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 March 31, 2007





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





Commission
      file number 0-25764





Spectre
      Gaming, Inc.


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





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





14200
      23 rd Avenue
      N.


Minneapolis,
      MN 55447


(Address
      of principal executive offices)





763-553-7601


(Issuer’s
      telephone number)





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





Check
      whether the issuer (1) filed all reports required to be filed by section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. YES x NO o





Indicate
      by check mark as to whether the Registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act): YES o NO x





APPLICABLE
      TO CORPORATE ISSUERS




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 18,460,449 shares of common stock outstanding
      as  of
      May
      23, 2007, par value $.01 per share.





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








Spectre
      Gaming, Inc.


Form
      10-QSB


Quarter
      Ended March 31, 2007





Table
      of
      Contents


Page
                  No.PART
                  I
              Financial
                  Information
              
              2Item
                  1.
              Financial
                  Statements Balance Sheets at March 31, 2007 (unaudited) and December
                  31,
                  2006 (audited)
              
              2Statements
                  of Operations for the three months ended March 31, 2007 and 2006
                  (unaudited)
              
              3Statements
                  of Cash Flows for the three months ended March 31, 2007 and 2006
                  (unaudited)
              
              4Notes
                  to Financial Statements
              
              5Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              
              16Item
                  3.
              Controls
                  and Procedures
              
              23PART
                  II
              Other
                  Information
              
              24Item
                  1.
              Legal
                  Proceedings
              
              24Item
                  6.
              Exhibits
              
              25SIGNATURES
              
              26


**PART
                I - Financial Information****Item
                1. Financial Statements**


**Spectre
      Gaming, Inc.**


**Balance
      Sheets**


As
                  of
                March
                  31, 2007
              
              As
                  of
                December
                  31, 2006*ASSETS*
              
              Unaudited
              
              AuditedCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              69,981
              
              $
              250Accounts
                  receivable, net
              
              
              8,907
              
              
              38,519Other
                  receivables, net
              
              
              -
              
              
              12,593Inventories
              
              
              429,124
              
              
              430,498Deposits
              
              
              608
              
              
              280Current
                  assets of discontinued operations
              
              
              102,634
              
              
              102,634Prepaid
                  royalties
              
              
              214,525
              
              
              293,275Prepaid
                  expenses
              
              
              202,607
              
              
              148,440Debt
                  issuance costs, net
              
              
              749,016
              
              
              801,399*Total
                  current assets:*
              
              
              1,777,402
              
              
              1,827,888Property,
                  equipment and leasehold improvements, net
              
              
              142,289
              
              
              154,593Leased
                  equipment, net
              
              
              6,990,819
              
              
              7,207,828Debt
                  issuance costs
              
              
              -
              
              
              21,409Prepaid
                  redemption product licenses
              
              
              237,333
              
              
              257,333Other
                  assets
              
              
              11,436
              
              
              11,436*Total
                  assets:*
              
              $
              9,159,279
              
              $
              9,480,487*LIABILITIES
                  AND SHAREHOLDERS’ DEFICIT*CURRENT
                  LIABILITIES:Current
                  portion of long-term debt
              
              $
              570,699
              
              $
              450,271Short-term
                  debt, net
              
              
              2,541,348
              
              
              1,670,400Equipment
                  financing debt
              
              
              4,481,942
              
              
              4,551,881Debentures
                  payable, net
              
              
              4,635,151
              
              
              4,154,164Accounts
                  payable
              
              
              998,242
              
              
              843,343Accrued
                  expenses
              
              
              1,011,695
              
              
              696,619*Total
                  current liabilities:*
              
              
              14,239,077
              
              
              12,366,678Long-term
                  debt, less current portion
              
              
              748,298
              
              
              869,907*Total
                  liabilities*
              
              
              14,987,375
              
              
              13,236,585SHAREHOLDERS’
                  DEFICITCapital
                  stock, par value $.01 per share, 100,000,000 shares
                  authorized:Series
                  A Convertible Preferred Stock, par value $.01 per share:Authorized
                  shares —
                  466,666;Issued
                  and outstanding shares: 43,334 shares ($65,001 liquidation
                  preference)
              
              
              433
              
              
              433Series
                  B Variable Rate Convertible Preferred Stock, par value $.01 per
                  share:Authorized
                  shares — 30,000;Issued
                  and outstanding shares: 2,251 shares ($2,250,950 liquidation
                  preference)
              
              
              23
              
              
              23Common
                  stock, par value $.01 per share: Authorized shares - 99,503,334;Issued
                  shares, 16,516,749 and 16,231,924 at March 31, 2007 and December
                  31, 2006,
                  respectively; outstanding shares 16,366,749 and 16,106,924 at March
                  31,
                  2007 and December 31, 2006, respectively
              
              
              163,667
              
              
              161,069Additional
                  paid-in capital
              
              
              44,488,348
              
              
              44,042,445Accumulated
                  deficit
              
              
              (50,466,172
              )
              
              (47,914,045
              )Deferred
                  equity compensation
              
              
              (14,395
              )
              
              (46,023
              )*Total
                  shareholders’ deficit:*
              
              
              (5,828,096
              )
              
              (3,756,098
              )*Total
                  liabilities and shareholders’ deficit:*
              
              $
              9,159,279
              
              $
              9,480,487




See
      accompanying notes to financial statements.




2




**Spectre
      Gaming, Inc.**


**Statements
      of Operations**


**(Unaudited)**


For
                  the three months ended March 31,2007
              
              2006REVENUE:Sales
              
              $
              216,438
              
              $
              -Cost
                  of revenues
              
              
              579,784
              
              
              -*Gross
                  loss*
              
              
              (363,346
              )
              
              -OPERATING
                  EXPENSES:Research
                  and development
              
              
              293,475
              
              
              540,779Sales
                  and marketing
              
              
              89,135
              
              
              50,127General
                  and administrative
              
              
              715,212
              
              
              604,618*Total
                  Operating Expenses:*
              
              
              1,097,822
              
              
              1,195,524Operating
                  loss
              
              
              (1,461,168
              )
              
              (1,195,524
              )OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              377
              
              
              11,742Interest
                  expense
              
              
              (1,038,607
              )
              
              (105,250
              )*Total
                  other income (expense)*
              
              
              (1,038,230
              )
              
              (93,508
              )*Loss
                  from continuing operations:*
              
              
              (2,499,398
              )
              
              (1,289,032
              )Loss
                  from discontinued operations
              
              
              -
              
              
              (58,920
              )*Net
                  loss:*
              
              
              (2,499,398
              )
              
              (1,347,952
              )Preferred
                  stock dividends
              
              
              52,729
              
              
              163,173*Net
                  loss attributable to common shareholders*
              
              $
              (2,552,127
              )
              $
              (1,511,125
              )NET
                  LOSS PER COMMON SHARE BASIC AND DILUTED:Loss
                  from continuing operations
              
              $
              (0.15
              )
              $
              (0.09
              )Loss
                  from discontinued operations
              
              
              (0.00
              )
              
              (0.00
              )NET
                  LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
              
              
              (0.16
              )
              
              (0.11
              )WEIGHTED-AVERAGE
                  NUMBER OF SHARES OUTSTANDING:Basic
                  and diluted
              
              
              16,307,561
              
              
              13,641,006




See
      accompanying notes to financial statements.





3


**Spectre
      Gaming, Inc.**


**Statements
      of Cash Flows (Unaudited)**


For
                the three months ended March 31,2007
            
            2006**Operating
                activities**Net
                loss
            
            $
            (2,499,398
            )
            $
            (1,347,952
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            333,920
            
            
            28,784Stock
                options and warrants issued for services
            
            
            328,475
            
            
            250,573Gain
                on sale of property and equipment
            
            
            -
            
            
            (4,000
            )Amortization
                of original issue discount
            
            
            494,755
            
            
            -Amortization
                of debt issuance costs
            
            
            82,802
            
            
            -Amortization
                of long-term technology and distribution rights
            
            
            -
            
            
            250,000Change
                in allowance for doubtful accounts
            
            
            43,242
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (13,630
            )Other
                receivables
            
            
            12,593
            
            
            3,190Inventory
            
            
            1,373
            
            
            23,345Deposits
            
            
            (328
            )
            
            -Prepaid
                expenses
            
            
            97,487
            
            
            (40,701
            )Accounts
                payable and accrued expenses
            
            
            417,248
            
            
            (267,639
            )Net
                cash used in operating activities:
            
            
            (701,461
            )
            
            (1,104,400
            )**Investing
                activities**Net
                proceeds from sale of property and equipment
            
            
            -
            
            
            24,000Purchases
                of property, equipment and leasehold improvements
            
            
            (5,856
            )
            
            (49,936
            )Net
                cash used in investing activities:
            
            
            (5,856
            )
            
            (25,936
            )**Financing
                activities**Exercise
                of stock options
            
            
            -
            
            
            3,975Proceeds
                from short-term debt
            
            
            966,948
            
            
            -Payments
                on notes payable
            
            
            (180,890
            )
            
            -Debt
                issuance costs
            
            
            (9,010
            )Preferred
                stock dividend
            
            
            -
            
            
            (111,284
            )Net
                cash used by financing activities:
            
            
            777,048
            
            
            (107,309
            )Decrease
                in cash and cash equivalents
            
            
            69,731
            
            
            (1,237,645
            )Cash
                and cash equivalents at beginning of year
            
            
            250
            
            
            1,656,831Cash
                and cash equivalents at end of period:
            
            $
            69,981
            
            $
            419,186**Supplemental
                cash flow information**Cash
                paid for interest
            
            $
            53,115
            
            $
            172,500**Non-cash
                Investing and Financing Activities:**Conversion
                of Series B convertible preferred stock to common stock
            
            
            -
            
            
            1,562Inventory
                transferred to leased AWP equipment, net of reserve
            
            
            -
            
            
            96,680Preferred
                stock dividends accrued
            
            
            52,729
            
            
            163,173Common
                stock issued for interest expense
            
            
            151,654
            
            
            -




See
      accompanying notes to financial statements.





4


Spectre
      Gaming, Inc.


Notes
      to
      Financial Statements


March
      31,
      2007 and 2006


(unaudited)




**Note
      1. Business Description.**





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





In
      May
      2005 the Company acquired the exclusive license to a proprietary technology
      (Alpha-AWP) for the development and deployment of casino-style redemption or
      amusement-with-prize (AWP) games. The Company has developed AWP games and
      distributes the games to operators at various retail, commercial and
      entertainment venues in the United States which allow for such devices. In
      December 2005, the Company made the decision to focus its efforts exclusively
      in
      the AWP market.





The
      accompanying financial statements have been prepared on the basis that the
      Company will continue as a going concern. The Company had net losses for the
      three months ended March 31, 2007 and the year ended December 31, 2006, had
      an
      accumulated deficit at March 31, 2007, and does not have adequate liquidity
      to
      fund its operations through fiscal 2007. As of the date of this quarterly
      report, the Company’s current liabilities exceed current assets. To service its
      debt, the Company must produce sufficient operating revenue or raise additional
      capital. If the Company relies in whole or in part on financing, debt financing
      may involve restrictive covenants and equity financing will result in dilution
      to our common shareholders. Nevertheless, the Company may not be able to
      successfully obtain any financing at all. If we cannot produce revenue
      sufficient to service and repay our debt, or successfully obtain financing
      for
      that purpose, the Company will likely be forced to consider various strategic
      alternatives, including but not limited to liquidating some or all assets,
      ceasing some or all operations, and bankruptcy. In addition, the Company may
      be
      subject to foreclosures by its secured creditors. Since the Company does not
      have significant operating history in the AWP market, it is uncertain whether
      the Company can generate net cash flows necessary to sustain its business.
      The
      Company is currently engaged in fund raising activities and continues to seek
      opportunities to maximize the utilization and revenue generating potential
      of
      its assets. However, the Company’s management has been focused on procuring
      funds to operate the business and recently has been unable to invest the
      necessary resources required for further placement of games. Nevertheless,
      there
      can be no assurance the Company will raise the necessary capital to fund its
      business. If the Company is not successful in raising additional funds it will
      not be able to continue as a going concern. This could result in bankruptcy
      and/or liquidation of its assets, in which case the Company may not realize
      the
      carrying value of its assets. The financial statements do not include any
      adjustments that might result from the outcome of this condition.





5


Pursuant
      to the Master Loan Agreement entered into with PDS Gaming Corporation on June
      29, 2006, it is an event of default if the Company does not pay its principal
      and interest payments when due or if the Company becomes insolvent, defined
      as
      liabilities greater than assets. At March 31, 2007 and December 31, 2006, the
      Company was insolvent and was delinquent on its principal and interest payments.
      Upon an event of default, PDS may at any time declare all unmatured obligations
      immediately due and payable. On May 22, 2007, the Company entered into a
      Forbearance Agreement with PDS in which PDS agreed to forbear, until May 15,
      2008, from exercising its rights under the Master Loan Agreement between PDS
      and
      Spectre dated June 29, 2006.





Under
      terms associated with the Company’s outstanding Variable Rate Convertible
      Debentures due February 18, 2009, an event of default occurs if the Company
      is
      in default under any other indebtedness obligation exceeding $150,000. As a
      result of the defaults on the PDS Gaming Corporation promissory notes, the
      Company is in default under the Variable Rate Convertible Debentures. Upon
      an
      event of default, at the debentureholders’ election, the amount owing the
      holders will become immediately due and payable at 130% of the outstanding
      balance, representing a premium of $2,472,764 on the principal balance on the
      notes of $8,242,548, along with interest at the lesser of 18% or the maximum
      rate permitted under applicable law. As of the date of this report, the Company
      has not received notice from any debentureholders requiring acceleration of
      amounts due under the debenture. The Company has classified the debentures
      payable as short-term debt.





The
      Company expects to work with the Variable Rate Convertible Debenture holders
      to
      obtain waivers for the defaults and/or cure and avoid future events of
      default.





**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 months ended March 31, 2007 are
      not
      necessarily indicative of the results that may be expected for the year ending
      December 31, 2007. 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, 2006, contained in
      its
      Annual Report on Form 10-KSB for the year ended December 31, 2006.





6


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





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





The
      remaining assets of discontinued operations are classified as “Current assets of
      discontinued operations” and “Other assets of discontinued operations” on the
      balance sheet. Since the remaining value of those assets was estimated based
      on
      limited actual sales data and management’s best estimate, the Company cannot
      ensure that it will realize the remaining carrying value of those assets upon
      their disposition.





In
      accordance with the provisions of Statement of Financial Accounting Standards
      (“SFAS”) 144, the Company has not included the results of operations of its
      Class II and Class III business in the results from continuing operations.
      The
      results of operations for this business have been reflected as discontinued
      operations. The loss from discontinued operations for the three months ended
      March 31, 2007 and 2006, respectively, consist of the following:





For
                the three months
              ended
                March 31,2007
            
            2006REVENUE:Sales
            
            $
            -
            
            $
            4,710Cost
                of revenues
            
            
            -
            
            
            13,216*Gross
                profit*
            
            
            -
            
            
            (8,506
            )OPERATING
                EXPENSES:Research
                and development
            
            
            -
            
            
            -Sales
                and marketing
            
            
            -
            
            
            19,376General
                and administrative
            
            
            -
            
            
            35,038*Total
                Operating Expenses:*
            
            
            -
            
            
            54,414*Operating
                loss:*
            
            
            -
            
            
            (62,930
            )Gain
                on sale of equipment
            
            
            -
            
            
            4,000Net
                loss from discontinued operations
            
            $
            -
            
            $
            (58,920
            )





7


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





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





*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. The Company
      recorded a reserve for bad debts of $53,207 and $9,965 against its receivables
      at March 31, 2007 and December 31, 2006, respectively.





*Inventories.* Inventories,
      which consist principally of AWP game products and related materials, are stated
      at the lower of cost (determined on the specific identification method) or
      market. At March 31, 2007 the Company had $354,449 of finished goods inventory
      and $110,894 of spare parts and game cabinets. At December 31, 2006 the Company
      had $355,822 of finished goods inventory and $74,676 of spare parts and game
      cabinets.




*Prepaid
      Royalties* .
      Prepaid
      royalties relate to royalties due to PDS Gaming Corporation that were prepaid
      with the issuance of a short-term note payable (Note 6). The prepaid royalties
      are being amortized over a twelve month period. The Company expensed $78,750
      in
      the three months ended March 31, 2007 and will expense the remaining $214,525
      in
      the remainder of the year ending December 31, 2007.





*Leased
      Equipment and Property, Equipment and Leasehold Improvements* .
      Leased
      equipment and property, equipment and leasehold improvements were stated at
      cost. AWP machines placed with customers under participation arrangements are
      included in leased equipment. Depreciation of these assets is recognized on
      the
      straight-line basis over the asset’s estimated useful life ranging from three to
      five years. Leasehold improvements were amortized using the straight-line method
      over the shorter of the lease term or the estimated useful life. Maintenance,
      repairs and minor renewals are expensed when incurred. Sales and retirements
      of
      depreciable property were recorded by removing the related cost and accumulated
      depreciation from the accounts. Gains or losses on sales and retirements of
      property are reflected in the Company’s results of operations. At March 31,
      2007, the Company had 844 AWP machines in fixed assets that were either awaiting
      placement or had been temporarily removed from service to be relocated to
      alternate customer locations. Upon deployment at new locations, the Company
      will
      depreciate those machines over their remaining useful life. Depreciation and
      amortization expense on leased equipment and property, equipment and leasehold
      improvements was $235,169 and $25,108 for the three months ended March 31,
      2007
      and 2006, respectively.





8


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. There was not an adjustment to the
      value of the long-lived assets, other than the long-term technology and
      distribution rights, during the three months ended March 31, 2007 and 2006.
      Provided the Company can raise sufficient capital to fund its operations, its
      estimated cash flows on its leased AWP games is adequate to realize their value.
      However, the Company still has limited operating history in the AWP market
      and
      will continue to evaluate the carrying values of its assets in future periods
      as
      it gains more operating history, which may result in impairment
      charges.





*Debt
      Issuance Costs* .
      The
      Company capitalizes the costs associated with obtaining debt financing and
      it
      amortizes the costs over the term of the debt on a straight-line basis which
      approximates the effective interest method. Amortization expense for the three
      months ended March 31, 2007 and 2006 was $82,802 and $0, respectively. The
      Company amortizes the costs over the term of the debt which ranges from 30
      to 48
      months and will have additional amortization of $250,661 in 2007, $306,329
      in
      2008, $134,347 in 2009 and $57,681 in 2010.





*Prepaid
      Redemption Product Licenses* .
      On
      April 30, 2006, the Company entered into a Development and License Agreement
      with Global Gaming Group to provide game content. The Company capitalized
      payments of $240,000 to Global Gaming Group and is amortizing them over the
      three-year life of the agreement. The Company recorded amortization expense
      of
      $20,000 in the three months ended March 31, 2007. The Company will have
      additional amortization expense of $60,000 in 2007, $80,000 in 2008 and $33,333
      in 2010.





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





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





9


*Research
      and Development Costs.* Costs
      related to research, design and development of products are charged to research
      and development expense as incurred. Software development costs are capitalized
      beginning when a product’s technological feasibility has been established and
      ending when a product is available for general release to customers. The Company
      uses the working model approach to determine technological feasibility.
      Generally, the Company’s products are released soon after technological
      feasibility has been established. As a result, the Company has not capitalized
      any internal software development costs, since such costs have not been
      significant and the products are released shortly after technological
      feasibility. Research and development expense for continuing operations was
      $293,475 and $540,779 for the three months ended March 31, 2007 and 2006,
      respectively.





*Net
      Loss Per Common Share* .
      Basic
      and diluted loss per common share is computed by dividing net loss by the
      weighted-average number of common shares outstanding for the reporting period.
      Dilutive common-equivalent shares have not been included in the computation
      of
      diluted net loss per share because their inclusion would be antidilutive.
      Antidilutive common-equivalent shares issuable based on future exercise of
      stock
      options, warrants, convertible preferred stock, convertible debentures or
      restricted stock totaling 48,743,476 and 18,435,505 shares for the three months
      ended March 31, 2007 and 2006 respectively, could potentially dilute basic
      loss
      per common share in subsequent years. All options, warrants, convertible
      preferred stock, convertible debentures and restricted stock outstanding were
      antidilutive for the three months ended March 31, 2007 and 2006 due to a loss
      for these periods.





*Stock-Based
      Compensation - Employees* .
      The
      Company recognizes share based compensation costs on a straight-line basis
      over
      the requisite service period of the award which is generally over the option
      vesting term. The amount of expense recorded for the three months ended March
      31, 2007 and 2006 was $318,329 ($0.02 per share) and $263,947 ($0.02 per share),
      respectively. Based on options and restricted stock grants outstanding at March
      31, 2007, the Company estimates the expense to be $2,121,000 for the remainder
      of 2007 through 2010.





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




Three
                Months Ended March 31,2007
            
            2006Risk
                free interest rate
            
            
            4.48
            %
            
            4.31
            %Expected
                life
            
            
            4.00
                years
            
            
            5.00
                yearsExpected
                volatility
            
            
            214
            %
            
            169
            %Expected
                dividends
            
            
            0
            %
            
            0
            %




The
      volatility factor is based on the Company’s historical stock price fluctuations
      for a period of approximately 3 years. This period is shorter than the expected
      life of the options but was deemed more relevant given the significant change
      in
      the Company’s business model and strategy. The Company has not issued and does
      not intend to issue, dividends; therefore, the dividend yield assumption is
      0.
      The Company applied the risk-free interest rate based on the U.S. Treasury
      yield
      in effect at the time of the grant. The expected term of the option is based
      on
      the contractual period of the options granted. Based on the lack of history
      to
      calculate a forfeiture rate, the Company has not adjusted the calculated value
      of the options for the three months ended March 31, 2007 and 2006.





10


Non-employees





At
      March
      31, 2007 and 2006, the Company had outstanding options and warrants to purchase
      1,526,666 and 1,516,666 shares respectively, of the Company’s common stock to
      non-employees, mostly consultants, with exercise prices ranging from $0.26
      per
      share to $3.00 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
      a reduction of expense, due to a change in the fair value of the options and
      warrants, of $1,355 and $13,373 for the three months ended March 31, 2007 and
      2006, respectively, in accordance with EITF 96-18.





*Recent
      Accounting Pronouncements* .
      In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities - Including an Amendment
      of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to
      elect to measure many financial instruments and certain other items at fair
      value. Upon adoption of SFAS No. 159, an entity may elect the fair value option
      for eligible items that exist at the adoption date. Subsequent to the initial
      adoption, the election of the fair value option may only be made at initial
      recognition of the asset or liability or upon a re-measurement event that gives
      rise to new-basis accounting. The decision about whether to elect the fair
      value
      option is applied on an instrument-by-instrument basis, is irrevocable and
      is
      applied only to an entire instrument and not only to specific risks, cash flows
      or portions of that instrument. SFAS No. 159 does not affect any existing
      accounting literature that requires certain assets and liabilities to be carried
      at fair value nor does it eliminate disclosure requirements included in other
      accounting standards. SFAS No. 159 is effective for fiscal years beginning
      after
      November 15, 2007. The Company believes that the adoption of SFAS No. 159 will
      not have an impact on its financial statements.





*Income
      Taxes.* Effective
      January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48 (“FIN No.
      48”), “Accounting for Uncertainty in Income Taxes”, to address the
      noncomparability in reporting tax assets and liabilities resulting from a lack
      of specific guidance in FASB SFAS No. 109 (“SFAS 109”), Accounting for Income
      Taxes”, on the uncertainty in income taxes recognized in an enterprise’s
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return, and provides related guidance on
      derecognition, classification, interest and penalties, accounting interim
      periods, disclosure and transition. The Company has determined that there was
      no
      impact on the financial position or results of operations following adoption
      of
      FIN No. 48 for the three months ended March 31, 2007.





11


**Note
      3. Shareholder’s Deficit**





**Common
      Stock**





During
      the three months ended March 31, 2007, the Company issued 259,825 shares of
      its
      common stock, valued at $151,654, as payment for interest on certain one-year
      notes issued by the Company (Note 5).





**Note
      4. Convertible Debt Financing**





On
      August
      18, 2006, the Company offered and sold an aggregate of $8,242,549 in Variable
      Rate Convertible Debentures (“Debentures”), together with warrants to purchase
      an aggregate of 10,343,474 shares of the Company’s common stock at $1.10 per
      share, subject to adjustment (Note 1). The Debentures are convertible into
      common stock at a conversion price of $1.00 per share, subject to adjustment.
      Interest only payments on the Debentures are due on a quarterly basis beginning
      January 1, 2007 and is based on a *per
      annum* rate
      equal to the 6-month LIBOR on the day before the quarterly interest period,
      plus
      four percent. The principal balance of the Debentures is due February 18,
      2009.





The
      allocation of the gross proceeds of the Debentures financed in August
      2006 are summarized below as of March 31, 2007:





Debentures
                payable
            
            $
            8,242,548Value
                of warrants allocated to additional paid in capital
            
            
            (2,508,366
            )Value
                of beneficial conversion option allocated to paid in
                capital
            
            
            (2,301,497
            )Debentures
                payable, net of original issue discount
            
            
            3,432,685Amortization
                of original issue discount
            
            
            1,202,466Total
                debentures payable, net
            
            $
            4,635,151




**Note
      5. Short-term Debt**





As
      of
      March 31, 2007, the Company was past due on a note payable to Parklane
      Associates LLC with a principal balance of $279,000, which was due on December
      31, 2006. The Parklane note originated as a note payable to Pandora Select
      Partners L.P. in the amount of $750,000. On May 12, 2006, the Pandora note
      was assumed by Parklane Associates LLC. On February 8, 2007, Pandora
      Select Partners filed a confession of judgment against Parklane and three
      individual guarantors of the debt Parklane owes to Pandora Select Partners,
      including Ronald E. Eibensteiner, D. Bradly Olah, and Wayne W. Mills, to enforce
      their guaranties. As of May 23, 2007, however, the Company has not received
      any
      notice of default from Parklane. The Company has subsequently made additional
      payments to Parklane, with a principal balance of $102,000 at May 23,
      2007.





12


From
      December 18, 2006 through December 31, 2006 and January 1, 2007 through January
      29, 2007, the Company sold to 28 investors unsecured term promissory notes
      in
      the aggregate principal amounts of $225,000 and $410,260, respectively. All
      principal due under the notes is payable in cash only and due and payable in
      full on the one-year anniversary of the issuance of the notes. Interest on
      the
      principal amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. As of
      March
      31, 2007 the Company had issued 259,825 shares of common stock as payment of
      interest and subsequently issued the remaining 53,500 required interest shares.
      The Company recorded the issuance of the interest shares as prepaid interest
      based at their fair value at date of issuance and is amortizing the balance
      over
      the life of the loans. The Company recorded interest expense of $33,741 related
      to these loans during the three month period ended March 31, 2007. Payments
      of
      principal under the notes are subordinate to the Company’s obligations under
      variable rate convertible debentures issued on August 18, 2006, in aggregate
      principal amount of $8,242,549 (Note 4). The balance on the notes at March
      31,
      2007 was $626,650.





On
      March 16, 2007, the Company finalized a secured term promissory note, treated
      effective December 18, 2006, to PDS Gaming Corporation in the principal amount
      of $320,400 as payment for amounts due under a royalty agreement from December
      2006 through November 2007. The note was recorded on the Company’s balance sheet
      as of December 31. 2006. All principal due under the notes is payable in cash
      only and due and payable in full on December 18, 2007. Interest on the principal
      amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. Subsequent
      to March 31, 2007, the Company issued 160,200 shares valued at $27,234 as
      payment for interest due on the note. Payments of principal under the notes
      are
      subordinate to the Company’s obligations under variable rate convertible
      debentures issued on August 18, 2006, in aggregate principal amount of
      $8,242,549 (Note 4). As additional consideration for entering into the note,
      the
      Company granted PDS a five-year license to use the Company’s AWP technology in
      the event PDS were to foreclose on any AWP machines owned by the Company. The
      balance on the notes at March 31, 2007 was $320,400.





In
      March
      2007, the Company began offering existing warrant holders a reduced exercise
      price for their warrants of $0.25. Investors that participate and exercise
      their
      warrants will receive an additional one-half share of common stock for each
      share that they purchase. As an option, a warrant holder may transfer their
      warrant to an investor who will exercise the warrant, in which case the Company
      will replace the warrant to the transferor. There can be no assurance that
      warrantholders will accept this offer and the offering is subject to a $3.5
      million aggregate minimum offering amount. As of March 31, 2007, the Company
      had
      not closed on the warrant repricing offering.





In
      connection with the warrant repricing offering, the Company also began selling
      short-term bridge notes. The notes are unsecured, mature in one year, and are
      convertible into the exercise price for warrants at the
      reduced exercise price. The notes provide for 0% interest. The Company
      will imput interest on the notes at its effective borrowing rate which
      approximates 14.5% and will result in total interest expense of $71,588 over
      the
      12 month term of the notes. The respective imputed interest expense was not
      significant for the three months ended March 31, 2007.  In connection
      with the private placement, the Company agreed to permit investors to exercise
      certain currently issued common stock purchase warrants, the shares
      issuable upon exercise of which are not registered for resale, on a cashless
      conversion basis. The warrants may not, however, be cashlessly
      converted for an amount of common shares exceeding eight times the dollar amount
      loaned to the Company in exchange for the note. Some of the note holders
      may not currently hold enough warrants to fully benefit from this provision
      but
      may acquire warrants from other holders. The Company has committed in some
      instances, on a best efforts basis, to replace warrants provided by certain
      warrant holders for conversion by the note holders participating in the bridge
      note offering. No securities offered or sold in the private placement of
      the bridge notes, the shares of common stock issuable upon the cashless
      conversion of warrants, or the shares of common stock issuable upon exercise
      of
      warrants with a reduced exercise price, were registered under the Securities
      Act. Therefore, no such securities may be offered or sold in the United States
      absent registration or an applicable exemption from registration requirements.
      The Company offered and sold the above-referenced securities in reliance on
      the
      statutory exemption from registration in Section 4(2) of the Securities Act,
      and
      on Rule 506 under the Securities Act. The disclosure about the private placement
      and related agreements contained in this report does not constitute an offer
      to
      sell or a solicitation of an offer to buy any securities of the Company, and
      is
      made only as required under applicable rules for filing reports with the SEC,
      and as permitted under Rule 135c under the Securities Act. As of March 31,
      2007,
      the Company has received proceeds on the sale of bridge notes payable totaling
      $565,298 and had recorded the notes as short-term debt. Additionally, as of
      March 31, 2007, no investors had exercised their cashless conversion
      rights.





13


Total
      short-term debt outstanding at March 31, 2007 and 2006 was $2,541,348 and
      $1,670,400 respectively.





**Note
      6. Equipment Financing**





On
      May
      25, 2006, the Company entered into a Master Loan Agreement with PDS Gaming
      Corporation, a Minnesota corporation, providing for purchase-money
      amusement-with-prize machine financing in an amount aggregating up to $20
      million. Under the Master Loan Agreement, the Company has the right to request
      advances, subject to certain funding contingencies, in amounts not to exceed
      $10
      million or to be less than $650,000.





On
      June
      28, 2006, the Company entered into a Master Loan Agreement and delivered
      into two new promissory notes in the amounts of $3,182,854 and $1,910,000.
      Proceeds of the notes are to fund the purchase of 875 redemption product
      licenses form Bally Gaming, Inc. and purchase AWP equipment. As additional
      consideration for entering into the promissory notes, the Company agreed to
      pay
      PDS a monthly royalty fee of $1.75 per day for 500 AWP devices for 48 months
      commencing on August 1, 2006. During the three months ended March 31, 2007
      and
      2006, the Company expensed $78,750 and $0, respectively, due PDS under the
      royalty agreement.





Pursuant
      to the Master Loan Agreement, it is an event of default if the Company does
      not
      pay its principal and interest payments when due or if the Company becomes
      insolvent, defined as liabilities greater than assets. At March 31, 2007 and
      December 31, 2006, the Company was insolvent and was delinquent on its principal
      and interest payments. Upon an occurrence of an event of default, PDS may at
      any
      time declare all unmatured obligations immediately due and payable. The Company
      has not received notice from PDS declaring the Company’s obligations immediately
      due and payable. In addition, after the first twelve months after the first
      closing date, the Company is required to maintain a targeted fixed charge
      coverage ratio of at least 1.1 to 1.0 for the following twelve months. The
      fixed
      charge coverage ratio is defined as EBITDA for such period to fixed charges,
      defined as required principal payments on all debt during the same period plus
      taxes payable during the same period. The Company has classified the amounts
      due
      PDS as short-term debt.





14


On
      May
      22, 2007, the Company entered into a Forbearance Agreement with PDS in which
      PDS
      agreed to forbear, until May 15, 2008, from exercising its rights under the
      Master Loan Agreement between PDS and Spectre dated June 29, 2006.





On
      July
      25, 2006, the Company entered into a financing transaction for the purchase
      of
      inventory. Total indebtedness equaled $1,463,050 and provides for interest
      at
      14.5% *per
      annum* ,
      and
      payments computed on a 36-month amortization but with a balloon payment due
      after 24 months (i.e., on July 25, 2008).





The
      allocation of the gross proceeds of the equipment financing debt, less
      repayments made, is summarized below as of March 31, 2007:





Equipment
                financing debt, net of repayments
            
            $
            5,957,575Value
                of 200,000 warrants allocated to additional paid in
                capital
            
            
            (220,290
            )Equipment
                financing debt, net of original issue discount
            
            
            5,737,285Amortization
                of original issue discount
            
            
            41,305Equipment
                financing debt
            
            
            5,778,590Less
                PDS debt classified as short-term
            
            
            (4,481,942
            )Other
                long-term debt
            
            
            22,349Long-term
                debt, net
            
            
            1,318,997Current
                portion of long-term debt
            
            
            (570,699
            )Total
                long-term debt, net
            
            $
            748,298





**Note
      7. Related Party Transactions**





The
      Company incurred expenses from corporations, owned by Ronald Eibensteiner,
      the
      former Chairman and CEO of the Company and employing Brian Niebur, another
      former director and former CFO of the Company, for rent and consulting services
      of approximately $0 and $11,000 during the three months ended March 31, 2007
      and
      2006, respectively.





Effective
      August 2, 2006, the Company entered into an Equipment Revenue Share Agreement
      with Florida Arcade Corporation, an entity which is owned in part by Ronald
      Eibensteiner, the Company’s former Chairman and Chief Executive Officer, and a
      greater than 5% shareholder during 2006. The Company derived revenue of $46,549
      during the three months ended March 31, 2007 under this agreement.





15


In
      Mach
      2007, the Company received proceeds of $50,000 and accepted a subscription
      for
      and additional $50,000 on the sale of the Company’s short-term bridge notes
      (Note 5) from D. Bradly Olah, the Company’s Chief Executive Officer and a
      director.





**Note
      8. Significant Customers**





Revenues
      from four customers was 93% of revenue from continuing operations for the three
      months ended March 31, 2007. The
      Company had no revenue from continuing operations for the three months ended
      March 31, 2006.





**Note
      9.**  **Subsequent
      Events**





The
      Company has received additional proceeds on the sale of bridge notes payables
      totaling $400,150, including $30,000 from D. Bradly Olah, the Company’s Chief
      Executive Officer and a director. The notes are unsecured, mature in one year,
      and are convertible into the exercise of warrants which the Company is offering
      at a reduced exercise price. In connection with the private placement, the
      Company agreed to permit investors to exercise certain common stock purchase
      warrants, the shares issuable upon exercise of which are not registered for
      resale, on a cashless conversion basis. The warrants may not, however, be
      cashlessly converted for an amount of common shares exceeding eight times
      the dollar amount loaned to the Company in exchange for the related note.
      Currently, no investors have exercised their cashless conversion rights.




On
      May
      15, 2007, D. Bradly Olah, the Company’s Chief Executive Officer, entered into a
      Warrant Exercise and Subscription Agreement with the Company pursuant to which
      Mr. Olah exercised a warrant to purchase 320,000 shares of Company common stock
      at $0.25 per share. Pursuant to the terms of the agreement, Mr. Olah also
      received 160,000 additional shares of common stock as incentive to exercise
      the
      warrant.





On
      May 9,
      2007, the Company entered into a Consulting Agreement with New Castle
      Consulting, LLC, a New York limited liability company, pursuant to which New
      Castle will provide investor relations and/or market relations services. In
      consideration for New Castle’s services for the next six months under the terms
      of the agreement, the Company issued New Castle 1,100,000 shares of unregistered
      common stock, with no registration rights.




No
      securities offered or sold in the private
      placements discussed above were registered under the Securities Act. Therefore,
      no such securities may be offered or sold in the United States absent
      registration or an applicable exemption from registration requirements. The
      Company offered and sold the above-referenced securities in reliance on the
      statutory exemption from registration in Section 4(2) of the Securities Act,
      and
      on Rule 506 under the Securities Act. The disclosure about the private placement
      and related agreements contained in this report does not constitute an offer
      to
      sell or a solicitation of an offer to buy any securities of the Company, and
      is
      made only as required under applicable rules for filing annual reports with
      the
      SEC, and as permitted under Rule 135c under the Securities Act.




**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, 2006, included in our Annual Report
        on
        Form 10-KSB for the year ended December 31, 2006.


16


**Results
      of Operations**





**Three
      Months Ended March 31, 2007 Compared to the Three Months Ended March 31,
      2006**





*Revenues* .
      The
      Company’s revenues from continuing operations for the three months ended March
      31, 2007 were $216,438 compared to $0 for the three months ended March 31,
      2006.
      The increase was due to the fact that the Company is new to the AWP business
      and
      had no revenue-producing sales during the three-month period ended March 31,
      2006.





*Cost
      of Revenues* .
      The
      Company’s cost of revenues from continuing operations for the three months ended
      March 31, 2007 were $579,784 compared to $0 for the three months ended March
      31,
      2006. The increase was due to the fact that the Company is new to the AWP
      business and had no revenue-producing sales during the three-month period ended
      March 31, 2006.





*Research
      and Product Development Expenses* .
      Research and product development expenses for continuing operations for the
      three months ended March 31, 2007 was $293,475, compared to $540,779 for the
      three months ended March 31, 2006. The decrease in expense for the three-month
      period was due to $0 of amortization of long-term technology and distribution
      rights included in 2007 versus $250,000 for the same period in 2006.
      Management expects that expenditures for research and product development may
      increase in future quarters as the Company continues placing its AWP machines
      in
      the market and continues to develop and broaden its product base.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses for the three months ended March 31, 2007 was $89,135,
      compared to $50,127 for the three months ended March 31, 2006. The **** increases
      in expense resulted from the Company commencing operations in the **** AWP
      market and incurring placement fees for AWP machines in operation in
      2007.




*General
      and Administrative Expenses* .
      General
      and administrative expenses from continuing operations for the three months
      ended March 31, 2007 was $715,212, compared to $604,618 for the three months
      ended March 31, 2006. The increase was due primarily to the addition to and
      increase in corporate staff expense, increased professional fees and other
      corporate expenses as a result of starting in the AWP business after the first
      quarter of 2005. In addition, the three months ended March 31, 2007 and 2006
      included $318,329 and $263,947, respectively, of expense related to employee
      stock options in connection with the adoption of FASB 123(R) which requires
      stock options to be expensed as they vest.




17





*Interest Expense* .
      Interest expense for the three months ended March 31, 2007 was $1,038,607,
      compared to $105,250 for the three months ended March 31, 2006. The increase
      in interest expense is primarily due to an increase of $494,754 of
      amortization of original issue discount on debentures payable and equipment
      financing, $82,803 of amortization of financing costs related to debt issuance
      and $355,800 of interest expense on Company borrowings.




*Loss
      From Discontinued Operations* . ** The
      loss
      from discontinued operations was $0 and $58,920 for the three months ended
      March
      31, 2007 and 2006, respectively. The decrease in loss between the comparable
      periods was due to the Company having no discontinued operations activity in
      the
      2007.





*Net
      Loss* .
      The
      Company incurred a net loss of $2,552,127 for the three months ended March
      31,
      2007, compared to a net loss of $1,511,125 for the three months ended March
      31,
      2006. The increased net loss between the comparable periods is due primarily
      to
      losses from the Company AWP operations and increased debt and borrowing related
      costs including amortization of original issue discount.





*Liquidity
      and Capital Resources* .
      The
      Company had negative working capital of $12,461,675 and $10,538,790 at March
      31,
      2007 and December 31, 2006, respectively. During the three months ended March
      31, 2007, cash used in operations was $701,461 and the primary uses of cash
      were
      to fund the Company’s net loss and associated development of AWP products. These
      uses were partially offset by non-cash charges related to stock options and
      warrants issued for services, amortization of original issue discount, stock
      based compensation expense, and depreciation and amortization. For the three
      months ended March 31, 2006, the cash used in operations was $1,104,400 and
      the
      primary use of cash was to fund the Company’s net loss and associated
      development of AWP products. These uses were partially offset by non-cash
      charges related to stock options and warrants issued for services, amortization
      of long-term technology and distribution rights, stock based compensation
      expense, and depreciation and amortization.





Cash
      used
      in investing activities was $5,826 and $25,936 for the three months ended March
      31, 2007 and 2006, respectively, to purchase fixed assets. Cash used in the
      2005
      period was partially offset by proceeds of $24,000 from the sale of property
      and
      equipment.





Cash
      provided in financing activities was $966,948 for the three months ended March
      31, 2007 which was attributable to proceeds from short-term financing less
      costs
      and offset by payments on notes payable. Cash used in financing activities
      for
      the three months ended March 31, 2006 was 111,284 which consisted of the payment
      of dividends on preferred stock.





Pursuant
      to the Master Loan Agreement entered into with PDS Gaming Corporation on June
      29, 2006, it is an event of default if the Company does not pay its principal
      and interest payments when due or if the Company becomes insolvent, defined
      as
      liabilities greater than assets. At March 31, 2007 and December 31, 2006, the
      Company was insolvent and was delinquent on its principal and interest payments.
      Upon an occurrence of an event of default, PDS may at any time declare all
      unmatured obligations immediately due and payable. On May 22, 2007, the Company
      entered into a Forbearance Agreement with PDS in which PDS agreed to forbear,
      until May 15, 2008, from exercising its rights under the Master Loan Agreement
      between PDS and Spectre dated June 29, 2006.




18





Under
      terms associated with the Company’s outstanding Variable Rate Convertible
      Debentures due February 18, 2009, an event of default occurs if the Company
      is
      in default under any other indebtedness obligation exceeding $150,000. As a
      result of the defaults on the PDS Gaming Corporation promissory notes, the
      Company is in default on those certain covenants in the Variable Rate
      Convertible Debentures. Upon an event of default, at the debentureholders’
election, the amount owing the holders will become immediately due and payable
      at 130% of the outstanding balance, representing a premium of $2,472,764 on
      the
      principal balance on the notes of $8,242,548, along with interest at the lesser
      of 18% or the maximum rate permitted under applicable law. As of May 23, 2007,
      the Company has not received notice from any debentureholders requiring
      acceleration of amounts due under the debenture. The Company has classified
      the
      debentures payable as short-term debt.





As
      of the
      date of this report, the Company had not made a principal payment of $102,000,
      plus accrued interest, that originally became due December 31, 2006, on a
      promissory note held by Parklane Associates LLC and secured by substantially
      all
      of the assets of the Company. The note was originally issued and due to Pandora
      Select Partners, L.P. on September 10, 2004, but was acquired by Parklane in
      May
      2006. Parklane paid for this purchase by issuing a substantially identical
      promissory note to Pandora Select Partners. Since January 1, 2007, the Company
      has made principal payments to Parklane in the aggregate amount of $273,000.
      In
      addition, the Company had not made interest payments on its Variable Rate
      Convertible Debentures totaling approximately $298,500 and dividends on its
      Series B Variable Rate Convertible Preferred Stock totaling approximately
      $63,500, which were due on December 31, 2006 and January 1, 2007, respectively.
      Since such due dates, the Company has received consents, representing 98% of
      amounts due to debenture holders and 100% of amounts due to preferred holders,
      to defer such interest and dividends due on January 1, 2007 and any additional
      amounts that will accrue and become payable in 2007, until January 1,
      2008.





On
      February 8, 2007, Pandora Select Partners filed a confession of judgment against
      Parklane and three individual grantors of the debt Parklane owes to Pandora
      Select Partners, including Ronald E. Eibensteiner, D. Bradly Olah, and Wayne
      W.
      Mills. As of the date of this report, however, the Company had not received
      any
      notice of default from Parklane. In the event the Company receives such a
      notice, it will have ten days to make payment in full to Parklane prior to
      defaulting under the terms of the promissory note.





From
      December 18, 2006 through December 31, 2006 and January 1, 2007 through January
      29, 2007, the Company sold to 28 investors unsecured term promissory notes
      in
      the aggregate principal amounts of $225,000 and $410,260, respectively. All
      principal due under the notes is payable in cash only and due and payable in
      full on the one-year anniversary of the issuance of the notes. Interest on
      the
      principal amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. As of
      March
      31, 2007 the Company had issued 259,825 shares of common stock as payment of
      interest and subsequently issued the remaining 53,500 required interest shares.
      The Company recorded the issuance of the interest shares as prepaid interest
      based at their fair value at date of issuance and is amortizing the balance
      over
      the life of the loans. The Company recorded interest expense of $33,741 related
      to these loans during the three month period ended March 31, 2007. Payments
      of
      principal under the notes are subordinate to the Company’s obligations under
      variable rate convertible debentures issued on August 18, 2006, in aggregate
      principal amount of $8,242,549 (Note 4). The balance on the notes as of the
      date
      of this report was $626,650.




19





On
      March 16, 2007, the Company finalized a secured term promissory note, effective
      December 18, 2006, to PDS Gaming Corporation in the principal amount of $320,400
      as payment for amounts due under a royalty agreement from December 2006 through
      November 2007. The note was recorded on the Company’s balance sheet as of
      December 31. 2007. All principal due under the notes is payable in cash only
      and
      due and payable in full on the one-year anniversary of the issuance of the
      notes. Interest on the principal amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. Subsequent
      to March 31, 2007, the Company issued 160,200 shares valued at $27,234 as
      payment for interest due on the note. Payments of principal under the notes
      are
      subordinate to the Company’s obligations under variable rate convertible
      debentures issued on August 18, 2006, in aggregate principal amount of
      $8,242,549 (Note 4). As additional consideration for entering onto the note,
      the
      Company entered into a five year license to its AWP technology to be used by
      PDS
      in the event it was to foreclose on any AWP machines owned by the Company.
      The
      balance on the notes as of the date of this report was $320,400.





In
      March
      2007, the Company began offering existing warrant holders a reduced
      exercise price of $0.25 for their warrants. Investors that participate will
      receive an additional one-half share of common stock for each share that they
      purchase upon exercise of their warrants at the reduced price. As an option,
      a
      warrant holder may transfer their warrant to an investor who will exercise
      the
      warrant, in which case the Company will replace the warrant to the transferor.
      There can be no assurance that warrantholders will accept this offer.





In
      connection with the warrant repricing offering, the Company also began selling
      short-term bridge notes. The notes are unsecured, mature in one year, and are
      convertible into the exercise of warrants which the Company is offering at
      a
      reduced exercise price. In connection with the private placement, the Company
      agreed to permit investors to exercise certain common stock purchase warrants,
      the shares issuable upon exercise of which are not registered for resale, on
      a
      cashless conversion basis. The warrants may not, however, be cashlessly
      converted for an amount of common shares exceeding eight times the dollar amount
      loaned to the Company in exchange for the related note.




No
      securities offered or sold in connection with the above described warrant
      repricing offering or the short-term bridge note offering were registered
      under the Securities Act. Therefore, no such securities may be offered or sold
      in the United States absent registration or an applicable exemption from
      registration requirements. The Company has offered and sold the above-referenced
      securities in reliance on the statutory exemption from registration in Section
      4(2) of the Securities Act, and on Rule 506 under the Securities Act. The
      disclosure about the private placement and related agreements contained in
      this
      report does not constitute an offer to sell or a solicitation of an offer to
      buy
      any securities of the Company, and is made only as required under applicable
      rules for filing annual reports with the SEC, and as permitted under Rule 135c
      under the Securities Act. As of the date of this report, the Company has
      received proceeds on the sale of bridge notes payables totaling $965,488 and
      has
      accepted subscriptions for an additional $40,000. The notes are being recorded
      as short-term debt. Additionally, as of May 23, 2007, no investors had exercised
      their cashless conversion rights.




20





On
      May
      15, 2007, D. Bradly Olah, the Company’s Chief Executive Officer, entered into a
      Warrant Exercise and Subscription Agreement with the Company pursuant to which
      Mr. Olah exercised a warrant to purchase 320,000 shares of Company common stock
      at $0.25 per share. Pursuant to the terms of the agreement, Mr. Olah also
      received 160,000 additional shares of common stock as incentive to exercise
      the
      warrant.





The
      Company anticipates that it will need to expend significant resources in 2007
      acquiring machines to be placed in amusement centers on either a fixed lease
      or
      a participation basis. Once placed in service, these machines are transferred
      to
      fixed assets. In addition, the Company expects that research and product
      development, sales and marketing, and general and administrative expenses will
      also increase as the Company adds additional personnel and incurs other costs
      associated with placing and marketing its AWP products and for other corporate
      purposes. Over the next 12 months, the Company expects to spend a significant
      amount on deploying its existing AWP machines, on capital equipment purchases
      primarily for AWP machines, and for such purpose expects to seek financing
      to
      purchase such equipment.





The
      Company believes it does not have sufficient cash to fund operations beyond
      May
      2007. The Company is engaged in efforts to secure financing for its operations.
      Nevertheless, the Company may not be able to secure financing, if at all, on
      terms favorable or acceptable to the Company. In the absence of additional
      financing, the Company would likely be forced to consider a variety of strategic
      alternatives, including but not limited to liquidating some or all of the
      Company’s assets or discontinuing operations. If the Company is forced to
      liquidate its assets, it may not be able to realize the carrying value of those
      assets. Moreover, even if financing is obtained, the Company expects that its
      ability to continue operations in the future will be materially dependent on
      its
      ability to generate or raise sufficient additional working capital. The Company
      continues to seek opportunities which will maximize the utilization and revenue
      potential of its assets and believes that it can ultimately generate the
      necessary working capital through continued placement of its AWP games and
      other
      utilization of its technology.




**Off-Balance-Sheet
      Arrangements**





The
      Company has no off-balance-sheet arrangements.





**Critical
      Accounting Estimates**





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




21





**Forward-Looking
      Statements**





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





Although
      the Company believes that the expectations reflected in the forward-looking
      statements contained in this document are generally reasonable, we cannot assure
      you that such expectations will ultimately prove to be correct. Generally,
      the
      forward-looking statements contained in this document relate to business plans
      and strategies, projected or anticipated benefits or other consequences of
      market conditions and opportunities, projections involving anticipated sales
      and
      revenues, expenses, projected future earnings and other aspects of operations
      and operational results. All phases of the Company’s operations are subject to a
      number of risks, most of which are outside the Company’s control, and the
      materialization of any one or combination of such risks could materially and
      adversely affect the results of the Company’s operations, and also, could affect
      whether any forward-looking statements contained in this document ultimately
      prove to be accurate. Important factors that could cause actual results to
      differ materially from the Company’s expectations are summarized above, as well
      as in the “Risk Factors” section of our Annual Report on Form 10-KSB for the
      year ended December 31, 2006 (as such risk factors are modified below). The
      forward-looking statements contained in this document are made as of the date
      of
      this document, and the Company assumes no obligation to update the
      forward-looking statements or to update the reasons why actual results could
      differ from those contained in any such forward-looking statements. Therefore,
      we caution our readers not to unduly rely on the forward-looking statements
      contained in this document.




22


**Risk
      Factors**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in our Annual Report on Form 10-KSB for the
      year
      ended December 31, 2006, which could materially affect our business, financial
      condition or future results. The risks described in our Annual Report are not
      the only risks facing our Company. Additional risks and uncertainties not
      currently known to us or that we currently deem to be immaterial also may
      materially and adversely affect our business, financial condition and/or
      operating results.




**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 March 31, 2007, 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 2005 and 2006, 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.





23


**PART
      II Other Information**





**Item
      1. Legal Proceedings**





The
      Company is not a party to any material legal proceedings. Nevertheless, on
      February 14, 2007, the Company learned that the operator of a location in
      Hernando County, Florida, where the Company has 52 games in operation, received
      a letter from the State Attorney for the Fifth Judicial Circuit of Florida
      (encompassing five separate Florida counties, including Hernando County), dated
      February 6, 2007, alleging that the Company’s games do not comply with
      applicable Florida law, and demanding that the operator cease and desist the
      operation of the games in Hernando County, Florida. The State Attorney’s letter
      states that if the operator continues to operate our games at that location,
      the
      games could be subject to seizure.





The
      Company does not agree with the State Attorney’s position and facilitated a
      transfer of the operator contract to a third party. As a result, t he
      business was re-opened on May 24, 2007 under different ownership at a
      different location within Hernando County, Florida. Florida state or county
      authorities have the power to seize the Company’s games pending
      resolution through litigation or a settlement of any assertion that the
      Company's games do not comply with Florida legal requirements. If the matter
      proceeds to litigation, it is possible that the Company’s games could be found
      to be non-compliant with Florida state law. Such a determination would likely
      result in the Company being forced to remove all of its games in Florida, or
      else have them seized.





Under
      the
      Company’s agreement with the current operator of the Hernando County, Florida,
      location, the Company is not obligated to indemnify the operator for damages,
      loss or liability for the Company’s delivery to the operator of games that are
      not compliant, at the time of delivery, with federal, state and local laws
      and
      regulations.




24





**Item
      6. Exhibits**




**Exhibit
                No.**
            
            **Description**4.1
            
            Form
                of Unsecured Term Promissory Note issued in December 2006 through
                March
                2007, and issued to PDS Gaming Corporation in March 2007 (incorporated
                by
                reference to Exhibit 4.3 to the registrant’s SB-2/A registration statement
                (File No. 333-13751) filed on February 8, 2007).31.1
            
            Rule
                13a-14(a) Certification of Chief Executive Officer (*filed
                herewith*).31.2
            
            Rule
                13a-14(a) Certification of Chief Financial Officer (*filed
                herewith*).32
            
            Section
                1350 Certification (*filed
                herewith*).





25




**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:
              May 30, 2007
            By:
            /s/ D.
              Bradly
              OlahTitle:Chief
              Executive Officer(Principal
                Executive Officer)  Date:
              May 30, 2007
            By:
            /s/ Kevin
              M.
              GreerTitle:Chief
              Financial Officer(Principal
                Accounting Officer)




26




**Exhibits**





**Exhibit
                No.**
            
            **Description**4.1
            
            Form
                of Unsecured Term Promissory Note issued in December 2006 through
                March
                2007, and issued to PDS Gaming Corporation in March 2007 (incorporated
                by
                reference to Exhibit 4.3 to the registrant’s SB-2/A registration statement
                (File No. 333-13751) filed on February 8, 2007).31.1
            
            Rule
                13a-14(a) Certification of Chief Executive Officer (*filed
                herewith*).31.2
            
            Rule
                13a-14(a) Certification of Chief Financial Officer (*filed
                herewith*).32
            
            Section
                1350 Certification (*filed
                herewith*).





27