United
      States


Securities
      & Exchange Commission


Washington,
      D.C. 20549





FORM
      10-QSB/A








(Mark
      One)


[X]  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
      ACT OF 1934




For the quarterly period ended June 30, 2006





[ 
      ]  TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      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 [ ]





Indicate
      by check mark as to whether the Registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act): YES [  ]   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: 13,913,024 shares of common stock outstanding
      as  of
      August
      15, 2006, par value $.01 per share.





Transitional
      Small Business Disclosure Format (check one): YES [  ]   NO
      [X]








Spectre
      Gaming, Inc.


Form
      10-QSB/A


Quarter
      Ended June 30, 2006





Table
      of
      Contents





Page
                No.PART
                I
            Financial
                Information
            2Item
                1.
            Financial
                StatementsBalance
                Sheets at June 30, 2006 (unaudited) andDecember
                31, 2005 (audited)
            2Statements
                of Operations for the three and six monthsended
                June 30, 2006 and 2005 (unaudited)
            3Statements
                of Cash Flows for the six monthsended
                June 30, 2006 and 2005 (unaudited)
            4Notes
                to Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis or Plan of Operation
            18Item
                3.
            Controls
                and Procedures
            31PART
                II
            Other
                Information
            32Item
                2.
            Unregistered
                Sales of Equity Securities
            32Item
                6.
            Exhibits
            32SIGNATURES
            
            33




EXPLANATORY
      NOTE


This
        Amendment to the Company’s Form 10-QSB/A for the period ended June 30, 2006
        which amends the Company’s Form 10-QSB originally filed on August 14, 2006 (the
“Original Filing”), is being filed to correct several inaccuracies discovered in
        the notes to financial statements.
 
 In
        particular, the Company has in this Amendment eliminated a superfluous table
        that had appeared in footnote 4 to the financial statements in the Original
        Filing, corrected an amount set forth in a table that remains in such footnote,
        and corrected an amount set forth under the caption “Other Expense” in
        Management’s Discussion and Analysis.










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


**Spectre
      Gaming, Inc.**


**Balance
      Sheets**




As
                of
              June
                30, 2006
            
            
            As
                of
              December
                31, 2005***ASSETS***
            
            
            Unaudited
            
            
            AuditedCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            96,517
            
            $
            1,656,831Other
                receivables
            
            
            6,532
            
            
            9,722Inventory
            
            
            1,990,214
            
            
            300,009Deposits
              Current
                assets of discontinued operations
            
            
            20,923
              151,374
            
            
            20,050
              536,217Prepaid
                expenses
            
            
            139,793
            
            
            57,566*Total
                current assets:*
            
            
            2,405,353
            
            
            2,580,395Property,
                equipment and leasehold improvements, net
            
            
            151,998
            
            
            66,231Leased
                gaming equipment, net
              Long-term
                technology and distribution rights, net
            
            
            332,635
              -
            
            
            109,629
              4,397,849Prepaid
                license fees
            
            
            -
            
            
            187,500Debt
                issuance costs
            
            
            372,314
            
            
            -Prepaid
                redemption product licenses
            
            
            2,100,000
            
            
            -Other
                assets of discontinued operations
            
            
            13,964
            
            
            163,500Other
                assets
            
            
            11,436
            
            
            11,436*Total
                Assets:*
            
            $
            5,387,700
            
            $
            7,516,540


***LIABILITIES
                AND SHAREHOLDERS’ EQUITY (DEFICIT)***CURRENT
              LIABILITIES:Current
                portion of long-term debt
            
            $
            270,226
            
            $
            1,500,000Short-term
                debt, net
            
            
            1,878,572
            
            
            1,500,000Accounts
                payable
            
            
            379,965
            
            
            69,635Accrued
                Payable - Bally
            
            
            2,424,022Accrued
                expenses
              Liabilities
                of discontinued operations
            
            
            313,159
              -
            
            
            467,870
              303,228*Total
                current liabilities:*
            
            
            5,265,944
            
            
            3,840,733Long-term
                debt, less current portion
            
            
            973,588
            
            
            750,000*Total
                liabilities*
            
            
            6,239,532
            
            
            4,590,733SHAREHOLDERS’
                EQUITY (DEFICIT)Capital
                stock, par value $.01 per share, 100,000,000 shares
                authorized:Series
                A Convertible Preferred Stock, par value $.01 per share:Authorized
                shares -- 466,666Issued
                and outstanding shares: 43,334 shares at June 30 2006 and
              December
                31, 2005 ($65,001 liquidation preference)
            
            
            433
            
            
            433Series
                B Variable Rate Convertible Preferred Stock, par value $.01 shares:
              Authorized
                shares -- 30,000
              Issued
                and outstanding shares: 7,170 and 7,420 shares at June 30, 2006 and
                December 31, 2005 and , respectively ($7,170,000 and $7,420,000
                liquidation preference at June 30, 2006 and December 31, 2005,
                respectively)
            
            
            72
            
            
            74Common
                stock, par value $.01 per share: Authorized shares - 99,503,334Issued
                and outstanding shares, 13,913,024 and 13,520,439 at June 30, 2006
                and
                December 31, 2005, respectively
            
            
            139,130
            
            
            135,204Additional
                paid-in capital
            
            
            39,751,472
            
            
            37,208,067Accumulated
                deficit
            
            
            (40,700,029
            )
            
            (34,253,490
            )Deferred
                equity compensation
            
            
            (42,910
            )
            
            (164,481
            )*Total
                shareholders’ equity (deficit):*
            
            
            (851,832
            )
            
            2,925,807*Total
                liabilities and shareholders’ equity (deficit):*
            
            $
            5,387,700
            
            $
            7,516,540




See
      accompanying notes to financial statements.




2




**Spectre
      Gaming, Inc.**


**Statements
      of Operations**


**(Unaudited)**


For
                the Three Months Ended
              June
                30,
            
            
            For
                the Six Months Ended
              June
                30,2006
            
            
            2005
            
            
            2006
            
            
            2005Revenue
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Cost
                of revenues
            
            
            -
            
            
            -
            
            
            -
            
            
            -*Gross
                profit*
            
            
            -
            
            
            -
            
            
            -
            
            
            -OPERATING
                EXPENSES:Research
                and development
            
            
            574,144
            
            
            103,134
            
            
            1,114,923
            
            
            103,134Sales
                and marketing
            
            
            82,680
            
            
            102,150
            
            
            132,807
            
            
            102,150General
                and administrative
            
            
            678,195
            
            
            656,383
            
            
            1,282,813
            
            
            889,778Impairment
                of long-term technology and distribution rights and prepaid license
                fees
            
            
            1,707,582
            
            
            -
            
            
            1,707,582
            
            
            -*Total
                operating expenses*
            
            
            3,042,601
            
            
            861,667
            
            
            4,238,125
            
            
            1,095,062Operating
                loss
            
            
            (3,042,601
            )
            
            (861,667
            )
            
            (4,238,125
            )
            
            (1,095,062
            )OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            2,030
            
            
            3,590
            
            
            13,772
            
            
            13,574Interest
                expense
            
            
            (488,546
            )
            
            (385,742
            )
            
            (593,796
            )
            
            (784,946
            )Debt
                extinguishment
            
            
            (1,104,178
            )
            
            -
            
            
            (1,104,178
            )
            
            -*Loss
                from continuing operations*
            
            
            (4,633,295
            )
            
            (1,243,819
            )
            $
            (5,922,327
            )
            
            (1,866,434
            )Loss
                from discontinued operations
            
            
            (140,882
            )
            
            (627,679
            )
            
            (199,802
            )
            
            (1,244,002
            )*Net
                loss*
            
            
            (4,774,177
            )
            
            (1,871,498
            )
            
            (6,122,129
            )
            
            (3,110,436
            )Preferred
                Stock Dividend
            
            
            161,237
            
            
            -
            
            
            324,410
            
            
            -*Net
                loss attributable to common shareholders*
            
            $
            (4,935,414
            )
            $
            (1,871,498
            )
            $
            (6,446,539
            )
            $
            (3,110,436
            )NET
                LOSS PER COMMON SHARE BASIC AND DILUTED:Loss
                from continuing operations
            
            $
            (0.34
            )
            $
            (0.09
            )
            $
            (0.43
            )
            $
            (0.14
            )Loss
                from discontinued operations
            
            
            (0.01
            )
            
            (0.05
            )
            
            (0.01
            )
            $
            (0.09
            )Net
                loss
            
            
            (0.34
            )
            
            (0.14
            )
            
            (0.45
            )
            $
            (0.24
            )NET
                LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
            
            
            (0.36
            )
            
            (0.14
            )
            
            (0.47
            )
            $
            (0.24
            )WEIGHTED-AVERAGE
                NUMBER OF SHARES OUTSTANDING:Basic
                and diluted
            
            
            13,698,097
            
            
            13,288,433
            
            
            13,745,458
            
            
            13,115,829





See
      accompanying notes to financial statements.




3


**Spectre
      Gaming, Inc.**


**Statements
      of Cash Flows**


**(Unaudited)**


For
                the six months ended June 30,2006
            
            
            2005**Operating
                activities**Net
                loss
            
            $
            (6,122,129
            )
            $
            (3,110,436
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            60,907
            
            
            124,876Impairment
                of gaming equipment in inventory
            
            
            95,810
            
            
            30,000Impairment
                of long-term technology and distribution rights
            
            
            1,707,582
            
            
            -Stock
                options and warrants issued for services
            
            
            72,031
            
            
            378,833Stock
                based compensation expense
            
            
            528,190
            
            
            -Loss
                on sale of property and equipment
            
            
            12,360
            
            
            -Amortization
                of original issue discount
            
            
            378,572
            
            
            389,722Amortization
                of debt issuance costs
            
            
            -
            
            
            248,358Amortization
                of long-term technology and distribution rights
            
            
            416,665
            
            
            102,151Debt
                extinguishment
            
            
            1,104,178
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            -
            
            
            (31,098
            )Other
                receivables
              Inventory
            
            
            3,190
              (1,180,061
            )
            
            (76,561
              (154,575
            )
              )Deposits
            
            
            285
            
            
            23,775Prepaid
                expenses
            
            
            (122,307
            )
            
            (41,714
            )Accounts
                payable and accrued expenses
            
            
            (9,396
            )
            
            153,596*Net
                cash used in operating activities:*
            
            
            (3,054,123
            )
            
            (1,963,073
            )**Investing
                activities**Net
                proceeds from
                sale of property and equipment
              Purchases
                of property, equipment and leasehold improvements
            
            
            24,000
              (114,672
            )
            
            -
              (68,467
            )Technology
                and distribution rights
            
            
            -
            
            
            (1,000,000
            )*Net
                cash used in investing activities:*
            
            
            (90,672
            )
            
            (1,068,467
            )**Financing
                activities**Debt
                financing costs
            
            
            (372,314
            )
            
            (105,000
            )Exercise
                of stock options
            
            
            3,975
            
            
            -Proceeds
                from short-term debt
            
            
            600,000
            
            
            1,500,000Proceeds
                from long-term debt
            
            
            1,464,104
            
            
            -Payments
                on notes payable
            
            
            -
            
            
            (192,709
            )Preferred
                stock dividend
            
            
            (111,284
            )
            
            -*Net
                cash used by financing activities:*
            
            
            1,584,481
            
            
            1,202,291Decreasein
                cash and cash equivalents
            
            
            (1,560,314
            )
            
            (1,829,249
            )Cash
                and cash equivalents at beginning of year
            
            
            1,656,831
            
            
            2,431,280*Cash
                and cash equivalents at end of period:*
            
            $
            96,517
            
            $
            602,031**Supplemental
                cash flow information**Cash
                paid for interest
            
            $
            218,957
            
            $
            111,547**Non-cash
                Investing and Financing Activities:**Common
                stock issued for payment on convertible notes payable
            
            
            -
            
            
            245,231Warrants
                issued for services relating to debt issuance
            
            
            -
            
            
            578,064Conversion
                of Series B convertible preferred stock to common stock
            
            
            1,562
            
            
            -Inventory
                transferred to leased gaming equipment, net of reserve
            
            
            51,400
            
            
            496,871Accrued
                payable in exchange for long-term technology and distribution
                rights
            
            
            -
            
            
            1,000,000Accrued
                payable - Bally in exchange for redemption product licenses and
                inventory
            
            
            2,424,022
            
            
            -Unsecured
                promissory note in exchange for long-term technology and distribution
                rights
            
            
            -
            
            
            3,000,000Preferred
                stock dividends accrued
            
            
            184,174
            
            
            -Conversion
                of preferred dividends to common stock
            
            
            140,236
            
            
            -Issuance
                of warrants in connection with short-term and long-term
                debt
            
            
            1,924,468
            
            
            -





See
      accompanying notes to financial statements.




4





Spectre
      Gaming, Inc.


Notes
      to
      Financial Statements


June
      30,
      2006 and 2005


(unaudited)








**Note
      1. Business Description.**





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





In
      May
      2005 the Company 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 begun the development of
      AWP
      games and plans to distribute the games to operators at various retail,
      commercial and entertainment venues in the United States which allow for such
      devices. In December 2005, the Company made the decision to focus its efforts
      exclusively in the AWP market.





The
      accompanying financial statements have been prepared on the basis that the
      Company will continue as a going concern. The Company had net losses for the
      three and six months ended June 30, 2006 and the year ended December 31, 2005,
      had an accumulated deficit at June 30, 2006. The Company is currently in the
      process of securing additional funding which it believes it will be successful
      in securing. If not, the Company will not have adequate liquidity to fund
      operation through August 2006. The financial statements do not include any
      adjustments that might result from the outcome of this condition.





The
      Company, as noted above, is now pursuing business opportunities in the AWP
      market. To fund these business opportunities, the Company has engaged in debt
      and equity financing. The Company anticipates engaging in additional debt and
      equity financing in the future. Nevertheless, there can be no assurance the
      Company will raise the necessary capital to fund its business.





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





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





5


The
      financial information furnished 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. 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 in those markets. In
      accordance with appropriate accounting rules, the Company has reclassified
      its
      previously reported financial results to exclude the results of the discontinued
      operations and these results are presented on a historical basis as a separate
      line item in the Company’s statement of operations and balance sheets entitled
“Discontinued Operations.” All of the financial information in the financial
      statements and notes to the financial statements has been revised to reflect
      the
      results of continuing operations.





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





In
      accordance with the provisions of SFAS 144, the Company has not included the
      results of operations of its Class II and Class III business in the results
      from
      continuing operations. The results of operations for this business have been
      reflected as discontinued operations. The loss from discontinued operations
      for
      the three and six months ended June 30, 2006 and 2005, respectively, consist
      of
      the following:




For
                the three months
              ended
                June 30,
            For
                the six months
              ended
                June 30,2006
            
            
            2005
            
            
            2006
            
            
            2005REVENUE:Sales
            
            $
            -
            
            $
            159,784
            
            $
            4,710
            
            $
            248,884Cost
                of revenues
            
            
            97,948
            
            
            131,997
            
            
            111,164
            
            
            175,090*Gross
                profit*
            
            
            (97,948
            )
            
            27,787
            
            
            (106,454
            )
            
            73,794OPERATING
                EXPENSES:Research
                and development
              Sales
                and marketing
            
            
            -
              (914
            )
            
            6,966
              429,593
            
            
            -
              18,462
            
            
            101,898
              833,810General
                and administrative
            
            
            28,772
            
            
            218,907
            
            
            63,810
            
            
            382,088*Total
                Operating Expenses:*
            
            
            27,858
            
            
            655,466
            
            
            82,272
            
            
            1,317,796*Operating
                loss:*
            
            
            (125,806
            )
            
            (627,679
            )
            
            (188,726
            )
            
            (1,244,002
            )Loss
                on sale of equipment
            
            
            (15,076
            )
            
            -
            
            
            (11,076
            )
            
            -Net
                loss from discontinuedoperations
            
            $
            (140,882
            )
            $
            (627,679
            )
            $
            (199,802
            )
            $
            (1,244,002
            )





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





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





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





For
      the
      three and six months ended June 30, 2006, the Company has not had any operations
      which would generate revenues for these purposes.





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





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





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





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





6


*Inventory.* Inventory,
      which consists principally of amusement with prize products and related
      materials, is stated at the lower of cost (determined on the specific
      identification method) or market. At June 30, 2006, the Company had no finished
      goods inventory and $1,990,214 of parts and work in process. At December 31,
      2005 the Company had $120,516 of finished goods inventory and $179,493 of spare
      parts and game cabinets.





*Prepaid
      License Fees.* Prepaid
      license fees were originally related to licenses associated with the themes
      of
      certain gaming machines which were to be licensed from Bally Gaming, Inc.
      Effective March 29, 2006, the Company entered into an agreement with Bally
      to
      apply these prepaid license fees to future royalty payments, relating to AWP,
      which was to become due in 2007 and 2008 under the Redemption Technology and
      Supply Agreement, as amended. Effective June 28, 2006, the Company entered
      into
      a Termination and Settlement Agreement with Bally which resulted in an
      impairment charge of $187,500 for the balance of the prepaid license fees (Note
      6).





*Prepaid
      Redemption Product Licenses.* As of
      June 30, 2006 the Company had completed the purchase of the 875 redemption
      technology licenses from Bally and has recorded an asset for prepaid product
      licenses of $2,100,000. As the Company places its AWP machines, that include
      Bally hardware, the cost of a license will be added to the machine cost and
      depreciated over the life of the asset (Note 6).





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





*Leased
      Gaming Equipment and Property, Equipment and Leasehold
      Improvements* .
      Leased
      gaming equipment and property, equipment and leasehold improvements are stated
      at cost. Gaming machines placed with customers under participation arrangements
      are included in leased gaming equipment. Depreciation of an asset is recognized
      on the straight-line basis over the asset’s estimated useful life ranging from
      three to five years. Leasehold improvements were amortized using the
      straight-line method over the shorter of the lease term or the estimated useful
      life. Maintenance, repairs and minor renewals are expensed when incurred. Sales
      and retirements of depreciable property were recorded by removing the related
      cost and accumulated depreciation from the accounts. Gains or losses on sales
      and retirements of property are reflected in the Company’s results of
      operations. Depreciation and amortization expense on leased gaming equipment
      and
      property, equipment and leasehold improvements was $31,292 and $5,105 for the
      three months ended June 30, 2006 and 2005, respectively and $56,400 and $8,606
      for the six months ended June 30, 2006 and 2005, respectively .





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





7


The
      Company has determined that it will convert the remaining Class III gaming
      machines for use in its AWP business. The Company expects that it will incur
      additional amounts to convert those machines to AWP.





*Technology
      and Distribution Rights.* The
      Company’s technology and distribution rights related to a $5,000,000 fee for
      redemption technology licensed from Bally Gaming, Inc. The technology and
      distribution rights were being amortized over the five-year term of the
      agreement. (Note 6).





Management
      reviewed the technology and distribution rights for impairment in accordance
      with FAS 144 whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. There was not an adjustment
      to the value of the technology and distribution rights at and December 31,
      2005.
      Effective June 28, 2006 the Company entered into a Termination and Settlement
      Agreement with Bally. As a result, the Company has recorded an impairment charge
      of $1,520,082 for the unamortized balance of the technology and distribution
      rights asset, net of the note payable and other liabilities that will not
      be realized (Note 6).





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





*Research
      and Development Costs.* Costs
      related to research, design and development of products are charged to research
      and development expense as incurred. Software development costs are capitalized
      beginning when a product’s technological feasibility has been established and
      ending when a product is available for general release to customers. The Company
      uses the working model approach to determine technological feasibility.
      Generally, the Company’s products are released soon after technological
      feasibility has been established. As a result, the Company has not capitalized
      any internal software development costs, since such costs have not been
      significant and the products are released shortly after technological
      feasibility. Research and development expense for continuing operations was
      $574,144 and $103,134 for the three months ended June 30, 2006 and 2005,
      respectively and $1,114,923 and $103,134 for the six months ended June 30,
      2006
      and 2005, respectively .





*Net
      Loss Per Common Share* .
      Basic
      and diluted loss per common share is computed by dividing net loss by the
      weighted-average number of common shares outstanding for the reporting period.
      Dilutive common-equivalent shares have not been included in the computation
      of
      diluted net loss per share because their inclusion would be antidilutive.
      Antidilutive common-equivalent shares issuable based on future exercise of
      stock
      options, warrants or convertible preferred stock totaling 20,845,505 and
      6,010,249 shares as of June 30, 2006 and 2005 respectively, could potentially
      dilute basic loss per common share in subsequent years. All options and warrants
      outstanding were antidilutive for the three and six months ended June 30, 2006
      and 2005.





8


Employees





*Stock-Based
      Compensation* .
      On
      December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based
      Payment”, which is a revision of SFAS No. 123 and supercedes APB Opinion No. 25.
      SFAS No. 123(R) requires all share-based payments to employees, including grants
      of employee stock options, to be valued at fair value on the date of grant,
      and
      to be expensed over the applicable vesting period. Pro forma disclosure of
      the
      income statement effects of share-based payments is no longer an alternative.
      For the Company, SFAS No. 123(R) is effective for all share-based awards granted
      on or after January 1, 2006. In addition, companies must also recognize
      compensation expense related to any awards that are not fully vested as of
      the
      effective date. Compensation expense for the unvested awards will be measured
      based on the fair value of the awards previously calculated in developing the
      pro forma disclosures in accordance with the provisions of SFAS No. 123. We
      implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective
      method. The amount of expense recorded for the three and six months ended June
      30, 2006 was $264,243 and $528,190 respectively. Based on options outstanding
      at
      June 30, 2006, the Company estimates the expense to be $1,066,000 for the year
      ending December 31, 2006 with an estimated total amount of $2,151,000 from
      2007
      through 2014.





Prior
      to
      January 1, 2006, in accordance with Accounting Principles Board (“APB”) Opinion
      No. 25 and related interpretations, the Company used the intrinsic value-based
      method for measuring stock-based compensation cost which measures compensation
      cost as the excess, if any, of the quoted market price of the Company's common
      stock at the grant date over the amount the employee must pay for the stock.
      The
      Company's general policy is to grant stock options and warrants at fair value
      at
      the date of grant. Options and warrants issued to employees are recorded at
      fair
      value, as required by 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.”





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




Three
                Months Ended
              June
                30, 2005
            
            
            Six
                Months Ended
              June
                30, 2005Net
                loss:As
                reported
            
            $
            (1,871,498
            )
            $
            (3,110,436
            )Pro
                forma
            
            
            (2,084,030
            )
            
            (3,554,743
            )Basic
                and diluted net loss per common shareAs
                reported
            
            $
            (0.14
            )
            $
            (0.24
            )Pro
                forma
            
            
            (0.16
            )
            
            (0.27
            )Stock-based
                compensationAs
                reported
            
            $
            -
            
            $
            -Pro
                forma
            
            
            212,532
            
            
            444,307





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





Three
                Months Ended June
                30,
            
            
            Six
                Months Ended June 30,2006
            
            
            2005
            
            
            2006
            
            
            2005Risk
                Free interest rate
            
            
            5.12
            %
            
            4.01
            %
            
            5.05
            %
            
            3.72
            %Expected
                life
            
            
            4.0
                years
            
            
            4.0
                years
            
            
            4.1
                years
            
            
            4.7
                yearsExpected
                volatility
            
            
            178
            %
            
            150
            %
            
            177
            %
            
            145
            %Expected
                dividends
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %





The
      volatility factor is based on the Company’s historical stock price fluctuations
      for a period of approximately 2.5 years. This period is shorter than the
      expected life of the options but was deemed more relevant given the significant
      change in the Company’s business model and strategy. The Company has not issued
      and does not intend to issue, dividends; therefore, the dividend yield
      assumption is 0. The Company applied the risk-free interest rate based on the
      U.S. Treasury yield in effect at the time of the grant. The expected term of
      the
      option is based on the contractual period of the options granted. Based on
      the
      lack of history to calculate a forfeiture rate, the Company has not adjusted
      the
      calculated value of the options for the three and six months ended June 30,
      2006.





Non-employees





Through
      June 30, 2006, the Company has outstanding options and warrants to purchase
      1,516,666 shares of the Company’s common stock to non-employees, mostly
      consultants for services, with exercise prices ranging from $0.75 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 related to
      the options on the earlier of the date a performance commitment is met or the
      date the performance is complete and recognizes the estimated value of the
      awards over the service performance period. The Company recorded an expense
      of
      $45,732 and $378,835 for the three months ended June 30, 2006 and 2005,
      respectively, and an expense of $59,105 and $385,417 for the six months ended
      June 30, 2006 and 2005, respectively, in accordance with EITF 96-18. During
      the
      six months ended June 30, 2006, options for 185,208 shares of the Company’s
      common stock were cancelled.





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





9


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





**Common
      Stock**





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





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





**Preferred
      Stock**





The
      Company has Series A Convertible Preferred Stock that has voting rights
      identical to common stock. In the event of liquidation, the Series A Preferred
      Shareholders receive a liquidation preference. Although no dividends are
      required with respect to the Series A Preferred Stock, no dividend shall be
      paid
      on any shares of common stock unless comparable dividends are paid on the Series
      A 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.





During
      2005, holders of 163,333 shares of the Company’s Series A Convertible Preferred
      Stock converted their preferred shares into 368,617 shares of the Company’s $.01
      par value common stock.
      At June 30, 2006 and December 31, 2005, there were outstanding 43,334 shares
      of
      Series A Convertible Preferred Stock which were convertible into an aggregate
      of
      97,799 shares of the Company’s common stock with a liquidation preference of
      $65,001.





On
      October 27, 2005, the Company sold an aggregate of 7,420 shares of Series B
      Variable Rate Convertible Preferred Stock, together with five-year warrants
      to
      purchase an aggregate of 4,637,500 shares of common stock at $1.84 per share.
      In
      the event of liquidation, the Series B Variable Rate Convertible Preferred
      Shareholders receive a liquidation preference. The Series B Variable Rate
      Convertible Preferred shareholders are entitled to cash dividends, payable
      quarterly. Under certain circumstances, the Company can pay the dividends with
      its common stock.





10


The
      Company is obligated to pay dividends on the Series B Variable Rate Convertible
      Preferred Stock on a quarterly basis, based on a rate per annum equal to the
      6-month LIBOR on the day before the quarterly interest period, plus 4%. Under
      certain circumstances specified in the Certificate of Designation, the Company
      may pay the dividends with its common stock.





The
      holders of Series B Variable Rate Convertible Preferred Stock may 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 B Variable Rate 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, the preferred shares are convertible into an aggregate of 4,637,500
      of common stock at a conversion price of $1.60 per share.





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





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





As
      a
      condition of the Series B Variable Rate Convertible Preferred Stock offering,
      the Company was required to reserve $75,000 of the gross proceeds to make
      regularly scheduled interest payments on the Pandora Select Partners, L.P.
      and
      Whitebox Intermarket Partners, L.P. notes payable
      (see note 11). An additional condition of the Series B Variable Rate Convertible
      Preferred Stock offering is that the Company agreed to sell its Class II and
      Class III gaming machines to an unaffiliated person on or before March 31,
      2006.
      The Company was unable to dispose of the machines on or before March 31, 2006,
      which did not have an effect on the financial statements. As of June 30, 2006,
      the Company was no longer trying to dispose of the machines but was instead
      converting the machines for use in the AWP market (Note 2).





If
      a
      purchaser of the Series B Variable Rate Convertible Preferred Stock still owns
      such stock on the 36-month anniversary of the closing date, the Company shall
      issue such purchaser additional warrants to purchase up to a number of shares
      of
      common stock equal to 100% of the




11


stated
      value of the Series B Variable Rate Convertible Preferred Stock then held by
      such purchaser divided by the lesser of then applicable conversion price or
      the
      average of the closing prices for the five trading days immediately prior to
      the
      additional warrant issuance date, with an exercise price equal to the lesser
      of
      (i) the then applicable conversion price, (ii) the then applicable exercise
      price of any warrants held by such purchaser or (iii) 50% of the average of
      the
      closing prices for the five trading days immediately prior to the additional
      warrant issuance date, subject to adjustment therein (Note 2).





In
      February 2006, D. Bradly Olah, President and a director of the Company,
      converted 250 shares of Series B Preferred stock held by him into 156,250 shares
      of common stock.





**Note
      4. Short-term Debt**





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





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





12


On
      May
      12, 2006 the Whitebox and Pandora notes were assumed by Rockmore
      Investment Master Trust Ltd. and Parklane Associates LLC,
      respectively.  In
      connection with the note transfer,  on
      May
      25, 2006, the Company issued a five-year warrant to purchase up to 500,000
      shares of common stock at a per-share price of $1.84 to each of Rockmore and
      Parklane. The 1,000,000 warrants were issued in consideration for the agreement
      of such entities to subordinate the Company’s obligations under certain
      promissory notes they had acquired from Pandora and Whitebox, to the Company’s
      obligations under the Master Loan Agreement entered into with PDS Gaming
      Corporation (Note 5). The
      Company determined the issuance of warrants in exchange for the subordination
      should be treated as a modification of debt. In accordance with EITF 96-19,
      "Debtor's Accounting for a Modification of Exchange of Debt Instruments," the
      Company accounted for the fair value of the warrants, using the Black-Scholes
      pricing model, as debt extinguishment and recorded an expense of $1,104,178
      for
      the three and six months ended June 30, 2006.




The
      balance of the notes payable is $1,500,000 at
      June 30, 2006.




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




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




The
      $1.84
      conversion price adjusts to match the price of any offer, sale, repricing or
      issuance of common stock or “common stock equivalents,” as defined therein, that
      is less than the then-effective conversion price under the promissory notes.
      The
      promissory notes define “common stock equivalents” as any Company securities
      entitling the holder thereof to acquire at any time Company common stock. The
      foregoing adjustment provision is subject to certain customary exceptions,
      including the issuance of (i) shares of common stock or options to employees,
      officers or directors pursuant to certain stock or option plans, (ii) securities
      upon the conversion of any of the group of short-term promissory notes (iii)
      securities exercisable or exchangeable for or convertible into shares of common
      stock issued and outstanding on the date of the promissory notes, and (iv)
      securities issued pursuant to certain acquisitions or strategic
      transactions.




13


The
      warrants issued to the lenders in connection with the short-term borrowings
      contain provisions for the adjustment of their $1.84 per-share purchase price
      that are substantially similar to those contained in the promissory notes and
      described above.




Both
      the
      promissory notes and warrants granted the lenders piggyback registration rights
      in the event the Company or any of its security holders offers any Company
      securities (other than pursuant to a registration statement on Form S-4, S-8
      or
      other similar limited-purpose form).





The
      common stock warrants were valued using the Black-Scholes pricing model. The
      value of the warrants and beneficial conversion exceeded the promissory notes
      balances and the original issue discount was limited to the note balances.
      The
      resulting original issue discount and the fair value of the warrants will be
      amortized over the life of the promissory notes using the straight-line method,
      which approximates the interest method.





The
      due
      dates of each of the notes was extended until August 21, 2006.





The
      allocation of the gross proceeds of the short-term debt is summarized below
      as
      of June 30, 2006:





Short-term
                debt, total borrowed
            
            $
            600,000Value
                of 1,200,000
                warrants and beneficial conversion allocated to additional paid in
                capital
            
            
            (600,000
            )Short-term
                debt, net of original issue discount
            
            
            -Amortization
                of original issue discount
            
            
            378,572Sub-total
                short-term debt, net
            
            $
            378,572Total
                short-term debt, net
            
            $
            1,878,572








**Note
      5. Equipment Financing**





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





14


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





On
      June
      28, 2006 the Company entered into a Master Loan Agreement which replaced the
      May
      25, 2006 agreement. In addition the Company entered into two new promissory
      notes in the amounts of $3,182,854 and $1,910,000. The promissory note dated
      May
      25, 2006 was cancelled with the proceeds being rolled into the $3,182,854
      promissory note. Both notes bear interest of 13%, have 48-month terms and may
      not be prepaid for a period of 12 months after their issuance. Proceeds of
      the
      notes are to fund the purchase of 875 redemption product licenses form Bally
      Gaming (Note 6) and purchase AWP equipment. As of June 30, 2006, proceeds of
      $1,464,104 had been advanced on the notes.





The
      allocation of the gross proceeds of the equipment is summarized below as of
      June
      30, 2006:





Long-term
                debt, total borrowed
            
            $
            1,464,104Value
                of 200,000
                warrants allocated to additional paid in capital
            
            
            (220,290
            )Long-term
                debt, net of original issue discount
            
            
            1,243,814Amortization
                of original issue discount
            
            
            -Total
                long-term
                debt, net
            
            $
            1,243,814








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





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





Under
      the
      Agreement Bally granted to the Company: (i) an exclusive license to market
      and
      distribute redemption games using equipment containing certain proprietary
      technology of Bally; (ii) an exclusive license to utilize the technology to
      develop redemption games and gaming systems; and (iii) a non-exclusive license
      to use the technology for purposes ancillary to the foregoing (collectively,
      the
“License”). In addition to obtaining the License, the Agreement provides that
      the Company shall have the right to exclusively license Bally-owned game themes
      for use with the Company’s redemption games and systems.





The
      Agreement was subject to subsequent amendments which amended the terms and
      financial commitments due Bally by the Company.





15


Effective
      on June 28, 2006, the Company entered into a Termination and Settlement
      Agreement with Bally Gaming, Inc., pursuant to which the parties terminated
      their respective obligations under a Redemption Technology and Supply Agreement
      between the parties, dated as of May 25, 2005, as amended (the “Redemption
      Technology and Supply Agreement”), including but not limited to the elimination
      of the Company’s obligation to purchase 1,825 gaming cabinets and pay royalties
      to Bally Gaming. The Termination and Settlement Agreement is effective as of
      June 28, 2006. Under the Termination and Settlement Agreement, the parties
      also
      agreed to (i) the mutual release of all claims between the parties, (ii) Bally
      Gaming’s forgiveness of an aggregate of $2,250,000 of outstanding principal,
      together with accrued but unpaid interest, under a promissory note dated
      September 5, 2005, originally delivered by the Company in favor of Bally Gaming
      in connection with the Redemption Technology and Supply Agreement, and the
      return and cancellation of such promissory note, (iii) the Company’s return to
      Bally Gaming of all “Enabling Technology,” as defined in the Redemption
      Technology and Supply Agreement, with certain limited exceptions, and (iv)
      the
      parties’ entry into a Technology Agreement (described below) governing the
      Company’s future use of certain technology licensed from Bally
      Gaming.





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





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





As
      of
      June 30, 2006 the Company had completed the purchase of the 175 game cabinets
      and recorded $1,443,750 of inventory and the 875 redemption technology
      licenses from Bally and has recorded an asset for prepaid product licenses
      of
      $2,100,000. As the Company places its AWP machines, that include Bally hardware,
      it will add the cost of a license to the machine cost and depreciate it over
      the
      life of the asset. The Company paid Bally $1,094,728 with proceeds from a note
      payable to PDS Gaming Corporation (Note 5). The remaining balance due to Bally
      is recorded as an accrued payable Bally in the accompanying Balance
      Sheet.








**Note
      7. Related Party Transactions**





The
      Company incurred expenses from a corporation, owned by a former director of
      the
      Company and employing another former director and officer of the Company, for
      rent and consulting services of approximately $11,000 and $26,000 during the
      three months ended June 30, 2006 and 2005, respectively and $11,000 and $54,000
      during the six months ended June 30, 2006 and 2005, respectively.





16


The
      Company incurred expenses from a corporation, partially owned by the CEO and
      director of the Company, for consulting services and expense reimbursements
      of
      approximately $0 and $25,000 during the three months ended June 30, 2006 and
      2005, respectively and $0 and $39,000 during the six months ended June 30,
      2006
      and 2005, respectively. The Company’s CEO also serves as a director of the
      corporation.





On
      May 9,
      2006, D. Bradly Olah, the Company’s President, loaned the Company $150,000 and
      was issued a convertible promissory note and a warrant to purchase 300,000
      shares of common stock for $1.84. The terms granted to Mr. Olah in the
      promissory note and warrant issued to him for the loan were the same terms
      as
      those granted to other lenders. (Note 4)





**Note
      8. Significant Customers**





Revenues
      to one customer accounted for 100% of total revenues of discontinued operations
      during the three and six months ended June 30, 2006 and revenues to two
      customers accounted for 80% and 71% of total revenues of discontinued operations
      during the three and six months ended June 30, 2005 respectively.





**Note
      9. Subsequent Events**





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




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





17


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





On
      August
      10, 2006 and August 11, 2006 PDS Gaming Corporation funded an additional
      $2,741,022 due on the promissory notes entered into with the Company on June
      28,
      2006 (Note 5).





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





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





**Results
      of Operations**





**Three
      and Six Months Ended June 30, 2006 Compared to the Three and Six Months Ended
      June 30, 2005**





*Revenues
      and Cost of Revenues.* The
      Company’s revenues and cost of revenues from continuing operations for the three
      and six months ended June 30, 2006 and 2005 were $0 due to the fact that the
      Company is new to the AWP business and had no revenue producing sales. The
      Company has begun to generate revenues and cost of revenues beginning in the
      three month period ending September 30, 2006.





18


*Research
      and Product Development Expenses* .
      Research and product development expenses for continuing operations for the
      three months ended June 30, 2006 was $574,144, compared to $103,134 for the
      three months ended June 30, 2005. Expenses for the six months ended June 30,
      2006 and 2005 was $1,114,923 and $103,134 respectively. The increase in both
      the
      three and six month periods was due to the Company beginning development of
      its
      AWP products after the first quarter of 2005. In addition, the three and six
      month periods ended June 30, 2006 included $166,666 and $416,666, respectively,
      of amortization of the long-term technology and distribution rights acquired
      from Bally Gaming. Management expects that expenditures for research and product
      development may increase in future quarters as the Company begins placing its
      AWP machines in the market an continues to develop its products.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses for the three months ended June 30, 2006 was $82,680,
      compared to $102,150 for the three months ended June 30, 2005. Sales and
      marketing expenses for the six months ended June 30, 2006 was $132,807, compared
      to $102,150 for the six months ended June 30, 2005. The **** increases
      in expense primarily resulted from the Company commencing operations in
      the **** AWP
      market after the first quarter of 2005.




*General
      and Administrative Expenses* .
      General
      and administrative expenses from continuing operations for the three months
      ended June 30, 2006 was $678,195, compared to $656,383 for the three months
      ended June 30, 2005. General and administrative expenses from continuing
      operations for the six months ended June 30, 2006 was $1,282,813, compared
      to
      $889,778 for the six months ended June 30, 2005. The increase for the six month
      period was due primarily to the addition of corporate staff, increased
      professional fees and other corporate expenses as a result of starting in the
      AWP business after the first quarter of 2005. In addition the six months ended
      June 30, 2006 includes $528,190 of expense related to employee stock options
      in
      connection with the adoption of FASB 123(R) which requires stock options to
      be
      expensed as they vest. This was partially offset by a reduction in consultant
      option expense of $72,031.





*Other
      Expense.* Other
      expense for the three months ended June 30, 2006 was $1,590,694, compared to
      $382,152 for the three months ended June 30, 2005. The increase in other expense
      is primarily due to an increase of $1,351,083 of amortization of original issue
      discount and debt extinguishment, offset in part by a decrease of $162,024
      in
      the amortization of the debt issuance costs related to the Company’s borrowings.
      Other expense for the six months ended June 30, 2006 was $1,684,202, compared
      to
      $771,372 for the six months ended June 30, 2005. The increase in other expense
      is primarily due to an increase of $1,093,028 of amortization of original issue
      discount and debt extinguishment, offset in part by a decrease of $248,358
      in
      the amortization of the debt issuance costs.





*Loss
      From Discontinued Operations.* The
      loss
      from discontinued operations was $140,882 and $627,679 for the three months
      ended June 30, 2006 and 2005, respectively. The loss from discontinued
      operations was $199,802 and $1,244,002 for the six months ended June 30, 2006
      and 2005, respectively. The decrease in loss between the comparable periods
      was
      due to the Company’s decision to discontinue its Class II and Class III business
      in December, 2005, which resulted in very little activity in the
      2006.





19


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





*Net
      Loss* .
      The
      Company incurred a net loss of $4,774,177 for the three months ended June 30,
      2006, compared to a net loss of $1,871,498 for the three months ended June
      30,
      2005. The Company incurred a net loss of $6,122,129 for the six months ended
      June 30, 2006, compared to a net loss of $3,110,436 for the six months ended
      June 30, 2005. The increased net loss between the comparable periods is due
      primarily to the Company commencing AWP operations and the impairment of
      long-term technology and distribution rights, offset by the losses the Company
      incurred from its discontinued operations in the 2005 periods.





*Liquidity
      and Capital Resources* .
      The
      Company had negative working capital of $2,860,591 and $1,260,338 at June 30,
      2006 and December 31, 2005, respectively. During the six months ended June
      30,
      2006, cash used in operations was $3,054,123 and the primary uses of cash were
      to fund the Company’s net loss associated with developing AWP products, aquire
      inventory and the payment of payables and accrued expenses. For the six months
      ended June 30, 2005, the cash used in operations was $1,963,073 and the primary
      use of cash was to fund the Company’s net loss, and acquire inventory for the
      Class II and Class III markets. These uses were partially offset by non-cash
      charges related to stock options and warrants issued for services and
      amortization of original issue discount for both periods and amortization of
      debt issuance costs for the 2005 period.





Cash
      used
      in investing activities was $90,672 and $1,068,467 for the six months ended
      June
      30, 2006 and 2005, respectively, primarily to purchase property, equipment
      and
      leasehold improvements for both periods and the purchase of technology and
      distribution rights for the 2005 period.





Cash
      provided in financing activities was $1,584,481 and $1,202,291 for the six months ended
      June
      30, 2006 and 2005, respectively. The 2006 amount included proceeds of $600,000
      from short-term financing, proceed for long-term equipment financing of
      $1,464,104. The 2005 amount included proceeds of $1,500,000 form short-term
      financing, offset by $105,000 of debt financing costs and $192,709 of payments
      on notes payable.





On
      September 10, 2004, the Company issued two $750,000 promissory notes bearing
      interest at the rate of 10% per annum. One note was issued to Pandora and the
      other note was issued to Whitebox. The notes were payable interest only through
      March 10, 2005, at which time the principal was due. The notes were subsequently
      amended and balance of $750,000 due on September 29, 2006 and the other $750,000
      due on September 30, 2007. On May 12, 2006 the Whitebox and Pandora notes were
      transferred to Rockmore Investment Master Trust Ltd. and Parklane Associates
      LLC, respectively.





20


On
      September 23, 2005, the Company signed a term sheet with PDS Gaming for a $20
      million credit facility to finance its AWP gaming equipment. The term sheet
      is
      not a definitive agreement. As currently contemplated, terms of the facility
      will provide that the Company may make draws in increments of a minimum of
      $650,000 up to $10 million. Each loan under the facility will be amortized
      over
      36 months with interest at 13% and will be subject to the Company meeting
      certain financial covenants and other conditions. A 1% fee will be required
      to
      be paid at closing of the facility and a 4% fee will be required on each draw.
      The Company is required to pay the expenses of the lender and paid an expense
      advance of $22,500 in September 2005. As of June 30, 2006, the Company had
      closed on the credit facility and had entered into promissory notes in the
      amounts of $3,182,854 and $1,910,000. As of August 11, 2006 $4,205,126 had
      been
      advanced under the notes.





On
      May
      24, 2005, the Company entered into a Redemption Technology and Supply Agreement
      with Bally Gaming pursuant to which the Company acquired a license for certain
      AWP technology from Bally Gaming, including exclusive distribution rights to
      that technology and follow-on exclusive distribution rights for Video Lottery
      Terminals (“VLT”), if VLT becomes legal. This agreement and the license last for
      an initial term of five years, but may be extended if the Company meets certain
      performance targets. Under the agreement, the Company is obligated to pay an
      upfront fee of $5 million. Of this amount, $2 million was paid, and the Company
      delivered an unsecured two-year promissory note for the remaining $3 million.





Effective
      June 28, 2006, Spectre Gaming, Inc. (the “Company”) entered into a Termination
      and Settlement Agreement with Bally Gaming, Inc., pursuant to which the parties
      terminated their respective obligations under a Redemption Technology and Supply
      Agreement between the parties, dated as of May 24, 2005, as amended. As a result
      of entering into the Termination and Settlement Agreement with Bally, the
      Company recorded an impairment charge for the unamortized balance of the
      long-term technology and distribution asset of $3,981,184 and prepaid license
      fees of $187,500. Offsetting these charges was the balance of the note due
      Bally
      of $2,250,000 plus accrued interest and other accrued liabilities due
      Bally.





On
      June
      30, 2006, and simultaneously with the above-described Termination and Settlement
      Agreement, the Company entered into a new Technology Agreement that will govern
      the Company’s use of intellectual property of Bally Gaming and certain related
      matters. The Technology Agreement is effective as of June 28, 2006. In
      particular, the Technology Agreement provides that (i) Bally Gaming grants
      the
      Company a perpetual non-exclusive license to use certain proprietary technology
      of Bally Gaming in connection with up to a maximum of 875 “redemption product
      licenses”, (ii) “redemption product licenses” may be used with respect to any
      new or used gaming cabinet manufactured by Bally Gaming that will be used as
      amusement-with-prize or redemption gaming machines, (iii) the Company purchases
      from Bally Gaming 175 gaming cabinets as of June 28, 2006, at a price of $8,250
      per cabinet, (iv) the Company purchases from Bally Gaming 500 redemption
      product licenses as of June 28, 2006, at a per-license cost of $3,000, and
      (v)
      the Company will order from Bally Gaming 375 additional redemption product
      licenses on or prior to July 10, 2006 for an aggregate of $600,000.





As
      of
      June 30, 2006 the Company had completed the purchase of the 175 game cabinets
      and the 875 redemption technology licenses from Bally and has recorded an asset
      for prepaid product licenses of $2,100,000. As the Company places its AWP
      machines, that include Bally hardware, it will add the cost of a license to
      the
      machine cost and depreciate it over the life of the asset.





21


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





Between
      May 5 and May 9, 2006, the Company closed on a total of $600,000 of short-term
      loans. In connection with the borrowings, the Company issued 1,200,000 five
      year
      warrants at $1.84 per share. The proceeds of the loans will be used for
      operating capital.





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




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




The
      Company anticipates that it will expend significant resources in 2006 acquiring
      machines to be placed in amusement centers on either a fixed lease or a
      participation basis. Once placed in service these machines are transferred
      to
      fixed assets. In addition, the Company expects that research and product
      development, sales and marketing, and general and




22


administrative
      expenses will also increase as the Company adds additional personnel and incurs
      other costs associated with placing and marketing its AWP products and for
      other
      corporate purposes. Over the next 12 months, the Company expects to spend a
      significant amount on capital equipment purchases primarily for AWP machines,
      and for such purpose expects to seek financing to purchase such
      equipment.





The
      Company is currently seeking additional financing, which it believes it will
      be
      successful in obtaining without additional financing, the Company's current
      cash
      is not sufficient to continue operations through August 2006 .
      Beyond
      that point, the Company may need to obtain additional cash to meet its needs,
      including repaying its debt obligations.





**Risk
      Factors**





**We
      have no operating history and our business plan is currently being tested.**  **We
      anticipate incurring future losses.**





We
      are in
      the early stages of developing and distributing AWP games. We are therefore
      subject to all of the risks and uncertainties inherent in establishing a new
      business. We have no prior operating history for these products from which
      to
      evaluate our success, or our likelihood of success in operating our business,
      generating any revenues or achieving profitability. In sum, we have very limited
      assets, very little operating revenue and uncertain prospects of future
      profitable operations. Our operations may not be successful and the likelihood
      of our success must be considered in light of the problems, expenses,
      difficulties, complications and delays frequently encountered in connection
      with
      the formation of a new business, development of technology and the competitive
      environment in which we operate. We anticipate that we will incur losses in
      the
      near future.





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




The
      Company is currently seeking additional
      financing, which it believes it will be successful in obtaining without
      additional financing, the Company's current cash is not sufficient to continue
      operations through August 2006. 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
      may be required to find additional sources of financing.





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





23


**Our
      independent auditors have substantial doubt about our ability to continue as
      a
      going concern.**





We
      have
      had net losses for the six months ended June 30, 2006, and the year ended
      December 31, 2005, and we had an accumulated deficit as of June 30, 2006. 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. We expect that our ability to
      continue as a going concern depends, in large part, on our ability to raise
      sufficient capital through subsequent equity or debt financing transactions.
      If
      we are unable to raise additional capital, we may be forced to discontinue
      our
      business.





**Our
      redemption gaming products have not been fully tested.**





The
      development process has only recently been completed and we cannot be certain
      that the operating system will work as anticipated and required for use in
      a
      regulated marketplace. To date, we have had to make refinements, edits and
      other
      changes to the technology which has delayed our ability to get machines into
      the
      market. The completion of the development of our proposed AWP system remains
      subject to all the risks associated with the development and manufacture of
      new
      products, including unanticipated technical or other problems, failures to
      meet
      regulatory requirements or performance objectives, and the possible
      insufficiency of the funds allocated for the completion of such development,
      which could result in a change in the design, delay in the development, or
      abandonment of such system and its products. It is possible that our AWP system
      may never be fully functional or successfully distributed.





**Even
      if successfully developed, our gaming products may not be accepted by the
      marketplace.**





Our
      gaming systems and the gaming products, even if successfully tested, developed
      and manufactured, may not be accepted by the marketplace or successfully compete
      against other systems, games and products in the marketplace.





**We
      have depended upon others for the manufacture of our gaming products, which
      will
      subject our business to the risk that we will be unable to fully control the
      supply of our products to the market.**





Our
      ability to develop, manufacture and successfully commercialize our proposed
      products depends upon our ability to enter into and maintain contractual and
      collaborative arrangements with others, such as Bally. In addition to purchasing
      our hardware components of our game machines, we do intend to manufacture our
      proposed products, but have no such manufacturing experience. There can be
      no
      assurance that Bally or any other manufacturers will be able to supply our
      products or components in the required quantities, at appropriate quality levels
      or at acceptable costs. We may be adversely affected by any difficulties
      encountered by such third-party manufacturers and suppliers that result in
      product defects, production delays or the inability to fulfill orders on a
      timely basis. If a manufacturer cannot meet our quality standards and delivery
      requirements in a cost-efficient manner, we would likely suffer interruptions
      of
      delivery while we arrange for alternative manufacturing sources. Any extended
      disruption in the delivery of products could result in our inability to satisfy
      customer demand for our products. Consequently, our inability to obtain
      alternative sources on a timely basis may have a material adverse effect on
      our
      business and results of operations.





24


**Our
      reliance on third-party manufacturers and other third parties in other aspects
      of our business will reduce any profits we may earn from our products, and
      may
      negatively affect future product development.**





As
      noted
      above, we currently intend to market and commercialize products manufactured
      by
      ourselves and others, and in connection therewith we will likely be required
      to
      enter into manufacturing, licensing and distribution arrangements with third
      parties. These arrangements will likely reduce our product profit margins.
      In
      addition, the identification of new product candidates for development may
      require us to enter into licensing or other collaborative agreements with
      others. These collaborative agreements may require us to pay license fees,
      make
      milestone payments, pay royalties and/or grant rights, including marketing
      rights, to one or more parties. Any such arrangement will likely reduce our
      profits. Moreover, these arrangements may contain covenants restricting our
      product development or business efforts in the future.





**We
      may not be able to enter into manufacturing, supply or other collaborative
      agreements on terms acceptable to us, if at all, which
      failure**  **would
      materially and adversely affect our business.**





We
      may
      not be able to enter into manufacturing, supply or other collaborative
      arrangements with third parties on terms acceptable to us, if at all, when
      and
      as required. If we fail to establish such arrangements when and as necessary,
      we
      could be required to undertake these activities at our own expense, which would
      significantly increase our capital requirements and may delay the development,
      manufacture and installation of our gaming machines on casino floors. If we
      cannot find ways of addressing these capital requirements, we would likely
      be
      forced to sell or abandon our business.





**Our
      inability to protect the intellectual property we use could impair our ability
      to compete.**





Our
      success and ability to compete depend in part upon proprietary intellectual
      property. The intellectual property we use currently consists of certain
      licensed propriety technology that is critical to our AWP business, as well
      as
      other trademark, image and likeness, moral rights, and certain other
      intellectual property assets. We currently rely and intend to rely in the future
      on a combination of copyright, trademark, patent, 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.





**The
      regulatory environment in which the Company operates lacks clarity, which could
      impair our ability to place redemption gaming machines in some jurisdictions.**





25


AWP
      is
      not a highly regulated industry, and as such, it lacks the clarity which
      typically stems from the existence and a body of interpretation of laws and
      regulations. Moreover, AWP laws tend to be enforced at the county or city level
      instead of a central state-sponsored regulatory authority, which decreases
      the
      visibility and predictability of such regulation. The lack of clarity or
      guidance can lead to legal interpretation errors, changes in the manner in
      which
      the laws or controlling court cases are articulated and interpreted by law
      enforcement personnel, and disagreements about the legality of the Company’s
      operations and games in various jurisdictions. In turn, these matters can lead
      to delays in game deployment, removal of games from locations, withdrawal of
      business operations in various counties, as well as the possibility that games
      may be seized pending resolution of the appropriate court case, and the possible
      arrest of company personnel for violation of law.





**Changes
      in regulatory approvals** **or
      regulatory interpretations** **may adversely effect our AWP operations.**





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





**Changes
      in laws regarding gaming or AWP may inhibit the Company’s ability to do
      business.**





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





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





The
      Company will establish partnerships with various distribution and service
      companies which are doing business in the jurisdictions in which Spectre will
      conduct AWP. These operators will provide sales and support, as well as money
      and data collection. Failure to find sufficient or capable partners may delay
      the rollout in various areas. Additionally, partners may not move quickly enough
      to exploit any market advantages the company may have. Partners may not provide
      a sufficient level of service, to the detriment of games in place or to future
      placements. Finally, partners will not be exclusive partners, and their
      associated business activities and conduct may cause conflict with the Company’s
      business.





**More
      experienced and better financed companies may enter the AWP market which may
      result in the Company losing significant market share.**





26


Currently,
      the AWP marketplaces in Texas and Florida, as well as other states, do not
      have
      any established major gaming competitors (such as IGT, Alliance, Aristocrat,
      Konami, MGAM, et al), but is instead a market for small second or third tier
      manufacturers. The entry of well financed, established competitors into the
      market could have a material impact on Spectre’s ability to place games or to
      continue to maintain the number of games in the field it will have at that
      time.





**We
      are highly dependent on the services provided by certain executives and key
      personnel.**





Our
      success depends in significant part upon the continued service of certain senior
      management and other key personnel. In particular, we are materially dependent
      upon the services of Russell C. Mix, a director of the Company and our Chief
      Executive Officer, and the services of D. Bradly Olah, a director of the Company
      and our President. We have an employment agreement with Mr. Mix, but if he
      should no longer serve the Company it would likely have a materially adverse
      impact on our business, financial condition and operations. We do not have an
      employment agreement with Mr. Olah. The Company has not secured any “key person”
life insurance covering the lives of either Mr. Mix or Mr. Olah.





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 number of sales, business development, marketing, technical
      and
      administrative personnel in the future. Competition for such personnel is
      intense and there can be no assurance that we will successfully attract,
      assimilate or retain a sufficient number of qualified personnel. The failure
      to
      retain and attract the necessary technical, managerial, sales and marketing
      and
      administrative personnel could have a material adverse impact on our business,
      financial condition and operations.





**Our
      officers and directors, together with certain affiliates, possess substantial
      voting power with respect to our common stock, which could adversely affect
      the
      market price of our common stock.**





As
      of
      August 14, 2006, our officers and directors collectively possessed beneficial
      ownership of approximately 2,292,447 shares of our common stock, which
      represents approximately 14.3% of our common stock. Certain other significant
      shareholders, including Perkins Capital Management, Inc., Ronald E. Eibensteiner
      and Wayne W. Mills collectively possessed beneficial ownership of a total of
      approximately 6,510,835 shares of common stock, which represents
      approximately 35.6% of our common stock. When taken together, our directors,
      officers and significant shareholders have beneficial ownership of approximately
      43.1% of our common stock. This represents a significant and controlling portion
      of the voting power of the Company’s shareholders. As a result, our directors
      and officers, together with significant shareholders, have the ability to
      substantially (but not wholly) control our management and affairs through the
      election and removal of our entire board of directors, and all other matters
      requiring shareholder approval, including the future merger, consolidation
      or
      sale of all or substantially all of our assets. This concentrated control could
      discourage others from initiating any potential merger, takeover or other
      change-of-control transaction that may otherwise be beneficial to our
      shareholders. As a result, the market price of our common stock or ultimate
      sale
      of our business could be adversely affected.





27


**Our
      stock price is, and we expect it to remain, volatile, which could limit our
      shareholders’ ability to resell shares of our common stock at a profit.**





The
      volatile price of our common stock makes it difficult for shareholders 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 not limited to:





·
            achievement
                or rejection of regulatory approvals in favor of us or the tribes
                or other
                purchasers of our products,


·
            announcements
                of technological innovations or new commercial products by us or
                our
                competitors,


·
            developments
                concerning proprietary rights, including
                patents,


·
            regulatory
                developments relating to the United States relating to the gaming
                industry,


·
            period-to-period
                fluctuations in our revenues and other results of operations,
                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.





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





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





As
      of
      August 14, 2006, we had 13,913,024 shares of common stock outstanding. As of
      such date, a further 22,792,535 shares of our common stock have been reserved
      for issuance as follows:





·
            2,180,000
                shares under our existing stock option plans, of which options relating
                to
                1,911,666 shares are currently
                outstanding;


·
            1,511,942
                sharesrelating
                to additional options grantedoutside of our stock option plans;


·
            97,799
                shares upon conversion of outstanding Series A Preferred
                Stock


·
            4,481,250
                shares upon conversion of outstanding Series B Variable Rate Convertible
                Preferred Stock, and


·
            14,521,544
                shares upon the exercise of outstanding
                warrants.





28


In
      connection with the sale of 7,420 shares of our Series B Variable Rate
      Convertible Preferred Stock, the Company obtained the right, until September
      23,
      2006 and upon meeting certain milestones, to sell to the original Series B
      investors another 2,580 preferred shares, which would be convertible into
      1,612,500 shares of common stock, together with warrants to purchase 1,612,500
      common shares. In addition, until March 23, 2006 the original Series B investors
      have the option to purchase another 7,420 preferred shares, convertible into
      4,637,500 common shares, and receive warrants to
      purchase 4,637,500 common shares.





In
      addition to the above reservations of shares of common stock, the Company is
      obligated under a Securities Purchase Agreement dated October 27, 2005, entered
      into with purchasers of Series B Variable Rate Convertible Preferred Stock
      to
      reserve additional shares of common stock that may be required to pay dividends,
      if paid in common stock, and to fulfill other obligations to such purchasers
      in
      connection with the Securities Purchase Agreement .





**Our
      common stock trades only in an illiquid trading market.**





Trading
      of our common stock is conducted on the over-the-counter bulletin board. This
      has an adverse effect on the liquidity of our common stock, not only in terms
      of
      the number of shares that can be bought and sold at a given price, but also
      through delays in the timing of transactions and reduction in security analysts’
and the media’s coverage of our Company and its common stock. This may result in
      lower prices for our common stock than might otherwise be obtained and could
      also result in a larger spread between the bid and asked prices for our common
      stock.





**There
      is currently little trading volume in our common stock, which may make it
      difficult to sell shares of our common stock.**





In
      general, there has been very little trading activity in our common stock. Over
      the past three months, the average daily trading volume (as reported by Yahoo
      Finance) has been approximately 16,000 shares. The relatively small trading
      volume will likely make it difficult for our shareholders to sell their shares
      as and when they choose. Furthermore, small trading volumes generally depress
      market prices. As a result, you may not always be able to resell shares of
      our
      common stock publicly at the time and prices that you feel are fair or
      appropriate.





**Because
      it is a “penny stock,” you may have difficulty selling shares of our common
      stock.**





Our
      common stock is a “penny stock” and is therefore subject to the requirements of
      Rule 15g-9 under the Securities and Exchange Act of 1934. Under this rule,
      broker-dealers who sell penny stocks must provide purchasers of these stocks
      with a standardized risk-disclosure document prepared by the SEC. Under
      applicable regulations, our common stock will generally remain a “penny stock”
until and for such time as its per-share price is $5.00 or more (as determined
      in accordance with SEC regulations), or until we meet certain net asset or
      revenue thresholds. These thresholds include the possession of net tangible
      assets (i.e., total assets less intangible assets and liabilities) in excess
      of
      $2,000,000 in the event we have been operating for at least three years or
      $5,000,000 in the event we have been operating for fewer than three years,
      and
      the recognition of average revenues equal to at least $6,000,000 for each of
      the
      last three years. We do not anticipate meeting any of the foregoing thresholds
      in the foreseeable future.





29


The
      penny-stock rules severely limit the liquidity of securities in the secondary
      market, and many brokers choose not to participate in penny-stock transactions.
      As a result, there is generally less trading in penny stocks. If you become
      a
      holder of our common stock, you may not always be able to resell shares of
      our
      common stock publicly at the time and prices that you feel are fair or
      appropriate.





**We
      have no intention of paying dividends on our common stock.**





To
      date,
      we have not paid any cash dividends and do not anticipate the payment of cash
      dividends in the foreseeable future. Accordingly, the only return on an
      investment in shares of our common stock, if any, may occur upon a subsequent
      sale of such shares.





**Off-Balance-Sheet
      Arrangements**





The
      Company has no off-balance-sheet arrangements.





**Critical
      Accounting Estimates**





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





30


**Forward-Looking
      Statements**





This
      Form
      10-QSB contains certain forward-looking statements within the meaning of Section
      27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended. Statements made in this report which are
      not
      historical in nature, including but not limited to statements using the terms
      “may,” “expect to,” “believe,” “should,” “anticipate,” and other language
      employing a future aspect, are referred to as forward-looking statements, should
      be viewed as uncertain and should not be relied upon. Although our management
      believes that the results reflected in or suggested by these forward-looking
      statements are reasonable, all forward-looking statements involve risks and
      uncertainties and our actual future results may be materially different from
      the
      expectations expressed in such forward-looking statements. In particular, all
      statements included herein regarding activities, events or developments that
      the
      Company expect, believe or anticipate will or may occur in the future, including
      such things as future capital expenditures (including the amount and nature
      thereof), business strategy and measures to implement strategy, competitive
      strengths, goals, expansion and other such matters are forward-looking
      statements. The foregoing list is not exhaustive, and the Company disclaims
      any
      obligation to subsequently revise any forward-looking statements to reflect
      events or circumstances after the date of such statements.





Actual
      events may differ materially from those anticipated in the forward-looking
      statements. Important factors that may cause such a difference include those
      risk factors summarized above. For additional information regarding these and
      other factors, see our Annual Report on Form 10-KSB/A for the year ended
      December 31, 2005 and other recent filings with the SEC.





**Item
      3. Controls and Procedures**





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





31





**PART
      II Other Information**





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





During
      the three and six month period ended June 30, 2006, the Company issued 127,487
      shares of its common stock as payment of dividends in lieu of cash to owners
      of
      its Series B Variable Rate Convertible Preferred Stock and issued 75,000 shares
      of common stock to a consultant in satisfaction of a contractual obligation.
      In
      addition, during the six months ended June 30, 2006, the Company issued 156,250
      shares of the Company’s common stock upon conversion of 250 shares of the
      Company’s Series B Variable Rate Convertible Preferred Stock. The Company also
      issued 7,348 shares of its common stock upon the cashless exercise of warrants
      to purchase 14,140 shares of the Company’s common stock and issued 26,500 shares
      of its common stock upon the exercise of stock options. All of these issuances
      were made in reliance on the exemption from registration provided under Section
      4(2) of the Securities Act of 1933.





**Item
      6. Exhibits**





(a)  Exhibits








31.1 Rule
      13a-14(a) Certification of Chief Executive Officer.


31.2 Rule
      13a-14(a) Certification of Chief Financial Officer.


32 Section
      1350 Certification.











32







**SIGNATURES**





Pursuant
      to the registration requirements of the Securities Exchange Act of 1934, the
      registrant has duly caused this report to be signed on its behalf by the
      undersigned thereunto duly authorized.





SPECTRE
                GAMING, INC.Date:
                August 16, 2006
            By:
            /s/
                Russell C. MixTitle:
            Chief
                Executive OfficerDate:
                August 16, 2006
            By:
            /s/
                Kevin M. GreerTitle:
            Chief
                Financial Officer(Principal
                Accounting Officer)








33