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 June 30, 2005
 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.)
 
 1466
        Pioneer Way, #10
 El
        Cajon,
        CA 92020
 (Address
        of principal executive offices)
 
 619-440-6183
 (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 xNO o
 
 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: 13,393,079 shares of common stock outstanding
        as  of
        August
        5, 2005, par value $.01 per share.
 
 Transitional
        Small Business Disclosure Format (check one): YES oNO x
 
 
 Spectre
        Gaming, Inc.
 Form
        10-QSB
 Quarter
        Ended June 30, 2005
  Table
        of
        Contents
 
 Page
                  No.PART
                  I
              Financial
                  Information
              2Item
                  1.
              Financial
                  StatementsBalance
                  Sheets at June 30, 2005 (unaudited) and December 31, 2004
                  (audited)
              2Statements
                  of Operations for the three and six months ended June 30, 2005
                  and 2004
                  (unaudited)
              3Statements
                  of Cash Flows for the six months ended June 30, 2005 and 2004
                  (unaudited)
              4Notes
                  to Financial Statements
              5Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              17Item
                  3.
              Controls
                  and Procedures
              30PART
                  II
              Other
                  Information
              31Item
                  2.
              Changes
                  in Securities and Small Business Issuer Purchases of Equity
                  Securities
              31Item
                  6.
              Exhibits
              31SIGNATURES
              
              31
 
 
 
 **PART
                  I - Financial Information****Item
                  1. Financial Statements**
 **Spectre
        Gaming, Inc.**
 **Balance
        Sheets**
 As
                  of
                June
                  30, 2005
              
              As
                  of
                December
                  31, 2004Unaudited
              
              Audited*ASSETS*CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              602,031
              
              $
              2,431,280Accounts
                  receivable
              
              
              38,445
              
              
              7,347Other
                  receivables
              
              
              76,561
              
              
              --Inventory
              
              
              2,185,387
              
              
              2,530,683Prepaid
                  license fees
              
              
              187,500
              
              
              187,500Deposits
              
              
              34,133
              
              
              51,258Prepaid
                  expenses
              
              
              78,653
              
              
              36,939*Total
                  current assets:*
              
              
              3,202,710
              
              
              5,245,007Property,
                  equipment and leasehold improvements, net
              
              
              106,947
              
              
              77,677Leased
                  gaming equipment, net
              
              
              1,118,912
              
              
              734,720Long-term
                  technology and distribution rights
              
              
              4,897,849
              
              
              --Other
                  assets
              
              
              641,643
              
              
              213,587*Total
                  Assets:*
              
              $
              9,968,061
              
              $
              6,270,991
 *LIABILITIES
                  AND SHAREHOLDERS’ EQUITY*CURRENT
                  LIABILITIES:Convertible
                  note payable, net
              
              $
              179,527
              
              $
              354,134Current
                  portion of long-term debt
              
              
              1,500,000
              
              
              --Short-term
                  debt, net
              
              
              3,000,000
              
              
              1,373,611Accounts
                  payable
              
              
              741,741
              
              
              687,518Accrued
                  payroll
              
              
              17,551
              
              
              --Accrued
                  expenses
              
              
              250,613
              
              
              168,791Accrued
                  payable - long-term technology and distribution rights
              
              
              1,000,000
              
              
              --*Total
                  current liabilities:*
              
              
              6,689,432
              
              
              2,584,054Long-term
                  debt, less current portion
              
              
              1,500,000
              
              
              --*Total
                  liabilities:*
              
              
              8,189,432
              
              
              2,584,054SHAREHOLDERS’
                  EQUITY:Capital
                  stock, par value $.01 per share, 100,000,000 shares
                  authorized:Series
                  A Convertible Preferred Stock, par value $.01 per share:Authorized
                  shares--466,666Issued
                  and outstanding shares:
                43,334
                  and 206,667 shares at June 30, 2005 and December 31, 2004,
                  respectively
              
              
              433
              
              
              2,067($65,000
                  and $310,000 liquidation preference at June 30, 2005 and December
                  31,
                  2004, respectively)Common
                  stock, par value $.01 per share:Authorized
                  shares--99,533,334Issued
                  and outstanding shares:
                13,374,149
                  and 12,888,213 at June 30, 2005 and December 31, 2004,
                  respectively
              
              
              133,741
              
              
              128,882Additional
                  paid-in capital
              
              
              26,199,450
              
              
              25,087,624Accumulated
                  deficit
              
              
              (23,718,447
              )
              
              (20,608,011
              )Deferred
                  equity compensation
              
              
              (836,548
              )
              
              (923,625
              )*Total
                  shareholders’ equity:*
              
              
              1,778,629
              
              
              3,686,937*Total
                  liabilities and shareholders’ equity:*
              
              $
              9,968,061
              
              $
              6,270,991
 *See
        accompanying notes to financial statements* .
   -2-
 **Spectre
          Gaming, Inc.**
 **Statements
        of Operations**
 For
                  the Three Months Ended
                June
                  30,
              
              For
                  the Six Months Ended
                June
                  30,2005
              
              2004
              
              2005
              
              2004Gaming
                  revenue
              
              $
              159,784
              
              $
              --
              
              $
              248,884
              
              $
              --Cost
                  of revenues
              
              
              131,997
              
              
              --
              
              
              175,090
              
              
              --*Gross
                  profit*
              
              
              27,787
              
              
              --
              
              
              73,794
              
              
              --OPERATING
                  EXPENSES:Research
                  and development
              
              
              110,100
              
              
              --
              
              
              205,032
              
              
              850,000Sales
                  and Marketing
              
              
              531,743
              
              
              --
              
              
              935,960
              
              
              --General
                  and administrative
              
              
              875,290
              
              
              662,813
              
              
              1,271,866
              
              
              849,796*Total
                  Operating Expenses:*
              
              
              1,517,133
              
              
              662,813
              
              
              2,412,858
              
              
              1,699,796Operating
                  loss
              
              
              (1,489,346
              )
              
              (662,813
              )
              
              (2,339,064
              )
              
              (1,699,796
              )OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              3,590
              
              
              1,442
              
              
              13,574
              
              
              2,098Interest
                  expense
              
              
              (385,742
              )
              
              (70,045
              )
              
              (784,946
              )
              
              (70,045
              )*Net
                  Loss:*
              
              $
              (1,871,498
              )
              $
              (731,416
              )
              $
              (3,110,436
              )
              $
              (1,767,743
              )NET
                  LOSS PER COMMON SHARE:Basic
                  and diluted
              
              $
              (0.14
              )
              $
              (0.07
              )
              $
              (0.24
              )
              $
              (0.18
              )WEIGHTED-AVERAGE
                  NUMBER OF SHARES OUTSTANDING:Basic
                  and diluted
              
              
              13,288,433
              
              
              10,502,870
              
              
              13,115,829
              
              
              9,658,311
 *See
        accompanying notes to financial statements.*
   -3-
 **Spectre
          Gaming, Inc.**
 **Statements
          of Cash Flows**
 **(Unaudited)**
 For
                  the Six Months Ended June 30,2005
              
              2004**Operating
                  activities**Net
                  loss
              
              $
              (3,110,436
              )
              $
              (1,767,743
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              124,876
              
              
              317Provision
                  for inventory obsolescence
              
              
              30,000
              
              
              --Common
                  stock issued for purchased research and development
              
              
              --
              
              
              700,000Stock
                  options and warrants issued for services
              
              
              378,833
              
              
              66,479Amortization
                  of original issue discount
              
              
              389,722
              
              
              60,879Amortization
                  of debt issuance costs
              
              
              248,358
              
              
              24,506Amortization
                  of license fees
              
              
              102,151
              
              
              --Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (31,098
              )
              
              --Other
                  receivables
              
              
              (76,561
              )
              
              --Inventory
              
              
              (154,575
              )
              
              (1,235,537
              )Deposits
              
              
              23,775
              
              
              --Prepaid
                  license fees
              
              
              --
              
              
              (187,500
              )Prepaid
                  expenses
              
              
              (41,714
              )
              
              8,507Other
                  assets
              
              
              --
              
              
              (4,650
              )Accounts
                  payable
              
              
              54,223
              
              
              552,108Accrued
                  payroll
              
              
              17,551
              
              
              (3,942
              )Accrued
                  expenses
              
              
              81,822
              
              
              32,374*Net
                  cash used in operating activities:*
              
              
              (1,963,073
              )
              
              (1,754,202
              )**Investing
                  activities**Purchases
                  of property, equipment and leasehold improvements
              
              
              (68,467
              )
              
              (11,862
              )Technology
                  and distribution rights
              
              
              (1,000,000
              )
              
              --*Net
                  cash used in investing activities:*
              
              
              (1,068,467
              )
              
              (11,862
              )**Financing
                  activities**Debtissuance
                  costs
              
              
              (105,000
              )
              
              (93,000
              )Proceeds
                  from sale of common stock,
                  net of issuance costs
              
              
              --
              
              
              1,067,040Proceeds
                  from convertible note payable and common stock warrants
                  issued
              
              
              --
              
              
              1,100,000Proceeds
                  from notes payable
              
              
              1,500,000
              
              
              --Payments
                  on convertible notes payable
              
              
              (192,709
              )
              
              --*Net
                  cash provided by financing activities:*
              
              
              1,202,291
              
              
              2,074,040Increase
                  (decrease) in cash and cash equivalents
              
              
              (1,829,249
              )
              
              307,976Cash
                  and cash equivalents at beginning of year
              
              
              2,431,280
              
              
              323,675*Cash
                  at end of period:*
              
              $
              602,031
              
              $
              631,651**Supplemental
                  cash flow information:**Cash
                  paid for interest
              
              $
              111,547
              
              $
              9,166**Non-cash
                  Investing and Financing Activities:**Common
                  stock issued for payment on convertible notes payable
              
              $
              245,231
              
              $
              --Warrants
                  issued for services relating to debt issuance
              
              $
              578,064
              
              $
              225,000Inventory
                  transferred to leased gaming equipment
              
              $
              469,871
              
              $
              --Accrued
                  payable in exchange for long-term technology and distribution
                  rights
              
              $
              1,000,000
              
              $
              --Unsecured
                  promissory note in exchange for long-term technology and distribution
                  rights
              
              $
              3,000,000
              
              $
              --
 *See
        accompanying notes to financial statements.*
 
  -4-
 Spectre
        Gaming, Inc.
 Notes
        to
        Financial Statements
 June
        30,
        2005 and 2004
 (unaudited)
 
 
 **Note
        1. Business Description.**
 
 Spectre
        Gaming, Inc. (the “Company” or “Spectre,”“we,”“us” or “ours”) (formerly OneLink,
        Inc.) 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. The Company now designs and develops networks, software and
        content
        that provide its customers with a comprehensive gaming system, and begun
        placing
        its gaming machines on casino floors.
 
 To
        fund
        its business, the Company has engaged in debt and equity financing. The Company
        anticipates engaging in additional financings in the future. Nevertheless,
        there
        can be no assurance the Company will raise the necessary capital to fund
        its
        business.
 
 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
        quarter and six months ended June 30, 2005 and the years ended December 31,
        2004
        and 2003, had an accumulated deficit at June 30, 2005 and does not have adequate
        liquidity to fund its operations through out fiscal 2005. 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 six months ended June 30,
        2005
        are not necessarily indicative of the results that may be expected for the
        year
        ending December 31, 2005. 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, 2004,
        contained in its Annual Report on Form 10-KSB for the year ended December
        31,
        2004.
   -5-
 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.
 
 *Revenue
        Recognition.* The
        Company derives its gaming revenues primarily in two ways, outright sales
        of
        machines or participation arrangements with its Native American customers.
        Revenue for machine sales is recorded upon shipment and upon the expiration
        of
        any applicable trial periods granted to the customer. Under the participation
        arrangements, the Company retains ownership of the equipment installed at
        a
        customer site and 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 the revenue
        received on participation agreements as operating lease revenue.
 
 The
        Company records amounts being charged to customers for shipping and handling
        as
        sales in accordance with Emerging Issues Task Force (EITF) Issue 00-10,
        "Accounting for Shipping and Handling Fees and Costs." Shipping and handling
        costs incurred by the Company are included in cost of goods sold.
 
 The
        SEC
        issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” which
        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.
 
 *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 June 30, 2005 and December 31, 2004,
        respectively.
 
 The
        Company extends unsecured credit to customers in the normal course of
        business.
 
 *Inventory.* Inventory,
        which consists principally of gaming products and related materials, is stated
        at the lower of cost (determined on the first-in, first-out method) or market.
        At June 30, 2005, the Company had $376,494 of finished goods inventory and
        $1,808,893 of spare parts and gaming cabinets. At December 31, 2004 the Company
        had $652,114 of finished goods inventory and $1,878,569 of spare parts and
        gaming cabinets.
  
 -6-
 *Prepaid
        License Fees.* $187,500
        of the prepaid license fees relate to licenses associated with the themes
        of
        certain gaming machines which are licensed from unrelated parties. Under
        participation agreements and upon the placement of the machines into service,
        the Company will begin amortizing the licenses over the estimated useful
        life of
        the pertinent machines of 3 years.
 
 *Leased
        Gaming Equipment and Property, Equipment and Leasehold
        Improvements* .
        Leased
        gaming equipment and property, equipment and leasehold improvements were
        stated
        at cost. Gaming machines placed with customers under participation arrangements
        are included in leased gaming 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 are 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 are 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 gaming equipment
        and
        property, equipment and leasehold improvements was $65,489 and $124,876 for
        the
        three and six months ended June 30, 2005, respectively and was $317 for both
        the
        three and six months ended June 30, 2004.
 
 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.
 
 *Technology
        and Distribution Rights.* The
        Company’s technology and distribution rights relate to a $5,000,000 fee for
        redemption technology licensed from Bally Gaming, Inc. The technology and
        distribution rights are being amortized over the five year term of the
        agreement. (Note 8)
 
 *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 L.P. (“Pandora”) in May 2004 include the origination fee paid to
        Pandora of $33,000, 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.
        The capitalized costs related to the loans from Pandora and Whitebox Intermarket
        Partners L.P. in September 2004 include the origination fee paid of $45,000
        and
        $5,000 of legal fees. The capitalized costs related to the loans from Pandora
        and Whitebox Intermarket Partners L.P. in September 2004 also include the
        fee
        paid in March 2005 of $37,500 to allow the Company to extend the due date
        of the
        notes. The capitalized costs related to the loan from Crown Bank in June
        2005
        inlcude the origination fee paid of $30,000 and the value of the warrants
        issued
        to Ronald E. Eibensteiner (the Company’s former Chairman and Chief Executive
        Officer, and greater-than-ten-percent shareholder) and D. Bradly Olah for
        their
        personal guarantee of the loan. The warrants issued to Messrs. Eibnsteiner
        and
        Olah were valued at $578,064 using the Black-Scholes pricing model. At June
        30,
        2005 the Company had $641,643 of debt issuance cost and at December 31, 2004,
        the Company had debt issuance costs of $206,937 classified as other assets
        on
        the balance sheet. Amortization expense of the debt issuance costs for the
        three
        months ended June 30, 2005 and 2004 was $162,024 and $24,506, respectively
        and
        for the six months ended June 30, 2005 and 2004 was $248,358 and $24,506,
        respectively. Estimated future amortization
        of debt issuance costs is $641,643 for the year ending December 31,
        2005.
  
 -7-
 *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 software’s technological feasibility has been established and
        ending when the software code is completed and incorporated in gaming systems.
        The Company uses the working model approach to determine technological
        feasibility. Generally, the Company’s software is placed into gaming products
        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 was $110,100
        and $0
        for the three months ended June 30, 2005 and 2004, respectively and was $205,032
        and $850,000 for the six months ended June 30, 2005 and 2004,
        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 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, 2005 and 2004.
 
 Employees
 
 *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 issued to employees. 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:
 Three
                    Months Ended June 30,
                
                Six
                    Months Ended June 30,2005
                
                2004
                
                2005
                
                2004Net
                    loss:As
                    reported
                
                $
                (1,871,498
                )
                $
                (731,416
                )
                $
                (3,110,436
                )
                $
                (1,767,743
                )Pro
                    forma
                
                
                (2,084,030
                )
                
                (866,488
                )
                
                (3,554,743
                )
                
                (2,016,114
                )Basic
                    and diluted net loss per common shareAs
                    reported
                
                $
                (0.14
                )
                $
                (0.07
                )
                $
                (0.24
                )
                $
                (0.18
                )Pro
                    forma
                
                
                (0.16
                )
                
                (0.08
                )
                
                (0.27
                )
                
                (0.21
                )Stock-based
                    compensationAs
                    reported
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                --Pro
                    forma
                
                
                212,532
                
                
                135,072
                
                
                444,307
                
                
                248,371
  -8-
 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 30,2005
                
                2004
                
                2005
                
                2004Risk
                    Free interest rate
                
                
                4.01
                %
                
                3.83
                %
                
                3.72
                %
                
                2.93
                %Expected
                    life
                
                
                4.0
                    years
                
                
                5.0
                    years
                
                
                4.7years
                
                
                5.0
                    yearsExpected
                    volatility
                
                
                150
                %
                
                644
                %
                
                145
                %
                
                637
                %Expected
                    dividends
                
                
                0
                %
                
                0
                %
                
                0
                %
                
                0
                %
 
 Non-employees
 
 Through
        June 30, 2005, the Company issued options and warrants to purchase 1,711,666
        shares of the Company’s common stock to non-employees, mostly consultants, with
        exercise prices ranging from $0.75 per share to $3.30 per share and expiring
        at
        various times through June 2014. Pursuant to Emerging Issues Task Force 96-18
        (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 and record an expense related to the options on the earlier
        of the date a performance commitment is met or the date the performance is
        complete. The Company recorded an expense of $385,417 and $66,479 for the
        three
        months ended June 30, 2005 and 2004, respectively, and an expense of $378,833
        and $66,479 for the six months ended June 30, 2005 and 2004, respectively,
        in
        accordance with EITF 96-18. During the six months ended June 30, 2005, options
        for 65,000 shares of the Company’s common stock were cancelled.
 
 *Reclassifications.* Certain
        accounts in the prior quarter financial statements have been reclassified
        for
        comparative purposes to conform with the presentation in the current quarter
        financial statement. These reclassifications had no effect on the net loss
        or
        shareholders’ equity.
 
 *Recent
        Accounting Pronouncements.* In
        June
        2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error
        Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
        statement applies to all voluntary changes in accounting principle, and changes
        the requirements for accounting for and reporting of a change in accounting
        principle. SFAS No. 154 requires retrospective application to prior periods’
        financial statements of a voluntary change in accounting principle unless
        it is
        impracticable. SFAS No. 154 is effective for accounting changes and corrections
        of errors made in fiscal years beginning after December 15, 2005. Earlier
        application is permitted for accounting changes and corrections of errors
        made
        occurring in fiscal years beginning after June 1, 2005. The statement does
        not
        change the transition provisions of any existing accounting pronouncements,
        including those that are in a transition phase as of the effective date of
        this
        statement. The Company does not expect the adoption of SFAS No. 154 to have
        a
        material effect on its financial statements.
 
 -9-
 **Note
        3. Software**
 
 On
        March
        4, 2004, the Company signed a Software Development 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 anticipates utilizing the software as it develops its
        business opportunities in the Native American Class II and charitable gaming
        markets.
 
 The
        Company had 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 failed to deliver software that met the specifications detailed
        in
        the agreement or in the event that MET failed 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.
        For this purpose, 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.
 
 On
        February 3, 2005, the Company and MET executed an amendment to the Software
        Development Agreement to be effective January 24, 2005. The amendment provides
        for the Company’s acceptance of MET’s non-conforming delivery of the bingo
        software in exchange for MET’s reimbursement to the Company of up to $100,000
        for all internal and external costs and expenses related to the completion
        of
        the bingo software and the Company’s access to MET’s office and warehouse space
        to facilitate the completion of the bingo software. As of June 30, 2005,
        $76,561
        has been recorded as an other receivable for expenses related to completion
        of
        the software. The Company intends to complete the development of the bingo
        software internally. In connection with the amendment, the Company agreed
        to
        release the restrictions on 100,000 shares of common stock immediately and
        on
        the remaining 700,000 shares commensurate with revised milestone achievements.
        The amendment did not change the Company’s ownership rights to the completed
        software. As a result there were no accounting adjustments or revisions
        attributable to this amendment.
 
 -10-
 **Note
        4. Shareholder’s Equity**
 
 **Common
        Stock**
 
 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 and issued the agent fully-vested 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. In addition, the Company incurred legal fees and other expenses of
        $19,407 related to the Offering.
 
 In
        November, 2004, the Company completed
        a private placement (the “Second Offering”) of 1,811,429 Units (“Units”), each
        consisting of one share of common stock, par value $.01 per share, and five-year
        warrants to purchase one additional share of common stock at a purchase price
        of
        $3.75 per share. The per-Unit price was $2.50 (i.e., raising a gross total
        of
        $4,528,573). The Company used two agents in completing the sale of the Units
        in
        the Second Offering. As a fee, the Company paid the agents $362,286 in cash,
        and
        issued the agents fully-vested five-year warrants to purchase up to 181,143
        Units for an exercise price of $2.50 per Unit. In addition, the Company incurred
        legal fees and other expenses of $70,898 related to the Second
        Offering.
 
 In
        connection with the two transactions, the cash paid and the legal fees incurred
        were recorded as reductions in the proceeds received.
 
 **Preferred
        Stock**
 
 The
        Company’s Series A Convertible Preferred Stock has voting rights identical to
        common stock. In the event of liquidation, the Series A Convertible Preferred
        shareholders receive a liquidation preference. 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 Convertible 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.
  
 -11-
 As
        of
        December 31, 2004, holders of 233,333 shares of the Company’s Series A
        Convertible Preferred Stock had converted their preferred shares into 526,597
        shares of the Company’s $.01 par value common stock. In February 2005, holders
        of an additional 33,333 shares of the Company’s Series A Convertible Preferred
        Stock converted their preferred shares into 75,228 shares of the Company’s $.01
        par value common stock and in April 2005, holders of an additional 130,000
        shares of the Company’s Series A Convertible Preferred Stock converted their
        preferred shares into 293,389 shares of the Company’s $.01 par value common
        stock. At June 30, 2005 there were outstanding 43,334 shares of Series A
        Convertible Preferred Stock which were convertible into an aggregate of 97,798
        shares of the Company’s common stock with a liquidation preference of
        $65,000.
  **Note
        5. Convertible Note Payable**
 
 On
        May
        20, 2004, the Company received $1,100,000 in a convertible debt investment
        from
        Pandora. The note was 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
        fully-vested 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. 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 holder’s beneficial
        ownership interest would exceed 4.99% of outstanding common stock at conversion.
        In addition, Spectre agreed to file a registration statement by November
        3,
        2004, which date was extended to November 30, 2004, with the SEC, 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, and cause the
        same to
        be effective by February 1, 2005. The Company filed the registration statement
        on November 30, 2004 and the registration statement was declared effective
        on
        January 24, 2005. In connection with the financing, the Company also paid
        a
        finder’s fee to Blake of $50,000 and issued a fully-vested five-year warrant for
        the purchase of 50,000 shares of the Company’s common stock at $2.50 per share
        and a fully-vested five-year warrant for the purchase of 50,000 shares at
        $3.00
        per share, and paid legal fees of $10,000. The fees and the value of the
        warrants were recorded as deferred financing costs and will be amortized
        over
        the life of the convertible debt.
 
 -12-
 The
        allocation of the gross proceeds of the convertible note payable is summarized
        below as of June 30, 2005:
 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
              
              
              587,545Principal
                  payments on convertible note
              
              
              (718,018
              )Convertible
                  note payable, net
              
              $
              179,527
 
 **Note
        6. 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 and
        the
        other note was issued to Whitebox Intermarket Partners, L.P. (“Whitebox”). The
        notes were payable interest only through March 10, 2005, at which time the
        principal was due. In connection with the financing, Spectre paid a 3%
        origination fee, issued five-year warrants for the purchase of 50,000 shares
        of
        Spectre’s common stock at $3.00 per share to both Pandora and Whitebox, and
        granted Pandora and Whitebox security interests in the Company’s assets. 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 will be amortized over the life of the promissory notes using the
        straight-line method, which approximates the interest method. In addition,
        Spectre agreed to file a registration statement by February 1, 2005 with
        the
        SEC, covering the issuance or resale of the shares of Spectre’s common stock
        which may be issued in connection with 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.
 
 On
        March
        10, 2005, the Company signed amendments to the two $750,000 secured promissory
        notes issued to Pandora and Whitebox. The amendments extend the due date
        of the
        notes to June 10, 2005, which date was further extended by the Company to
        September 10, 2005. As part of the amendments the Company agreed to maintain
        assets whose value equals or exceeds the principal interest amounts then
        owned
        under the notes. For purposes of valuing the assets for compliance under
        this
        provision, the Company’s cash shall be valued at 100%, the Company’s accounts
        receivable shall be valued at 80% and the Company’s inventory and fixed assets
        shall be 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 is amortizing the expense over the second extension
        period.
  
 -13-
 The
        allocation of the gross proceeds of the short-term debt is summarized below
        as
        of June 30, 2005:
 Short-term
                  debt, total borrowed
              
              $
              1,500,000Value
                  of 100,000 warrants allocated to additional paid in
                  capital
              
              
              (325,000
              )Short-term
                  debt, net of original issue discount
              
              
              1,175,000Amortization
                  of original issue discount
              
              
              325,000Total
                  short-term debt, net
              
              $
              1,500,000
 
 **Note
        7. Class II 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 License 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
        was obligated to purchase at least 100 game cabinets from Bally, and incur
        certain minimum license-fee charges of $187,500, by June 30, 2004. As of
        June
        30, 2005, the Company had not taken delivery of any of the products that
        include
        the license fee charges and therefore the minimum license fee paid is included
        in prepaid expenses at June 30, 2005 and December 31, 2004. Upon receipt
        of the
        machines that include the license fees and the placement of the machines,
        through a participation agreement, into service, the Company will begin
        amortizing the licenses over the three-year estimated useful life of the
        machines.
 
 **Note
        8. Redemption Technology and Supply Agreement**
  On
        May
        24, 2005, the Company entered into a Redemption Technology and Supply Agreement
        (the “Agreement”) with Bally Gaming, Inc., a Nevada corporation.
  Under
        the
        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 (collectively,
        the
“License”). In addition to obtaining the License, the Agreement provides that
        the Company shall have the right to exclusively license Bally-owned game
        themes
        for use with the Company’s redemption games and systems.
  The
        Agreement and the License last for an initial term of five years, but may
        be
        extended if the Company meets certain performance targets. Under the Agreement,
        the Company will pay an upfront License fee of $5 million, payable as follows:
        $1 million is due on or prior to June 23, 2005; $1 million is due no later
        than
        August 15, 2005; and the remaining $3 million is payable pursuant to an
        unsecured two-year promissory note providing payments in four equal installments
        on each successive six-month anniversary of the Agreement. The note bears
        interest at 12% per annum. In addition to the License fee, beginning in January
        2007 the Agreement requires the Company to pay royalties monthly based on
        the
        number of in-service redemption games during each day of the Agreement’s term.
        As of June 30, 2005, the Company has paid the $1 million due on June 23,
        2005
        and recorded liabilities for the remaining $4 million payable to
        Bally.
  -14-
 Under
        the
        Agreement, the Company will have the right to have Bally provide transition
        training services so that Company employees may become familiar with the
        licensed technology. The Agreement also provides fixed pricing for the Company’s
        (i) purchase of electronic components containing the licensed technology,
        (ii)
        purchase of gaming cabinets in which to house redemption games employing
        the
        licensed technology, (iii) purchase of materials to convert the redemption
        games
        into video lottery terminals and/or Class III gaming machines (i.e., slot
        machines), and (iv) acquisition from Bally of other services on an hourly
        basis.
  **Note
        9. Bank Promissory Note**
 
 On
        June
        21, 2005, the Company issued a $1.5 million unsecured promissory note to
        Crown
        Bank of Edina, Minnesota. The note is due on August 31, 2005 and bears interest
        at 1% above prime (7.25% at June 30, 2005). In connection with this loan
        the
        Company paid a two percent origination fee, which is being amortized until
        August 31, 2005. The loan was guaranteed by two persons, Ronald E. Eibensteiner
        (the Company’s former Chairman and Chief Executive Officer, and a
        greater-than-ten-percent shareholder) and D. Bradly Olah, who became our
        President on August 2, 2005. In exchange for their guarantees, the Company
        issued each of the foregoing guarantors five-year warrants to purchase 150,000
        shares of the Company’s common stock at the price of $2.20, the closing price of
        the common stock on the date of issuance. The warrants were valued at $578,064
        using the Black Scholes pricing model and will be amortized until August
        31,
        2005.
 
 **Note
        10. Related Party Transactions**
 
 The
        Company incurred expenses from a corporation, owned by a former director
        of the
        Company and employing another director and officer of the Company, for rent
        and
        consulting services of approximately $26,000 and $21,000 during the three
        months
        ended June 30, 2005 and 2004, respectively and $54,000 and $45,000 during
        the
        six months ended June 30, 2005 and 2004, respectively.
 
 The
        Company incurred expenses from a corporation, partially owned by the CEO
        and
        director of the Company, for consulting services and expense reimbursements
        of
        approximately $153,000 and $13,000 during the three months ended June 30,
        2005
        and 2004, respectively and $178,000 and $13,000 during the six months ended
        June
        30, 2005 and 2004, respectively. The Company’s CEO also serves as a director of
        the corporation.
 
 In
        February 2004, the Company entered into a consulting agreement with D. Bradly
        Olah, then a greater-than-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 will be measured on the date performance is complete;
        until then variable plan accounting is applied using the Black-Scholes pricing
        model. The options had a value of $640,954 at June 30, 2005, of which $260,519
        had been charged to expense through June 30, 2005.
  
 -15-
 In
        connection with the convertible debt financing from Pandora, the Company
        paid
        $50,000 and issued two fully-vested 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. One warrant
        grants Blake 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 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, 2005, the Company recorded expense of $37,500 and $75,000 related
        to
        these warrants.
 
 On
        June
        21, 2005 the Company secured a $1.5 million loan from Crown Bank of Edina,
        Minnesota. In connection with this loan the Company paid a two percent
        origination fee, which is being amortized until August 31, 2005. The loan
        was
        guaranteed by two persons, Ronald E. Eibensteiner (the Company’s former Chairman
        and Chief Executive Officer, and a greater-than-ten-percent shareholder)
        and D.
        Bradly Olah, who became our President on August 2, 2005. In exchange for
        their
        guarantees, the Company issued each of the foregoing guarantors five-year
        warrants to purchase 150,000 shares of the Company’s common stock at the price
        of $2.20, the closing price of the common stock on the date of issuance.
        The
        warrants were valued at $578,064 using the Black Scholes pricing model and
        will
        be amortized until August 31, 2005.
 
 **Note
        11. Significant Customers**
 
 Revenues
        to two customers accounted for 80% of total revenues during the three months
        ended June 30, 2005 and revenues to two customers accounted for 71% of total
        revenues during the six months ended June 30, 2005.
 
 **Note
        12. Subsequent Events**
 
 On
        August
        2, 2005, the Company appointed D. Bradly Olah as its President. As part of
        Mr.
        Olah’s compensation the Company granted him a ten-year option to purchase up to
        500,000 shares of the Company’s common stock at a per share price of $2.55. The
        options vest as to 166,666 shares on each of August 2, 2006 and 2007 and
        as to
        166,668 shares on August 2, 2008.
 
 On
        August
        15, 2005, the Company received an extention until August 31, 2005 to make
        the $1
        million payment to Bally’s that was due on August 15, 2005.
 
 
 -16-
 **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, 2004, included in our Annual Report
        on
        Form 10-KSB for the year ended December 31, 2004.
 
 **Results
        of Operations**
 
 **The
        Three and Six Months Ended June 30, 2005 Compared to the Three and Six Months
        Ended June 30, 2004**
 
 *Revenues.* Revenues
        for the three months ended June 30, 2005 were $160,000 as compared with $0
        for
        the three months ended June 30, 2004. Revenues for the six months ended June
        30,
        2005 were $249,000 as compared with $0 for the six months ended June 30,
        2004.
        The increase in revenues is the result of the Company placing its gaming
        machines in Native American casinos starting in October 2004. The Company
        had
        not placed any machines, and therefore recognized no revenue, during the
        three
        and six months ended June 30, 2004.
 
 *Research
        and Development Expenses.* Research
        and development expenses for the three months ended June 30, 2005 and 2004
        were
        $110,000 and $0, respectively. Research and development expenses for the
        six
        months ended June 30, 2005 and 2004 were $205,000 and $850,000, respectively.
        Research and development expenses during the three and six months ended June
        30,
        2005 consisted primarily of salary expense and consulting expense. 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 Native
        American Class II and charitable gaming markets.
 
 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 in March
        2004.
        The common stock was valued at $0.75 per share, based upon the price of the
        Company’s then recently completed private placement.
 
 *Sales
        and Marketing Expenses.* Sales
        and marketing expenses for the three months ended June 30, 2005 were $532,000
        as
        compared with $0 for the three months ended June 30, 2004. Sales and marketing
        expenses for the six months ended June 30, 2005 were $936,000 as compared
        with
        $0 for the six months ended June 30, 2004. Sales and marketing expense for
        the
        three and six months ended June 30, 2005 consisted primarily of salary and
        consulting expenses associated with placing games in Native American casinos.
        In
        addition, there were expenses related to travel, promotions, regulatory game
        approval and theme development during the three and six months ended June
        30,
        2005.
   -17-
 *General
        and Administrative Expenses* .
        General
        and administrative expenses for the three months ended June 30, 2005 and
        2004
        were $875,000 and $663,000, respectively. General and administrative expenses
        for the six months ended June 30, 2005 and 2004 were $1,272,000 and $850,000,
        respectively. The general and administrative expenses for the three and six
        months ended June 30, 2005 primarily consisted of salary and employee related
        expenses, travel expense, consulting and professional fees, insurance and
        rent
        expense. General and administrative expenses for the three and six months
        ended
        June 30, 2004 primarily consisted of salaries, professional services, consulting
        and travel expenses. The **** increases
        in expense in 2005 as compared to 2004 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. General and administrative expense
        for
        the three and six months ended June 30, 2005 include expenses of $317,000
        and
        $231,000, respectively, related to options and warrants granted to
        consultants.
 
 *Net
        Other Expense.* Net
        interest expense was $382,000 for the three months ended June 30, 2005 as
        compared with net interest expense of $69,000 for the three months ended
        June
        30, 2004. Net interest expense was $771,000 for the six months ended June
        30,
        2005 as compared with net interest expense of $68,000 for the six months
        ended
        June 30, 2004. The increase in other expense is primarily due to interest
        on
        notes payable to Pandora Select Partners, L.P. (“Pandora”) and Whitebox
        Intermarket Partners L.P. (“Whitebox”) along with the amortization of the
        associated debt issuance costs and the amortization of the original issue
        discounts. Interest expense for the three and six months ended June 30, 2005,
        also increased due to interest expense on the promissory note issued to Bally
        Gaming, Inc. and interest expense and amortization of the associated debt
        issuance costs related to the promissory note issued to Crown Bank.
 
 *Net
        Loss* .
        The
        Company incurred a net loss of $1,871,000 and $731,000 for the three months
        ended June 30, 2005 and 2004, respectively. The Company incurred a net loss
        of
        $3,110,000 and $1,768,000 for the six months ended June 30, 2005 and 2004,
        respectively. The increased net losses for the three and six months ended
        June
        30, 2005 as compared with June 30, 2004 is primarily the result of the Company
        commencing operations in the Native American and charitable gaming markets
        which
        involve significant increases in employee and consulting expense. The net
        loss
        for the six months ended June 30, 2004, includes the expense related to the
        consideration paid in the MET transaction. The net loss also includes $386,000
        and $785,000 of interest expense for the three and six months ended June
        30,
        2005, respectively.
 
 *Liquidity
        and Capital Resources* .
        The
        Company had a working capital deficit of $3,487,000 at June 30, 2005 and
        working
        capital of $2,661,000 at December 31, 2004. Cash used in operations was
        $1,963,000 and $1,754,000 for the six months ended June 30, 2005 and 2004,
        respectively. For the six months ended June 30, 2005, the primary uses of
        cash
        were to fund the Company’s net loss and purchase inventory. These uses were
        partially offset by non-cash charges related to amortization of original
        debt
        issue discount, amortization of debt issuance costs, stock options and warrants
        issued for services and depreciation and amortization and an increase in
        accrued
        expenses. 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 acquire technology and
        distribution rights. These uses were partially offset by increases in accounts
        payable, payroll and related taxes and accrued expenses and a non-cash charge
        related to common stock issued for services.
   -18-
 Cash
        used
        in investing activities was $1,068,000 and $12,000 for the six months ended
        June
        30, 2005 and 2004, respectively. For the six months ended June 30, 2005 the
        Company used cash to acquire technology and distribution rights to Bally
        Gaming,
        Inc.’s redemption technology and for the six months ended June 30, 2005 and
        2004, the Company used cash for capital expenditures, primarily at its El
        Cajon,
        California location.
 
 Cash provided
        by financing activities was $1,202,000 for the six months ended June 30,
        2005 as
        compared with cash provided by financing activities of $2,074,000 for the
        six
        months ended June 30, 2004. Proceeds from notes payable provided $4,500,000
        of
        cash during the six months ended June 30, 2005. Payments on notes payable
        used
        $192,000 and debt financing costs used $105,000 of cash during the six months
        ended June 30, 2005. 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 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. The related promissory note was 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 fully-vested 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. In addition, Spectre agreed to file a
        registration statement by November 3, 2004 with the U.S. Securities and Exchange
        Commission (the “SEC”), 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, and cause the same to be declared effective by
        February 1, 2005. The registration statement was declared effective on January
        24, 2005. In connection with the financing, the Company also paid a finder’s fee
        to Blake Capital Advisors, LLC (“Blake”) of $50,000 and issued a fully-vested
        five-year warrant for the purchase of 50,000 shares of the Company’s common
        stock at $2.50 per share and a fully-vested five-year warrant for the purchase
        of 50,000 shares at $3.00 per share. Net cash received by the Company after
        paying the finders fee, origination fee and legal cost of the lender of $10,000
        was $1,007,000.
 
 On
        September 10, 2004, the Company issued two $750,000 promissory notes accruing
        interest at 10% per annum. One note was issued to Pandora and the other note
        was
        issued to Whitebox. The notes are payable interest only through March 10,
        2005,
        at which time the principal was due. In connection with the financing, Spectre
        paid a 3% origination fee, issued fully-vested five-year warrants for the
        purchase of 50,000 shares of Spectre’s common stock at $3.00 per share to both
        Pandora and Whitebox, and granted Pandora and Whitebox security interests
        in the
        Company’s assets. In addition, Spectre agreed to file a registration statement
        by November 3, 2004 with the SEC, covering the issuance or resale of the
        shares
        of Spectre’s common stock which may be issued in connection with the warrants
        issued to Pandora and Whitebox, and cause the same to be declared effective
        by
        February 1, 2005. The registration statement was declared effective on January
        24, 2005. Net cash received by the Company after paying the origination fee
        and
        legal costs of the lenders of $5,000 was $1,450,000.
   -19-
 On
        March
        10, 2005, the Company signed amendments to the two $750,000 secured promissory
        notes issued to Pandora and Whitebox. The amendments extend the due date
        of the
        notes to June 10, 2005, which date could be further extended by the Company
        to
        September 10, 2005. As part of the amendments the Company agreed to maintain
        assets whose value equals or exceeds the principal interest amounts then
        owned
        under the notes. For purposes of valuing the assets for compliance under
        this
        provision, the Company’s cash shall be valued at 100%, the Company’s accounts
        receivable shall be valued at 80% and the Company’s inventory and fixed assets
        shall be 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 is amortizing the expense over the second extension
        period.
 
 On
        May
        24, 2005, the Company entered into a Redemption Technology and Supply Agreement
        (the “Agreement”) with Bally Gaming, Inc., a Nevada corporation
        (“Bally”).
 
 Under
        the
        Agreement Bally granted to the Company: (i) an exclusive license to 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 (collectively, the
“License”). In addition to obtaining the License, the Agreement provides that
        the Company shall have the right to exclusively license Bally-owned game
        themes
        for use with the Company’s redemption games and systems.
 
 The
        Agreement and the License last for an initial term of five years, but may
        be
        extended if the Company meets certain performance targets. Under the Agreement,
        the Company will pay an upfront fee of $5 million, payable as follows: $1
        million was paid in June 2005; $1 million is due no later than August 15,
        2005;
        and the remaining $3 million is payable pursuant to an unsecured two-year
        promissory note providing payments in four equal installments on each successive
        six-month anniversary of the Agreement. The note bears interest at 12% per
        annum. In addition to the upfront fee, beginning in January 2007 the Agreement
        requires the Company to pay royalties monthly based on the number of in-service
        redemption games during each day of the Agreement’s term.
 
 On
        June
        21, 2005, the Company issued a $1.5 million unsecured promissory note to
        Crown
        Bank of Edina, Minnesota. The note is due on August 31, 2005 and bears interest
        at 1% above prime. In connection with this loan the Company paid a two percent
        origination fee. The loan was guaranteed by two persons, Ronald E. Eibensteiner
        (the Company’s former Chairman and Chief Executive Officer, and a
        greater-than-ten-percent shareholder) and D. Bradly Olah, who became our
        President on August 2, 2005. In exchange for their guarantees, the Company
        issued each of the foregoing guarantors five-year warrants to purchase 150,000
        shares of the Company’s common stock at the price of $2.20, the closing price of
        the common stock on the date of issuance.
   -20-
 On
        June
        30, 2004, the Company signed a three-year non-exclusive license agreement
        (“License Agreement”) with Bally Gaming Inc. The License Agreement calls for the
        Company to purchase up to 3,000 game cabinets from Bally over the term of
        the
        License 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 was obligated
        to
        purchase at least 100 game cabinets from Bally, and incur certain minimum
        license-fee charges of $187,500, by June 30, 2004. As of June 30, 2005, the
        Company had purchased 100 game cabinets from Bally.
 
 Management
        believes that its current cash should be sufficient to satisfy its cash
        requirements for the next one month. The Company will need to obtain additional
        cash to meet its needs,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 amusement-with-prize facilities.
        As a
        result, the Company expects that it will engage in one or more debt or equity
        financings.
 
 **Risk
        Factors**
 
 ***We
        have no operating history and our business plan is currently being tested.
        We
        anticipate incurring future losses*** .
        We are
        in the early stages of providing interactive electronic games to the Native
        American, amusement with prize and charitable gaming industry. We are therefore
        subject to all of the risks and uncertainties inherent in establishing a
        new
        business. We have no prior operating history for these products from which
        to
        evaluate our success, or our likelihood of success in operating our business,
        generating any revenues or achieving profitability. In sum, we have very
        limited
        assets, very little operating revenue and uncertain prospects of future
        profitable operations. We cannot assure you that our operations will be
        successful and the likelihood of our success must be considered in light
        of the
        problems, expenses, difficulties, complications and delays frequently
        encountered in connection with the formation of a new business, development
        of
        technology and the competitive environment in which we operate. We anticipate
        that we will incur losses in the near future.
 
 ***We
        will need additional financing in the future and any such financing will
        likely
        be dilutive to our existing shareholders*** .
        We will
        likely require additional sources of financing before we can generate revenues
        needed to sustain operations. In particular, management believes that the
        Company’s current cash is sufficient to continue operations only through August
        2005. Our operations, as currently conducted or anticipated to be conducted,
        generate costs related to the exploration of additional business opportunities,
        as well as ongoing personnel, legal and accounting expenses. If we are unable
        to
        capitalize on existing opportunities or locate and act on other business
        opportunities, or if expenditures exceed our current expectations, we will
        be
        required to find additional sources of financing. Even if we successfully
        avail
        ourselves of current or future opportunities, additional financing may be
        required to expand or continue being involved in such
        opportunities.
  
 -21-
 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. No assurance, however, can be given
        that we will 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 United States Securities
        and
        Exchange Commission, 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.
 
 ***Our
        independent auditors have substantial doubt about our ability to continue
        as a
        going concern.*** **** We
        have
        had net losses for the three and six months ended June 30, 2005 and the year
        ended December 31, 2004, and we had an accumulated deficit as of June 30,
        2005
        and December 31, 2004. 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, this diminishes our ability to accurately forecast our
        revenues and expenses. Our ability to continue as a going concern depends,
        in
        large part, on our ability to raise sufficient capital through equity or
        debt
        financing transactions. If we are unable to raise additional capital, we
        may be
        forced to discontinue our business.
 
 ***The
        proprietary operating system and related gaming products critical to our
        future
        success have not been, and may never be, fully
        developed.*** ****** ** Pursuant
        to our software development agreement with MET Games, we are developing a
        Linux-based operating system for use with our proposed Class II games whose
        outcome are determined by a central server. The development process has not
        yet
        been completed and we cannot be certain that the operating system will work
        as
        anticipated and required for use in a highly regulated marketplace. The
        completion of the development of our proposed Linux-based operating system
        remains subject to all the risks associated with the development and manufacture
        of new products based on innovative technologies, including unanticipated
        technical or other problems, failures to meet regulatory requirements or
        performance objectives, and the possible insufficiency of the funds allocated
        for the completion of such development, which could result in a change in
        the
        design, delay in the development, or abandonment of such system and its
        products. Consequently, there can be no assurance that our proprietary
        Linux-based operating system will be fully developed or successfully
        manufactured. Our failure to complete the Linux-based operating system for
        our
        proposed Class II games will likely have a materially adverse effect
        on our
        business and prospects for future profitability.
 
 ***Our
        redemption gaming products, the intellectual property rights for which we
        license from Bally Gaming, Inc., have not been, and may never be, fully
        developed.*** ** Pursuant
        to our Redemption Technology and Supply Agreement with Bally Gaming, Inc.,
        we
        are enhancing a Bally’s amusement-with-play (“AWP”) redemption gaming
        technology. The development process on the enhancements has not yet been
        completed and we cannot be certain that the operating system will work as
        anticipated and required for use in a highly regulated marketplace. The
        completion of the development of our proposed AWP system remains subject
        to all
        the risks associated with the development and manufacture of new products,
        including unanticipated technical or other problems, failures to meet regulatory
        requirements or performance objectives, and the possible insufficiency of
        the
        funds allocated for the completion of such development, which could result
        in a
        change in the design, delay in the development, or abandonment of such system
        and its products. Consequently, there can be no assurance that our AWP system
        will be fully developed or successfully manufactured.
  
 -22-
 ***Even
        if successfully developed, our operating systems and gaming products may
        not be
        accepted by the marketplace.*** ** Our
        gaming systems and gaming products, even if successfully tested, developed
        and
        manufactured, may not be accepted in the gaming marketplace.
 
 ***Evolving
        law may adversely affect 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 two cases decided in the Eighth and Tenth U.S. Circuits
        Courts of Appeal, respectively ( *see
        United States of America v. Santee Sioux Tribe of Nebraska* (3/20/03, No. 02-1503); and *Seneca-Cayuga
        Tribe of Oklahoma et al. v. Nat’l Indian Gaming Comm’n et al.* ,
        4/17/03, No. 01-5066). The Eight and Tenth Circuits cover the west and northern
        plains states, where dozens of Native American tribes are located. The two
        circuit court decisions examined whether certain electronic gaming devices
        were
        Class II or Class III gaming machines under IGRA. Under IGRA, bingo generally
        qualifies as a Class II game. Class II games, including bingo, do not lose
        their
        designation as such if electronic, computer or technological aids are used
        in
        connection with the games; but an electronic facsimile of any game of chance
        (including bingo) does not qualify as a Class II game. Class III games (e.g.,
        slot machines, video poker, other table games, etc.) encompass all other
        games
        not Class I (social games played for prizes of minimal value) or Class II
        games.
 
 In
        both
        the Eighth and Tenth Circuit cases, the courts determined that electronic
        machines that dispensed paper pull-tabs (another game of chance) were Class
        II
        machines under the IGRA because they merely dispensed paper pull-tabs and
        displayed results. The courts found, in essence, that the games in question
        were
        not “electronic facsimiles” of the game of pull-tabs, but instead merely
        facilitated the playing of pull-tabs. Regulations promulgated under the IGRA
        indicate that the use of electronic and electromechanical formats which broaden
        player participation by allowing multiple players to play with or against
        each
        (other than with or against a machine) will not constitute electronic facsimiles
        (see 25 C.F.R. § 502.8).
 
 The
        classification of electronically linked bingo-style games is important to
        the
        Company and its business plan. 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, our involvement in the gaming industry is directly
        related to these kinds of bingo/slot-machine games. Therefore, if games that
        we
        anticipate will qualify as Class II games were to be classified by regulatory
        authorities as Class III games, the size of our available market would
        significantly shrink.
 
 On
        March
        2, 2004, the Supreme Court denied the Justice Department’s petition for writ of
        certiorari for the Eighth and Tenth Circuit decisions, which means the Court
        declined to review the Eighth and Tenth Circuit Court decisions. Because
        of this
        action, the Eighth and Tenth Circuit decisions stand. While this result is
        positive for the gaming industry in general and for us in particular, there
        can
        be no assurance that there will not be other legal actions that will result
        in a
        classification of our Class II games as Class III games, or that current
        IGRA
        regulations will not be repealed. Furthermore, the cases discussed above
        did not
        involve bingo-style gaming machines or games whose outcome are determined
        by a
        central server (and their corresponding gaming systems) such as those
        distributed by the Company. The result of any such further attempts to overturn
        precedent or to reclassify bingo-style gaming machines, such as ours, is
        beyond
        our control, and its outcome must be considered a material and significant
        risk
        factor.
  
 -23-
 In
        May
        2004, the Oklahoma Legislature passed legislation authorizing certain forms
        of
        gaming at racetracks, and additional types of games at tribal gaming facilities,
        pursuant to a tribal-state compact. This legislation was subject to approval
        in
        a statewide referendum, which was subsequently obtained in the November 2004
        elections. The Oklahoma gaming legislation allows the tribes to sign a compact
        with the State of Oklahoma to operate an unlimited number of electronic instant
        bingo games, electronic “bonanza-style” bingo games, electronic skill games and
        non house-banked blackjack games. In addition, certain horse tracks in Oklahoma
        will be allowed to operate a limited number of instant and “bonanza-style” bingo
        games and electronic skill games. The compact became
        effective and the tribes began operating the compacted games in the first
        quarter of 2005 pursuant to the compact. Vendors placing games at any of
        the
        racetracks under the compact will ultimately be required to be licensed by
        the
        State of Oklahoma. In addition, vendors placing games at tribal facilities
        will
        have to be licensed by each tribe and all electronic games placed in gaming
        venues will have to be certified by independent testing laboratories to meet
        technical specifications published by the Oklahoma Horse Racing Commission
        and
        the individual tribal gaming authorities in February 2005.
  We
        believe the recently adopted Oklahoma legislation significantly clarifies
        and
        expands the types of gaming permitted by Native America tribes in that state.
        We
        currently expect continued intensified competition from vendors currently
        operating in Oklahoma as well as new market entrants. As a result, we anticipate
        further pressure on our ability to penetrate the  market
        in
        Oklahoma. In addition, in the immediate future, we expect continued regulatory
        uncertainty in Oklahoma. In particular, although we and other vendors may
        not
        begin to offer games enabled by the new legislation until state and tribal
        regulations, rules and specifications adopted pursuant to that legislation
        become final, certain other vendors and tribes may begin to offer new games
        prior to that time. It is unclear what, if any, regulatory enforcement action
        could or would be taken against tribes and vendors offering games not authorized
        by existing law but permitted under the newly adopted, but not yet effective,
        legislation.
  The
        new
        legislation requires Oklahoma tribes to develop their own licensing procedures
        for their vendors. Our Oklahoma tribal customers are in the early stages
        of
        developing these procedures, and we currently have limited, if any, information
        regarding the ultimate process or expenses involved with securing licensure
        by
        the tribes. Moreover, tribal policies and procedures, as well as tribal
        selection of gaming vendors, are subject to the political and governance
        environment within the tribe. Changes in tribal leadership or tribal political
        pressure can affect our relationships with our customers. As a result of
        these
        and other considerations, it remains difficult to forecast the impact on
        our
        business from the recent Oklahoma gaming legislation.
 
 ***The
        Company currently has few required licenses and permits for its gaming business,
        and has encountered delays in the permitting and licensing process with tribal
        authorities.*** 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, tribal and/or
        quasi-governmental agencies or bodies. At this time, we have registered with
        the
        U.S. Department of Justice under the Johnson Act, we possess a manufacturer
        and
        distributor registration from the State of California Gambling Control
        Commission, twelve tribal licenses from tribes in located in the State of
        California, and one tribal licenses in the State of Oklahoma. We possess
        no
        other authorizations, licenses, permits or other forms of approval that may
        be
        required for us to manufacture, manage and service our anticipated gaming
        products.
  
 -24-
 We
        will
        likely require further approvals from regulatory authorities in the State
        of
        California in order to carry out our current business plans and opportunities
        in
        such jurisdiction. In particular, we will require tribal permits upon each
        placement of machines in Native American casinos and facilities, and will
        likely
        also require a suitability finding by the California State Gaming Agency.
        In
        addition, we expect to be required to obtain similar permits, licenses and
        approvals in the State of Oklahoma. We cannot be certain that we will be
        able to
        successfully obtain any of the foregoing permits, licenses or obtain a
        suitability finding. Any failure on our part to obtain required authorizations,
        licenses, permits or other form of approval may thwart our business plans
        significantly or entirely.
 
 In
        addition, in the course of pursuing authorizations, licenses, permits and
        other
        forms of approval for us to manufacture, manage and service our gaming products
        in California and Oklahoma, the Company has routinely encountered slower
        application processes than anticipated, especially when seeking authorizations,
        licenses and permits from tribal authorities.
 
 ***We
        may have a difficult time enforcing our contracts against Native American
        tribes
        and the casinos they own and operate.*** Native
        American Tribes generally enjoy sovereign immunity from suit similar to that
        of
        the states and the United States. In order to sue a Native American tribe
        (or an
        agency or instrumentality of a Native American tribe), the Native American
        tribe
        must have effectively waived its sovereign immunity with respect to the matter
        in dispute.
 
 In
        our
        contracts with Native American customers, we attempt to provide that any
        dispute
        regarding interpretation, performance or enforcement shall be submitted to,
        and
        resolved by, arbitration in accordance with the Commercial Arbitration Rules
        of
        the American Arbitration Association and that any award, determination, order
        or
        relief resulting from such arbitration is binding and may be entered in any
        federal court having jurisdiction. Even if we are able to effectively bargain
        or
        negotiate for such a provision, we could be precluded from judicially enforcing
        any rights or remedies against a tribe without a waiver, limited or otherwise,
        of the tribe’s sovereign immunity. These rights and remedies include, but are
        not limited to, our right to enter Native American lands to retrieve our
        property in the event of a breach of contract by the tribe party to that
        contract, and our right to enforce any arbitration decision in our
        favor.
 
 ***We
        will depend upon others for the manufacture of our gaming products, which
        will
        subject our business to the risk that we will be unable to fully control
        the
        supply of our products to the market.*** Our
        ability to develop, manufacture and successfully commercialize our proposed
        products depends upon our ability to enter into and maintain contractual
        and
        collaborative arrangements with others, such as Bally. We do not intend to
        manufacture any of our proposed products; but instead intend to retain contract
        manufacturers. There can be no assurance that Bally or any other manufacturers
        will be able to supply our products in the required quantities, at appropriate
        quality levels or at acceptable costs. We may be adversely affected by any
        difficulties encountered by such third-party manufacturers that result in
        product defects, production delays or the inability to fulfill orders on
        a
        timely basis. If a manufacturer cannot meet our quality standards and delivery
        requirements in a cost-efficient manner, we would likely suffer interruptions
        of
        delivery while we arrange for alternative manufacturing sources. Any extended
        disruption in the delivery of products could result in our inability to satisfy
        customer demand for our products. Consequently, our inability to obtain
        alternative sources on a timely basis may have a material adverse effect
        on our
        business and results of operations. A number of our products are manufactured
        outside of the United States. Our purchase contracts are typically settled
        in
        Yen and we therefore may be subject to currency risk.
  
 -25-
 ***Our
        reliance on third-party manufacturers and other third parties in other aspects
        of our business will reduce any profits we may earn from our products, and
        may
        negatively affect future product development.*** As noted
        above, we currently intend to market and commercialize products manufactured
        by
        others, and in connection therewith we will likely be required to enter into
        manufacturing, licensing and distribution arrangements with third parties
        similar to the licensing agreement we entered into with Bally. These
        arrangements will likely reduce our product profit margins. In addition,
        the
        identification of new product candidates for development may require us to
        enter
        into licensing or other collaborative agreements with others. These
        collaborative agreements may require us to pay license fees, make milestone
        payments, pay royalties and/or grant rights, including marketing rights,
        to one
        or more parties. Any such arrangement will likely reduce our profits. Moreover,
        these arrangements may contain covenants restricting our product development
        or
        business efforts in the future.
 
 ***We
        may not be able to enter into manufacturing agreements or other collaborative
        agreements on terms acceptable to us, if at all, which failure would materially
        and adversely affect our business.*** We
        cannot be sure that we will be able to enter into manufacturing or other
        collaborative arrangements with third parties on terms acceptable to us,
        if at
        all, when and as required. If we fail to establish such arrangements when
        and as
        necessary, we could be required to undertake these activities at our own
        expense, which would significantly increase our capital requirements and
        may
        delay the development, manufacture and installation of our gaming machines
        on
        casino floors. If we could not find ways of addressing these capital
        requirements, we would likely be forced to sell or abandon our
        business.
 
 ***We
        operate in an extremely competitive environment.*** The
        market for gaming machines is a difficult one in which to compete as there
        are a
        number of established, well-financed and well-known companies that compete
        with
        our current and planned products. In particular, International Game Technology
        (“IGT”) enjoys a significant domestic and international market position in the
        gaming-machine market. Similarly, Multimedia Games, Inc. enjoys a significant
        market position in the Class II gaming machine market. Other major
        gaming-machine companies include Sigma Gaming, Inc. and Bally Gaming Inc.,
        a
        subsidiary of Alliance Gaming Corp. All of these companies have substantially
        more resources than we do. The development of a successful new product by
        a
        competitor could adversely affect the market demand for our products and
        impair
        our ability to generate sales. Similarly, if well-established companies such
        as
        IGT were to focus their resources on the developing Class II gaming machine
        market, our ability to capitalize on the perceived opportunities in that
        market
        could be significantly impaired.
 
 ***Our
        inability to protect our intellectual property could impair our ability to
        compete.*** Our
        success and ability to compete depend in part upon proprietary intellectual
        property. Our proprietary intellectual property currently consists of certain
        licensed trademark, image and likeness, and other moral rights, assets acquired
        pursuant to an asset purchase agreement with Streamline Development Company,
        Inc., and a right to acquire copyright and other intellectual-property rights
        relating to software that may be developed by MET Games pursuant to our software
        development agreement with them. We currently rely and intend to rely in
        the
        future on a combination of copyright, trademark, patents, trade secret laws,
        and
        nondisclosure agreements to protect our proprietary technology. Although
        we have
        entered into confidentiality, non-compete and invention assignment agreements
        with our employees and otherwise limit access to, and distribution of, our
        proprietary technology, there can be no assurance that such agreements will
        not
        be breached, that we would have adequate remedies for any breach, or that
        our
        trade secrets will not otherwise become independently developed or discovered
        by
        competitors.
  
 -26-
 ***We
        are highly dependent on the services provided by certain executives and key
        personnel.*** Our
        success in the Native American and charitable gaming markets depends in
        significant part upon the continued service of certain senior management
        and
        other key personnel. In particular, we are materially dependent upon the
        services of Russell C. Mix, a director of the Company and our President and
        Chief Executive Officer. We have an employment agreement with Mr. Mix, but
        if
        Mr. Mix should no longer serve the Company it would likely have a materially
        adverse impact on our business, financial condition and operations. The Company
        has not secured any “key person” life insurance covering the life of Mr.
        Mix.
 
 Our
        success also depends on our ability to identify, hire, train, retain and
        motivate highly skilled technical, managerial, sales and marketing personnel.
        We
        intend to hire a full-time Chief Financial Officer and 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 we 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 our business, financial condition and
        operations.
 
 ***Our
        officers and directors, together with certain affiliates, possess substantial
        voting power with respect to our common stock, which could adversely affect
        the
        market price of our common stock.*** As of
        July 19, 2005, our officers and directors collectively possess beneficial
        ownership of 487,200 shares of our common stock, which represents approximately
        3.6% of our common stock. Certain other significant shareholders, including
        Perkins Capital Management, Inc., Ronald E. Eibensteiner, and Wayne W. Mills,
        collectively possess beneficial ownership of a total of 5,662,975 shares
        of
        common stock, which represents approximately 41.1% of our common stock. When
        taken together, our directors, officers and significant shareholders have
        beneficial ownership of approximately 43.5% of our common stock. This represents
        a significant and controlling portion of the voting power of the Company’s
        shareholders. As a result, our directors and officers, together with significant
        shareholders, have the ability to substantially (but not wholly) control
        our
        management and affairs through the election and removal of our entire board
        of
        directors, and all other matters requiring shareholder approval, including
        the
        future merger, consolidation or sale of all or substantially all of our assets.
        This concentrated control could discourage others from initiating any potential
        merger, takeover or other change-of-control transaction that may otherwise
        be
        beneficial to our shareholders.
 
 ***Our
        stock price is, and we expect it to remain, volatile.*** The
        volatile price of our common stock makes it difficult for investors to predict
        the value of their investment, to sell shares at a profit at any given time,
        or
        to plan purchases and sales in advance. A variety of factors may affect the
        market price of our common stock, including but are not limited to:
 
 ·
              achievement
                  or rejection of regulatory approvals by us or by the tribes or
                  other
                  purchasers of our products;
 ·
              announcements
                  of technological innovations or new commercial products by our
                  competitors
                  or us;
 ·
              developments
                  concerning proprietary rights, including
                  patents;
 ·
              regulatory
                  developments in the United States relating to the gaming
                  industry;
 ·
              period-to-period
                  fluctuations in our revenues and other results of
                  operations;
 ·
              changes
                  in financial estimates by securities analysts;
                  and
 ·
              sales
                  of our common stock.
   -27-
 We
        will
        not be able to control many of these factors, and we believe that
        period-to-period comparisons of our financial results will not necessarily
        be
        indicative of our future performance.
 
 ***Our
        articles of incorporation grant the Company’s 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 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 the
        common
        stock offered hereby. Our board of directors’ ability to designate and issue
        shares could impede or deter an unsolicited tender offer or takeover proposal.
        Further, 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 book value of the Company.
 
 As
        of
        June 30, 2005, we had 13,374,149 shares of common stock outstanding and a
        further 7,008,284 shares of our common stock had been reserved as
        follows:
 
 ·
              2,300,000
                  shares for issuance under our existing stock option plans, of which
                  options relating to 1,204,166 shares were
                  outstanding;
 
 ·
              1,711,942
                  shares for issuance pursuant to stock option agreements entered
                  into
                  outside of stock option plans; and
 
 ·
              2,996,342
                  shares issuable upon the exercise of outstanding
                  warrants.
 
 In
        addition to the shares noted above, our board of directors has designated
        466,666 of our shares for issuance as “Series A Convertible Preferred Stock.”
        During the fiscal year ended December 31, 2001, the Company issued 440,000
        shares of Series A Convertible Preferred Stock. As of June 30, 2005,
        shareholders holding 396,666 shares of Series A Convertible Preferred Stock
        had
        converted their preferred shares into shares of our common stock. As a result,
        there remain 43,334 shares of Series A Convertible Preferred Stock outstanding
        as of June 30, 2005, which shares are currently convertible into an additional
        97,798 shares of our common stock.
 
 ***Our
        common stock trades only in an illiquid trading
        market.*** Trading
        of our common stock is conducted on the over-the-counter 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 its 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.
 
 ***There
        is currently little trading volume in our common stock, which may make it
        difficult to sell shares of our common stock.*** In
        general, there has been very little trading activity in our common stock.
        Over
        the past 50 days, the average daily trading volume (as reported by
        BigCharts.com) has been approximately 33,000 shares. The relatively small
        trading volume will likely make it difficult for our shareholders to sell
        their
        shares as and when they choose. Furthermore, small trading volumes generally
        depress market prices. As a result, you may not always be able to resell
        shares
        of our common stock publicly at the time and prices that you feel are fair
        or
        appropriate.
   -28-
 ***Because
        it is a “penny stock,” you may have difficulty selling shares of our common
        stock.*** Our
        common stock is a “penny stock” and is therefore subject to the requirements of
        Rule 15g-9 under the Securities and Exchange Act of 1934, as amended (the
        “Exchange Act”). Under this rule, broker-dealers who sell penny stocks must
        provide purchasers of these stocks with a standardized risk-disclosure document
        prepared by the Securities and Exchange Commission. Under applicable
        regulations, our common stock will generally remain a “penny stock” until and
        for such time as its per-share price is $5.00 or more (as determined in
        accordance with SEC regulations), or until we meet certain net asset or revenue
        thresholds. These thresholds include the possession of net tangible assets
        (i.e., total assets less intangible assets and liabilities) in excess of
        $2,000,000 in the event we have been operating for at least three years or
        $5,000,000 in the event we have been operating for fewer than three years,
        and
        the recognition of average revenues equal to at least $6,000,000 for each
        of the
        last three years. We do not anticipate meeting any of the foregoing thresholds
        in the foreseeable future.
 
 The
        penny-stock rules severely limit the liquidity of securities in the secondary
        market, and many brokers choose not to participate in penny-stock transactions.
        As a result, there is generally less trading in penny stocks. If you become
        a
        holder of our common stock, you may not always be able to resell shares of
        our
        common stock publicly at the time and prices that you feel are fair or
        appropriate.
 
 ***We
        have no intention of paying dividends on our common
        stock.*** To date,
        we have not paid any cash dividends and do not anticipate the payment of
        cash
        dividends in the foreseeable future. Accordingly, the only return on an
        investment in shares of our common stock, if any, may occur upon a subsequent
        sale of such shares.
 
 **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
        gaming revenues in primarily two ways, outright sales of machines to customers,
        and participation arrangements with its Native American customers. Revenue
        for
        machine sales is recorded upon shipment. Under the participation arrangements,
        the Company retains ownership of the equipment installed at a customer site
        and
        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 the participation 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 Emerging Issues Task Force 96-18 (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-
 **Recent
        Accounting Pronouncement**
 
 In
        June
        2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error
        Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
        statement applies to all voluntary changes in accounting principle, and changes
        the requirements for accounting for and reporting of a change in accounting
        principle. SFAS No. 154 requires retrospective application to prior periods’
        financial statements of a voluntary change in accounting principle unless
        it is
        impracticable. SFAS No. 154 is effective for accounting changes and corrections
        of errors made in fiscal years beginning after December 15, 2005. Earlier
        application is permitted for accounting changes and corrections of errors
        made
        occurring in fiscal years beginning after June 1, 2005. The statement does
        not
        change the transition provisions of any existing accounting pronouncements,
        including those that are in a transition phase as of the effective date of
        this
        statement. The Company does not expect the adoption of SFAS No. 154 to have
        a
        material effect on its financial statements.
 
 **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. Statements made in this report which are
        not
        historical in nature, including but not limited to statements using the terms
        “may,”“expect to,”“believe,”“should,”“anticipate,” and other language employing
        a future aspect, are referred to as forward-looking statements, should be
        viewed
        as uncertain and should not be relied upon. Although our management believes
        that the results reflected in or suggested by these forward-looking statements
        are reasonable, all forward-looking statements involve risks and uncertainties
        and our actual future results may be materially different from the expectations
        expressed in such forward-looking statements. In particular, 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. The
        foregoing list is not exhaustive, and the Company disclaims any obligation
        to
        subsequently revise any forward-looking statements to reflect events or
        circumstances after the date of such 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, 2004 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, 2005,
        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, 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.
   -30-
 **PART
          II Other Information**
 
 **Item
        2. Changes in Securities and Small Business Issuer Purchases of Equity
        Securities**
  During
        the three months ended June 30, 2005, the Company issued an aggregate of
        117,319
        shares of the Company’s common stock to Pandora, in lieu of payments of $169,502
        in principal and interest, under the promissory note issued to Pandora in
        connection with the May 20, 2004 borrowing described in Note 5 of the financial
        statements (see Item 1 of Part I of this report).
 
 **Item
        6. Exhibits**
 
 (a)
              Exhibits
  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.
 **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
                  15, 2005
                By:
                /s/ Russell
                  C. MixRussell
                    C. Mix
                  Chief
                    Executive Officer
  Date: August
                  15, 2005
                By:
                /s/ Brian
                  D. NieburBrian
                    D. Niebur
                  Chief Financial Officer
                  (Principal Accounting
                    Officer)
   -31-