##### Table of Contents



United States
Securities & Exchange Commission  FORM 10-QSB (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2004
 [  ]
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 Commission file number 0-25764 Spectre Gaming, Inc.  Minnesota
(State or other jurisdiction
of incorporation or organization)
    
    41-1675041
(IRS Employer
Identification No.)
 1466 Pioneer Way, #10
El Cajon, CA 92020
(Address of principal executive offices) 612-279-2030
(Issuers telephone number) 800 Nicollet Mall, Suite 2690
Minneapolis, MN 55402
(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 [  ] 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: 11,001,784
shares of common stock outstanding as of August 1, 2004, par value $.01
per share. Transitional Small Business Disclosure Format (check one): YES [ ]
NO [X]




---



##### Table of Contents



Spectre Gaming, Inc.
Form 10-QSB
Quarter Ended June 30, 2004 Table of Contents Page No.PART I
    
    Financial Information
    
    
    2Item 1.
    
    Financial StatementsBalance Sheets at June 30, 2004 (unaudited) and December 31, 2003 (audited)
    
    
    2Statements of Operations for the three and six months ended June 30, 2004 and 2003 (unaudited)
    
    
    3Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)
    
    
    4Notes to Financial Statements
    
    
    5Item 2.
    
    Management's Discussion and Analysis or Plan of Operation
    
    
    12Item 3.
    
    Controls and Procedures
    
    
    18PART II
    
    Other Information
    
    
    19Item 2.
    
    Changes in Securities and Small Business Issuer Purchases of Equity Securities
    
    
    19Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    19SIGNATURES
    
    
    20License AgreementRule 13a-14(a) Certification of CEORule 13a-14(a) Certification of CFOSection 1350 Certification




---



##### Table of Contents



PART I  Financial Information 
 Item 1. Financial Statements Spectre Gaming, Inc. 
 Balance Sheets
 June 30,
    
    December 31,2004
    
    2003(unaudited)
    
    (audited)ASSETSCURRENT ASSETS:Cash
    
    $
    631,651
    
    
    $
    323,675Inventory
    
    
    1,235,537
    
    
    
    Prepaid license fees
    
    
    187,500
    
    
    
    Prepaid expenses and other current assets
    
    
    31,954
    
    
    
    40,461Total current assets:
    
    
    2,086,642
    
    
    
    364,136Fixed assets, net
    
    
    11,545
    
    
    
    Other assets
    
    
    298,144
    
    
    
    Total assets:
    
    $
    2,396,331
    
    
    $
    364,136LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Current portion of convertible note payable, net
    
    $
    191,352
    
    
    $
    Accounts payable
    
    
    595,015
    
    
    
    42,907Accrued payroll and related taxes
    
    
    
    
    
    
    3,942Accrued expenses
    
    
    89,912
    
    
    
    57,538Total current liabilities:
    
    
    876,279
    
    
    
    104,387Convertible note payable, net
    
    
    179,527
    
    
    
    Total liabilities
    
    
    1,055,806
    
    
    
    104,387SHAREHOLDERS EQUITY:Capital stock, par value $.01 per share, 16,666,666 shares
authorized:Series A Convertible Preferred Stock, par value $.01 per share:Authorized shares466,666Issued and outstanding shares:240,000 and 440,000 shares at June 30, 2004 and December 31,
2003, respectively
    
    
    2,400
    
    
    
    4,400($360,000 and $660,000 liquidation preference at June 30, 2004
and December 31, 2003, respectively)Common stock, par value $.01 per share:Authorized shares13,333,33310,926,556 and 8,093,198 shares issued and outstanding at June
30, 2004 and December 31, 2003, respectively
    
    
    109,266
    
    
    
    80,932Additional paid-in capital
    
    
    20,345,192
    
    
    
    16,388,237Accumulated deficit
    
    
    (17,981,563
    )
    
    
    (16,213,820
    )Deferred equity compensation
    
    
    (1,134,770
    )
    
    
    Total shareholders equity:
    
    
    1,340,525
    
    
    
    259,749Total liabilities and shareholders equity:
    
    $
    2,396,331
    
    
    $
    364,136
 See accompanying notes to financial statements. 2




---



##### Table of Contents



Spectre Gaming, Inc. 
 Statements of Operations
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)OPERATING EXPENSES:Research and development
    
    $
    
    
    
    $
    
    
    
    $
    850,000
    
    
    $
    Selling, general and administrative
    
    
    662,813
    
    
    
    21,836
    
    
    
    849,796
    
    
    
    52,529Total Operating Expenses:
    
    
    662,813
    
    
    
    21,836
    
    
    
    1,699,796
    
    
    
    52,529Operating loss
    
    
    (662,813
    )
    
    
    (21,836
    )
    
    
    (1,699,796
    )
    
    
    (52,529
    )OTHER INCOME (EXPENSE):Interest income
    
    
    1,442
    
    
    
    
    
    
    
    2,098
    
    
    
    Interest expense
    
    
    (70,045
    )
    
    
    
    
    
    
    (70,045
    )
    
    
    Net Loss:
    
    $
    (731,416
    )
    
    $
    (21,836
    )
    
    $
    (1,767,743
    )
    
    $
    (52,529
    )NET LOSS PER COMMON SHARE:Basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.00
    )
    
    $
    (0.18
    )
    
    $
    (0.01
    )WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:Basic and diluted
    
    
    10,502,870
    
    
    
    9,861,254
    
    
    
    9,658,311
    
    
    
    9,861,254
 See accompanying notes to financial statements. 3




---



##### Table of Contents



Spectre Gaming, Inc. 
 Statements of Cash Flows
 Six Months Ended June 30,2004
    
    2003(unaudited)Operating activitiesNet loss
    
    $
    (1,767,743
    )
    
    $
    (52,529
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    317
    
    
    
    Common stock issued for services
    
    
    700,000
    
    
    
    Stock options and warrants issued for services
    
    
    66,479
    
    
    
    Amortization of original issue discount
    
    
    60,879
    
    
    
    Amortization of debt issuance costs
    
    
    24,506
    
    
    
    Changes in operating assets and liabilities:Inventory
    
    
    (1,235,537
    )
    
    
    Prepaid license fees
    
    
    (187,500
    )
    
    
    Prepaid expenses
    
    
    8,507
    
    
    
    26,110Other assets
    
    
    (4,650
    )
    
    
    Accounts payable, payroll and related taxes and
accrued expenses
    
    
    580,540
    
    
    
    8,134Net cash used in operating activities:
    
    
    (1,754,202
    )
    
    
    (18,285
    )Investing activitiesCapital expenditures
    
    
    (11,862
    )
    
    
    Net cash used in investing activities
    
    
    (11,862
    )
    
    
    Financing activitiesDebt financing costs
    
    
    (93,000
    )
    
    
    Proceeds from sale of common stock, net of issuance costs
    
    
    1,067,040
    
    
    
    Proceeds from convertible note payable and common stock
warrants issued
    
    
    1,100,000
    
    
    
    Proceeds from loan payable  related parties
    
    
    
    
    
    
    15,000Net cash provided by financing activities
    
    
    2,074,040
    
    
    
    15,000Increase (decrease) in cash
    
    
    307,976
    
    
    
    (3,285
    )Cash at beginning of the period
    
    
    323,675
    
    
    
    3,346Cash at end of the period:
    
    $
    631,651
    
    
    $
    61Supplemental cash flow informationCash paid for interest
    
    $
    9,166
    
    
    $
    Cash paid for income taxes
    
    
    
    
    
    
    Warrants issued for services relating to debt issuance
    
    
    225,000
    
    
    
    
 See accompanying notes to financial statements. 4




---



##### Table of Contents



Spectre Gaming, Inc. 
 
 Note 1. Business Description. Spectre Gaming, Inc. (the Company or Spectre) (formerly OneLink, Inc.)
was incorporated in Minnesota in June 1990 and changed its name to Spectre
Gaming, Inc. in January 2004. The Company is a provider of interactive
electronic games to the rapidly growing Native American and charitable gaming
markets. The Company designs and develops networks, software and content that
provide its customers with a comprehensive gaming system. The Company
anticipates that it will generate revenues starting in the third quarter of
2004. 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 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 six months ended June 30, 2004 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2004. 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, 2003, contained in its Annual Report on
Form 10-KSB for the year ended December 31, 2003 (Readers should also carefully
review Note 3 below discussing the sale of assets). The financial information furnished 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. Inventory.Inventory, which consist principally of gaming products and
related materials, are stated at the lower of cost (determined on the first-in,
first-out method) or market. 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 software
development costs, since such costs have not been significant. 5




---



##### Table of Contents



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 or warrants could
potentially dilute basic loss per common share in subsequent years. All
options and warrants outstanding were antidilutive for the three and six months
ended June 30, 2004 and 2003. Debt Issuance Costs.The Company capitalizes debt issuance costs and
amortizes the costs over the life of the loan using the straight-line method,
which approximates the interest method. The capitalized costs related to the
convertible debt investment from Pandora Select Partners LP (Pandora) include
the origination fee paid to Pandora, the $50,000 cash paid to Blake Capital
Advisors, LLC (Blake), the value of the warrants issued to Blake and $10,000
of legal fees, and are included in other assets in the financial statements.
The warrants issued to Blake were valued at $225,000 using the Black-Scholes
pricing model. Amortization expense of the debt issuance costs for the three
and six months ended June 30, 2004 was $24,506. Estimated amortization for
debt issuance costs are $130,508 and $187,492 for the years ending December 31,
2004 and 2005, respectively. Stock Based Compensation.In accordance with Accounting Principles Board
(APB) Opinion No. 25 and related interpretations, the Company uses 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
non-employees are recorded at fair value, as required by Statement of Financial
Accounting Standards (SFAS) No. 123 Accounting for Stock Based
Compensation, using the Black-Scholes pricing model. The Company has adopted
the disclosure only provision of SFAS No. 148, Accounting for Stock Based
Compensation. The Company applies APB No. 25 and related interpretations in accounting
for its stock options and warrants. Compensation expense for the three and six
months ended June 30, 2004 was $66,479. Had compensation costs for the
Companys stock options and warrants been determined based on the fair value at
the grant dates consistent with the method of SFAS No. 123, the Companys net
loss and loss per share would have been changed to the approximate pro forma
amounts indicated below: 6




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss:As reported
    
    $
    (731,416
    )
    
    $
    (21,836
    )
    
    $
    (1,767,743
    )
    
    $
    (52,529
    )Pro forma
    
    
    (866,488
    )
    
    
    (21,836
    )
    
    
    (2,016,114
    )
    
    
    (52,529
    )Basic and diluted net
loss per common shareAs reported
    
    $
    (0.07
    )
    
    $
    (0.00
    )
    
    $
    (0.18
    )
    
    $
    (0.01
    )Pro forma
    
    
    (0.08
    )
    
    
    (0.00
    )
    
    
    (0.21
    )
    
    
    (0.01
    )Stock-based compensationAs reported
    
    $
    66,479
    
    
    $
    
    
    
    $
    66,479
    
    
    $
    Pro forma
    
    
    135,072
    
    
    
    
    
    
    
    248,371
    
    
    
    
 The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes pricing model: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Risk Free interest rate
    
    
    3.83
    %
    
    
    N/A
    
    
    
    2.93
    %
    
    
    N/AExpected life
    
    
    5.0 years
    
    
    
    N/A
    
    
    
    5.0 years
    
    
    
    N/AExpected volatility
    
    
    644
    %
    
    
    N/A
    
    
    
    637
    %
    
    
    N/AExpected dividends
    
    
    0
    %
    
    
    N/A
    
    
    
    0
    %
    
    
    N/A
 During the six months ended June 30, 2004, the Company has issued options
to purchase 550,000 shares of the Companys common stock to non-employees,
mostly consultants, with exercise prices ranging from $2.00 per share to $2.40
per share and expiring at various times through June 2009. The Company valued
these options at $1,201,249 using the Black-Scholes pricing model. The Company
recorded expense of $66,479 for the three and six months ended June 30, 2004 in
accordance with APB No. 25. Note 3. Sale of Assets and Liquidity On April 24, 2002, while the Company was involved in providing
telecommunications-based business-intelligence services, the Company announced
that its ability to generate cash flow was severely impacted by the downturn in
the telecommunications market. The severe downturn greatly delayed the
deployment of the Companys products by Regional Bell Operating Companies. On
June 3, 2002, the Company announced that a letter of intent had been signed
with CallVision, Inc. (CallVision) pursuant to which CallVision agreed in
principle to purchase substantially all of the Companys assets. The Company
entered into an asset purchase agreement with CallVision on June 28, 2002, and
ceased operations as of July 1, 2002. On December 6, 2002, the Companys
shareholders approved the asset sale and on December 11, 2002, the Company
closed on its sale of substantially all of its assets to CallVision. 7




---



##### Table of Contents



Pursuant to the asset purchase agreement with CallVision, the Company sold
substantially all its assets in exchange for cash payments of $214,300. Upon
the execution and delivery of the asset purchase agreement, CallVision paid the
Company $100,000 in cash, plus an additional $14,300 in cash for the Companys
June 2002 office rent and T-1 bandwidth. At the closing of the asset sale,
CallVision paid the Company the remaining $100,000 in cash. The Company was
also to receive an amount equal to 15% of revenue generated from certain sales
of current or future versions of the Companys products during the period from
closing through December 31, 2003. There were no such sales of the Companys
products during such period. The proceeds received from the sale of the
Companys assets were not sufficient to allow the Company to make any
distributions to the Companys shareholders. During the year ended December
31, 2002, the Company recorded a loss of approximately $337,000 related to a
long-term prepaid expense, and property and equipment sold to CallVision in
connection with the asset sale. 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 six months ended June 30, 2004 and 2003 and the years ended
December 31, 2003 and 2002 and had an accumulated deficit at June 30, 2004.
The Company expects to begin generating revenues through the placement of our
machines in casinos in the third quarter of 2004. The ability to reduce our
loss is dependent on the placement and sales of machines. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties. Note 4. Software On March 4, 2004, the Company signed an agreement with MET Games, Inc.
(MET) to purchase certain Linux-based software and technology being developed
by and owned by MET for the operation of certain gaming computers and systems.
Pursuant to the agreement, the Company made a $250,000 cash payment to MET and
issued 800,000 unregistered, restricted shares of the Companys common stock.
The Company will utilize the software as it develops its business opportunities
in the rapidly growing Native American Class II and charitable gaming markets. The Company has the right to terminate the agreement and recover the
$250,000 payment and 800,000 unregistered, restricted shares of the Companys
common stock if MET fails to deliver software that meets the specifications
detailed in the agreement or in the event that MET fails to provide the
software in accordance with the development schedule detailed in the agreement.
Despite this fact, due to the development of the software not having reached
technological feasibility on the date of the agreement and the $250,000 cash
payment being a significant performance commitment, the Company expensed the
cash payment and the value of the common stock, $600,000, as research and
development expense. The common stock was valued at $0.75 per share, based
upon the price of the Companys recently completed private placement. MET is wholly-owned by an individual who became an employee of the Company
on March 4, 2004. 8




---



##### Table of Contents



Note 5. Shareholders Equity In November 2003, the Company began a private placement which ended in
March 2004 (the Offering). A majority of the sales of the Companys common
stock occurred after December 31, 2003. In the Offering, the Company sold a
total of 1,796,829 shares of its common stock (of which 1,531,989 were sold in
2004) for a per share price of $0.75 (i.e., raising a gross total of
$1,347,626, $1,148,996 of which was raised in 2004). The Offering was a
private placement made under Rule 506 promulgated under the Securities Act of
1933, as amended. The Company raised funds in this private placement in
anticipation of entering into the business of developing, manufacturing,
distributing and servicing gaming machines, primarily for the Native American
and charitable gaming markets. The Company used an agent for a portion of
these sales. As a fee, the Company paid the agent $62,550 in cash which was
accounted for as a reduction of gross proceeds, and issued the agent five-year
warrants to purchase up to 83,400 shares of the Companys common stock for an
exercise price of $0.75 per share. Preferred Stock During the year ended December 31, 2001, the Company sold 440,000 shares
of Series A Convertible Preferred Stock and received net proceeds of $615,133.
The preferred stock has voting rights identical to common stock. In the event
of liquidation, the Series A Preferred shareholders shall receive a liquidation
preference of $1.50 per share. Although no dividends are required with respect
to the Series A Preferred Stock, 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 elect to 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 on file with the Minnesota Secretary of State. 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. In June 2004, holders of 200,000 shares of the Companys Series A
Convertible Preferred Stock converted their preferred shares into 451,369
shares of the Companys $.01 par value common stock. At the end of the period
covered by this report there were outstanding 240,000 shares of Series A
Convertible Preferred Stock which were convertible into an aggregate of 541,680
shares of the Companys common stock. Note 6. Distribution Agreement In June 2004, the Company signed a distribution agreement to become the
exclusive distributor of Games of Chance, Inc (GOC). Under the terms of the
five-year agreement the Company will issue an aggregate of 200,000 shares of
the Companys common stock, 50,000 shares of which were issuable upon the
signing of the agreement with the remaining 150,000 shares issuable in five
30,000-share installments on each of the five anniversaries of the agreement.
In addition, GOC received an option to purchase 500,000 shares of the Companys
common stock at an exercise price of $2.50 per share. The options vest in
increments of 25,000 shares as the Company places or sells 500 GOC machines. Upon signing the
Company also paid GOC $15,000 related to prior expenses incurred by GOC on
behalf of the Company. 9




---



##### Table of Contents



In connection with the distribution agreement the Company signed a
five-year consulting agreement (Consulting Agreement) with Barry Quick, the
spouse of the President of GOC. The Consulting Agreement calls for monthly
payments to Mr. Quick of $10,000 and is terminable, without penalty, for cause
or non-performance. Note 7. Convertible Debt On May 20, 2004, the Company received $1,100,000 in a convertible debt
investment from Pandora Select Partners LP (Pandora). The note is payable in
interest only, at 10% per annum, through August 20, 2004, and thereafter is
payable in equal monthly installments over the next 15 months. The note is
convertible by Pandora into common stock of Spectre at $2.50 per share, and
allows Spectre, subject to certain conditions and limitations, to make monthly
installment payments with its common stock at a price per share equal to 90% of
the average closing bid price of the common stock over the 30 trading days
immediately preceding the payment date. In connection with the financing,
Spectre paid a 3% origination fee, issued a five-year warrant for the purchase
of 200,000 shares of Spectres common stock at $2.50 per share, and granted
Pandora a security interest in the Companys assets. The gross proceeds of
$1,100,000 were allocated between the convertible note 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, the fair value of the
warrants and the beneficial conversion of the note into common stock as defined
in EITF 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments, will be amortized over the life of the promissory note using the
straight-line method, which approximates the interest method. Principle
payments commence in September 2004 but may be deferred based upon the number
of Class III machines sold or placed on a participation basis on or before
August 20, 2004. The note is convertible by the holder any time in whole or in
part upon written notice to the Company. Such conversion is limited to the
extent the holders beneficial ownership interest would exceed 4.99% of
outstanding common stock at conversion. In addition, Spectre agreed to file a
registration statement by February 1, 2005 with the U.S. Securities and
Exchange Commission, covering the issuance or resale of the shares of Spectres
common stock which may be issued in connection with the note and warrant issued
to Pandora. In connection with the financing, the Company also paid a finders
fee to Blake Capital Advisors, LLC (Blake), a Minnesota limited liability
company wholly owned by Wayne W. Mills, a greater-than-five-percent shareholder
of the Company, of $50,000 and issued a five-year warrant for the purchase of
50,000 shares of the Companys common stock at $2.50 per share and a five-year
warrant for the purchase of 50,000 shares at $3.00 per share. 10




---



##### Table of Contents



The allocation of the gross proceeds of the convertible note payable is
summarized below as of June 30, 2004: Convertible note payable, total borrowed
    
    $
    1,100,000Value of 200,000 warrants allocated to additional paid
in capital
    
    
    (450,000
    )Value of beneficial conversion of note payable
allocated to additional paid in capital
    
    
    (340,000
    )Convertible note payable, net of original issue
discount
    
    
    310,000Amortization of original issue discount
    
    
    60,879Total convertible note payable
    
    
    370,879Less current portion
    
    
    191,352Convertible note payable, net
    
    $
    179,527
 Note 8. License Agreement On June 30, 2004, the Company signed a three year non-exclusive license
agreement (License Agreement) with Bally Gaming Inc. (Bally). The License
Agreement calls for the Company to purchase up to 3,000 game cabinets from
Bally over the term of the Agreement. Nevertheless, if the Company has
purchased at least 70% of its Class II cabinet purchases from Bally during the
term, Bally shall waive the 3,000 game cabinet purchase minimum. In addition,
the Company is obligated to purchase at least 100 game cabinets from Bally, and
incur certain minimum license-fee charges of $187,500, by June 30, 2004. Note 9. Related Party Transactions The Company incurred expenses from a corporation, owned by a director and
officer of the Company and employing another director and officer of the
Company, for rent and consulting services of $21,000 and $3,000 during the
three months ended June 30, 2004 and 2003, respectively and $45,000 and $5,000
during the six months ended June 30, 2004 and 2003, respectively. In February 2004, the Company entered into a consulting agreement with D.
Bradly Olah, a greater-then-five-percent shareholder of the Company. Pursuant
to the consulting agreement, Mr. Olah received $12,500 per month for four
months (ending as of May 31, 2004) in exchange for general consulting services.
On June 1, 2004, the Company entered into a new consulting agreement with Mr.
Olah providing for payments of $12,500 per month for a two-year term. In
connection with the new consulting agreement, Mr. Olah received options to
purchase up to 300,000 shares of the Companys common stock at an exercise
price of $2.15 per share (the fair value of the stock on the date of grant).
Beginning on June 15, 2005, the option vests in 100,000-share increments on
each June 15 through 2007, and has a five-year term during which the options
must be exercised or forfeited. The options were valued at $645,000 using the
Black-Scholes pricing model and will be expensed using the straight-line method
over the term of the consulting agreement. For the three and six months ended June 30, 2004,
the Company recorded expense of $26,875 related to these options. 11




---



##### Table of Contents



In connection with the convertible debt financing from Pandora, the
Company paid $50,000 and issued two three-year warrants to Blake Advisors, LLC,
a Minnesota limited liability company wholly owned by Wayne W. Mills, a
greater-than-five-percent shareholder of the Company. The warrants were issued
in exchange for financial-advisory services rendered by Blake Advisors. One
warrant grants Blake Advisors the right to obtain up to 50,000 shares of the
Companys common stock at an exercise price of $2.50 per share, and the second
warrant grants Blake Advisors the right to obtain up to 50,000 shares of the
Companys common stock at an exercise price of $3.00 per share. The warrants
were valued at $225,000 using the Black-Scholes pricing model and will be
expensed using the straight-line method over the term of the promissory note.
For the three and six months ended June 30, 2004, the Company recorded expense
of $17,339 related to these warrants. Note 10. Subsequent Event In July 2004, holders of 33,333 shares of the Companys Series A
Convertible Preferred Stock converted their preferred shares into 75,228 shares
of the Companys common stock, leaving an aggregate of 206,667 shares of Series
A Convertible Preferred Stock outstanding. Such preferred shares are
convertible into an aggregate of 466,447 shares of the Companys common stock. 
 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, 2003, included in our Annual Report on
Form 10-KSB for the year ended December 31, 2003. Results of Operations The Three and Six Months Ended June 30, 2004 Compared to the Three and Six
Months Ended June 30, 2003 Research and Development Expenses.Research and development expenses for
the three and six months ended June 30, 2004 were $0 and $850,000,
respectively, as compared with $0 and $0 for the three and six months ended
June 30, 2003, respectively. On March 4, 2004, the Company signed an agreement
with MET Games, Inc. (MET) to purchase certain Linux-based software and
technology being developed by and owned by MET for the operation of certain
gaming computers and systems. Pursuant to the agreement, the Company made a
$250,000 cash payment to MET and issued 800,000 unregistered, restricted shares
of the Companys common stock. The Company will utilize the software as it
develops its business opportunities in the rapidly growing Native American
Class II and charitable gaming markets. 12




---



##### Table of Contents



The Company has the right to terminate the agreement and recover the
$250,000 payment and the 800,000 unregistered, restricted shares of the
Companys common stock if MET fails to deliver software that meets the
specifications detailed in the agreement or in the event that MET fails to
provide the software in accordance with the development schedule detailed in
the agreement. Despite this fact, due to the development of the software not
having reached technological feasibility on the date of the agreement and the
$250,000 cash payment being a significant performance commitment, the Company
expensed the cash payment and the value of the common stock, $600,000, as
research and development expense. The common stock was valued at $0.75 per
share, based upon the price of the Companys then recently completed private
placement. MET is wholly-owned by an individual who became an employee of the Company
on March 4, 2004. Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three and six months ended June 30, 2004 were
$663,000 and $850,000, respectively, consisting mainly of salaries,
professional services, consulting and travel expenses, compared to $22,000 and
$53,000 for the three and six months ended June 30, 2003, respectively. The
increases in expense primarily resulted from the Company commencing operations
in the Native American and charitable gaming markets. To execute on the
opportunity in these markets, the Company has hired employees and engaged
consultants which significantly increased these expenses. Selling, general and
administrative expense for the three and six months ended June 30, 2004,
includes $66,479 of expense related to options and warrants granted to
consultants. Net Loss. The Company incurred a net loss of $731,000 and $1,768,000 for
the three and six months ended June 30, 2004, respectively, compared to net
losses of $22,000 and $53,000 for the comparable periods in the prior year,
respectively. These increased net losses are primarily the result of the
Company commencing operations in the Native American and charitable gaming
markets including employee and
consulting expense and, for the six months ended June 30, 2004,
the Company expensing the consideration given in the MET
transaction. Liquidity and Capital Resources. The Company had working capital of
$1,210,000 and $260,000 at June 30, 2004 and December 31, 2003, respectively.
Cash used in operations was $1,847,000 and $18,000 for the six months ended
June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004,
the primary uses of cash were to fund the Companys net loss, acquire inventory
and to prepay license fees. These uses were partially offset by an increase in
accounts payable, payroll and related taxes and accrued expenses and a non-cash
charge related to common stock issued for services. For the six months ended
June 30, 2003, the primary use of cash was to fund the Companys net loss
partially offset by a decrease in prepaid expenses and increases in accounts
payable, payroll and related taxes and accrued expenses. Cash used in investing activities was $12,000 and $0 for the six months
ended June 30, 2004 and 2003, respectively. For the six months ended June 30,
2004 the Company used cash for capital expenditures, primarily at its El Cajon,
California location. Cash provided by financing activities was $2,167,000 and $15,000 for the
six months ended June 30, 2004 and 2003, respectively. In November 2003, the
Company began a private placement which ended in March 2004 (the Offering).
A majority of the sales of the 13




---



##### Table of Contents



Companys common stock occurred after December 31, 2003. In the Offering,
the Company sold a total of 1,796,829 shares of its common stock (of which
1,531,989 were sold in 2004) for a per share price of $0.75 (i.e., raising a
gross total of $1,347,626, $1,148,996 of which was raised in 2004). The
Company used an agent for a portion of these sales. As a fee, the Company paid
the agent $62,550 in cash and issued the agent five-year warrants to purchase
up to 83,400 shares of the Companys common stock for an exercise price of
$0.75 per share. On May 20, 2004, the Company received $1,100,000 in a convertible debt
investment from Pandora Select Partners LP (Pandora). The note is payable in
interest only, at 10% per annum, through August 20, 2004, and thereafter is
payable in equal monthly installments over the next 15 months. The note is
convertible by Pandora into common stock of Spectre at $2.50 per share, and
allows Spectre, subject to certain conditions and limitations, to make monthly
installment payments with its common stock at a price per share equal to 90% of
the average closing bid price of the common stock over the 30 trading days
immediately preceding the payment date. In connection with the financing,
Spectre paid a 3% origination fee, issued a five-year warrant for the purchase
of 200,000 shares of Spectres common stock at $2.50 per share, and granted
Pandora a security interest in the Companys assets. The gross proceeds of
$1,100,000 were allocated between the convertible note 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, the fair value of the
warrants and the beneficial conversion of the note into common stock as defined
in EITF 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments, will be amortized over the life of the Note using the
straight-line method, which approximates the interest method. Principle
payments commence in September 2004 but may be deferred based upon the number
of Class III machines sold or placed on a participation basis on or before
August 20, 2004. The note is convertible by the holder any time in whole or in
part upon written notice to the Company. Such conversion is limited to the
extent the holders beneficial ownership interest would exceed 4.99% of
outstanding common stock at conversion. In addition, Spectre agreed to file a
registration statement by February 1, 2005 with the U.S. Securities and
Exchange Commission, covering the issuance or resale of the shares of Spectres
common stock which may be issued in connection with the note and warrant issued
to Pandora. In connection with the financing, the Company also paid a finders
fee to Blake Capital Advisors, LLC (Blake), a Minnesota limited liability
company wholly owned by Wayne W. Mills, a greater-than-five-percent shareholder
of the Company, of $50,000 and issued a five-year warrant for the purchase of
50,000 shares of the Companys common stock at $2.50 per share and a five-year
warrant for the purchase of 50,000 shares at $3.00 per share. During the six months ended June 30, 2003, proceeds from loans provided
$15,000 of cash. The loans were unsecured, non-interest bearing, and due upon
demand. On June 30, 2004, the Company signed a three-year non-exclusive license
agreement (License Agreement) with Bally Gaming Inc. (Bally). The License
Agreement calls for the Company to purchase up to 3,000 game cabinets from
Bally over the term of the Agreement. Nevertheless, if the Company has
purchased at least 70% of its Class II cabinet purchases from Bally during the
term, Bally shall waive the 3,000 game cabinet purchase minimum. In addition,
the Company is obligated to purchase at least 100 game cabinets from Bally, and
incur certain minimum license-fee charges of $187,500, by June 30, 2004. 14




---



##### Table of Contents



The Company expects to spend a significant amount on capital equipment
purchases over the next twelve months, primarily as it places its gaming
machines in Native American and charitable gaming facilities. The Company
expects that it will use debt and/or equity financing to purchase this
equipment. Management believes that its cash should be sufficient to satisfy its cash
requirements for the next three months. The Company will need to obtain
additional cash to meet its needs beyond that period and has been actively
pursuing additional debt and equity financing. Risk Factors Unpredictability of Future Results of Operations. As a result of the
Companys lack of operating history in the Native American and charitable
gaming markets, the Company is unable to accurately forecast its future
revenues. Need for Additional Financing. The Companys operations, as currently
conducted, generate costs related to the exploration of additional business
opportunities for the Company, as well as ongoing personnel, legal and
accounting expenses. If the Company is unable to capitalize on its existing
opportunities or locate and act on other business opportunities, or if
expenditures exceed the Companys current expectations, the Company will be
required to find additional sources of financing. Even if the Company
successfully avails itself of current or future opportunities, additional
financing may be required to expand or to continue being involved in such
opportunities. Additional financing could be sought from a number of sources, including
but not limited to additional sales of equity or debt securities, loans from
banks, loans from affiliates of the Company or other financial institutions.
No assurance can be given, however, that the Company will be able to sell any
such securities, or obtain 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
the Companys entire business, discontinue preparing and filing the disclosure
reports, or dissolve the Company. Possible Issuance of Additional Common or Preferred Stock. Our authorized
capital consists of 16,666,666 shares of capital stock, 13,333,333 of which
have been designated as Common Stock, 466,666 of which have been designated as
Series A Convertible Preferred Stock and 2,866,667 of which are undesignated
(i.e., available for issuance as either Common Stock or preferred stock).
Pursuant to authority granted by the Companys Articles of Incorporation, our
Board of Directors, without any action by the shareholders, may designate and
issue shares in such classes or series (including other classes or series of
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 other classes or series of preferred stock
that may be issued could be superior to the rights of the current shareholders.
Our Boards ability to designate and issue such undesignated shares could
impede or deter an unsolicited tender offer or takeover proposal. Any such
issuances will dilute the percentage of ownership interest of current
shareholders and may dilute the book value of the Company. 15




---



##### Table of Contents



Dependence on Senior Management; Need for Additional Personnel. The
Companys success in the Native American and charitable gaming markets depends
in significant part upon the continued service of its key senior management
personnel. In particular, we are materially dependent upon the services of
Russell Mix, a director of the Company and the Companys President and Chief
Executive Officer. If Mr. Mix is unable to continue serving the Company, it
could have a materially adverse impact on the Companys business, financial
condition and operations. The Companys success also depends on its ability to
identify, hire, train, retain and motivate highly-skilled technical,
managerial, sales and marketing personnel. The Company intends to hire a
number of sales, business development, marketing, technical and administrative
personnel in the future. Competition for such personnel is intense and there
can be no assurance that the Company will successfully attract, assimilate or
retain a sufficient number of qualified personnel. The failure to retain and
attract the necessary technical, managerial, sales and marketing and
administrative personnel could have a material adverse impact on the Companys
business, financial condition and operations. Control by Existing Shareholders. The outstanding shares of the Companys
common stock are concentrated in the hands of a relatively few shareholders.
These shareholders are able to exercise significant control over matters
requiring shareholder approval, including the election of directors, and the
approval of mergers, consolidations and sales of all or substantially all of
the assets of the Company. Our Common Stock Trades only in an Illiquid Trading Market. Trading of
our common stock is conducted on the OTC Bulletin Board. This has an adverse
effect on the liquidity of our common stock, not only in terms of the number of
shares that can be bought and sold at a given price, but also through delays in
the timing of transactions and reduction in security analysts and the medias
coverage of our Company and common stock. This may result in lower prices for
our common stock than might otherwise be obtained and could also result in a
larger spread between the bid and asked prices for our common stock. Our Common Stock is Subject to Penny-Stock Rules Which May Further Hamper
Your Ability to Sell Shares. Our Common Stock is a penny stock under current
SEC rules. Broker-dealers who sell penny stocks must provide purchasers of
these stocks with a standardized risk disclosure document prepared by the SEC.
This document provides information about penny stocks and the nature and level
of risks involved in investing in the penny stock market. A broker must also
give a purchaser, orally or in writing, bid and offer quotations and
information regarding broker and salesperson compensation, make a written
determination that the penny stock is a suitable investment for the purchaser,
and obtain the purchasers written agreement to the purchase. The penny stock
rules may make it difficult for you to sell shares of our Common Stock.
Because of the rules, there is less trading in penny stocks. Also, many
brokers choose not to participate in penny stock transactions because of the
administrative burden. Accordingly, you may not always be able to resell
shares of our Common Stock publicly at times and prices that you feel are
appropriate or fair. No Future Cash Dividends. To date, the Company has not paid any cash
dividends and does not anticipate the payment of cash dividends in the
foreseeable future. 16




---



##### Table of Contents



Our Independent Auditors Have Substantial Doubt About Our Ability To
Continue As A Going Concern. We have had net losses for each of the years
ended December 31, 2003 and 2002, and we had an accumulated deficit as of December 31, 2003. Since the
financial statements for each of these periods were prepared assuming that we
would continue as a going concern, in the view of our independent auditors,
these conditions raise substantial doubt about our ability to continue as a
going concern. Furthermore, since we are pursuing a new line of business in
the rapidly growing Native American and charitable gaming markets, we do not
expect to generate any significant revenues for the foreseeable future. Our
ability to continue as a going concern depends, in large part, on our ability
to raise additional capital through equity or debt financing transactions. If
we are unable to raise additional capital, we may be forced to discontinue our
business. Evolving Law May Adversely Impact the Companys Entry into the Gaming
Industry. On November 25, 2003, the United States Department of Justice, at the
request of the Bush administration, filed two formal requests asking the United
States Supreme Court to review caselaw affecting the 10th and 8th Circuits.
These appellate court circuits cover dozens of tribes in the west and northern
plains states. The Justice Department filing was aimed at overturning two
recent cases which determined that certain types of casino games  those called
bingo and using bingo odds and rules of play but which appear, sound and play
like slot machines  are really bingo-type machines classified as Class II
games. The classification of these particular types of games is important for
many reasons. For one, state tribal compacts typically limit the number of
Class III slot-machine games able to be installed in any one gaming location.
Second, the Companys involvement in the gaming industry is directly related to
these kinds of bingo/slot-machine games. The Company has entered into a
transaction with MET Games, Inc., an Oklahoma corporation, pursuant to which
the Company will acquire gaming technology related to these kinds of bingo/slot
machines. The Companys ability to capitalize effectively on this technology
materially depends on the classification of slot-machine/bingo games and the
number of gaming machines eligible to be used in gaming locations. On March 2, 2004, the United States Supreme Court denied writs of
certiorari for the two above-indicated lawsuits. Essentially, this act upholds
the lower courts decisions that the gaming machines using bingo rules of play
but appear and play like slot machines are rightly categorized as Class II
gaming machines. While this recent ruling is positive for the gaming industry
in general and for the Company in particular, there can be no assurance that
there will not be other attempts to overturn this result. Of course, the
result of any such further attempts is beyond the Companys control, and its
outcome must be considered a material and significant risk factor. The Company Currently Has Few Licenses and Permits for its Anticipated
Gaming Business. The gaming industry in the United States is highly regulated,
and frequently requires operators of gaming facilities and manufacturers and
distributors of gaming machines and related equipment to acquire various
authorizations, licenses, permits or other forms of approval from governmental
and/or quasi-governmental agencies or bodies. At this time, the Company
possesses only a manufacturer and distributor registration from the State of
California Gambling Control Commission. Moreover, the Company may require
further approvals from regulatory authorities in the State of California in
order to carry out its current business plans and opportunities in such
jurisdiction. The Company possesses no other such authorizations, licenses,
permits or other forms of approval that may be required for the Company to 17




---



##### Table of Contents



manufacture, manage and service its anticipated gaming machines. Any failure
to obtain required authorizations, licenses, permits or other form of approval
may thwart the Companys business plans entirely. Off-Balance-Sheet Arrangements The Company has no off-balance-sheet arrangements. Critical Accounting Estimates Critical accounting policies are those (i) having the most impact on the
reporting of the Companys financial condition and results, and (ii) requiring
significant judgments and estimates. Due to the incipient nature of the
Companys operations in the Native American and charitable gaming markets, the
Company does not believe it has any critical policies or procedures. Forward Looking Statements This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements
included herein regarding activities, events or developments that the Company
expect, believe or anticipate will or may occur in the future, including such
things as future capital expenditures (including the amount and nature
thereof), business strategy and measures to implement strategy, competitive
strengths, goals, expansion and other such matters are forward-looking
statements. Actual events may differ materially from those anticipated in the
forward-looking statements. Important factors that may cause such a difference
include those risk factors summarized above. For additional information
regarding these and other factors, see our Annual Report on Form 10-KSB for the
year ended December 31, 2003 and other recent filings with the SEC. 
 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 June 30,
2004, of our disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) 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 Securities and Exchange
Commission, 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.
The Company periodically assesses the cost versus benefit of adding the 18




---



##### Table of Contents



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. 
 PART II Other Information 
 Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities The disclosures made in Notes 4, 6, 7 and 9 of the financial statements
(see Item 1 of Part I of this report) regarding sales and issuances of the
Companys securities during the period beginning March 1, 2004 and ending June
30, 2004 are hereby incorporated into this Item 2 of Part II by this reference. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits (Certain terms related to pricing indicated by ** in Exhibit 10.1 have been
omitted and have been filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment under Rule
24b-2 of the Securities Exchange Act of 1934.) 10.1
    
    License Agreement dated June 30, 2004 between the
Company and Bally Gaming Inc.31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer.32
    
    Section 1350 Certification.
  (b)
    
    Reports on Form 8-K On May 27, 2004, the Company filed a Current Report on form 8-K disclosing
that it had received $1,100,000 in a convertible debt investment from Pandora
Select Partners LP. 19




---



##### Table of Contents



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: August 13, 2004
    
    By:
    
    /s/ Russell C. MixTitle:
    
    President and Chief Executive OfficerDate: August 13, 2004
    
    By:
    
    /s/ Brian D. NieburTitle:
    
    Chief Financial Officer(Principal Accounting Officer)
 20