##### Table of Contents



United States
Securities & Exchange Commission  FORM 10-QSB (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004[   ]
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number 0-25764 Spectre Gaming, Inc.  Minnesota
(State or other jurisdiction
of incorporation or organization)
    
    41-1675041
(IRS Employer
Identification No.)
 1466 Pioneer Way, #10
El Cajon, CA 92020
(Address of principal executive offices) 612-279-2030
(Issuers telephone number) (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Check whether the issuer (1) filed all reports required to be filed
by section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. YES [X] NO [   ] APPLICABLE TO CORPORATE ISSUERS  Transitional
Small Business Disclosure Format (check one): YES [   ] NO  [X]




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Spectre Gaming, Inc.
Form 10-QSB
Quarter Ended September 30, 2004 Table of Contents  
 Page No.PART I Financial Information
    
    
    2Item 1.Financial StatementsBalance Sheets at September 30, 2004 (unaudited) and
December 31, 2003 (audited)
    
    
    2Statements of Operations for the three and nine months
ended September 30, 2004 and 2003 (unaudited)
    
    
    3Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 (unaudited)
    
    
    4Notes to Financial Statements
    
    
    5Item 2.Managements Discussion and Analysis or Plan of Operation
    
    
    13Item 3. Controls and Procedures
    
    
    22PART II Other Information
    
    
    23Item 2.Changes in Securities and Small Business Issuer Purchases of
Equity Securities
    
    
    23Item 4.Submission of Matters to a Vote of Security Holders
    
    
    23Item 6.Exhibits and Reports on Form 8-K
    
    
    24SIGNATURES
    
    
    25Rule 13a-14(a) Certification of CEORule 13a-14(a) Certification of CFOSection 1350 Certification




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PART I  Financial Information 
 Item 1. Financial Statements Spectre Gaming, Inc. 
 Balance Sheets
 September 30,
    
    December 31,2004
    
    2003(unaudited)
    
    (audited)ASSETSCURRENT ASSETS:Cash
    
    $
    558,617
    
    
    $
    323,675Inventory
    
    
    1,723,354
    
    
    
    Prepaid license fees
    
    
    187,500
    
    
    
    Deposits
    
    
    611,242
    
    
    
    Prepaid expenses and other current assets
    
    
    47,556
    
    
    
    40,461Total current assets:
    
    
    3,128,269
    
    
    
    364,136Fixed assets, net
    
    
    84,951
    
    
    
    Other assets
    
    
    291,588
    
    
    
    Total assets:
    
    $
    3,504,808
    
    
    $
    364,136LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Current portion of convertible notes payable, net
    
    $
    349,486
    
    
    $
    Short-term debt, net
    
    
    1,211,111
    
    
    
    Accounts payable
    
    
    857,627
    
    
    
    42,907Accrued payroll and related taxes
    
    
    
    
    
    
    3,942Accrued expenses
    
    
    157,289
    
    
    
    57,538Total current liabilities:
    
    
    2,575,513
    
    
    
    104,387Convertible note payable, net
    
    
    83,908
    
    
    
    Total liabilities
    
    
    2,659,421
    
    
    
    104,387SHAREHOLDERS EQUITY:Capital stock, par value $.01 per share, 100,000,000 shares
authorized:Series A Convertible Preferred Stock, par value $.01 per share:Authorized shares466,666Issued and outstanding shares:206,667 and 440,000 shares at September 30, 2004 and December
31, 2003, respectively
    
    
    2,067
    
    
    
    4,400($310,000 and $660,000 liquidation preference at September 30,
2004 and December 31, 2003, respectively)Common stock, par value $.01 per share:Authorized shares13,333,33311,006,784 and 8,093,198 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively
    
    
    110,068
    
    
    
    80,932Additional paid-in capital
    
    
    20,715,223
    
    
    
    16,388,237Accumulated deficit
    
    
    (18,968,138
    )
    
    
    (16,213,820
    )Deferred equity compensation
    
    
    (1,013,833
    )
    
    
    Total shareholders equity:
    
    
    845,387
    
    
    
    259,749Total liabilities and shareholders equity:
    
    $
    3,504,808
    
    
    $
    364,136
 See accompanying notes to financial statements. 2




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Spectre Gaming, Inc. 
 Statements of
Operations
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)OPERATING EXPENSES:Research and development
    
    $
    
    
    
    $
    
    
    
    $
    850,000
    
    
    $
    Selling, general and administrative
    
    
    722,509
    
    
    
    44,638
    
    
    
    1,547,800
    
    
    
    97,167Total Operating Expenses:
    
    
    722,509
    
    
    
    44,638
    
    
    
    2,397,800
    
    
    
    97,167Operating loss
    
    
    (722,509
    )
    
    
    (44,638
    )
    
    
    (2,397,800
    )
    
    
    (97,167
    )OTHER INCOME (EXPENSE):Interest income
    
    
    1,001
    
    
    
    
    
    
    
    3,099
    
    
    
    Interest expense
    
    
    (265,067
    )
    
    
    
    
    
    
    (359,617
    )
    
    
    Net Loss:
    
    $
    (986,575
    )
    
    $
    (44,638
    )
    
    $
    (2,754,318
    )
    
    $
    (97,167
    )NET LOSS PER COMMON SHARE:Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.27
    )
    
    $
    (0.03
    )WEIGHTED-AVERAGE NUMBER OF SHARES
OUTSTANDING:Basic and diluted
    
    
    10,994,420
    
    
    
    3,456,896
    
    
    
    10,106,932
    
    
    
    3,344,310
 See accompanying notes to financial statements. 3




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Spectre Gaming, Inc. 
 Statements of Cash
Flows
 Nine Months Ended September 30,2004
    
    2003(unaudited)Operating activitiesNet loss
    
    $
    (2,754,318
    )
    
    $
    (97,167
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    5,614
    
    
    
    Common stock issued for services
    
    
    712,500
    
    
    
    Stock options and warrants issued for services
    
    
    220,416
    
    
    
    Amortization of original issue discount
    
    
    228,655
    
    
    
    Amortization of debt issuance costs
    
    
    83,062
    
    
    
    Changes in operating assets and liabilities:Inventory
    
    
    (1,723,354
    )
    
    
    Deposits
    
    
    (611,242
    )
    
    
    Prepaid license fees
    
    
    (187,500
    )
    
    
    Prepaid expenses
    
    
    (7,095
    )
    
    
    30,536Other assets
    
    
    (6,650
    )
    
    
    Accounts payable, payroll and related taxes and
accrued expenses
    
    
    910,529
    
    
    
    3,936Net cash used in operating activities:
    
    
    (3,129,383
    )
    
    
    (62,695
    )Investing activitiesCapital expenditures
    
    
    (90,565
    )
    
    
    Net cash used in investing activities
    
    
    (90,565
    )
    
    
    Financing activitiesDebt financing costs
    
    
    (143,000
    )
    
    
    Proceeds from sale of common stock, net of issuance costs
    
    
    1,067,040
    
    
    
    130,480Proceeds from notes payable and common stock warrants issued
    
    
    2,600,000
    
    
    
    Proceeds from loan payable  related parties
    
    
    
    
    
    
    47,000Payments on notes payable
    
    
    (69,150
    )
    
    
    Payments on loans payable  related parties
    
    
    
    
    
    
    (5,000
    )Net cash provided by financing activities
    
    
    3,454,890
    
    
    
    172,480Increase in cash
    
    
    234,942
    
    
    
    109,785Cash at beginning of the period
    
    
    323,675
    
    
    
    3,346Cash at end of the period:
    
    $
    558,617
    
    
    $
    113,131Supplemental cash flow informationCash paid for interest
    
    $
    36,668
    
    
    $
    Cash paid for income taxes
    
    
    
    
    
    
    Warrants issued for services relating to debt issuance
    
    
    225,000
    
    
    
    Conversion of loans payable  related parties to common stock
    
    
    
    
    
    
    (42,000
    )Stock subscription receivable
    
    
    
    
    
    
    (100,000
    )
 See accompanying notes to financial statements. 4




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Spectre Gaming, Inc. 
    Note 1. Business Description. Spectre Gaming, Inc. (the Company or Spectre) (formerly OneLink, Inc.)
was incorporated in Minnesota in June 1990 and changed its name to Spectre
Gaming, Inc. in January 2004. The Company is a provider of interactive
electronic games to the Native American and charitable gaming markets. The
Company designs and develops networks, software and content that provide its
customers with a comprehensive gaming system. Note 2. Summary of Significant Accounting Policies. Interim Financial Information. The accompanying unaudited financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and pursuant to the rules
and regulations of the U. S. Securities and Exchange Commission for interim
financial information. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to such rules and regulations. Operating results
for the three and nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. The accompanying financial statements and related notes should be read
in conjunction with the Companys audited financial statements, and notes
thereto, for the fiscal year ended December 31, 2003, contained in its Annual
Report on Form 10-KSB for the year ended December 31, 2003 (Readers should also
carefully review Note 3 below discussing the sale of assets). The financial information furnished reflects, in the opinion of
management, all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the results of the interim periods presented. Inventory.Inventory, which consist principally of gaming products and
related materials, are stated at the lower of cost (determined on the first-in,
first-out method) or market. Prepaid License Fees.Prepaid license fees relates to licenses associated
with the themes of the gaming machines. Upon the placement of the machines
into service, the Company will begin amortizing the licenses over the estimated
useful life of 5 years. Deposits.Deposits relate to the prepayment of machines ordered which
have not been received as of September 30, 2004. Upon receipt of the machines,
the deposit of $611,242 will be reclassified into inventory. Debt Issuance Costs.The Company capitalizes debt issuance costs and
amortizes the costs over the life of the loan using the straight-line method,
which approximates the interest method. 5




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The capitalized costs related to the convertible debt investment from
Pandora Select Partners LP (Pandora) in May 2004 include the origination fee
paid to Pandora of $33,000, the $50,000 cash paid to Blake Capital Advisors,
LLC (Blake), the value of the warrants issued to Blake and $10,000 of legal
fees, and are included in other assets in the financial statements. The
warrants issued to Blake were valued at $225,000 using the Black-Scholes
pricing model. The capitalized costs related to the loans from Pandora and
Whitebox Intermarket Partners LP in September 2004 include the origination fee
paid of $45,000 and $5,000 of legal fees. Amortization expense of the debt
issuance costs for the three and nine months ended September 30, 2004 was
$58,556 and $83,062, respectively. Estimated amortization for debt issuance
costs is $161,063 and $206,937 for the years ending December 31, 2004 and 2005,
respectively. Research and Development Costs.Costs related to research, design and
development of products are charged to research and development expense as
incurred. Software development costs are capitalized beginning when a
products technological feasibility has been established and ending when a
product is available for general release to customers. The Company uses the
working model approach to determine technological feasibility. Generally, the
Companys products are released soon after technological feasibility has been
established. As a result, the Company has not capitalized any software
development costs, since such costs have not been significant and the products
are released shortly after technological feasibility. Net Loss Per Common Share. Basic and diluted loss per common share is
computed by dividing net loss by the weighted-average number of common shares
outstanding for the reporting period. Dilutive common-equivalent shares have
not been included in the computation of diluted net loss per share because
their inclusion would be antidilutive. Antidilutive common-equivalent shares
issuable based on future exercise of stock options or warrants could
potentially dilute basic loss per common share in subsequent years. All
options and warrants outstanding were antidilutive for the three and nine
months ended September 30, 2004 and 2003. Stock Based Compensation.In accordance with Accounting Principles Board
(APB) Opinion No. 25 and related interpretations, the Company uses the
intrinsic value-based method for measuring stock-based compensation cost which
measures compensation cost as the excess, if any, of the quoted market price of
the Companys common stock at the grant date over the amount the employee must
pay for the stock. The Companys general policy is to grant stock options and
warrants at fair value at the date of grant. Options and warrants issued to
non-employees are recorded at fair value, as required by Statement of Financial
Accounting Standards (SFAS) No. 123 Accounting for Stock Based
Compensation, using the Black-Scholes pricing model. The Company has adopted
the disclosure only provision of SFAS No. 148, Accounting for Stock Based
Compensation. The Company applies APB No. 25 and related interpretations in accounting
for its stock options and warrants. Compensation expense for the three and
nine months ended September 30, 2004 was $153,937 and $220,416, respectively.
Had compensation costs for the Companys stock options and warrants been
determined based on the fair value at the grant dates consistent with the
method of SFAS No. 123, the Companys net loss and loss per share would have
been changed to the approximate pro forma amounts indicated below: 6




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss:As reported
    
    $
    (986,575
    )
    
    $
    (44,638
    )
    
    $
    (2,754,318
    )
    
    $
    (97,167
    )Pro forma
    
    
    (1,107,739
    )
    
    
    (64,638
    )
    
    
    (3,123,853
    )
    
    
    (117,167
    )Basic and diluted net
loss per common shareAs reported
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.27
    )
    
    $
    (0.03
    )Pro forma
    
    
    (0.10
    )
    
    
    (0.02
    )
    
    
    (0.31
    )
    
    
    (0.04
    )Stock-based compensationAs reported
    
    $
    153,937
    
    
    $
    
    
    
    $
    220,416
    
    
    $
    Pro forma
    
    
    121,164
    
    
    
    20,000
    
    
    
    369,535
    
    
    
    20,000
 The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes pricing model: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Risk Free interest rate
    
    
    2.94
    %
    
    
    3.11
    %
    
    
    2.93
    %
    
    
    3.11
    %Expected life
    
    
    4.0
    years
    
    
    5.0
    years
    
    
    4.96
    years
    
    
    5.0
    yearsExpected volatility
    
    
    642
    %
    
    
    385
    %
    
    
    637
    %
    
    
    385
    %Expected dividends
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 During the nine months ended September 30, 2004, the Company has issued
options to purchase 1,065,000 shares of the Companys common stock to
non-employees, mostly consultants, with exercise prices ranging from $2.00 per
share to $3.30 per share and expiring at various times through August 2009.
The Company valued these options at $1,234,249 using the Black-Scholes pricing
model. The Company recorded expense of $153,937 and $220,416 for the three and
nine months ended September 30, 2004, respectively, in accordance with APB No.
25. Reclassifications.Certain accounts in the prior quarters financial
statements have been reclassified for comparative purposes to conform with the
presentation in the current quarter financial statements. These
reclassifications had no effect on the net loss or stockholders equity. Note 3. Sale of Assets and Liquidity On April 24, 2002, while the Company was involved in providing
telecommunications-based business-intelligence services, the Company announced
that its ability to generate cash 7




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flow was severely impacted by the downturn in the telecommunications market. The
severe downturn greatly delayed the deployment of the Companys products by
Regional Bell Operating Companies. On June 3, 2002, the Company announced that
a letter of intent had been signed with CallVision, Inc. (CallVision)
pursuant to which CallVision agreed in principle to purchase substantially all
of the Companys assets. The Company entered into an asset purchase agreement
with CallVision on June 28, 2002, and ceased operations as of July 1, 2002. On
December 6, 2002, the Companys shareholders approved the asset sale and on
December 11, 2002, the Company closed on its sale of substantially all of its
assets to CallVision. Pursuant to the asset purchase agreement with CallVision, the Company sold
substantially all its assets in exchange for cash payments of $214,300. Upon
the execution and delivery of the asset purchase agreement, CallVision paid the
Company $100,000 in cash, plus an additional $14,300 in cash for the Companys
June 2002 office rent and T-1 bandwidth. At the closing of the asset sale,
CallVision paid the Company the remaining $100,000 in cash. The Company was
also to receive an amount equal to 15% of revenue generated from certain sales
of current or future versions of the Companys products during the period from
closing through December 31, 2003. There were no such sales of the Companys
products during such period. The proceeds received from the sale of the
Companys assets were not sufficient to allow the Company to make any
distributions to the Companys shareholders. During the year ended December
31, 2002, the Company recorded a loss of approximately $337,000 related to a
long-term prepaid expense, and property and equipment sold to CallVision in
connection with the asset sale. The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company had net losses for
the three and nine months ended September 30, 2004 and 2003 and the years ended
December 31, 2003 and 2002 and had an accumulated deficit at September 30,
2004. The ability to reduce our loss is dependent on the placement and sales
of machines. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties. Note 4. Software On March 4, 2004, the Company signed an agreement with MET Games, Inc.
(MET) to purchase certain Linux-based software and technology being developed
by and owned by MET for the operation of certain gaming computers and systems.
Pursuant to the agreement, the Company made a $250,000 cash payment to MET and
issued 800,000 unregistered, restricted shares of the Companys common stock.
The Company will utilize the software as it develops its business opportunities
in the Native American Class II and charitable gaming markets. The Company has the right to terminate the agreement and recover the
$250,000 payment and 800,000 unregistered, restricted shares of the Companys
common stock if MET fails to deliver software that meets the specifications
detailed in the agreement or in the event that MET fails to provide the
software in accordance with the development schedule detailed in the agreement.
Despite this fact, due to the development of the software not having reached
technological feasibility on the date of the agreement and the $250,000 cash
payment being a significant performance commitment, the Company expensed the
cash payment and the value of the common stock, $600,000, as research and
development expense. The common stock was 8




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valued at $0.75 per share, based upon the price of the Companys then
recently completed private placement. MET is wholly-owned by an individual who became an employee of the Company
on March 4, 2004. Note 5. Shareholders Equity In November 2003, the Company began a private placement which ended in
March 2004 (the Offering). A majority of the sales of the Companys common
stock occurred after December 31, 2003. In the Offering, the Company sold a
total of 1,796,829 shares of its common stock (of which 1,531,989 were sold in
2004) for a per share price of $0.75 (i.e., raising a gross total of
$1,347,626, $1,148,996 of which was raised in 2004). The Offering was a
private placement made under Rule 506 promulgated under the Securities Act of
1933, as amended. The Company raised funds in this private placement in
anticipation of entering into the business of developing, manufacturing,
distributing and servicing gaming machines, primarily for the Native American
and charitable gaming markets. The Company used an agent for a portion of
these sales. As a fee, the Company paid the agent $62,550 in cash which was
accounted for as a reduction of gross proceeds, and issued the agent five-year
warrants to purchase up to 83,400 shares of the Companys common stock for an
exercise price of $0.75 per share. Preferred Stock During the year ended December 31, 2001, the Company sold 440,000 shares
of Series A Convertible Preferred Stock and received net proceeds of $615,133.
The preferred stock has voting rights identical to common stock. In the event
of liquidation, the Series A Preferred shareholders shall receive a liquidation
preference of $1.50 per share. Although no dividends are required with respect
to the Series A Preferred Stock, no dividend shall be paid on any shares of
common stock unless comparable dividends are paid on the Series A Preferred
Stock. The holders of Series A Convertible Preferred Stock may elect to convert
all or a portion of such shares into shares of the Companys common stock in
the manner set forth in the Series A Convertible Preferred Stock Certificate of
Designation on file with the Minnesota Secretary of State. After adjustment
pursuant to the terms of the Certificate of Designation, each share of Series A
Convertible Preferred Stock currently converts into 2.257 shares of the
Companys common stock. In June 2004, holders of 200,000 shares of the Companys Series A
Convertible Preferred Stock converted their preferred shares into 451,369
shares of the Companys $.01 par value common stock. In July 2004, holders of
an additional 33,333 shares of the Companys Series A Convertible Preferred
Stock converted their preferred shares into 75,228 shares of the Companys $.01
par value common stock. At the end of the period covered by this report there
were outstanding 206,667 shares of Series A Convertible Preferred Stock which
were convertible into an aggregate of 466,452 shares of the Companys common
stock. 9




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Note 6. Distribution Agreement In June 2004, the Company signed a distribution agreement to become the
exclusive distributor of Games of Chance, Inc. (GOC). Under the terms of the
five-year agreement the Company will issue an aggregate of 200,000 shares of
the Companys common stock, 50,000 shares of which were issuable upon the
signing of the agreement with the remaining 150,000 shares issuable in five
30,000-share installments on each of the five anniversaries of the agreement.
In addition, GOC received an option to purchase 500,000 shares of the Companys
common stock at an exercise price of $2.50 per share. The options vest in
increments of 25,000 shares as the Company places or sells 500 GOC machines.
As of September 30, 2004, the Company had not placed or sold any GOC machines.
Upon signing the Company also paid GOC $15,000 related to prior expenses
incurred by GOC on behalf of the Company. In connection with the distribution agreement the Company signed a
five-year consulting agreement (Consulting Agreement) with Barry Quick, the
spouse of the President of GOC. The Consulting Agreement calls for monthly
payments to Mr. Quick of $10,000 and is terminable, without penalty, for cause
or non-performance. Note 7. Convertible Debt On May 20, 2004, the Company received $1,100,000 in a convertible debt
investment from Pandora Select Partners, L.P. (Pandora). The note was
payable in interest only, at 10% per annum, through August 20, 2004, and
thereafter is payable in equal monthly installments over the next 15 months.
The note is convertible by Pandora into common stock of Spectre at $2.50 per
share, and allows Spectre, subject to certain conditions and limitations, to
make monthly installment payments with its common stock at a price per share
equal to 90% of the average closing bid price of the common stock over the 30
trading days immediately preceding the payment date. In connection with the
financing, Spectre paid a 3% origination fee, issued a five-year warrant for
the purchase of 200,000 shares of Spectres common stock at $2.50 per share,
and granted Pandora a security interest in the Companys assets. The gross
proceeds of $1,100,000 were allocated between the convertible note and the
common stock warrants based on the relative fair values of the securities at
the time of issuance. The common stock warrants were valued using the
Black-Scholes pricing model. The resulting original issue discount, the fair
value of the warrants and the beneficial conversion of the note into common
stock as defined in EITF 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments, will be amortized over the life of the promissory
note using the straight-line method, which approximates the interest method.
The note is convertible by the holder any time in whole or in part upon written
notice to the Company. Such conversion is limited to the extent the holders
beneficial ownership interest would exceed 4.99% of outstanding common stock at
conversion. In addition, Spectre agreed to file a registration statement by
November 3, 2004 with the U.S. Securities and Exchange Commission, covering the
issuance or resale of the shares of Spectres common stock which may be issued
in connection with the note and warrant issued to Pandora, and cause the same
to be effective by February 1, 2005. In connection with the financing, the
Company also paid a finders fee to Blake Capital Advisors, LLC (Blake), a
Minnesota limited liability company wholly owned by Wayne W. Mills, a
greater-than-five-percent shareholder of the Company, of $50,000 and issued a
five-year warrant for the purchase of 50,000 shares of the 10




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Companys common stock at $2.50 per share and a five-year warrant for the
purchase of 50,000 shares at $3.00 per share. The allocation of the gross proceeds of the convertible note payable is
summarized below as of September 30, 2004: Convertible note payable, total borrowed
    
    $
    1,100,000Value of 200,000 warrants allocated to additional paid
in capital
    
    
    (450,000
    )Value of beneficial conversion of note payable
allocated to additional paid in capital
    
    
    (340,000
    )Convertible note payable, net of original issue discount
    
    
    310,000Amortization of original issue discount
    
    
    192,544Principal payments on convertible note
    
    
    (69,150
    )Total convertible note payable
    
    
    433,394Less current portion
    
    
    (349,486
    )Convertible note payable, net
    
    $
    83,908
 Note 8. Short-term Debt On September 10, 2004, the Company issued two $750,000 10% promissory
notes. One note was issued to Pandora Select Partners, L.P. (Pandora) and
the other note was issued to Whitebox Intermarket Partners, L.P. (Whitebox).
The notes are payable interest only through March 10, 2005, at which time the
principal is due. In connection with the financing, Spectre paid a 3%
origination fee, issued five-year warrants for the purchase of 50,000 shares of
Spectres common stock at $3.00 per share to both Pandora and Whitebox, and
granted Pandora and Whitebox security interests in the Companys assets. The
gross proceeds of $1,500,000 were allocated between the notes and the common
stock warrants based on the relative fair values of the securities at the time
of issuance. The common stock warrants were valued using the Black-Scholes
pricing model. The resulting original issue discount and the fair value of the
warrants will be amortized over the life of the promissory note using the
straight-line method, which approximates the interest method. In addition,
Spectre agreed to file a registration statement by November 3,
2004 with the
U.S. Securities and Exchange Commission, covering the issuance or resale of the
shares of Spectres common stock which may be issued in connection with the
warrants issued to Pandora and Whitebox, and cause the same to be
effective by February 1, 2005. The allocation of the gross proceeds of the short-term debt is summarized
below as of September 30, 2004: Short-term debt, total borrowed
    
    $
    1,500,000Value of 100,000 warrants allocated to additional paid
in capital
    
    
    (325,000
    )Short-term debt, net of original issue discount
    
    
    1,175,000Amortization of original issue discount
    
    
    36,111Total short-term debt, net
    
    
    1,211,111
 11




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Note 9. License Agreement On June 30, 2004, the Company signed a three-year non-exclusive license
agreement (License Agreement) with Bally Gaming Inc. (Bally). The License
Agreement calls for the Company to purchase up to 3,000 game cabinets from
Bally over the term of the Agreement. Nevertheless, if the Company has
purchased at least 70% of its Class II cabinet purchases from Bally during the
term, Bally shall waive the 3,000 game cabinet purchase minimum. In addition,
the Company was obligated to purchase at least 100 game cabinets from Bally,
and incur certain minimum license-fee charges of $187,500, by June 30, 2004. Note 10. Related Party Transactions The Company incurred expenses from a corporation, owned by a director and
officer of the Company and employing another director and officer of the
Company, for rent and consulting services of $29,000 and $10,000 during the
three months ended September 30, 2004 and 2003, respectively and $74,000 and
$10,000 during the nine months ended September 30, 2004 and 2003, respectively. In February 2004, the Company entered into a consulting agreement with D.
Bradly Olah, a greater-than-five-percent shareholder of the Company. Pursuant
to the consulting agreement, Mr. Olah received $12,500 per month for four
months (ending as of May 31, 2004) in exchange for general consulting services.
On June 1, 2004, the Company entered into a new consulting agreement with Mr.
Olah providing for payments of $12,500 per month for a two-year term. In
connection with the new consulting agreement, Mr. Olah received options to
purchase up to 300,000 shares of the Companys common stock at an exercise
price of $2.15 per share (the fair value of the stock on the date of grant).
Beginning on June 15, 2005, the option vests in 100,000-share increments on
each June 15 through 2007, and has a five-year term during which the options
must be exercised or forfeited. The options were valued at $645,000 using the
Black-Scholes pricing model and will be expensed using the straight-line method
over the term of the consulting agreement. For the three and nine months ended
September 30, 2004, the Company recorded expense of $80,625 and $107,500,
respectively, related to these options. In connection with the convertible debt financing from Pandora, the
Company paid $50,000 and issued two three-year warrants to Blake Advisors, LLC,
a Minnesota limited liability company wholly owned by Wayne W. Mills, a
greater-than-five-percent shareholder of the Company. The warrants were issued
in exchange for financial-advisory services rendered by Blake Advisors. One
warrant grants Blake Advisors the right to obtain up to 50,000 shares of the
Companys common stock at an exercise price of $2.50 per share, and the second
warrant grants Blake Advisors the right to obtain up to 50,000 shares of the
Companys common stock at an exercise price of $3.00 per share. The warrants
were valued at $225,000 using the Black-Scholes pricing model and will be
expensed using the straight-line method over the term of the promissory note.
For the three and nine months ended September 30, 2004, the Company recorded
expense of $37,500 and $54,839, respectively, related to these warrants. 12




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Note 11. Subsequent Events On October 27, 2004, the Company entered into a letter agreement with
Pandora and Whitebox pursuant to which the parties agreed that Spectres
obligation to file a registration statement covering shares of common stock
issuable upon conversion of the loans referenced in Notes 7 and 8 above, on or
before November 3, 2004, will be delayed until November 28, 2004. In addition,
the parties agreed that the Company will not be required to cause such
registration statement to be declared effective until February 28, 2005. On November 12, 2004, the Company closed on a private placement (the
Offering) of 1,636,429 Units (Units), each consisting of one share of common
stock, par value $.01 per share (the Shares or Common Stock), and five-year
warrants to purchase one additional share of Common Stock at a purchase price
of $3.75 per share. The per-Unit price was $2.50 (i.e., raising a gross total
of $4,091,073). The Company used two agents in completing the sale of the Units
in the Offering. As a fee, the Company paid the agents $327,286 in cash, and
issued the agents five-year warrants to purchase up to 163,643 Units for an
exercise price of $2.50 per Unit. The Offering is a private placement made under Rule 506 promulgated under
the Securities Act of 1933, as amended. The securities offered and sold in the
Offering have not been registered under the Securities Act of 1933, as amended,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. 
 Item 2. Managements Discussion and Analysis or Plan of Operation The accompanying managements discussion and analysis of the Companys
financial condition and results of operations should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Companys audited financial statements, and notes thereto,
for the fiscal year ended December 31, 2003, included in our Annual Report on
Form 10-KSB for the year ended December 31, 2003. Results of Operations The Three and Nine Months Ended September 30, 2004 Compared to the Three and
Nine Months Ended September 30, 2003 Research and Development Expenses.Research and development expenses for
the three and nine months ended September 30, 2004 were $0 and $850,000,
respectively, as compared with $0 and $0 for the three and nine months ended
September 30, 2003, respectively. On March 4, 2004, the Company signed an
agreement with MET Games, Inc. (MET) to purchase certain Linux-based software
and technology being developed by and owned by MET for the operation of certain
gaming computers and systems. Pursuant to the agreement, the Company made a
$250,000 cash payment to MET and issued 800,000 unregistered, restricted shares
of the Companys common stock. The Company will utilize the software as it
develops its business opportunities in the Native American Class II and
charitable gaming markets. 13




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The Company has the right to terminate the agreement and recover the
$250,000 payment and the 800,000 unregistered, restricted shares of the
Companys common stock if MET fails to deliver software that meets the
specifications detailed in the agreement or in the event that MET fails to
provide the software in accordance with the development schedule detailed in
the agreement. Despite this fact, due to the development of the software not
having reached technological feasibility on the date of the agreement and the
$250,000 cash payment being a significant performance commitment, the Company
expensed the cash payment and the value of the common stock, $600,000, as
research and development expense. The common stock was valued at $0.75 per
share, based upon the price of the Companys then recently completed private
placement. MET is wholly-owned by an individual who became an employee of the Company
on March 4, 2004. Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three and nine months ended September 30, 2004
were $723,000 and $1,548,000, respectively, consisting mainly of salaries,
professional services, consulting and travel expenses, compared to $45,000 and
$97,000 for the three and nine months ended September 30, 2003, respectively.
The increases in expense primarily resulted from the Company commencing
operations in the Native American and charitable gaming markets. To execute on
the opportunity in these markets, the Company has hired employees and engaged
consultants which significantly increased these expenses. Selling, general and
administrative expense for the three and nine months ended September 30, 2004,
includes $166,000 and $333,000, respectively, of expense related to options and
warrants granted to consultants. Net Interest Expense.Net interest expense was $264,000 and $357,000 for
the three and nine months ended September 30, 2004, compared to no net interest
expense for the three and nine months ended September 30, 2003. The increase
in interest expense is primarily due to interest on loans from Pandora Select
Partners, L.P. and Whitebox Intermarket Partners L.P. along with the
amortization of the associated financing costs and the amortization of the
original issue discount. Net Loss. The Company incurred a net loss of $987,000 and $2,754,000 for
the three and nine months ended September 30, 2004, respectively, compared to
net losses of $45,000 and $97,000 for the comparable periods in the prior year,
respectively. These increased net losses are primarily the result of the
Company commencing operations in the Native American and charitable gaming
markets including employee and consulting expense and, for the nine months
ended September 30, 2004, the Company expensing the consideration given in the
MET transaction. The net loss also includes $265,000 and $360,000 of interest
expense for the three and nine months ended September 30, 2004, respectively. Liquidity and Capital Resources. The Company had working capital of
$553,000 and $260,000 at September 30, 2004 and December 31, 2003,
respectively. Cash used in operations was $3,129,000 and $63,000 for the nine
months ended September 30, 2004 and 2003, respectively. For the nine months
ended September 30, 2004, the primary uses of cash were to fund the Companys
net loss, acquire inventory and to prepay license fees. These uses were
partially offset by an increase in accounts payable, payroll and related taxes
and accrued expenses and a non-cash charge related to common stock issued for
services. For the nine months ended 14




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September 30, 2003, the primary use of cash was to fund the Companys net loss
partially offset by a decrease in prepaid expenses and increases in accounts
payable, payroll and related taxes and accrued expenses. Cash used in investing activities was $91,000 and $0 for the nine months
ended September 30, 2004 and 2003, respectively. For the nine months ended
September 30, 2004 the Company used cash for capital expenditures, primarily at
its El Cajon, California location. Cash provided by financing activities was $3,455,000 and $172,000 for the
nine months ended September 30, 2004 and 2003, respectively. In November 2003,
the Company began a private placement which ended in March 2004 (the
Offering). A majority of the sales of the Companys common stock occurred
after December 31, 2003. In the Offering, the Company sold a total of
1,796,829 shares of its common stock (of which 1,531,989 were sold in 2004) for
a per share price of $0.75 (i.e., raising a gross total of $1,347,626,
$1,148,996 of which was raised in 2004). The Company used an agent for a
portion of these sales. As a fee, the Company paid the agent $62,550 in cash
and issued the agent five-year warrants to purchase up to 83,400 shares of the
Companys common stock for an exercise price of $0.75 per share. On September
30, 2003, the Company completed the private placement of 13,624,000 shares of
the Companys common stock. Total proceeds from the private placement totaled
$272,480, of which $130,480 was received in cash, $42,000 was a conversion of
loans payable to related parties and $100,000 was received as stock
subscriptions receivable. On May 20, 2004, the Company received $1,100,000 in a convertible debt
investment from Pandora Select Partners, L.P. (Pandora). The note was payable
in interest only, at 10% per annum, through August 20, 2004, and thereafter is
payable in equal monthly installments over the next 15 months. The note is
convertible by Pandora into common stock of Spectre at $2.50 per share, and
allows Spectre, subject to certain conditions and limitations, to make monthly
installment payments with its common stock at a price per share equal to 90% of
the average closing bid price of the common stock over the 30 trading days
immediately preceding the payment date. In connection with the financing,
Spectre paid a 3% origination fee, issued a five-year warrant for the purchase
of 200,000 shares of Spectres common stock at $2.50 per share, and granted
Pandora a security interest in the Companys assets. In addition, Spectre
agreed to file a registration statement by November 3, 2004 with the U.S.
Securities and Exchange Commission, covering the issuance or resale of the
shares of Spectres common stock which may be issued in connection with the
note and warrant issued to Pandora, and cause the same to be declared effective
by February 1, 2005. In connection with the financing, the Company also paid a
finders fee to Blake Capital Advisors, LLC (Blake), a Minnesota limited
liability company wholly owned by Wayne W. Mills, a greater-than-five-percent
shareholder of the Company, of $50,000 and issued a five-year warrant for the
purchase of 50,000 shares of the Companys common stock at $2.50 per share and
a five-year warrant for the purchase of 50,000 shares at $3.00 per share. Net
cash received by the Company after paying the finders fee, origination fee and
legal cost of the lender of $10,000 was $1,007,000. On September 10, 2004, the Company issued two $750,000 10% promissory
notes. One note was issued to Pandora Select Partners L.P. (Pandora) and the
other note was issued to Whitebox Intermarket Partners L.P. (Whitebox). The
notes are payable interest only through March 10, 2005, at which time the
principal is due. In connection with the financing, Spectre paid a 3%
origination fee, issued five-year warrants for the purchase of 50,000 shares of 15




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Spectres
common stock at $3.00 per share to both Pandora and Whitebox, and granted
Pandora and Whitebox security interests in the Companys assets. In addition,
Spectre agreed to file a registration statement by November 3, 2004 with the
U.S. Securities and Exchange Commission, covering the issuance or resale of the
shares of Spectres common stock which may be issued in connection with the
warrants issued to Pandora and Whitebox, and cause the same to be declared
effective by February 1, 2005. Net cash received by the Company after paying
the origination fee and legal costs of the lenders of $5,000 was $1,450,000.
On October 27, 2004, the Company secured a letter agreement with Pandora and
Whitebox pursuant to which they agreed to extend until February 28, 2005 the
deadline for causing the registration statement to be declared effective. During the nine months ended September 30, 2003, proceeds from loans
provided $47,000 of cash. The loans were unsecured, non-interest bearing, and
due upon demand. The Company also raised funds from the sale of it common stock
during the nine months ended September 30, 2003. On June 30, 2004, the Company signed a three-year non-exclusive license
agreement (License Agreement) with Bally Gaming Inc. (Bally). The License
Agreement calls for the Company to purchase up to 3,000 game cabinets from
Bally over the term of the Agreement. Nevertheless, if the Company has
purchased at least 70% of its Class II cabinet purchases from Bally during the
term, Bally shall waive the 3,000 game cabinet purchase minimum. In addition,
the Company was obligated to purchase at least 100 game cabinets from Bally,
and incur certain minimum license-fee charges of $187,500, by June 30, 2004. The Company expects to spend a significant amount on capital equipment
purchases over the next twelve months, primarily as it places its gaming
machines in Native American and charitable gaming facilities. The Company
expects that it will use debt and/or equity financing to purchase this
equipment. Management believes that its cash should be sufficient to satisfy its cash
requirements for the next month. The Company will need to obtain additional
cash to meet its needs, including repaying the notes described above, beyond
that period and has been actively pursuing additional debt and equity
financing. Risk Factors We have no significant operating history. We are in the very early stages of our development as a provider of
interactive electronic games to the Native American and charitable gaming
industry. We are therefore subject to all of the risks and uncertainties
inherent in establishing a new business. We have very limited assets, no
operating revenue and uncertain prospects of future profitable operations. We
cannot assure you that our operations will be successful and the likelihood of
our success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection
with the formation of a new business and the competitive environment in which
we will operate. 16




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Need for additional financing. Our operations, as currently conducted or anticipated to be conducted,
generate costs related to the exploration of additional business opportunities,
as well as ongoing personnel, legal and accounting expenses. If we are unable
to capitalize on existing opportunities or locate and act on other business
opportunities, or if expenditures exceed our current expectations, we will be
required to find additional sources of financing. Even if we successfully
avail ourselves of current or future opportunities, additional financing may be
required to expand or continue being involved in such opportunities. Additional financing could be sought from a number of sources, including
but not limited to additional sales of equity or debt securities, loans from
banks, loans from affiliates of the Company or other financial institutions.
No assurance can be given, however, that we will be able to sell any
securities, or obtain any such additional financing when needed, or do so on
terms and conditions acceptable or favorable to the Company, if at all. If
financing is not available, we may be forced to abandon our business plans or
our entire business, discontinue our preparation and filing of public
disclosure reports with the SEC, or dissolve the Company. Our independent auditors have substantial doubt about our ability to
continue as a going concern. We have had net losses for each of the years ended December 31, 2003 and
2002, and we had an accumulated deficit as of December 31, 2003. Since the
financial statements for each of these periods were prepared assuming that we
would continue as a going concern, in the view of our independent auditors,
these conditions raise substantial doubt about our ability to continue as a
going concern. Furthermore, since we are pursuing a new line of business, this
diminishes our ability to accurately forecast our revenues and expenses. Our
ability to continue as a going concern depends, in large part, on our ability
to raise sufficient capital through equity or debt financing transactions. If
we are unable to raise additional capital, we may be forced to discontinue our
business. Evolving law may adversely affect the Companys entry into the gaming
industry. On November 25, 2003, the United States Department of Justice, at the
request of the Bush administration, filed two formal requests asking the United
States Supreme Court to review two cases decided in the Eighth and Tenth U.S.
Circuits Courts of Appeal, respectively (United States of America v. Santee
Sioux Tribe of Nebraska(3/20/03, No. 02-1503); and Seneca-Cayuga Tribe of
Oklahoma et al. v. Natl Indian Gaming Commn et al., 4/17/03, No. 01-5066).
The Eight and Tenth Circuits cover the west and northern plains states, where
dozens of Native American tribes are located. The two circuit court decisions
examined whether certain electronic gaming devices were Class II or Class III
gaming machines under the Indian Gaming Regulatory Act (IGRA). Under the
IGRA, bingo generally qualifies as a Class II game. Class II games, including
bingo, do not lose their designation as such if electronic, computer or
technological aids are used in connection with the games, but an electronic
facsimile of any game of chance (including bingo) does not qualify as a Class
II game. Class III games (e.g., slot machines, video poker, other table games,
etc.) encompass all other games not Class I (social games played for prizes of
minimal value) or Class II games. 17




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In both the Eighth and Tenth Circuit cases, the courts determined that
electronic machines that dispensed paper pull-tabs (another game of chance)
were Class II machines under the IGRA because the machines at issue merely
dispensed paper pull-tabs and displayed results. The courts found, in essence,
that the games in question were not electronic facsimiles of the game of
pull-tabs, but instead merely facilitated the playing of pull-tabs.
Regulations promulgated under the IGRA indicate that use of electronic and
electromechanical formats that broaden player participation by allowing
multiple players to play with or against each (other rather than with or
against a machine) will not constitute electronic facsimiles (see 25 C.F.R. §
502.8). The classification of electronically linked bingo-style games is important
to the Company and its business plan. For one, state-tribal compacts typically
limit the number of Class III slot-machine games able to be installed in any
one gaming location. Second, our involvement in the gaming industry is
directly related to these kinds of bingo/slot-machine games. Therefore, if
games that we anticipate will qualify as Class II games were to be classified
by regulatory authorities as Class III games, the size of our available market
would significantly shrink. On March 2, 2004, the Supreme Court denied the Justice Departments
petition for writ of certiorari for the Eight and Tenth Circuit decisions,
which means the Court declined to review the Eight and Tenth Circuit Court
decisions. Because of this action, the Eight and Tenth Circuit decisions
stand. While this result is positive for the gaming industry in general and
for us in particular, there can be no assurance that there will not be other
legal actions that will result in a classification of our Class II games as
Class III games, or that current IGRA regulations will not be repealed. Of
course, the result of any such further attempts is beyond our control, and its
outcome must be considered a material and significant risk factor. The Company currently has few licenses and permits for its anticipated
gaming business. The gaming industry in the United States is highly regulated, and
frequently requires operators of gaming facilities and manufacturers and
distributors of gaming machines and related equipment to acquire various
authorizations, licenses, permits or other forms of approval from governmental,
tribal and/or quasi-governmental agencies or bodies. At this time, we possess
only a manufacturer and distributor registration from the State of California
Gambling Control Commission. We possess no other such authorizations,
licenses, permits or other forms of approval that may be required for us to
manufacture, manage and service our anticipated gaming products. We will likely require further approvals from regulatory authorities in
the State of California in order to carry out our current business plans and
opportunities in such jurisdiction. In particular, we will require tribal
permits upon each placement of machines in Native American casinos and
facilities, and will likely also require a suitability finding by the
California State Gaming Agency. In addition, we expect to be required to
obtain similar permits, licenses and approvals in the State of Oklahoma, where
we anticipate commencing operations prior to the end of 2004. We cannot be
certain that we will be able to successfully obtain any of the foregoing
permits, licenses or obtain a suitability finding. Any failure on our part to
obtain required authorizations, licenses, permits or other form of approval may
thwart our business plans significantly or entirely. 18




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Our stock price is, and we expect it to remain, volatile. The volatile price of our common stock makes it difficult for investors to
predict the value of their investment, to sell shares at a profit at any given
time, or to plan purchases and sales in advance. A variety of factors may
affect the market price of our common stock, including but are not limited to:  
    
    achievement or rejection of regulatory approvals by us or by
the tribes or other purchasers of our products;  
    
    announcements of technological innovations or new commercial
products by our competitors or us;  
    
    developments concerning proprietary rights, including patents;  
    
    regulatory developments in the United States relating to the gaming industry;  
    
    period-to-period fluctuations in our revenues and other results of operations;  
    
    changes in financial estimates by securities analysts; and  
    
    sales of our common stock. We will not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily be
indicative of our future performance. Possible issuance of additional common or preferred stock. Our authorized capital consists of 100,000,000 shares of capital stock.
Pursuant to authority granted by the Companys Articles of Incorporation, our
board of directors, without any action by the shareholders, may designate and
issue shares in such classes or series (including classes or series of common
stock and/or preferred stock) as it deems appropriate and establish the rights,
preferences, and privileges of such shares, including dividends, liquidation
and voting rights. The rights of holders of classes or series of common stock
or preferred stock that may be issued could be superior to the rights of the
current common stock. Our board of directors ability to designate and issue
shares could impede or deter an unsolicited tender offer or takeover proposal.
Further, the issuance of additional shares having preferential rights could
adversely affect other rights appurtenant to the current shares of common
stock. Any such issuances may dilute the book value of the Company. We are highly dependent on our senior management; we need to hire
additional personnel. Our success in the Native American and charitable gaming markets depends
in significant part upon the continued service of our key senior management
personnel. In particular, we are materially dependent upon the services of
Russell Mix, a director of the Company and our President and Chief Executive
Officer, and Gary Watkins, our Vice President of Operations in Oklahoma. We
have employment agreements with both Messrs. Mix and Watkins, but if either
such individual should become unable to continue serving the Company it could
have a materially adverse impact on our business, financial condition and
operations. Our success also depends on our ability to identify, hire, train,
retain and motivate highly skilled technical, managerial, sales and marketing
personnel. We intend to hire a full-time Chief Financial Officer and a number
of sales, business development, marketing, technical and administrative
personnel in the future. Competition for such personnel is intense and there
can be no assurance that we will successfully attract, assimilate or retain a
sufficient number of qualified personnel. The 19




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failure to retain and attract the necessary technical, managerial, sales and marketing and
administrative personnel could have a material adverse impact on our business,
financial condition and operations. We operate in an extremely competitive environment. The market for gaming machines is a difficult one in which to compete as
there are a number of established, well-financed and well-known companies that
compete with our current and planned products. International Game Technology
(IGT), in particular, enjoys a significant domestic and international market
position in the gaming machine market. Similarly, Multimedia Games, Inc.
enjoys a significant market position in the Class II gaming machine market.
Other major gaming machine companies include Sigma Gaming, Inc. and Bally
Gaming Inc., a subsidiary of Alliance Gaming Corp. All of these companies have
substantially more resources than we do. The development of a successful new
product by a competitor could adversely affect the market demand for our
products and impair our ability to generate sales. Similarly, if
well-established companies such as IGT were to focus their resources on the
developing Class II gaming machine market, our ability to capitalize on the
perceived market opportunities could be significantly impaired. Our inability to protect our intellectual property could impair our
ability to compete. Our success and ability to compete depend in part upon proprietary
intellectual property. Our proprietary intellectual property currently
consists of certain licensed trademark, image and likeness, and other moral
rights, and a right to acquire copyright and other intellectual-property rights
relating to software that may be developed by MET Games, Inc. pursuant to a
software development agreement. We currently rely and intend to rely in the
future on a combination of copyright, trademark, trade secret laws, and
nondisclosure agreements to protect our proprietary technology. Although we
have entered into confidentiality, non-compete and invention assignment
agreements with our employees and otherwise limit access to, and distribution
of, our proprietary technology, there can be no assurance that such agreements
will not be breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become independently developed or
discovered by competitors. We may have a difficult time enforcing our contracts against Native
American Tribes and the casinos they own and operate. Native American Tribes generally enjoy sovereign immunity from suit
similar to that of the states and the United States. In order to sue a Native
American tribe (or an agency or instrumentality of a Native American tribe),
the Native American tribe must have effectively waived its sovereign immunity
with respect to the matter in dispute. In our contracts with Native American customers, we attempt to provide
that any dispute regarding interpretation, performance or enforcement shall be
submitted to, and resolved by, arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association and that any award,
determination, order or relief resulting from such arbitration is binding and
may be entered in any federal court having jurisdiction. Even if we are able
to effectively bargain or negotiate for such a provision, we could be precluded
from judicially enforcing any rights or remedies against a tribe without a
waiver, limited or otherwise, of the 20




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tribes sovereign immunity. These rights
and remedies include, but are not limited to, our right to
enter Native American lands to retrieve our property in the event of a
breach of contract by the tribe party to that contract, and our right to
enforce any arbitration decision in our favor. Our common stock trades only in an illiquid trading market. Trading of our common stock is conducted on the OTC Bulletin Board. This
has an adverse effect on the liquidity of our common stock, not only in terms
of the number of shares that can be bought and sold at a given price, but also
through delays in the timing of transactions and reduction in security
analysts and the medias coverage of our Company and its common stock. This
may result in lower prices for our common stock than might otherwise be
obtained and could also result in a larger spread between the bid and asked
prices for our common stock. Our common stock is subject to penny-stock rules which may further hamper
your ability to sell shares of our common stock. Our common stock is a penny stock under current SEC rules.
Broker-dealers who sell penny stocks must provide purchasers of these stocks
with a standardized risk disclosure document prepared by the SEC. This
document provides information about penny stocks and the nature and level of
risks involved in investing in the penny stock market. A broker must also give
a purchaser, orally or in writing, bid and offer quotations and information
regarding broker and salesperson compensation, make a written determination
that the penny stock is a suitable investment for the purchaser, and obtain the
purchasers written agreement to the purchase. The penny stock rules may make
it difficult for you to sell shares of our common stock. Because of the rules,
there is less trading in penny stocks. Also, many brokers choose not to
participate in penny stock transactions because of the administrative burden.
Accordingly, you may not always be able to resell shares of our common stock
publicly at times and prices that you feel are appropriate or fair. Control by existing shareholders. The outstanding shares of the Companys common stock are concentrated in
the hands of a relatively few shareholders. These shareholders are able to
exercise significant control over matters requiring shareholder approval,
including the election of directors, and the approval of mergers,
consolidations and sales of all or substantially all of the assets of the
Company. We have no intention of paying dividends. To date, we have not paid any cash dividends and do not anticipate the
payment of cash dividends in the foreseeable future. Off-Balance-Sheet Arrangements The Company has no off-balance-sheet arrangements. 21




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Critical Accounting Estimates Critical accounting policies are those (i) having the most impact on the
reporting of the Companys financial condition and results, and (ii) requiring
significant judgments and estimates. Due to the incipient nature of the
Companys operations in the Native American and charitable gaming markets, the
Company does not believe it has any critical policies or procedures. Forward-Looking Statements This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements
included herein regarding activities, events or developments that the Company
expect, believe or anticipate will or may occur in the future, including such
things as future capital expenditures (including the amount and nature
thereof), business strategy and measures to implement strategy, competitive
strengths, goals, expansion and other such matters are forward-looking
statements. The foregoing list is not exhaustive, and the Company disclaims
any obligation to subsequently revise any forward-looking statements to reflect
events or circumstances after the date of such statements. Actual events may differ materially from those anticipated in the
forward-looking statements. Important factors that may cause such a difference
include those risk factors summarized above, as well as delays in
placing our gaming machines in casinos resulting from lengthy
application and/or regulatory processes required by state, local and
tribal laws and regulations. For additional information
regarding these and other factors, see our Annual Report on Form 10-KSB for the
year ended December 31, 2003 and other recent filings with the SEC. 
 Item 3. Controls and Procedures The Company carried out an evaluation, with the participation of our chief
executive and chief financial officers, of the effectiveness, as of September
30, 2004, of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934). Based upon
that evaluation, made at the end of the period, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
are effective in alerting them on a timely basis to material information
required to be disclosed in our periodic reports to the Securities and Exchange
Commission, and that there has been no significant change in such internal
controls, or other factors which could significantly affect such controls
including any corrective actions with regard to significant deficiencies or
material weaknesses, since our evaluation. However, due to the limited number
of Company employees engaged in the authorization, recording, processing and
reporting of transactions, there is inherently a lack of segregation of duties.
The Company periodically assesses the cost versus benefit of adding the
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. 22




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PART II Other Information 
 Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities The disclosures made in Notes 4, 6, 7, 8 and 10 of the financial
statements (see Item 1 of Part I of this report) regarding sales and issuances
of the Companys securities during the period beginning March 1, 2004 and
ending September 30, 2004 are hereby incorporated into this Item 2 of Part II
by this reference. 
 Item 4. Submission of Matters to a Vote of Security Holders On August 26, 2004 the Company held its Annual Meeting of Shareholders.
Of the 11,001,784 shares of common stock outstanding and entitled to vote at
the meeting, 7,461,104 shares were present, either in person or by proxy. The
following describes the matters considered by the Companys shareholders at the
Annual Meeting, as well as the results of the votes cast at the meeting.  1.
    
    To elect three directors for a one-year term or until the
respective succesors have been elected or appointed. For
    
    WithheldRonald E. Eibensteiner
    
    
    7,371,210
    
    
    
    89,894Russell Mix
    
    
    7,396,209
    
    
    
    64,895Brian D. Niebur
    
    
    7,362,876
    
    
    
    98,228
  2.
    
    To ratify the Companys appointment of Virchow, Krause & Company,
LLP as the Companys independent registered public accounting firm. For
    
    
    7,412,769Against
    
    
    27,215Abstain
    
    
    21,120Broker Non-vote
    
    
    
  3.
    
    To approve an amendment to the Companys Articles of Incorporation
for the purpose of increasing the number of authorized shares of
capital stock from 16,666,666 to 100 million. For
    
    
    7,275,467Against
    
    
    177,273Abstain
    
    
    8,364Broker Non-vote
    
    
    
  4.
    
    To approve an increase in the number of shares of common stock
reserved for issuance under the Companys 1999 Non-Qualified Stock
Option Plan from 200,000 to an aggregate of 300,000. 23




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For
    
    
    5,826,352Against
    
    
    207,724Abstain
    
    
    7,631Broker Non-vote
    
    
    1,419,397
  5.
    
    To adopt the Companys 2004 Stock Option Plan pursuant to which
2,000,000 shares of the Companys common stock shall be reserved for
issuance. For
    
    
    5,826,353Against
    
    
    209,089Abstain
    
    
    5,965Broker Non-vote
    
    
    1,419,397
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer.32
    
    Section 1350 Certification.
 (b) Reports on Form 8-K On September 16, 2004, the Company filed a Current Report on form 8-K
disclosing that it had received $1,500,000 in a debt investment from Pandora
Select Partners, L.P. and Whitebox Intermarket Partners, L.P. 24




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SIGNATURES Pursuant to the registration requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. SPECTRE GAMING, INC.Date: November 15, 2004
    
    By:
    
    /s/ Russell C. MixTitle:
    
    President and Chief Executive OfficerDate: November 15, 2004
    
    By:
    
    /s/ Brian D. NieburTitle:
    
    Chief Financial Officer(Principal Accounting Officer)
 25