plus accrued interest and other accrued liabilities due Bally.





Effective
      June 28, 2006, the Company also entered into a Technology Agreement that governs
      the Company’s use of certain intellectual property of Bally and related matters.
      The Technology Agreement provides that (i) Bally grants the Company a perpetual
      non-exclusive license to use certain proprietary technology of Bally in
      connection with up to a maximum of 875 “redemption product licenses,” (ii) the
“redemption product licenses” may be used with respect to any new or used gaming
      cabinet manufactured by Bally that will be used as AWP or redemption gaming
      machines, (iii) the Company purchases from Bally 175 gaming cabinets at a price
      of $8,250 per cabinet, (iv) the Company purchases from Bally 500 redemption
      product licenses at a cost of $3,000 per license, and (v) the Company will
      order
      from Bally 375 additional redemption product licenses on or prior to July 10,
      2006 for an aggregate price of $600,000. As of June 30, 2006, the Company had
      completed the purchase of the 175 game cabinets and all 875 redemption
      technology licenses from Bally, and has recorded an asset for prepaid product
      licenses of $2,100,000. As the Company places its AWP machines that include
      Bally hardware, the Company is adding the cost of a license to the machine
      cost
      and depreciating that cost over the life of the asset.




28




**Off-Balance-Sheet
      Arrangements**





The
      Company has no off-balance-sheet arrangements.





**Critical
      Accounting Estimates**





Our
      critical accounting policies are those both having the most impact to the
      reporting of our financial condition and results, and requiring significant
      judgments and estimates. Our critical accounting policies include those related
      to (a) revenue recognition, (b) property, plant and equipment, (c) inventory
      and
      (d) the valuation of stock-based compensation awarded. The Company derives
      its
      revenues primarily in two ways, through fixed rate leasing and participation
      arrangements with its customers. Under both arrangements, the Company retains
      ownership of the equipment installed at a customer site and under the
      participation arrangements receives revenue based on a percentage of the hold
      per day generated by each gaming system, which is generally considered both
      realizable and earned at the end of each gaming day. The Company accounts for
      both types of agreements as operating leases. Property, equipment and leasehold
      improvements and leased gaming equipment were stated at cost. Depreciation
      of an
      asset was recognized on the straight-line basis over the asset’s estimated
      useful life ranging from three to five years. Leasehold improvements were
      amortized using the straight-line method over the shorter of the lease term
      or
      the estimated useful life. Maintenance, repairs and minor renewals are expensed
      when incurred. Inventory, which consists principally of gaming products and
      related materials, are stated at the lower of cost (determined on the first-in,
      first-out method) or market.  The
      Company uses the intrinsic value-based method prescribed by Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and
      related interpretations in accounting for employee stock options and stock
      based
      compensation. The Company uses EITF 96-18, “Accounting for Equity Instruments
      that are Issued to Other Than Employees for Acquiring, or in Conjunction with
      Selling, Goods or Services,” to value options and warrants issued to
      non-employees. Management’s estimates of the fair value of each option and
      warrant granted is calculated using the Black-Scholes pricing model with
      weighted-average assumptions including risk free interest rate, expected life
      of
      options granted, expected volatility range, and expected dividend
      yield.




29




**Forward-Looking
      Statements**





This
      report contains certain statements that would be deemed “forward-looking
      statements” and includes, among other things, discussions of the Company’s
      business strategies, future operations and capital resources. Words such as,
      but
      not limited to, “may,” “likely,” “anticipate,” “expect” and “believe” indicate
      forward-looking statements.





Although
      the Company believes that the expectations reflected in the forward-looking
      statements contained in this document are generally reasonable, we cannot assure
      you that such expectations will ultimately prove to be correct. Generally,
      the
      forward-looking statements contained in this document relate to business plans
      and strategies, projected or anticipated benefits or other consequences of
      market conditions and opportunities, projections involving anticipated sales
      and
      revenues, expenses, projected future earnings and other aspects of operations
      and operational results. All phases of the Company’s operations are subject to a
      number of risks, most of which are outside the Company’s control, and the
      materialization of any one or combination of such risks could materially and
      adversely affect the results of the Company’s operations, and also, could affect
      whether any forward-looking statements contained in this document ultimately
      prove to be accurate. Important factors that could cause actual results to
      differ materially from the Company’s expectations are summarized above, as well
      as in the “Risk Factors” section of our Annual Report on Form 10-KSB/A for the
      year ended December 31, 2005 (as such risk factors are modified below). The
      forward-looking statements contained in this document are made as of the date
      of
      this document, and the Company assumes no obligation to update the
      forward-looking statements or to update the reasons why actual results could
      differ from those contained in any such forward-looking statements. Therefore,
      we caution our readers not to unduly rely on the forward-looking statements
      contained in this document.




30




**Risk
      Factors**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in our Annual Report on Form 10-KSB/A for the
      year ended December 31, 2005, which could materially affect our business,
      financial condition or future results. The risks described in our Annual Report
      are not the only risks facing our Company. Additional risks and uncertainties
      not currently known to us or that we currently deem to be immaterial also may
      materially and adversely affect our business, financial condition and/or
      operating results. In addition to the information in this report and the factors
      discussed our Annual Report on Form 10-KSB/A for the year ended December 31,
      2005, you should consider the following risk factors which may materially and
      adversely affect our business, financial condition and/or operating results,
      and
      which are designed to update the risks set forth in our Annual
      Report:





**We
      will need additional financing in the future and any such financing may dilute
      our existing shareholders.**





We
      have
      only recently begun generating revenue. Based on the limited revenue history
      of
      the Company, we are unable to predict with any certainty as to whether we can
      generate revenues to sustain operations. The Company will require additional
      financing to fund operations and its anticipated game cabinet manufacturing
      operations. The Company expects that one critical factor in its ability to
      obtain financing for equipment and manufacturing purposes will be the success
      of
      the Company’s placed and operating AWP games. Currently, the Company believes it
      has cash sufficient to fund operations through at least November 2006. The
      Company is engaged in efforts to secure financing for its operations, and
      believes that it will secure such financing. Nevertheless, the Company may
      not
      be able to secure financing, if at all, on terms favorable or acceptable to
      the
      Company. In the absence of additional financing, the Company would likely be
      forced to consider a variety of strategic alternatives, including but not
      limited to liquidating some or all of the Company’s assets or discontinuing
      operations. Moreover, even if financing is obtained, the Company expects that
      its ability to continue operations in the future will be materially dependent
      on
      its ability to generate or raise sufficient additional working capital. Any
      additional financing, whether related primarily to equipment purchases or
      general working capital, may dilute our existing shareholders.





Additional
      financing could be sought from a number of sources, including but not limited
      to
      additional sales of equity or debt securities (including equity-linked or
      convertible debt securities), loans from banks, loans from affiliates of the
      Company or other financial institutions. We may not, however, be able to sell
      any securities or obtain any such additional financing when needed, or do so
      on
      terms and conditions acceptable or favorable to the Company, if at all. If
      financing is not available, we may be forced to abandon our business plans
      or
      our entire business, discontinue our preparation and filing of public disclosure
      reports with the SEC, or dissolve the Company. If we successfully enter into
      a
      financing transaction, any additional equity or equity-linked financing would
      be
      dilutive to shareholders, and additional debt financing, if available, may
      involve restrictive covenants.




31




**The
      AWP market lacks regulatory clarity and consistency, which could impair our
      ability to place redemption gaming machines in some
      jurisdictions.**





AWP
      is
      generally not a highly regulated industry, and as such, it lacks the clarity
      which typically stems from the existence and a body of interpretation of laws
      and regulations. Moreover, AWP laws tend to be enforced at the county or city
      level instead of a central state-sponsored regulatory authority, which decreases
      the visibility and predictability of such regulation. In some jurisdictions,
      state authorities take the position that AWP games are no different than
      traditional Class III gaming. The lack of clarity or guidance can lead to errors
      in legal interpretation, changes in the manner in which the laws or controlling
      court cases are articulated and interpreted by law enforcement personnel, and
      disagreements about the legality of the Company’s operations and games in
      various jurisdictions. In turn, these matters can lead to delays in game
      deployment, removal of games from locations, withdrawal of business operations
      in various counties, as well as the possibility that games may be seized pending
      resolution of the appropriate court case, and that company personnel may be
      arrested for violations of law.





It
      is
      possible that after the Company has either received a favorable guidance letter
      or meeting from a county or city authority, and commenced operations, that
      such
      authority may change its position or the person rendering the advice is replaced
      by another person, such as a change in district attorney, and the advising
      authority determines that the Company’s activities or games do not comply with a
      new interpretation of the law or recent court case holdings. Such changes,
      to
      the negative, could cause the Company to limit its business activities in the
      respective jurisdiction, or to remove its operations and devices
      entirely.





**Any
      changes in regulatory approvals or regulatory interpretations arising as a
      result of the spread of AWP games may provide clarity and greater certainty,
      but
      may also adversely effect our AWP operations.**





In
      the
      event that a state changes the laws under which redemption or AWP activity
      is
      conducted, such as outlawing the games entirely or further limiting bet, play
      and prize restrictions, this will have a negative impact on the placement of
      games and the further conduct of operations, if any in the respective state.
      Another risk lies in the fact that a state may determine to legalize other
      forms
      of gaming, such as traditional Class III slot machine gaming. We expect that
      any
      liberalization of gaming laws applicable to such activity would have a negative
      impact on the Company’s operations in such state, unless the Company is able to
      convert the AWP games to the newly allowed form of games.





**The
      Company will rely on relationships with operators and distributors to install
      and maintain its AWP devices.**





The
      Company intends to establish partnerships with various distribution and service
      companies (operators) which are doing business in the jurisdictions in which
      Spectre will conduct AWP operations. These operators will likely provide sales
      and service support, as well as money and data collection. Failure to find
      sufficient or capable partners in a particular area may delay the rollout of
      our
      operations in that area. Even if we are able to establish a relationship with
      an
      operator, that operator may not move quickly enough to exploit any market
      advantages the Company may have. In addition, our operators may not provide
      a
      sufficient level of service, which could be expected to negatively affect the
      performance of AWP machines in that operator’s jurisdiction and the future
      placement of additional AWP machines. Finally, our operators will generally
      not
      be exclusive partners of the Company, and their other business activities may
      conflict with the Company’s business.


32


**The
      Company has significant debt at various rates of interest and maturity dates,
      including current liabilities that exceed its current assets, which poses
      significant risks to investors in the event we cannot produce revenue or obtain
      additional financing to service and repay such debt.**





The
      Company has been significantly financed through the issuance of debt. As of
      the
      date of this report, the Company has total debt of $15,560,887. This debt is
      subject to various rates of interest ( *per
      annum* )
      and
      maturities, as set forth below:




**Secured
                Debt**
            
            **Amount**
            
            **Interest**
            
            **Maturity**Rockmore
                Investment Master Trust Ltd.
            
            $
            750,000
            
            
            10
            %
            
            9/30/2007Parklane
                Associates LLC
            
            
            375,000
            
            
            15
            %
            
            12/31/2006PDS
                Gaming Corporation
            
            
            4,829,521
            
            
            13
            %
            
            8/01/2010Hawkeye
                Commodity Promotions, Inc.
            
            
            1,363,817
            
            
            14.5
            %
            
            7/25/2008








**Unsecured
                Debt**
            
            **Amount**
            
            **Interest**
            
            **Maturity**Variable
                Rate Convertible Debentures
            
            $
            8,242,549
            
            
            6
                Mth LIBOR + 4
            %
            
            2/18/2009





As
      of the
      date of this report, our current liabilities exceed current assets. To service
      its debt, the Company must produce sufficient operating revenue and/or engage
      in
      additional financing transactions. If the Company relies in whole or in part
      on
      financing, debt financing may involve restrictive covenants and equity financing
      will result in dilution to our common shareholders. Nevertheless, the Company
      may not be able to successfully obtain any financing. If we cannot produce
      revenue sufficient to service and repay our debt, or successfully obtain
      financing for that purpose, the Company will likely be forced to consider
      various strategic alternatives, including but not limited to liquidating some
      or
      all assets, ceasing some or all operations, and bankruptcy. In addition, the
      Company may be subject to foreclosures by its secured creditors.





**Our
      articles of incorporation grant our board of directors with the power to
      designate and issue additional shares of common and/or preferred
      stock.**





Our
      authorized capital consists of 100,000,000 shares of capital stock. Pursuant
      to
      authority granted by the Company’s articles of incorporation, our board of
      directors, without any further action by the shareholders, may designate and
      issue shares in such classes or series (including classes or series of common
      stock and/or preferred stock) as it deems appropriate and establish the rights,
      preferences, and privileges of such shares, including dividends, liquidation
      and
      voting rights. The rights of holders of classes or series of common stock or
      preferred stock that may be issued could be superior to the rights of our
      exiting capital stock. Our board of directors’ ability to designate and issue
      shares could impede or deter an unsolicited tender offer or takeover proposal.
      Furthermore, the issuance of additional shares having preferential rights could
      adversely affect other rights appurtenant to the shares of common stock offered
      hereby. Any such issuances will dilute the percentage of ownership interest
      of
      our shareholders and may dilute the per-share book value of the
      Company.




33




As
      of November 09, 2006, we had 15,690,024 shares of common stock outstanding,
      and 53,389,087 shares of common stock reserved for issuance as
      follows:





·
            4,170,000
                shares under our existing stock option plans, of which options relating
                to
                3,608,608 shares are currently
                outstanding





·
            1,061,942
                shares relating to additional options granted outside of our stock
                option
                plans





·
            97,798
                shares upon conversion of outstanding Series A Preferred
                Stock





·
            6,667,850
                shares upon conversion of outstanding Series B Variable Rate Convertible
                Preferred Stock





·
            33,148,948
                shares upon the exercise of outstanding warrants,
                and





·
            8,242,549
                shares upon conversion of outstanding convertible
                debentures.




In
      addition
      to the shares summarized above, in connection with our sale of Series B Variable
      Rate Convertible Preferred Stock in October 2005, the original investors in
      such
      preferred shares have the option until March 23, 2007 to purchase another 7,420
      shares of Series B Variable Rate Convertible Preferred Stock (which shares,
      if
      so purchased, would be convertible into an aggregate of 7,420,000 common
      shares), and in connection therewith receive warrants to purchase additional
      common shares. Finally, the Company is obligated under the Securities Purchase
      Agreement relating to the Series B Variable Rate Convertible Preferred Stock
      to
      reserve additional shares of common stock that may be required to pay dividends
      on such preferred shares, if paid in common stock, and to fulfill other
      obligations to such purchasers in connection with such Securities Purchase
      Agreement.





**Item
      3. Controls and Procedures**





The
      Company carried out an evaluation, with the participation of our Chief Executive
      and Chief Financial Officers, of the effectiveness, as of September 30, 2006,
      of
      our disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation,
      made at the end of the period, our Chief Executive Officer and Chief Financial
      Officer concluded that our disclosure controls and procedures are effective
      in
      alerting them on a timely basis to material information required to be disclosed
      in our periodic reports to the SEC, and that there has been no significant
      change in such internal controls, or other factors which could significantly
      affect such controls including any corrective actions with regard to significant
      deficiencies or material weaknesses, since our evaluation. However, due to
      the
      limited number of Company employees engaged in the authorization, recording,
      processing and reporting of transactions, there is inherently a lack of
      segregation of duties. During the course of their audit of our consolidated
      financial statements for fiscal 2004 and 2005, our independent registered public
      accounting firm, Virchow, Krause & Company, LLP, advised management and the
      audit committee of our Board of Directors that they had identified a deficiency
      in internal control. The deficiency is considered to be a material weakness
      as
      defined under standards established by the American Institute of Certified
      Public Accountants. The material weakness relates to the lack of segregation
      of
      duties within the financial processes in the Company. The Company periodically
      assesses the cost versus benefit of adding the resources that would remedy
      or
      mitigate this situation, and currently does not consider the benefits to
      outweigh the costs of adding additional staff in light of the limited number
      of
      transactions related to the Company’s operations.


34


**PART
      II Other Information**





**Item
      2. Unregistered Sales of Equity Securities**





During
      the nine-month period ended September 30, 2006, the Company issued 127,487
      shares of its common stock as payment of dividends in lieu of cash to owners
      of
      its Series B Variable Rate Convertible Preferred Stock and issued 75,000 shares
      of common stock to a consultant in satisfaction of a contractual obligation.
      In
      addition, during the three and nine months ended September 30, 2006, the Company
      issued 780,000 and 936,250 shares, respectively, of the Company’s common stock
      upon conversion of 780 and 1,030 shares, respectively, of the Company’s Series B
      Variable Rate Convertible Preferred Stock. During the nine-month period ended
      September 30, 2006 the Company also issued 7,348 shares of its common stock
      upon
      the cashless exercise of warrants to purchase 14,140 shares of the Company’s
      common stock and issued 26,500 shares of its common stock upon the exercise
      of
      stock options.




The
      Company also issued, effective as of July 28, 2006, a five-year warrant to
      purchase up to 410,000 shares of common stock at a per-share price of $1.84
      in
      connection with an agreement with Rockmore Investment Master Fund Ltd. to extend
      the due date of a promissory note. On September 12, 2006, the Company issued
      common stock purchase options aggregating 2,032,500 shares. All options
      were granted with a purchase price of $0.88 per share, the fair value of the
      Company's common stock on September 12, 2006. Of the option grants, options
      for
      482,500 shares were granted pursuant to the Company's new 2006 Stock Incentive
      Plan (all of which have a five-year term) and the remaining options were granted
      pursuant to the Company's 2004 Stock Option Plan (all of which have terms
      ranging from approximately four years to approximately nine years). On the
      same
      date, the Company issued an aggregate of 125,000 shares of restricted and
      unregistered common stock to the Company's directors. Finally, and also on
      September 12, 2006, the Company issued a two-year option to Russell Mix, the
      Company's former Chief Executive Officer, to purchase up to 450,000 shares
      of
      common stock at $1.00 per share.




All
      of the foregoing issuances were made pursuant to
      the exemption from registration provided in Section 4(2) of the Securities
      Act
      of 1933.




The
      Company also issued unregistred securities as
      required on Forms 8-K filed on July 10, 2006 and August 21,
      2006.





**Item
      6. Exhibits**


.


**Exhibit
                No.**
            
            **Description**4.1
            
            Form
                of Variable Rate Convertible Debentures (incorporated by reference
                to
                Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on
                August 21, 2006).10.1
            
            Termination
                and Settlement Agreement (incorporated by reference to Exhibit 10.1
                to the
                registrant’s Current Report on Form 8-K filed on July 6,
                2006).10.2
            
            Technology
                Agreement (incorporated by reference to Exhibit 10.2 to the registrant’s
                Current Report on Form 8-K filed on July 6, 2006).10.3
            
            11%
                Secured Promissory Note, in principal amount of $630,000 (incorporated
                by
                reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
                filed on July 10, 2006).10.4
            
            Common
                Stock Purchase Warrant for 1,260,000 shares (incorporated by reference
                to
                Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on July
                10, 2006).10.5
            
            Form
                of Securities Purchase Agreement by and among the Company and purchasers
                of Variable Rate Convertible Debentures and warrants (incorporated
                by
                reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
                filed on August 21, 2006).




35




10.6
            
            Form
                of Common Stock Purchase Warrant issued to purchasers of Variable
                Rate
                Convertible Debentures (incorporated by reference to Exhibit 10.3
                to the
                registrant’s Current Report on Form 8-K filed on August 21,
                2006).10.7
            
            Form
                of Registration Rights Agreement by and among the Company and the
                purchasers of Variable Rate Convertible Debentures and warrants
                (incorporated by reference to Exhibit 10.4 to the registrant’s Current
                Report on Form 8-K filed on August 21, 2006).10.8
            
            2006
                Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to
                the
                registrant’s Current Report on Form 8-K filed on September 18,
                2006).10.9
            
            Separation
                and Release Agreement with Russell C. Mix (incorporated by reference
                to
                Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on
                September 18, 2006).10.10
            
            Consulting
                Agreement with Russell C. Mix (incorporated by reference to Exhibit
                10.3
                to the registrant’s Current Report on Form 8-K filed on September 18,
                2006).10.11
            
            Stock
                Option Agreement with Russell C. Mix (incorporated by reference to
                Exhibit
                10.4 to the registrant’s Current Report on Form 8-K filed on September 18,
                2006).10.12
            
            Form
                of Stock Option Agreement for use with 2006 Stock Incentive Plan
                (*filed
                herewith*).31.1
            
            Rule
                13a-14(a) Certification of Chief Executive Officer (*filed
                herewith*).31.2
            
            Rule
                13a-14(a) Certification of Chief Financial Officer (*filed
                herewith*).32
            
            Section
                1350 Certification (*filed
                herewith*).




36


**SIGNATURES**





Pursuant
      to the registration 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
              GAMING,
              INC.Date:
              November 14,
              2006
            By:
            /s/ D.
              Bradly
              OlahTitle:
            Chief Executive Officer
              (Principal Executive
                  Officer)




Date:
              November 14,
              2006
            By:
            /s/ Kevin
              M.
              GreerTitle:
            Chief
                Financial Officer
              (Principal Accounting
                Officer)


37


**Exhibits**
 .
 **Exhibit
                  No.**
              
              **Description**4.1
              
              Form
                  of Variable Rate Convertible Debentures (incorporated by reference
                  to
                  Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on
                  August 21, 2006).10.1
              
              Termination
                  and Settlement Agreement (incorporated by reference to Exhibit
                  10.1 to the
                  registrant’s Current Report on Form 8-K filed on July 6,
                  2006).10.2
              
              Technology
                  Agreement (incorporated by reference to Exhibit 10.2 to the registrant’s
                  Current Report on Form 8-K filed on July 6, 2006).10.3
              
              11%
                  Secured Promissory Note, in principal amount of $630,000 (incorporated
                  by
                  reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
                  filed on July 10, 2006).10.4
              
              Common
                  Stock Purchase Warrant for 1,260,000 shares (incorporated by reference
                  to
                  Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on July
                  10, 2006).10.5
              
              Form
                  of Securities Purchase Agreement by and among the Company and purchasers
                  of Variable Rate Convertible Debentures and warrants (incorporated
                  by
                  reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
                  filed on August 21, 2006).
  10.6
              
              Form
                  of Common Stock Purchase Warrant issued to purchasers of Variable
                  Rate
                  Convertible Debentures (incorporated by reference to Exhibit 10.3
                  to the
                  registrant’s Current Report on Form 8-K filed on August 21,
                  2006).10.7
              
              Form
                  of Registration Rights Agreement by and among the Company and the
                  purchasers of Variable Rate Convertible Debentures and warrants
                  (incorporated by reference to Exhibit 10.4 to the registrant’s Current
                  Report on Form 8-K filed on August 21, 2006).10.8
              
              2006
                  Stock Incentive Plan (incorporated by reference to Exhibit 10.1
                  to the
                  registrant’s Current Report on Form 8-K filed on September 18,
                  2006).10.9
              
              Separation
                  and Release Agreement with Russell C. Mix (incorporated by reference
                  to
                  Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on
                  September 18, 2006).10.10
              
              Consulting
                  Agreement with Russell C. Mix (incorporated by reference to Exhibit
                  10.3
                  to the registrant’s Current Report on Form 8-K filed on September 18,
                  2006).10.11
              
              Stock
                  Option Agreement with Russell C. Mix (incorporated by reference
                  to Exhibit
                  10.4 to the registrant’s Current Report on Form 8-K filed on September 18,
                  2006).10.12
              
              Form
                  of Stock Option Agreement for use with 2006 Stock Incentive Plan
                  (*filed
                  herewith*).31.1
              
              Rule
                  13a-14(a) Certification of Chief Executive Officer (*filed
                  herewith*).31.2
              
              Rule
                  13a-14(a) Certification of Chief Financial Officer (*filed
                  herewith*).32
              
              Section
                  1350 Certification (*filed
                  herewith*).
  38