**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-KSB**





ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended December 31, 2005





Commission
      file number 0-25764





Spectre
      Gaming, Inc.


( Exact
      name of registrant as specified in its charter )


Minnesota
            41-1675041(State
                of incorporation)
            (I.R.S.
                Employer Identification No)





14200
      23 rd Avenue
      N.


Minneapolis,
      MN 55447


(Address
      of principal executive offices)





(763)
      553-7601


( Registrant ’s
      telephone number)




Securities
      registered under Section 12(g) of the Exchange Act: common stock, par value
      $.01.




Check if
      the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Exchange Act.





Yes
x No
o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days.





Yes
xNo
o





Check
      if
      there is no disclosure of delinquent filers in response to Items 405 of
      Regulation S-B in this form, and no disclosure will be contained, to the best
      of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of the Form 10-KSB or any amendment to
      this Form 10-KSB. o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes o No
x




The
      Company’s revenues from continuing operations for the fiscal year ended December
      31, 2005 totaled $0.




The
      aggregate market value of the common stock held by non-affiliates of the
      registrant as of March 16, 2006 was approximately $14,857,812 based on the
      average of the closing bid and asked price of the registrant’s common stock on
      such date . The
      number of shares outstanding of the registrant’s common stock, as of March 16,
      2006 was 13,705,537.




Transitional
      Small Business Issuer Format (Check One):





Yes o No
x


**SPECTRE
      GAMING, INC.**


**TABLE
      OF CONTENTS**




PagePART
                I
            2Item
                1.
            Description
                of Business
            2Item
                2.
            Description
                of Property
            13Item
                3.
            Legal
                Proceedings
            14Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            14PART
                II
            14Item
                5.
            Market
                for Common Equity and Related Stockholder Matters
            14Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            16Item
                7.
            Financial
                Statements
            25Item
                8.
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            49Item
                8A.
            Controls
                and Procedures
            50Item
                8B.
            Other
                Information
            50PART
                III
            51Item
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
                Section
                16(a) of the Exchange Act
            51Item
                10.
            Executive
                Compensation
            54Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
            57Item
                12.
            Certain
                Relationships and Related Transactions
            61Item
                13.
            Exhibits
            63Item
                14.
            Principal
                Accountant Fees and Services
            66









This
      annual report on Form 10-KSB contains certain statements that are
“forward-looking statements” under Section 27A of the Securities Act of 1933 and
      Section 21E of the Securities Exchange Act of 1934, and includes, among other
      things, discussions of the Company’s business strategies, future operations and
      capital resources. Words such as, but not limited to, “may,” “likely,”
“anticipate,” “expect” and “believes” indicate forward-looking statements.
      Although the Company believes that the expectations reflected in such
      forward-looking statements are generally reasonable, it can give no assurance
      that such expectations will ultimately prove to be correct. Generally, these
      statements relate to business plans and strategies, projected or anticipated
      benefits or other consequences of market conditions and opportunities, business
      plans or strategies, projections involving anticipated sales and revenues,
      expenses, projected future earnings and other aspects of operational results.
      All phases of the Company’s operations are subject to a number of uncertainties,
      risks and other influences, most of which are outside the Company’s control, and
      any one or combination of which could materially and adversely affect the
      results of the Company’s operations, and also, could affect whether any such
      forward-looking statements contained in this annual report ultimately prove
      to
      be accurate. Important factors that could cause actual results to differ
      materially from the Company’s expectations are summarized above, as well as in
      the section of this annual report captioned “Risk Factors.” The forward-looking
      statements contained in this annual report are made as of the date of this
      report, and the Company assumes no obligation to update the forward-looking
      statements or to update the reasons why actual results could differ from those
      contained in such forward-looking statements. Therefore, readers are cautioned
      not to put undue reliance on forward-looking statements.








**PART
      I**





**Item
      1.**  **Description
      of Business**





**General**





Spectre
      Gaming, Inc. (the “Company” or “Spectre,” “we,” “us” or “ours”) (formerly
      OneLink, Inc.) was incorporated in Minnesota in June 1990 under the name
      MarketLink, Inc. At that time, the Company provided telecommunications-based
      business-intelligence services to client end users. In January 1997, the Company
      changed its name to OneLink Communications, Inc., and later in June 2000,
      changed its name to OneLink, Inc. In July 2002, the Company ceased operating
      its
      telecommunications-based business, and in December 2002 sold substantially
      all
      of its assets. In September 2003, the Company adopted a new business plan
      focused on providing interactive electronic games to the Native American and
      charitable gaming markets, and in January 2004 changed its name to Spectre
      Gaming, Inc. Initially, Spectre focused on designing, developing and marketing
      networks, software and content to provide a comprehensive gaming system to
      the
      Class II and Class III markets.




In
      May
      2005, the Company acquired the exclusive license to a proprietary technology
      for
      the development and deployment of casino-style redemption or
      amusement-with-prize (“AWP”) games. AWP games are distinguishable from casino
      games in that players can win prizes or credits redeemable for prizes as opposed
      to cash. 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. The
      Company has decided to focus its efforts in this market and discontinued its
      efforts in the Class II and Class III markets.   In accordance with
      appropriate accounting rules, we have reclassified our previously reported
      financial results to exclude the results of our Class II and Class III business
      and these results are presented on a historical basis as a separate line in
      our
      statements of operations and balance sheets entitled “Discontinued
      Operations.”  Our continuing operations represent our AWP
      business only.  Most references to financial information and description of
      business in this Form 10-KSB have been revised to reflect only our
      continuing operations and most references to our now discontinued Class II
      and
      Class III business have been eliminated.





2


Our
      principal executive office is located at 14200 23 rd Avenue
      N., Minneapolis, MN 55447. Our telephone number at that office is (763)
      553-7601. Our internet website is www.spectregaming.com.








**Markets**





The
      Company has identified four specific aspects of this market, or submarkets,
      to
      focus on: countertop and touchscreen machines, redemption and novelty,
      eight-liner/video poker, and other aspects that we believe are untapped.





*Countertops/Touchscreens—* The
      countertop/slant-top game submarket flourishes in bars, lounges and truck stops
      across America. This submarket is primarily serviced by amusement operators
      that
      distribute juke boxes, pool tables, electronic dart boards and other amusement
      devices. This submarket is composed of stand-alone games containing what we
      believe to be antiquated technology. For example, these games do not operate
      under a client/server model, have no downloadable capabilities , and require a board
      swap or EPROM (Erasable, Programmable, Read Only Memory) changes and new
      graphics on the
      class or cabinet to
      change games and play .
      We
      believe that once
      successfully developed, the
      Spectre system will facilitate the changing of games once they have met their
      normal “shelf life,” and at a fraction of the current cost.





*Redemption/Novelty—* These devices
      are at street locations, including theaters, restaurants and adult entertainment
      centers (e.g., Dave and Busters, Game Works). This submarket is primarily
      serviced by the same amusement operators that currently dominate the
      countertop/slant-top marketplace.





*Eight
      Liner/Video Poker—* The
      Eight
      Liner/Video poker segment is the fastest growing electronic amusement
      submarket in the
      United States. This market has historically been served by the amusement
      industry with very little connection to
      legitimate gaming device manufacturers. Suppliers within this segment are
      commonly known as “Grey Area” manufacturers and are typically “mom and pop”
final assemblers having less than $10 million in annual revenue. Many of these
      devices are believed to be operating in various manners
      that do not comply with applicable laws and regulations and may
      therefore be
      subject to seizures
      and forfeitures by state
      and local authorities .





*Untapped
      Markets—* This
      marketplace consists of jurisdictions and locations within the United States
      where no form of gaming devices (i.e., Class II/Class III) are currently
      permitted. These locations include race tracks, strip malls, bingo halls, VFW
      halls, Jewish War Vets, Disabled American Vet facilities and various Native
      American tribes that have no federal status. We estimate
      that there are currently several hundred thousand devices in these locations.





3


**Spectre’s
      Strategy**





The
      Company’s initial plans include installing its AWP machines in adult amusement
      arcades, initially in Florida and Texas. The Company has designed and developed
      and continues to design and develop content, hardware, software, and networks
      able to provide its customers with comprehensive gaming systems. As
      opportunities arise, the Company intends to expand into other states and into
      the charitable gaming market.





**Research
      and Development**





Our
      research and development activities primarily focus on the development of new
      gaming systems, gaming engines, gaming platforms and content, and enhancements
      to our existing product lines. In addition, the Company has expended significant
      time and resources on integration, completion, adaptation and testing of the
      technology licensed from Bally Gaming, Inc. We believe our investments in
      product development are necessary to deliver differentiated products and
      solutions to the marketplace. Once the technological feasibility of a project
      has been established, the project is transferred from research to development,
      and capitalization begins. We expect our research and development expenses
      to
      grow over the upcoming periods as we continue focusing on product development
      and adding development staff. Our research and development expense for
      continuing operations was $361,122 and $0 during the years ended December 31,
      2005 and 2004, respectively.





**Sales
      and Distribution**





Our
      products and services are being sold on a lease or revenue sharing basis to
      game
      room operators or route operators that place the machines in those locations.
      We
      market our products and systems through our internal sales staff and agents.
      In
      this regard, we currently employ no sales personnel and instead rely on our
      executive management to initiate sales.





**Competition**





The
      market for gaming machines and proprietary systems is intensely competitive.
      The
      principal method of competition is the development of exciting and unique game
      titles, displays and concepts. A portfolio of strong performing games and
      intellectual property can be a competitive advantage. Other methods of
      competition include machine quality, sales and service operations, financial
      strength and product pricing.





In
      the
      market for AWP gaming machines, manufacturers and distributors that compete
      with
      Spectre include Cadillac Jack, Merit Industries, Texas Gaming Systems, BGI,
      Inc., Dyna and LabTronics. These competitors have significantly greater
      financial resources then Spectre.





**Intellectual
      Property**





Our
      intellectual property portfolio consists of certain co-operative group gaming
      technology that we acquired through the asset acquisition of Streamline
      Development Company, Inc. in December 2004. In addition, the Company has been
      developing software to be used in the AWP market. The Company has been
      developing its technology in concert with redemption and enabling technology
      licensed from Bally Gaming, Inc. in May 2005. Our propriety technology, combined
      with the technology that we licensed from Bally Gaming, Inc. including
      trademark, image and likeness, other moral rights, and certain other assets
      make
      up the bulk of our current product technology. 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.





4


The
      technology licensed from Bally includes the right to use a redemption device
      computer firmware circuit board, licensed themes, licensed theme materials,
      certain Bally games and redemption software and technology. Specific
      applications of the licensed Bally technology, by Spectre, are subject to
      approval by Bally’s compliance committee.





Most
      of
      our products are or will be sold or
      licensed using our own trademarks and copyrights that we
      hope
      will provide
      product recognition and promote widespread acceptance of our products in the
      marketplace. Our products may also contain content licensed from third parties,
      such as trademarks, fictional characters, names and likenesses and /or
      storylines.





Our
      ability to enforce our patents, copyrights, trademarks and other intellectual
      property is subject to general litigation risks. Typically, when a party seeks
      to enforce its intellectual-property rights, it is often subject to claims
      that
      the intellectual-property right is invalid, or is licensed to the party against
      whom the claim is being asserted. We cannot ensure that our
      intellectual-property rights will not be infringed upon or that others will
      not
      develop products in violation of our intellectual-property rights. Although
      we
      have entered into confidentiality, non-compete and invention-assignment
      agreements with our employees and consultants 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.





**Government
      Regulation**





State
      law
      determines the legality of AWP gaming, but tends to be interpreted and enforced
      at the local, usually county, level. As such, states do not have a defined
      regulatory agency charged with development of regulations, interpretation and
      enforcement of laws, or the regulation of business practices. There are no
      game
      certification requirements, system integrity testing and certification, or
      other
      similar requirements conducted by a state sponsored lab or bureau, nor are
      there
      any AWP, redemption or similar qualifying or condition precedent licenses or
      approvals necessary.





AWP
      systems are generally regulated to have limitations on the nature and the amount
      of the bet or wager allowed per play, limitations on the value of a prize which
      may be won with a single wager, and requirements pertaining to the exchange
      of
      the win from a game for a physical prize, as well as various other prize
      limitations.





Each
      AWP
      system, and the manner in which the AWP business enterprise is conducted must
      comply with state law requirements which define what an AWP or redemption game
      is and how it is to be played. Further, each county police authority or district
      attorney’s office, as well as other
      state agencies such as the alcohol or liquor enforcement agencies, has the
      ability to interpret not only what the law means and how it is to be
      implemented, but whether the game and redemption system as utilized in public
      are compliant. Therefore, Spectre intends to work closely with the appropriate
      agencies in each county in which it distributes AWP units to be sure that the
      deployed system will be jurisdictionally compliant in each respective county.





5


**Employees**





As
      of
      December 31, 2005, the Company had 10 full-time employees and no part-time
      employees.





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





We
      require additional sources of financing before we can generate revenues to
      sustain operations. In particular, management believes the Company’s current
      cash is sufficient to continue operations only through April 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 prior to April
      2006.





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.





6


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





We
      have
      had net losses for each of the years ended December 31, 2005 and 2004, and
      we
      had an accumulated deficit as of December 31, 2005. 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, and may never be, fully developed.**





Pursuant
      to our Redemption Technology and Supply Agreement with Bally Gaming, Inc.,
      we
      are enhancing Bally’s AWP redemption gaming technology. The development process
      has not yet been completed and we cannot be certain that the operating system
      will work as anticipated and required for use in a 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
      developed 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
      will depend upon others for the manufacture of our gaming products, which will
      subject our business to the risk that we will be unable to fully control the
      supply of our products to the market.**





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





7


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





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





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





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





8


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





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.





9


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





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
      February 28, 2006, our officers and directors collectively possessed beneficial
      ownership of approximately 1,929,999 shares of our common stock, which
      represents approximately 12.6% 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 6,412,059 shares of common stock, which represents
      approximately 36.7% of our common stock. When taken together, our directors,
      officers and significant shareholders have beneficial ownership of approximately
      43.8% 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.





10


**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.





11


As
      of
      February 28, 2006, we had 13,698,189 shares of common stock outstanding. As
      of
      such date, a further 18,847,978 shares of our common stock have been reserved
      for issuance as follows:





·
            2,300,000
                shares under our existing stock option plans, of which options relating
                to
                1,908,541 shares are currently
                outstanding;


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


·
            97,798
                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


·
            10,456,988
                shares upon the exercise of outstanding
                warrants.





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 36,000 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.





12


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.





**Item
      2.**  **Description
      of Property**




The
      Company currently leases 6,114 square feet of commercial office and warehouse
      space at 1466 Pioneer Way No. 10, El Cajon, California. The Company pays $4,747
      per month through May 31, 2006, which is the date such lease terminates. Under
      the terms of the El Cajon lease, the Company also pays $165 per month for water,
      sewer and HVAC. The Company has closed this location.





The
      Company leases 8,800 square feet of commercial office and warehouse space at
      7206 East 38th Street, in Tulsa, Oklahoma. The Company pays $3,300 per month
      for
      such lease through March 31, 2006, which is the date the lease terminates.
      The
      Company has closed this location.





The
      Company leases 2,114 square feet of space located at 5 Sierra Gate Plaza,
      Roseville, California, and pays $4,122 per month through August 31, 2006, $4,228
      per month through August 31, 2007 and $4,334 per month through August 31, 2008,
      at which time the lease will expire. This facility houses the Company’s research
      and development operations.





Finally,
      the Company signed a lease for 3,117 square feet of office and warehouse space
      located at 14200 23rd Avenue North, Minneapolis, Minnesota. The Company pays
      $2,980 per month from March 1, 2006 through December 31, 2007, and approximately
      $3,080 per month for the remaining term, ending December 31, 2008. This facility
      has replaced the El Cajon, California and 800 Nicollet Mall, Minneapolis,
      Minnesota locations and has become Spectre’s headquarters.




13


The
      Company believes that these spaces will be adequate for its operations at least
      for the next year.




**Item
      3.**  **Legal
      Proceedings**





The
      Company is not a party to any material legal proceedings.




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**





None.





**PART
      II**





**Item
      5.**  **Market
      for Common Equity and Related Stockholder Matters**





From
      December 22, 2003, until January 12, 2004, the Company’s common stock traded on
      the OTC Bulletin Board under the symbol “ONLK.OB.” Since January 12, 2004, the
      Company’s common stock has traded under the symbol “SGMG.OB.” The following
      table sets forth the high and low bid prices for our common stock as reported
      by
      the OTC Bulletin Board in 2005 and 2004. These quotations reflect inter-dealer
      prices, without retail mark-up, markdown, or commission, and may not represent
      actual transactions. Trading in the Company’s capital stock during the period
      represented was sporadic, exemplified by low trading volume and many days during
      which no trades occurred.




Year
                Ended December 31, 2005High
            
            
            LowFirst
                Qtr.
            
            $
            3.35
            
            $
            1.75Second
                Qtr.
            
            
            3.10
            
            
            1.85Third
                Qtr.
            
            
            2.60
            
            
            1.48Fourth
                Qtr.
            
            
            2.05
            
            
            1.56






Year
                Ended December 31, 2004High
            
            
            LowFirst
                Qtr.
            
            $
            2.25
            
            $
            .70Second
                Qtr.
            
            
            3.40
            
            
            1.70Third
                Qtr.
            
            
            4.50
            
            
            2.11Fourth
                Qtr.
            
            
            3.90
            
            
            2.45




14





The
      approximate number of shareholders of record of the Company’s common stock as of
      February 24, 2006 was 262.





The
      Company has never declared or paid a cash dividend on our common stock and
      does
      not anticipate paying any cash dividends on common stock in the foreseeable
      future.




The
      following table sets forth certain information regarding sales of equity
      securities by the Company during the calendar year 2005 in transactions which
      were not registered under the Securities Act of 1933.






Date
                of Sale
            
            Number
                of Shares Sold
            
            Persons
                to Whom Sold
            
            Consideration
                Paid
            
            Exemption
                from Registration Relied UponVarious
                dates (1)
            
            Options
                to purchase 1,307,500 shares of common stock
            
            9
                employees and directors of the Company
            
            Services
            
            Section
                4 (2) of Securities ActVarious
                dates(2)
            
            Options
                to purchase 300,000 shares of common stock
            
            2
                consultants
            
            Services
            
            Section
                4 (2) of Securities Act2/29/2005
                and 4/13/05
            
            368,617
                shares of common stock
            
            2
                entities
            
            Conversion
                of Series A
              Preferred
                Stock
            
            Section
                4 (2) of Securities ActVarious
                dates(3)
            
            163,356shares of common stock
            
            Pandora
                Select Partners, L.P.
            
            Conversion
                of note payable
            
            Section
                4 (2) of Securities Act6/21/2005
            
            Warrants
                to purchase 300,000 shares of common stock
            
            Ronald
                Eibensteiner and D. Bradly Olah
            
            Loan
                guarantee
            
            Sections
                4 (2) of Securities Act8/19/05
            
            6,753
                common shares
            
            1
                warrant holder
            
            Cashless
                exercise of
              warrants.
            
            Sections
                4 (2) of Securities Act9/30/2005
                through 10/24/2005
            
            Warrants
                to purchase 2,060,000 shares of common stock
            
            10
                entities
            
            Short-term
                debt financing
            
            Sections
                4 (2)and4
                (6) of the Securities Act




15




10/27/05
            
            6,190
                shares of Series B Variable Rate Convertible Preferred Stock and
                Warrants
                to purchase 3,868,750 shares of common stock
            
            31
                entities
            
            $6,190,000
            
            Section
                4 (2) of Securities ActandRegulation
                50610/27/05
            
            1,230
                shares of Series B Variable Rate Preferred Stock and Warrants to
                purchase
                768,750 shares of common stock
            
            10
                entities
            
            Conversion
                of note payable
            
            Section
                4 (2) of Securities ActandRegulation
                50610/27/05
            
            Warrants
                to purchase 695,624 shares of common stock
            
            Merriman
                Curhan Ford & Co. and Feltl and Company
            
            Services
                related to equity
              financing
            
            Section
                4 (2) of Securities ActandRegulation
                50612/9/05
            
            Warrants
                to purchase 100,000 shares of common stock
            
            Blake
                Advisors, LLC
            
            Services
            
            Sections
                4 (2) of Securities Act


(1) From
      January 24 through November 29, 2005.


(2) From
      April 4 through May 3, 2005.


(3) From
      February 29 through August 20, 2005.





**Item
      6.**  **Management’s
      Discussion and Analysi** **s
      or Plan of Operation**





**Overview:**





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




16





During
      the fourth quarter of 2004, the Company began generating revenues for the first
      time since developing and implementing its new gaming machine and gaming system
      business. These revenues resulted in gross profits of $18,943 before expenses.
      During 2004, the Company invested heavily in research and development primarily
      through a software development transaction with MET Games, Inc. of Oklahoma.
      The
      Company increased its selling, general and administrative expenses significantly
      in 2004 as it built it infrastructure to capitalize on the opportunities in
      the
      Native American class II and class III gaming markets. During 2004, the Company
      raised substantial capital by selling equity in the Company through two private
      placements and also by issuing notes payable and common stock
      warrants.





In
      May
      2005, the Company acquired the exclusive license to a proprietary technology
      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
      order
      to fund its efforts to enter the AWP market, in October 2005, the Company
      completed a private placement of its Series B Variable Rate Preferred Stock.
      In
      December 2005,the Company decided to exit the Class II and Class III markets
      to
      focus its efforts solely on the AWP market. Accordingly, the Company has reduced
      its staff in Tulsa, Oklahoma and El Cajon, California, and has removed nearly
      all of its gaming devices from the floors of its casino customers. The Company
      is actively trying to liquidate its inventory of Class II and Class III gaming
      devices and may not recover the book value of the inventory and other
      assets. As a result, the Company has taken charges to operations in 2005 of
      approximately $2,300,000 connection with the closure of the Company’s
      facilities in Oklahoma and California and the liquidation of its inventory
      and
      fixed assets in those states. In determining the value of its assets of
      discontinued operations, the Company relied on estimates provided by potential
      buyers, industry operators and its own limited sales results. Therefore,
      the Company cannot assure what it will realize upon the disposition of these
      assets.





In
      fiscal
      2005, the Company has accounted for the results of operations and assets used
      in
      the Class II and Class III markets as discontinued operations. The income or
      loss from discontinued operations includes the operating loss and the gain
      or
      loss on sale, if any, of these assets. Fiscal 2004 results of operations has
      been reclassified to reflect the Class II and Class III results as discontinued
      operations.





The
      Company currently has 20 AWP machines in operation in Florida on a test basis
      and has agreements signed and a backlog of 2,450 machines as of March 21, 2006.
      However, the Company’s AWP business is still in development. If we do not have
      or do not expect to have significant sales of our products within this market
      in
      the first six-months of fiscal 2006, we will present our financial statements
      as
      a development stage company in the first quarter of 2006. Management did not
      consider the Company to be in the development stage in fiscal 2005 because
      it
      continued to develop and market its Class II and Class III games through
      December 2005.




17


**Results
      of Operations:**




**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**





*Revenues.* The
      Company’s revenues from continuing operations for the years ended December 31,
      2005 and 2004 were $0 due to the fact that the Company is new to the AWP
      business and had no revenue producing sales.





*Cost
      of Revenues and Gross Profit* .
      The
      Company’s cost of revenues from continuing operations for the year ended
      December 31, 2005 was $1,517, compared to $0 for the year ended December 31,
      2004, an increase of 100%. The cost of revenues in 2005 relate to installation
      of the Company’s games on a trial basis.





Gross
      profit for the year ended December 31, 2005 was ($1,517) compared to $0 for
      the
      year ended December 31, 2004. The loss was due to the fact that no revenue
      from
      continuing operations had been generated for the initial installation of AWP
      Products.





*Research
      and Product Development Expenses* .
      Research and product development expenses for continuing operations for the
      year
      ended December 31, 2005 were $361,122, compared to $0 for the year ended
      December 31, 2004. The increase was due to the Company beginning development
      of
      its AWP products.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses for the year ended December 31, 2005 were $642,642,
      compared to $0 for the year ended December 31, 2004. The **** increases
      in expense primarily resulted from the Company commencing operations in
      the **** AWP
      market and consists primarily of amortization of the long-term technology and
      distribution rights acquired from Bally Gaming.




*General
      and Administrative Expenses* .
      General
      and administrative expenses from continuing operations for the year ended
      December 31, 2005 were $2,130,374, compared to $700,422 for the year ended
      December 31, 2004, an increase of 304%. The increase was due primarily to the
      addition of corporate staff, increased professional fees and other corporate
      expenses.





*Other
      Expense.* Other
      expense was $2,950,180 for the year ended December 31, 2005, compared to
      $781,978 for the year ended December 31, 2004. The increase in other expense
      is
      primarily due to interest on increased borrowings along with the amortization
      of
      the associated debt issuance costs and the amortization of the original issue
      discount related to the Company’s convertible note payable, short-term debt and
      bank promissory note.





*Loss
      From Discontinued Operations.* The
      loss
      from discontinued operations was $4,035,500 and $2,911,791 for the years ended
      December 31, 2005 and 2004 respectively. The 2005 loss included a charge for
      $2,268,652 related to the write-down of Class II and Class III inventory and
      equipment. Without taking into account the effect of this charge, the loss
      in
      2005 was $1,766,848. Losses in 2004 were greater then 2005 primarily due to
      research and development expenses in 2004 which included $850,000 relating
      to
      the acquisition of MET Games, Inc.




18





*Net
      Loss* .
      The
      Company incurred a net loss of $10,232,619 for the year ended December 31,
      2005,
      compared to a net loss of $4,394,191 for the prior year. These increased net
      losses for 2005 as compared to 2004 are primarily the result of the Company
      commencing AWP operations, losses from discontinued operations in the Native
      American and charitable gaming markets which involve significant increases
      in
      employee and consulting expense and increased interest expense.





*Liquidity
      and Capital Resources* .
      The
      Company had negative working capital of $1,260,338 and positive working capital
      of $2,473,453 at December 31, 2005 and 2004, respectively. During 2005, cash
      used in operations was $3,937,338, and the primary uses of cash were to fund
      the
      Company’s net loss, acquire inventory and reduce payables and accrued expenses.
      For the year ended December 31, 2004, the cash used in operations was $4,386,270
      and the primary use of cash was to fund the Company’s net loss, acquire
      inventory and to prepay license fees. These uses were partially offset by an
      increase in accounts payable, payroll and related taxes and accrued expenses
      and
      non-cash charges related to common stock, stock options and warrants issued
      for
      services.





Cash
      used
      in investing activities was $2,212,066 and $845,475 for the years ended December
      31, 2005 and 2004, respectively. For the year ended December 31, 2005,
      $2,000,000 of cash was used in the purchase of the technology and distribution
      rights from Bally. For the year ended December 31, 2004, the Company used cash
      for capital expenditures, primarily at its El Cajon, California location and
      to
      purchase gaming equipment.





Cash
      provided by financing activities was $5,374,955 and $7,339,350 for the years
      ended December 31, 2005 and 2004, respectively. In November 2003, the Company
      began a private placement which ended in March 2004. A majority of the sales
      of
      the Company’s common stock in this private placement occurred after December 31,
      2003. In the private placement, the Company sold a total of 1,796,829 shares
      of
      its common stock (of which 1,531,989 were sold in 2004) for a per-share price
      of
      $0.75 (i.e., raising a gross total of $1,347,622, $1,148,996 of which was raised
      in 2004). The Company used an agent for a portion of these sales. As a fee,
      the
      Company paid the agent $62,550 in cash and issued the agent fully-vested
      five-year warrants to purchase up to 83,400 shares of the Company’s common stock
      at an exercise price of $0.75 per share. In addition, the Company incurred
      legal
      fees and other expenses of $19,407 related to this private
      placement.





In
      November, 2004, the Company completed a private placement of 1,811,429 units,
      each unit consisting of one share of common stock and a five-year warrant to
      purchase one additional share of common stock at a purchase price of $3.75
      per
      share. The per-unit price was $2.50 (i.e., raising a gross total of $4,528,573).
      The Company used two agents in completing the sale of the units in the November
      2004 private placement. As a fee, the Company paid the agents an aggregate
      of
      $362,286 in cash, and issued the agents fully-vested five-year warrants to
      purchase up to 181,143 units for an exercise price of $2.50 per unit. In
      addition, the Company incurred legal fees and other expenses of $70,898 related
      to this private placement.





On
      May
      20, 2004, the Company received $1,100,000 in a convertible debt investment
      from
      Pandora Select Partners, L.P. The note was payable in interest only, at 10%
      per
      annum, through August 20, 2004, and thereafter is payable in equal monthly
      installments over the next 15 months. The note is convertible by Pandora into
      common stock of Spectre at $2.50 per share, and allows Spectre, subject to
      certain conditions and limitations, to make monthly installment payments with
      its common stock at a price per share equal to 90% of the average closing bid
      price of the common stock over the 30 trading days immediately preceding the
      payment date. In connection with the financing, Spectre paid a 3% origination
      fee, issued a fully-vested five-year warrant for the purchase of 200,000 shares
      of Spectre’s common stock at $2.50 per share, and granted Pandora a security
      interest in the Company’s assets. In addition, Spectre agreed to file a
      registration statement with the SEC, covering the issuance or resale of the shares
      of
      Spectre’s common stock which may be issued in connection with the note and
      warrant issued to Pandora. The registration statement was declared effective
      on
      January 24, 2005. In connection with the financing, the Company also paid a
      finder’s fee to Blake Capital Advisors, LLC, a Minnesota limited liability
      company wholly owned by Wayne W. Mills, a greater-than-five-percent shareholder
      of the Company, of $50,000 and issued a fully-vested five-year warrant for
      the
      purchase of 50,000 shares of the Company’s common stock at $2.50 per share and a
      fully-vested five-year warrant for the purchase of 50,000 shares at $3.00 per
      share. Net cash received by the Company after paying the finders fee,
      origination fee and legal cost of the lender of $10,000 was $1,007,000. The
      balance of the note was paid on October 28, 2005.





19


On
      September 10, 2004, the Company issued two $750,000 promissory notes accruing
      interest at 10% per annum. One note was issued to Pandora and the other note
      was
      issued to Whitebox Intermarket Partners L.P. The notes were payable interest
      only through March 10, 2005, at which time the principal became due. In
      connection with the financing, Spectre paid a 3% origination fee, issued
      fully-vested five-year warrants for the purchase of 50,000 shares of Spectre’s
      common stock at $3.00 per share to both Pandora and Whitebox, and granted
      Pandora and Whitebox security interests in the Company’s assets. In addition,
      Spectre agreed to file a registration statement 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 registration
      statement was declared effective on January 24, 2005. Net cash received by
      the
      Company after paying the origination fee and legal costs of the lenders of
      $5,000 was $1,450,000.





On
      March
      10, 2005, the Company signed amendments to the two $750,000 secured promissory
      notes with Pandora and Whitebox. The amendments extended the due date of the
      notes to June 10, 2005, and provided the Company with the option to further
      extend the due date to September 10, 2005. As part of the amendment the Company
      agreed to maintain assets whose value equals or exceeds the principal interest
      amounts then owned under the notes. For purposes of valuing the assets for
      compliance under this provision, the Company’s cash is valued at 100%, the
      Company’s accounts receivable are valued at 80% and the Company’s inventory and
      fixed assets are valued at 50% of their book value. As consideration for the
      amendments, the Company paid Pandora and Whitebox each $18,750. In June 2005,
      the Company exercised its option to extend the due dates of the two notes to
      September 10, 2005, and in consideration therefore paid the lenders $18,750
      each.





On
      September 28, 2005, the Company entered into Forbearance and Extension
      Agreements with both Pandora and Whitebox further extending the maturity dates
      of the two March 2005 promissory notes until September 30, 2006. Pursuant to
      these agreements, beginning October 10, 2005 and on the tenth day of each month
      thereafter, the Company is required to pay the accrued interest on the notes.





On
      June
      21, 2005, the Company secured a $1.5 million loan from Crown Bank of Edina,
      Minnesota. In connection with this loan the Company paid a 2% origination fee.
      The loan was guaranteed by two persons, Ronald E. Eibensteiner (the Company’s
      former Chairman and Chief Executive Officer, and then a greater-than-ten-percent
      shareholder) and D. Bradly Olah. In exchange for their guarantees, the Company
      issued each of the foregoing guarantors five-year warrants to purchase 150,000
      shares of the Company’s common stock at the price of $2.20, the closing price of
      the common stock on the date of issuance.





On
      September 29, 2005, the Company entered into a Forbearance and Extension
      Agreement with Crown Bank, extending the due date of the $1.5 million unsecured
      promissory note until October 31, 2005. On October 28, 2005, the Company paid
      the balance in full of the unsecured promissory note to Crown Bank.





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 March 21, 2006, the Company had not closed on the credit
      facility.





20


On
      October 27, 2005, the Company offered and 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. 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 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.
      Among
      subscribers converting loans into securities in the private placement were
      D.
      Bradly Olah, the President of the Company, and Prolific Publishing, Inc., a
      company of which Russell C. Mix, the Chief Executive Officer of the Company,
      is
      a director. 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.





In
      connection with the Series B Variable Rate Convertible Preferred Stock offering,
      the Company was required by the purchase agreement to register the common shares
      issuable upon conversion of the preferred stock, warrants and other shares
      issuable under the agreement. The Company filed a registration statement which
      was declared effective on December 23, 2005.





On
      June
      30, 2004, the Company signed a three-year non-exclusive License Agreement with
      Bally Gaming Inc., a Nevada corporation. The License Agreement obligates the
      Company to purchase from Bally Gaming the lesser of (i) 3,000 game cabinets
      over
      the term of the agreement or (ii) 70% of its Class II cabinet purchases. In
      addition, the Company was obligated to purchase at least 100 game cabinets
      from
      Bally Gaming, and incur certain minimum license-fee charges of $187,500. The
      Company has purchased 100 game cabinets from Bally Gaming. The agreement was
      terminated in August 2005. In connection with the termination, Bally agreed
      to
      allow the prepaid license fees of $187,500 to be applied to future Class III
      title purchases. The Company is in discussions with Bally to allow these fees
      to
      be applied against future AWP royalty fees due Bally.





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, $1 million was paid in June 2005,
      $1
      million was due on August 15, 2005, and the Company delivered
      an unsecured two-year promissory note for the remaining $3 million, providing
      for payments in four equal installments on each successive six-month anniversary
      of the agreement. The note bears interest at 12% per annum. In addition to
      the
      upfront fee, beginning in January 2007 the agreement requires the Company to
      pay
      royalties monthly based on the number of in-service redemption games during
      each
      day of the agreement’s term. On August 15, 2005, the Company received an
      extension until August 31, 2005 to make the $1 million payment to Bally’s that
      was due on August 15, 2005. On September 9, 2005, the Company received an
      additional extension until September 29, 2005 to make the required payment.
      On
      September 30, 2005, the agreement was amended and Bally agreed to accept a
      payment from the Company in partial satisfaction of the total amount owed Bally.
      In addition, Bally agreed to a payment extension for the remaining balance
      owed
      (in the principal amount of $1,572,566) plus accrued interest at 18% per annum,
      with such remaining amount due on October 31, 2005. On October 31, 2005, the
      Company paid the agreed upon amounts due Bally.





21


In
      October 2005, the Company paid Bally Gaming the agreed-upon amounts due as
      of
      October 31, 2005 under the Redemption Technology and Supply Agreement as
      amended, repaid the unsecured promissory note with Crown Bank, repaid the May
      2004 convertible note issued to Pandora and converted nine unsecured short-term
      promissory notes into 1,030 shares of its Series B Variable Rate Convertible
      Preferred Stock. A portion of the proceeds received from the sale of Series
      B
      preferred stock was used to make these payments.





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
      following summarizes the Company’s contractual obligations at December 31, 2005
      (See Notes 9, 11, 16).





Total
            
            
            1
                Year or Less
            
            
            1-3
                Years
            
            
            4-5
                Years
            
            
            Over
                5 YearsShort-term
                debt
            
            $
            1,500,000
            
            $
            1,500,000
            
            
            —
            
            
            —
            
            
            —Long-term
                debt
            
            
            2,250,000
            
            
            1,500,000
            
            
            750,000Operating
                leases
            
            
            281,796
            
            
            119,305
            
            
            161,242
            
            
            1,249
            
            
            —Total
            
            $
            4,031,796
            
            $
            3,119,305
            
            $
            911,242
            
            $
            1,249
            
            $
            —





During
      2005 and 2004, we did not pay or declare any cash dividends on common stock
      and
      do not intend to pay any cash dividends on common stock in the near
      future.





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.





Management
      believes that its cash should be sufficient to satisfy its cash requirements
      through April 2006. Beyond that point, the Company will need to obtain
      additional cash to meet its needs, including repaying the Bally, Pandora and
      Whitebox notes described above and has been actively pursuing additional debt
      and equity financing.




22


**Off-Balance-Sheet
      Arrangements**





The
      Company has no off-balance-sheet arrangements.





**New
      Accounting Pronouncements**





In
      November 2004, FASB issued SFAS No. 151 “Inventory Costs” amends the guidance in
      ARB No. 43, Chapter 4 “Inventory Pricing,” to clarify the accounting for
      abnormal amounts of idle facility expense, freight, handling costs, and wasted
      material (spoilage). Paragraph
      5 pf ARB 43, Chapter 4, previously stated that under some circumstances, items
      such as idle facility expense, excessive spoilage, double freight, and
      rehandling costs may be so abnormal as to require treatment as current period
      charges. SFAS No. 151 requires that those items be recognized as current-period
      charges regardless of whether they meet the criterion of “so abnormal.” In
      addition, SFAS No, 151 requires that allocation of fixed production overheads
      to
      the costs of conversion be based on the normal capacity of the production
      facilities. SFAS No. 151 shall be effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005. Earlier application is permitted
      for
      inventory costs incurred during fiscal years beginning after the date SFAS
      No.
      151 was issued. SFAS No. 151 shall be applied prospectively. The Company does
      not expect the adoption of SFAS No. 151 to have a material effect on its
      financial statements.





In
      December 2004, FASB issued SFAS No. 123R which requires companies to recognize
      in the income statement the grant-date fair value of stock options and other
      equity-based compensation issued to employees, but expressed no preference
      for
      the type of valuation model. FASB No. 123R is effective for small business
      issuers as of the beginning of interim or annual reporting periods that begin
      after December 15, 2005. The Company will adopt SFAS No. 123R in its first
      fiscal 2006 quarter. The impact of SFAS No. 123R for 2006 is expected to be
      approximately $770,000 based on options outstanding at December 31, 2005 which
      will vest during 2006.





In
      June
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
      a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement
      applies to all voluntary changes in accounting principle, and changes the
      requirements for accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
      is
      impracticable. SFAS No. 154 is effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. Earlier
      application is permitted for accounting changes and corrections of errors made
      occurring in fiscal years beginning after June 1, 2005. The statement does
      not
      change the transition provisions of any existing accounting pronouncements,
      including those that are in a transition phase as of the effective date of
      this
      statement. The Company does not expect the adoption of SFAS No. 154 to have
      a
      material effect on its financial statements.





23


**Critical
      Accounting Policies**





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,
      (d) intangible assets and (e) the valuation of stock-based compensation awarded.
      The Company derives its gaming revenues primarily two ways, outright sales
      of
      machines to customers, and participation arrangements with its 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 specific identification
      method) or market.  Acquired
      intangible assets are recorded at their estimated fair market value on the
      acquisition date and are being amortized on a straight-line basis over five
      years. 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.




24


**Item
      7.**  **Financial
      Statements**








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Shareholders, Audit Committee and Board of Directors


Spectre
      Gaming, Inc.


Minneapolis,
      Minnesota





We
      have
      audited the accompanying balance sheets of Spectre Gaming, Inc. as of December
      31, 2005 and 2004, and the related statements of operations, shareholders’
equity and cash flows for the years then ended. These financial statements
      are
      the responsibility of the Company’s management. Our responsibility is to express
      an opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Spectre Gaming, Inc. as of December
      31, 2005 and 2004, and the results of its operations and its cash flows for
      the
      years then ended, in conformity with U.S. generally accepted accounting
      principles.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company had net losses for the years ended December 31, 2005
      and
      2004, had an accumulated deficit at December 31, 2005 and does not have adequate
      liquidity to fund its operations through out fiscal 2006. These conditions
      raise
      substantial doubt about its ability to continue as a going concern. Management’s
      plans regarding those matters also are described in Note 1. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





/s/
              VIRCHOW,
              KRAUSE & COMPANY, LLPMinneapolis,
                Minnesota
              February
                10, 2006, except for Note 18, as to which the date is March 21,
                2006







25


**Spectre
      Gaming, Inc.**


**Balance
      Sheets**


As
                  of December 31,2005
              
              2004**ASSETS**CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              1,656,831
              
              $
              2,431,280Other
                  receivables
              
              
              9,722
              
              
              -Inventory
              
              
              300,009
              
              
              4,204Deposits
              
              
              20,050
              
              
              20,000Current
                  assets of discontinued operations
              
              
              536,217
              
              
              2,568,585Prepaid
                  expenses
              
              
              57,566
              
              
              33,438*Total
                  current assets:*
              
              
              2,580,395
              
              
              5,057,507Property,
                  equipment and leasehold improvements, net
              
              
              66,231
              
              
              9,729Leased
                  gaming equipment, net
              
              
              109,629
              
              
              —Long-term
                  technology and distribution rights, net
              
              
              4,397,849
              
              
              —Prepaid
                  license fees
              
              
              187,500
              
              
              187,500Other
                  assets of discontinued operations
              
              
              163,500
              
              
              809,318Other
                  assets
              
              
              11,436
              
              
              206,937*Total
                  Assets:*
              
              $
              7,516,540
              
              $
              6,270,991**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**CURRENT
                  LIABILITIES:Convertible
                  note payable, net
              
              $
              —
              
              $
              354,134Current
                  portion of long-term debt
              
              
              1,500,000
              
              
              —Short-term
                  debt, net
              
              
              1,500,000
              
              
              1,373,611Accounts
                  payable
              
              
              69,635
              
              
              110,110Accrued
                  expenses
              
              
              467,870
              
              
              98,771Liabilities
                  of discontinued operations
              
              
              303,228
              
              
              647,428*Total
                  current liabilities:*
              
              
              3,840,733
              
              
              2,584,054Long-term
                  debt, less current portion
              
              
              750,000
              
              
              —*Total
                  liabilities*
              
              
              4,590,733
              
              
              2,584,054SHAREHOLDERS’
                  EQUITY:Capital
                  stock, par value $.01 per share, 100,000,000 shares
                  authorized:Series
                  A Convertible Preferred Stock, par value
                  $.01 per share:
                Authorized
                  shares – 466,666
                Issued
                  and outstanding shares: 43,334 and 206,667 shares at December 31,
                  2005 and
                  2004,
                respectively($65,001
                  and $310,000 liquidation preference at December 31, 2005 and 2004
                respectively)
              
              
              433
              
              
              2,067Series
                  B Variable Rate Convertible Preferred Stock, par value $.01 shares:
                Authorized
                  shares – 30,000
                Issued
                  and outstanding shares: 7,420 and 0 shares at December 31, 2005
                  and2004,respectively
                ($7,420,000
                  and $0 liquidation preference at December 31, 2005 and 2004,
                  respectively)
              
              
              74
              
              
              —Common
                  stock, par value $.01 per share: Authorized shares –
                  99,503,334
                  and 99,533,334
                at
                  December 31, 2005 and 2004 respectivelyIssued
                  and outstanding shares, 13,520,439 and 12,888,213 at December 31,
                  2005 and
                  2004,
                respectively
              
              
              135,204
              
              
              128,882Additional
                  paid-in capital
              
              
              33,795,207
              
              
              25,087,624Accumulated
                  deficit
              
              
              (30,840,630
              )
              
              (20,608,011
              )Deferred
                  equity compensation
              
              
              (164,481
              )
              
              (923,625
              )*Total
                  shareholders’ equity:*
              
              
              2,925,807
              
              
              3,686,937*Total
                  liabilities and shareholders’ equity:*
              
              $
              7,516,540
              
              $
              6,270,991




See
      accompanying notes to financial statements.




26


**Spectre
      Gaming, Inc.**


**Statements
      of Operations**




For
                  the Years ended December 31,2005
              
              2004REVENUE:Sales
              
              $
              —
              
              $
              —Cost
                  of revenues
              
              
              1,517
              
              
              —*Gross
                  loss*
              
              
              (1,517
              )
              
              —OPERATING
                  EXPENSES:Research
                  and development
              
              
              361,122
              
              
              —Sales
                  and marketing
              
              
              642,642
              
              
              —General
                  and administrative
              
              
              2,130,374
              
              
              700,422*Total
                  Operating
                  Expenses:*
              
              
              3,134,138
              
              
              700,422Operating
                  loss
              
              
              (3,135,655
              )
              
              (700,422
              )OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              31,126
              
              
              11,331Interest
                  expense
              
              
              (2,981,306
              )
              
              (793,309
              )Loss
                  from continuing operations:
              
              
              (6,085,835
              )
              
              (1,482,400
              )*Loss
                  from discontinued operations*
              
              
              (4,035,500
              )
              
              (2,911,791
              )*Net
                  Loss:*
              
              
              (10,121,335
              )
              
              (4,394,191
              )Preferred
                  Stock Dividends
              
              
              111,284
              
              
              —**Net
                  Loss attributable to common shareholders
              
              $
              (10,232,619
              )
              $
              (4,394,191
              )NET
                  LOSS PER COMMON SHARE BASIC AND DILUTED:Loss
                  from continuing operations
              
              $
              (0.45
              )
              $
              (0.14
              )Loss
                  from discontinued operations
              
              
              (0.30
              )
              
              (0.28
              )Net
                  Loss
              
              
              (0.75
              )
              
              (0.42
              )NET
                  LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
              
              
              (0.76
              )
              
              (0.42
              )WEIGHTED-AVERAGE
                  NUMBER OF SHARES OUTSTANDING:Basic
                  and diluted
              
              
              13,456,045
              
              
              10,578,101


See
      accompanying notes to financial statements.




27
 **Spectre
        Gaming, Inc.**


**Statements
      of Shareholders’ Equity**




Series
                A Convertible
              Preferred
                Stock
            
            Series
                B Variable RateConvertiblePreferred Stock
            
            Common
                Stock
            
            Additional
              Paid–In
            
            Deferred
                Equity
            
            Accumulated
            
            Total
                Shareholders’Shares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Compensation
            
            Deficit
            
            EquityBalance
                at December 31, 2003
            
            
            440,000
            
            $
            4,400
            
            
            —
            
            $
            —
            
            
            8,093,198
            
            $
            80,932
            
            $
            16,388,237
            
            $
            —
            
            $
            (16,213,820
            )
            $
            259,749*Sale
                of common stock,*
              *net
                of**issuance
                costs*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,343,418
            
            
            33,434
            
            
            5,128,994
            
            
            —
            
            
            —
            
            
            5,162,428*Conversion
                of preferred*
              *stock
                to common stock*
            
            
            (233,333
            )
            
            (2,333
            )
            
            —
            
            
            —
            
            
            526,597
            
            
            5,266
            
            
            (2,933
            )
            
            —
            
            
            —
            
            
            —*Issuance
                of common stock for*
              *purchased**research
                and*
              *development*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            870,000
            
            
            8,700
            
            
            766,300
            
            
            —
            
            
            —
            
            
            775,000*Issuance
                of common*
              *stock
                for**distribution
                agreements*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            55,000
            
            
            550
            
            
            111,950
            
            
            —
            
            
            —
            
            
            112,500*Issuance
                of options and warrants for services*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,355,076
            
            
            (1,355,076
            )
            
            —
            
            
            —*Amortization
                of deferred equity compensation*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            431,451
            
            
            —
            
            
            431,451*Issuance
                of stock warrants*
              *related
                to notes payable*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,000,000
            
            
            —
            
            
            —
            
            
            1,000,000*Beneficial
                conversion of note payable*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            340,000
            
            
            —
            
            
            —
            
            
            340,000*Net
                and comprehensive loss*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,394,191
            )
            
            (4,394,191
            )Balance
                at December 31, 2004
            
            
            206,667
            
            
            2,067
            
            
            —
            
            
            —
            
            
            12,888,213
            
            
            128,882
            
            
            25,087,624
            
            
            (923,625
            )
            
            (20,608,011
            )
            
            3,686,937*Sale
                of preferred stock, net of*
              *issuance
                costs*
            
            
            —
            
            
            —
            
            
            6,190
            
            
            62
            
            
            —
            
            
            —
            
            
            5,574,938
            
            
            —
            
            
            —
            
            
            5,575,000*Conversion
                of notes payable*
              *to
                preferred stock*
            
            
            —
            
            
            —
            
            
            1,230
            
            
            12
            
            
            —
            
            
            —
            
            
            1,229,988
            
            
            —
            
            
            —
            
            
            1,230,000*Conversion
                of preferred stock*
              *to
                common stock*
            
            
            (163,333
            )
            
            (1,634
            )
            
            —
            
            
            —
            
            
            368,617
            
            
            3,686
            
            
            (2,052
            )
            
            —
            
            
            —
            
            
            —*Exercise
                of stock options*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            93,500
            
            
            935
            
            
            13,090
            
            
            —
            
            
            —
            
            
            14,025*Cashless
                exercise of warrants*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            6,753
            
            
            68
            
            
            (68
            )
            
            —
            
            
            —
            
            
            —*Conversion
                of note payable*
              *to
                common stock*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            163,356
            
            
            1,633
            
            
            340,503
            
            
            —
            
            
            —
            
            
            342,136*Issuance
                of options and warrants*
              *for
                services*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (56,880
            )
            
            —
            
            
            —
            
            
            (56,880
            )*Amortization
                of deferred equity*
              *compensation*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            759,144
            
            
            —
            
            
            759,144*Issuance
                of stock warrants*
              *related**to
                notes*
              *payable*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,608,064
            
            
            —
            
            
            —
            
            
            1,608,064*Net
                and comprehensive loss*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (10,121,335
            )
            
            (10,121,335
            )*Preferred
                stock dividend*
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (111,284
            )
            
            (111,284
            )Balance
                at December 31, 2005
            
            
            43,334
            
            $
            433
            
            
            7,420
            
            $
            74
            
            
            13,520,439
            
            $
            135,204
            
            $
            33,795,207
            
            $
            (164,481
            )
            $
            (30,840,630
            )
            $
            2,925,807





See
      accompanying notes to financial statements.





28


**Spectre
      Gaming, Inc.**


**Statements
      of Cash Flows**


For
                the Years ended December 31,2005
            
            2004**Operating
                activities**Net
                loss
            
            $
            (10,121,335
            )
            $
            (4,394,191
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            233,242
            
            
            33,078Loss
                on sale of property and equipment
            
            
            4,811
            
            
            —Common
                stock issued for purchased research and development
            
            
            —
            
            
            775,000Impairment
                of gaming equipment in inventory
            
            
            1,361,594
            
            
            —Impairment
                of leased gaming equipment
            
            
            907,058
            
            
            —Common
                stock issued for distribution agreements
            
            
            —
            
            
            112,500Stock
                options and warrants issued for services
            
            
            702,264
            
            
            431,451Amortization
                of original issue discount
            
            
            1,622,177
            
            
            522,823Amortization
                of debt issuance costs
            
            
            890,001
            
            
            161,063Amortization
                of long-term technology and distribution
                rights
            
            
            602,151
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            7,347
            
            
            (7,347
            )Other
                receivables
              Inventory
            
            
            (105,126
              (111,695
            )
              )
            
            —
              (2,530,683
            )Deposits
            
            
            14,589
            
            
            (51,258
            )Prepaid
                license fees
            
            
            —
            
            
            (187,500
            )Prepaid
                expenses
            
            
            (28,839
            )
            
            3,522Other
                assets
            
            
            —
            
            
            (6,650
            )Accounts
                payable and accrued expenses
            
            
            84,423
            
            
            751,922*Net
                cash used in operating activities:*
            
            
            (3,937,338
            )
            
            (4,386,270
            )**Investing
                activities**Net proceeds
              from
              sale of property and equipment
            
            
            3,172
            
            
            —Purchases
                of property, equipment and leasehold improvements
            
            
            (215,238
            )
            
            (94,742
            )Purchases
                of leased gaming equipment
            
            
            —
            
            
            (750,733
            )Technology
                and distribution rights
            
            
            (2,000,000
            )
            
            —*Net
                cash used in investing activities:*
            
            
            (2,212,066
            )
            
            (845,475
            )**Financing
                activities**Debt
                financing costs
            
            
            (105,000
            )
            
            (143,000
            )Exercise
                of stock options
            
            
            14,025
            
            
            —Proceeds
              from sale
              of common stock, net of issuance costs
            
            
            —
            
            
            5,162,428Proceeds
                from the sale of preferred stock, net of issuance costs
            
            
            5,575,000
            
            
            —Proceeds
                from notes payable and common stock warrants issued
            
            
            2,530,000
            
            
            2,600,000Payments
                on notes payable
            
            
            (2,527,786
            )
            
            (280,078
            )Preferred
                stock dividend
            
            
            (111,284
            )
            
            —*Net
                cash provided by financing activities:*
            
            
            5,374,955
            
            
            7,339,350Increase
                (decrease) in cash and cash equivalents
            
            
            (774,449
            )
            
            2,107,605Cash
                and cash equivalents at beginning of year
            
            
            2,431,280
            
            
            323,675*Cash
                and cash equivalents at end of year:*
            
            $
            1,656,831
            
            $
            2,431,280**Supplemental
                cash flow information**Cash
                paid for interest
            
            $
            392,087
            
            $
            98,190**Non-cash
                Investing and Financing Activities:**Common
                stock issued for payment on convertible notes payable
            
            
            342,136
            
            
            —Warrants
                issued for services relating to debt issuance
            
            
            723,775
            
            
            225,000Conversion
                of preferred stock to common stock
            
            
            3,686
            
            
            —Warrants
                issued for guarantees on bridge loans
            
            
            578,064
            
            
            —Warrants
                issued in connection with short-term debt
            
            
            1,030,000
            
            
            —Inventory
                transferred to leased gaming equipment
            
            
            523,775
            
            
            —Unsecured
                promissory note in exchange for long-term technology and distribution
                rights
            
            
            3,000,000
            
            
            —


Return
                of fixed assets and inventory for credit against accounts
                payable
            
            
            100,000
            
            
            —Conversion
              of notes
              payable to preferred stock
            
            
            1,230,000
            
            
            —Other
                receivable in exchange for the sale of property and
                equipment
            
            
            7,768
            
            
            —




See
      accompanying notes to financial statements.




29


**Spectre
      Gaming, Inc.**


**Notes
      to Financial Statements**


**For
      the years ended December 31, 2005 and 2004**





1.  **Description
      of Business**




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
      years ended December 31, 2005 and 2004, had an accumulated deficit at December
      31, 2005 and does not have adequate liquidity to fund its operations through
      fiscal 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 (see Notes 5, 10, 11, and 12). 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. In addition, the Company is negotiating to extend the maturity
      dates of significant debt obligations. There can be no assurance extensions
      will
      be granted.





2.  **Summary
      of Accounting Policies**




*Discontinued
      Operations.* In
      December, 2005, the Company made the decision to exit the markets for it’s 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 only the results of continuing
      operations.




30


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 of $1,361,594 on its
      gaming equipment in inventory and $907,058 on its previously leased gaming
      equipment and other fixed assets. 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 based on limited data and management’s best
      estimate, the Company cannot assure 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 years ended December 31, 2005 and 2004, respectively, consist of the
      following:




For
                the Years ended December 31,2005
            
            
            2004REVENUE:Sales
            
            $
            474,074
            
            $
            82,689Cost
                of revenues
            
            
            367,769
            
            
            63,746*Gross
                profit*
            
            
            106,305
            
            
            18,943OPERATING
                EXPENSES:Research
                and development
            
            
            240,482
            
            
            1,045,000Sales
                and marketing
            
            
            1,011,951
            
            
            —General
                and administrative
            
            
            620,720
            
            
            1,885,734Impairment
                of gaming equipment in inventory
            
            
            1,361,594
            
            
            —Impairment
                of leased gaming equipment
            
            
            907,058
            
            
            —*Total
                Operating Expenses:*
            
            
            4,141,805
            
            
            2,930,734Net
                loss from discontinued operations
            
            $
            (4,035,500
            )
            $
            (2,911,791
            )





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 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.





The
      Company records amounts being charged to customers for shipping and handling
      as
      sales in accordance with Emerging Issues Task Force (EITF) Issue 00-10,
      "Accounting for Shipping and Handling Fees and Costs." Shipping and handling
      costs incurred by the Company are included in cost of goods sold.





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.




31





*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 December 31, 2005 and 2004, 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.





*Inventory.* Inventory,
      which consists principally of gaming products and related materials, is stated
      at the lower of cost (determined on the specific identification method) or
      market. At December 31, 2005 the Company had $120,516 of finished goods
      inventory and $179,493 of spare parts and gaming cabinets.





*Prepaid
      License Fees.* Prepaid
      license fees relate to licenses associated with the themes of certain gaming
      machines which are licensed from unrelated parties. Under participation
      agreements and upon the placement of the machines into service, the Company
      will
      begin amortizing the licenses over the estimated useful life of the pertinent
      machines of 3 years. These licenses are associated with Class II and Class
      III
      gaming equipment. However, the Company has been negotiating with the unrelated
      party to apply the prepaid license fees against future amounts due to the vendor
      from AWP operations. These negotiations are ongoing, but management believes
      they will obtain this right.





*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 were stated
      at cost. Gaming machines placed with customers under participation arrangements
      are included in leased gaming equipment. Depreciation of an asset is recognized
      on the straight-line basis over the asset’s estimated useful life ranging from
      three to five years. Leasehold improvements 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 $19,398 and
      $631 for the years ended December 31, 2005 and 2004, respectively.





32


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.





*Technology
      and Distribution Rights.* The
      Company’s technology and distribution rights relate to a $5,000,000 fee for
      redemption technology licensed from Bally Gaming, Inc. The technology and
      distribution rights are being amortized over the five-year term of the
      agreement. (Note 9)





*Debt
      Issuance Costs.* The
      Company capitalizes debt issuance costs and amortizes the costs over the life
      of
      the loan using the straight-line method, which approximates the interest method.
      The capitalized costs related to the convertible debt investment from Pandora
      Select Partners LP (“Pandora”) in May 2004 included the origination fee paid to
      Pandora of $33,000, the $50,000 cash paid to Blake Capital Advisors, LLC
      (“Blake”), the value of the warrants issued to Blake and $10,000 of legal fees,
      and are included in other assets in the financial statements. The warrants
      issued to Blake were valued at $225,000 using the Black-Scholes pricing model.
      The capitalized costs related to the loans from Pandora and Whitebox Intermarket
      Partners LP in September 2004 included the origination fee paid of $45,000
      and
      $5,000 of legal fees. The capitalized costs related to the loans from Pandora
      and Whitebox in September 2004 also included the fee paid in March 2005 of
      $37,500 and June 2005 of $37,500 to allow the Company to extend the due date
      of
      the notes. The capitalized costs related to the loan from Crown Bank in June
      2005 included the origination fee paid of $30,000 and the value of the warrants
      issued to Ronald E. Eibensteiner (the Company’s former Chairman and Chief
      Executive Officer) and D. Bradly Olah, who became the Company’s President on
      August 2, 2005, for their personal guarantee of the loan. The warrants issued
      to
      Messrs. Eibensteiner and Olah were valued at $578,064 using the Black-Scholes
      pricing model.





At
      December 31, 2005 the Company had no unamortized debt issuance costs and at
      December 31, 2004 the Company had unamortized debt issuance costs of $206,937,
      classified as other assets on the balance sheet. Amortization of the debt
      issuance costs for the years ended December 31, 2005 and 2004 was $890,001
      and
      $161,063, respectively.





*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. The fair market value of the Company’s long-term
      debt appears to be less than the book value at December 31, 2005. The interest
      rate on the long-term debt is fixed at 12%. Recent negotiations with lenders
      as
      disclosed in notes 16 and 18 indicate the Company may realize higher interest
      rates on future borrowings.





*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 $361,122 and $0 for the years ended
      December 31, 2005 and 2004, respectively.





33


*Net
      Loss Per Common Share* .
      Basic
      and diluted loss per common share is computed by dividing net loss by the
      weighted-average number of common shares outstanding for the reporting period.
      Dilutive common-equivalent shares have not been included in the computation
      of
      diluted net loss per share because their inclusion would be antidilutive.
      Antidilutive common-equivalent shares issuable based on future exercise of
      stock
      options or warrants , totaling 13,899,804 shares, could potentially dilute
      basic
      loss per common share in subsequent years. All options and warrants outstanding
      were antidilutive for the years ended December 31, 2005 and 2004. (See Note
      6)





*Advertising
      Expense.* Advertising
      costs are charged to operations when incurred. Advertising expense for
      continuing operations was $9,594 and $6,885 for the years ended December 31,
      2005 and 2004, respectively.





*Stock-Based
      Compensation* .
      In
      accordance with Accounting Principles Board (“APB”) Opinion No. 25 and related
      interpretations, the Company uses the intrinsic value-based method for measuring
      stock-based compensation cost which measures compensation cost as the excess,
      if
      any, of the quoted market price of the Company's common stock at the grant
      date
      over the amount the employee must pay for the stock. The Company's general
      policy is to grant stock options and warrants at fair value at the date of
      grant. Options and warrants issued to 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.”




Employees





The
      Company applies APB Opinion No. 25 and related interpretations in accounting
      for
      its stock options and warrants issued to employees. Had compensation costs
      for
      the Company's stock options and warrants been determined based on the fair
      value
      at the grant dates consistent with the method of SFAS No. 123, the Company's
      net
      loss and loss per share would have been changed to the approximate pro forma
      amounts indicated below:




Year
                Ended December 31,2005
            
            2004Net
                loss attributable to common shareholdersAs
                reported
            
            $
            (10,232,619
            )
            $
            (4,394,191
            )Pro
                forma
            
            
            (11,162,836
            )
            
            (4,925,051
            )Basic
                and diluted net loss attributable to common shareholders per common
                shareAs
                reported
            
            $
            (0.76
            )
            $
            (0.42
            )Pro
                forma
            
            
            (0.83
            )
            
            (0.47
            )Stock-based
                compensationAs
                reported
            
            $
            —
            
            $
            —Pro
                forma
            
            
            930,217
            
            
            530,860






34





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




Year
                Ended December 31,2005
            
            2004Risk
                Free interest rate
            
            
            4.10%
            
            
            3.04%Expected
                life
            
            
            4.51 years
            
            
            5.09
                yearsExpected
                volatility
            
            
            158%
            
            
            640%Expected
                dividends
            
            
            0%
            
            
            0%





Non-employees





During
      the years ended December 31, 2005 and 2004, the Company has issued options
      and
      warrants to purchase 1,516,666 shares and 1,095,000 shares, respectively of
      the
      Company’s common stock to non-employees, mostly consultants, with exercise
      prices ranging from $0.75 per share to $3.30 per share and expiring at various
      times through June 2014. Pursuant to Emerging Issues Task Force 96-18 (EITF
      96-18), “Accounting for Equity Instruments that are Issued to Other Than
      Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” the
      Company will value and record an expense related to the options on the earlier
      of the date a performance commitment is met or the date the performance is
      complete. The Company recorded an expense of $702,264 and $431,451 for the
      years
      ended December 31, 2005 and 2004, respectively, in accordance with EITF 96-18.
      During the year ended December 31, 2005, options for 295,000 shares of the
      Company’s common stock were cancelled.





*Income
      Taxes* .
      The
      Company accounts for income taxes using the liability method. Deferred tax
      assets and liabilities are recognized for the expected future tax consequences
      attributable to the temporary differences between the financial and income
      tax
      reporting bases of assets and liabilities.





*Reclassifications.* Certain
      accounts in the prior years financial statements have been reclassified for
      comparative purposes to conform with the presentation in the current year
      financial statement. These reclassifications had no effect on the net loss
      or
      shareholders’ equity.





*Recent
      Accounting Pronouncements* .
      In
      November 2004, FASB issued SFAS No. 151 “Inventory Costs” amends the guidance in
      ARB No. 43, Chapter 4 “Inventory Pricing,” to clarify the accounting for
      abnormal amounts of idle facility expense, freight, handling costs, and wasted
      material (spoilage). Paragraph 5 pf ARB 43, Chapter 4, previously stated that
      under some circumstances, items such as idle facility expense, excessive
      spoilage, double freight, and rehandling costs may be so abnormal as to require
      treatment as current period charges. SFAS No. 151 requires that those items
      be
      recognized as current-period charges regardless of whether they meet the
      criterion of “so abnormal.”
      In addition, SFAS No, 151 requires that allocation of fixed production overheads
      to the costs of conversion be based on the normal capacity of the production
      facilities. SFAS No. 151 shall be effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005, or fiscal 2006 for the Company.
      Earlier application is permitted for inventory costs incurred during fiscal
      years beginning after the date SFAS No. 151 was issued. SFAS No. 151 shall
      be
      applied prospectively. The Company does not expect the adoption of SFAS No.
      151
      to have a material effect on its financial statements.





35


In
      December 2004, FASB issued SFAS No. 123R which requires companies to recognize
      in the income statement the grant-date fair value of stock options and other
      equity-based compensation issued to employees, but expressed no preference
      for
      the type of valuation model. SFAS No. 123R is effective for small business
      issuers as of the annual reporting periods that begin after December 15, 2005,
      or fiscal 2006 for the Company. The Company will adopt SFAS No. 123R in its
      first fiscal 2006 quarter. The impact of SFAS No. 123R for 2006 is expected
      to
      be approximately $770,000 based on options outstanding at December 31, 2005
      which will vest during 2006.





In
      June
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
      a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement
      applies to all voluntary changes in accounting principle, and changes the
      requirements for accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
      is
      impracticable. SFAS No. 154 is effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. Earlier
      application is permitted for accounting changes and corrections of errors made
      occurring in fiscal years beginning after June 1, 2005. The statement does
      not
      change the transition provisions of any existing accounting pronouncements,
      including those that are in a transition phase as of the effective date of
      this
      statement. The Company does not expect the adoption of SFAS No. 154 to have
      a
      material effect on its financial statements.





**3.**  **Asset
      Acquisition**





In
      December 2004, the Company signed an asset purchase agreement with Streamline
      Development Company, Inc. (“Streamline”) whereby the Company acquired all of the
      assets and intellectual property of Streamline. Pursuant to the agreement the
      Company made a $20,000 cash payment and issued 70,000 unregistered shares of
      the
      Company’s common stock to Streamline. The shares were valued at the trading
      price of the Company’s common stock on the day the agreement was executed, $2.50
      per share, and charged to research and development expense since the
      technological feasibility of the assets purchased had not yet been achieved.
      An
      additional 280,000 shares of the Company’s common stock will be issued to
      Streamline upon the achievement of certain development milestones. The shares
      will be expensed as development occurs, and valued at the trading price of
      the
      Company’s common stock, on the day the milestone is completed. Streamline is
      majority owned by two individuals who became employees of the Company in 2004.
      The Streamline technology relates primarily to Class II gaming products. As
      such, the in-process research and development charge is classified as
      discontinued operations in the 2004 income statement.





When
      the
      Company acquires technology from another entity, the purchase price is
      allocated, as applicable, between purchased in-process research and development
      expense (“IPR&D”), other identifiable intangible assets and net tangible
      assets. The Company’s policy defines IPR&D as the value assigned to those
      projects for which related products have not reached technological feasibility
      and have no alternative future use. The Company has charged to research and
      development expense the consideration paid to Streamline because the assets
      acquired had not yet reached technological feasibility.




36


4. 
**Property,
      Equipment and Leasehold Improvements and Leased Gaming
      Equipment**




At
      December 31, 2005 and 2004, the Company’s leased gaming equipment and property,
      equipment and leasehold improvements consisted of the following:





**2005**
            
            **2004**
            
            **Estimated
                Useful Lives**Furniture
                and equipment
            
            $
            79,124
            
            $
            10,360
            
            
            3-5
                yearsLeasehold
                improvements
            
            
            11,931
            
            
            —
            
            
            12-24
                monthsTotal
                property, equipment and leasehold improvements
            
            
            91,055
            
            
            10,360Less
                accumulated depreciation
            
            
            (24,824
            )
            
            (631
            )Total
                property, equipment and leasehold improvements, net
            
            $
            66,231
            
            $
            9,729Leased
                gaming equipment
            
            $
            111,532
            
            $
            —
            
            
            3
                yearsLess
                accumulated depreciation
            
            
            (1,903
            )
            
            —Total
                leased gaming equipment
            
            $
            109,629
            
            $
            —





Leased
      gaming equipment at December 31, 2005 includes machines at customer facilities
      on a test basis.





**5.**  **Shareholders’
      Equity**





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.





**Common
      Stock**





In
      November 2003, the Company began a private placement which ended in March 2004
      (the “Offering”). A majority of the sales of the Company’s common stock occurred
      after December 31, 2003. In the Offering, the Company sold a total of 1,796,829
      shares of its common stock (of which 1,531,989 were sold in 2004) for a per
      share price of $0.75 (i.e., raising a gross total of $1,347,622, $1,148,996
      of
      which was raised in 2004). The Offering was a private placement made under
      Rule
      506 promulgated under the Securities Act of 1933, as amended. The Company raised
      funds in this private placement in anticipation of entering into the business
      of
      developing, manufacturing, distributing and servicing gaming machines, primarily
      for the Native American and charitable gaming markets. The Company used an
      agent
      for a portion of these sales. As a fee, the Company paid the agent $62,550
      in
      cash which was accounted for as a reduction of gross proceeds, and issued the
      agent fully-vested five- year
      warrants to purchase up to 83,400 shares of the Company’s common stock for an
      exercise price of $0.75 per share. In addition, the Company incurred legal
      fees
      and other expenses of $19,407 related to the Offering.





37


In
      November, 2004, the Company closed on a private placement (the “Second
      Offering”) of 1,811,429 Units (“Units”), each consisting of one share of common
      stock, par value $.01 per share, and five-year warrants to purchase one
      additional share of common stock at a purchase price of $3.75 per share. The
      per-Unit price was $2.50 (i.e., raising a gross total of $4,528,573). The
      Company used two agents in completing the sale of the Units in the Second
      Offering. As a fee, the Company paid the agents $362,286 in cash, and issued
      the
      agents fully-vested five-year warrants to purchase up to 181,143 Units for
      an
      exercise price of $2.50 per Unit. In addition, the Company incurred legal fees
      and other expenses of $70,898 related to the Second Offering.




**Preferred
      Stock**





During
      the year ended December 31, 2001, the Company sold 440,000 shares of Series
      A
      Convertible Preferred Stock and received net proceeds of $615,133. The preferred
      stock has voting rights identical to common stock. In the event of liquidation,
      the Series A Preferred Shareholders 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
      2004, holders of 233,333 shares of the Company’s Series A Convertible Preferred
      Stock converted their preferred shares into 526,597 shares of the Company’s $.01
      par value common stock. At December 31, 2004, there were outstanding 206,667
      shares of Series A Convertible Preferred Stock which were convertible into
      an
      aggregate of 466,452 shares of the Company’s common stock with a liquidation
      preference of $310,000.





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 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.





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.





38


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”,
      there is no deemed dividend on the embedded conversion feature of the preferred
      stock.





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 (see note 11). An additional condition
      of the Series B Variable Rate Convertible Preferred Stock offering, 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 is unsure whether
      it will be able to dispose of the machines on or before March 31, 2006, but
      does
      not believe that there will be an effect on the financial statements if it
      does
      not.





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 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.





**6.**  **Warrants
      and Stock Options**





During
      2003, 16,666 five-year warrants were issued to a consultant and none were
      exercised. The warrants issued to the consultant are earned and vest as the
      consultant achieves milestones as described in the consulting agreement.
      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 has valued and will
      record an expense related to the warrants as the milestones are achieved. At
      December 31, 2005 and 2004, no expense has been recorded related to these
      warrants as no milestones were achieved.





At
      December 31, 2005, the Company had 10,456,988 warrants outstanding with exercise
      prices ranging from $0.75 to $3.75. The warrants expire serially through
      December 2010.





The
      Company established a stock option plan in 1999 (“1999 Stock Option Plan”) to
      provide incentives to directors and officers and under which 300,000 shares
      of
      common stock have been reserved for issuance. The options can only be
      non-qualified stock options and are valued at the fair market value of the
      common stock on the date of grant unless otherwise determined
      by the plan administrator, in which case the option may not be less than 85%
      of
      the fair market value of the common stock on the date of grant.





39


The
      Company established a stock option plan in 2004 (“2004 Stock Option Plan”) to
      provide incentives to employees, directors, officers and consultants and under
      which 2,000,000 shares of common stock have been reserved for issuance. The
      options can be either incentive stock options or non-statutory stock options
      and
      are valued at the fair market value of the stock on the date of grant. The
      exercise price of incentive stock options may not be less than 100% of the
      fair
      market value of the stock subject to the option on the date of the grant and,
      in
      some cases, may not be less than 110% of such fair market value. The exercise
      price of non-statutory options may not be less than 100% of the fair market
      value of the stock on the date of grant.





During
      2005 and 2004, the Company issued options for 2,005,000 shares of the Company’s
      common stock outside of the Company’s stock option plans.





At
      December 31, 2005, the Company had 771,982 exercisable options outstanding
      with
      a weighted-average exercise price of $1.87, and a weighted-average remaining
      contractual life of 7.2 years. At December 31, 2004, the Company had 327,772
      exercisable options outstanding with a weighted-average exercise price of $1.00,
      and a weighted-average remaining contractual life of 8.9 years.





The
      weighted-average grant date fair market value of options granted to employees
      during the year ended December 31, 2005 and 2004 was $1.92 and $2.03,
      respectively.




40




The
      following table summarizes options and warrants to purchase shares of the
      Company’s common stock:





Options
                Outstanding
            
            Weighted
              Average
              Exercise
                Price
              Per
                Share of Options
            
            Range
                of Option
              Exercise
              Price
            
            Warrants
                Outstanding
            
            Weighted
              Average
                Exercise Price
              Per
                Share of WarrantsBalance
                at December 31, 2003
            
            
            218,607
            
            
            .67
            
            $
            0.15
                to $6.00
            
            
            74,325
            
            
            3.71Granted
            
            
            2,334,167
            
            
            2.18
            
            $
            0.75
                to $3.50
            
            
            2,657,115
            
            
            3.41Canceled/expired
            
            
            (185,835
            )
            
            2.25
            
            $
            2.00
                to $3.09
            
            
            (33,494
            )
            
            4.47Balance
              at December
              31, 2004
            
            
            2,366,939
            
            
            2.04
            
            $
            0.15 to
              $6.00
            
            
            2,697,946
            
            
            3.41Granted
            
            
            1,607,500
            
            
            2.17
            
            $
            1.60 to
              $2.45
            
            
            7,949,374
            
            
            1.64Exercised
            
            
            (93,500
            )
            
            .15
            
            $
            0.15
            
            
            (9,917
            )
            
            .75Canceled/expired
            
            
            (438,123
            )
            
            2.43
            
            $
            2.00
              to $3.50
            
            
            (180,415
            )
            
            2.22Balance
                at December 31, 2005
            
            
            3,442,816
            
            
            $2.10
            
            $
            0.15
                to $6.00
            
            
            10,456,988
            
            
            $2.07





The
      following table summarizes information about stock options outstanding at
      December 31, 2005:




Options
                outstanding
            
            
            Options
                exercisableExercise
              Prices
            
            
            Number
              Outstanding
            
            
            Weighted-
              Average
              Remaining
              Contractual
              Life
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Number
              Exercisable
            
            
            Weighted-
              Average
              Exercise
              Price$0.15
            
            
            39,833
            
            
            7.75
            
            
            $0.15
            
            
            39,833
            
            
            $0.15$0.75
            
            
            83,333
            
            
            7.88
            
            
            0.75
            
            
            62,499
            
            
            0.75$1.50
                - $1.70
            
            
            950,000
            
            
            6.98
            
            
            1.55
            
            
            180,000
            
            
            1.50$1.83
                - $2.05
            
            
            572,500
            
            
            6.04
            
            
            2.00
            
            
            200,000
            
            
            2.02$2.15
                - $2.25
            
            
            325,000
            
            
            5.54
            
            
            2.22
            
            
            175,000
            
            
            2.19$2.40
                - $2.55
            
            
            1,301,875
            
            
            8.44
            
            
            2.51
            
            
            64,375
            
            
            2.42$2.70
                - $3.00
            
            
            13,609
            
            
            2.48
            
            
            2.82
            
            
            13,609
            
            
            2.82$3.20
                - $3.50
            
            
            150,000
            
            
            6.78
            
            
            3.20
            
            
            30,000
            
            
            3.20$6.00
            
            
            6,666
            
            
            3.70
            
            
            6.00
            
            
            6,666
            
            
            6.00$0.15
                to $6.00
            
            
            3,442,816
            
            
            7.24
            
            
            $2.10
            
            
            771,982
            
            
            $1.87






41


**7.**  **Software**





On
      March
      4, 2004, the Company signed an agreement with MET Games, Inc. (“MET”) to
      purchase certain Linux-based software and technology being developed by and
      owned by MET for the operation of certain gaming computers and systems. Pursuant
      to the agreement, the Company made a $250,000 cash payment to MET and issued
      800,000 unregistered, restricted shares of the Company’s common stock. The
      Company intended to use the software as it developed its business opportunities
      in the Native American Class II and charitable gaming markets.





The
      Company had the right to terminate the agreement and recover the $250,000
      payment and 800,000 unregistered, restricted shares of the Company’s common
      stock if MET failed to deliver software that meets the specifications detailed
      in the agreement or in the event that MET failed to provide the software in
      accordance with the development schedule detailed in the agreement. Despite
      this
      fact, due to the development of the software not having reached technological
      feasibility on the date of the agreement and the $250,000 cash payment being
      a
      significant performance commitment, the Company expensed the cash payment and
      the value of the common stock, $600,000, as research and development expense.
      For this purpose, the common stock was valued at $0.75 per share, based upon
      the
      price of the Company’s then recently completed private placement.





MET
      is
      wholly-owned by an individual who became an employee of the Company on March
      4,
      2004 and is no longer an employee as of March 2006.





On
      February 3, 2005, the Company and MET executed an amendment to the Software
      Development Agreement to be effective January 24, 2005. The amendment provides
      for the Company’s acceptance of MET’s non-conforming delivery of the software in
      exchange for MET’s reimbursement to the Company of up to $100,000 for all
      internal and external costs and expenses related to the completion of the
      software and the Company’s access to MET’s office and warehouse space to
      facilitate the completion of the software. As of December 31, 2005, $100,000
      has
      been recorded as an other receivable, which is included in current assets of
      discontinued operations, for expenses related to completion of the software.
      In
      connection with the amendment, the Company agreed to release the restrictions
      on
      100,000 shares of common stock immediately and on the remaining 700,000 shares
      commensurate with revised milestone achievements. The amendment did not change
      the Company’s ownership rights or limit its risks with respect to the completed
      software. As a result there were no accounting adjustments or revisions
      attributable to this amendment.





With
      the
      decision to exit the Class II market, the Company ceased to develop on and
      pursue the use of the MET technology as of December 31, 2005.





**8.**  **Distribution
      Agreement**





In
      June
      2004, the Company signed a distribution agreement to become the exclusive
      distributor of Games of Chance, Inc. (“GOC”). Under the terms of the five-year
      agreement the Company will issue an aggregate of 200,000 shares
      of
      the Company’s common stock, 50,000 shares of which were issuable upon the
      signing of the agreement with the remaining 150,000 shares issuable in five
      30,000-share installments on each of the five anniversaries of the agreement.
      The shares issued upon the signing of the agreement were expensed at $100,000,
      their current value on the date of the agreement. In addition, GOC received
      an
      option to purchase 500,000 shares of the Company’s common stock at an exercise
      price of $2.50 per share. The options vest in increments of 25,000 shares as
      the
      Company places or sells 500 GOC machines. Pursuant to Emerging Issues Task
      Force
      96-18 (EITF 96-18), “Accounting for Equity Instruments that are Issued to Other
      Than Employees for Acquiring or in Conjunction with Selling, Goods or Services,”
the Company will value and record an expense related to the options as the
      machines are sold. At December 31, 2005 and 2004, $0 and $4,500 had been
      recorded for expense of these options. As of December 31, 2005, the Company
      had
      placed 54 GOC machines. Upon signing, the Company also paid GOC $15,000 related
      to prior expenses incurred by GOC on behalf of the Company in 2004.





In
      connection with the distribution agreement the Company signed a five-year
      consulting agreement (“Consulting Agreement”) with Barry Quick, the spouse of
      the President of GOC. The Consulting Agreement calls for monthly payments to
      Mr.
      Quick of $10,000 and is terminable, without penalty, for cause or
      non-performance. The agreement was terminated on October 31, 2005. The Company
      incurred expense of $100,000 and $75,000 for the years ended December 31, 2005
      and 2004, respectively.





With
      the
      decision to exit the Class III market, the Company ceased distributing GOC
      games
      as of December 31, 2005.





**9.
      Redemption Technology and Supply Agreement**





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





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





The
      Agreement and the License last for an initial term of five years, but may be
      extended if the Company meets certain performance targets. Under the Agreement,
      the Company will pay an upfront License fee of $5 million, payable as follows:
      $1 million was due on or prior to June 23, 2005; $1 million was due no later
      than August 15, 2005; and the remaining $3 million was payable pursuant to
      an
      unsecured two-year promissory note providing payments in four equal installments
      on each successive six-month anniversary of the Agreement. The note bears
      interest at 12% per annum. The Agreement and note were subsequently amended
      and
      Spectre paid Bally a total of $2,750,000, plus interest, in 2005. The Company
      has $2,250,000 remaining due under the amended note at December 31, 2005, and
      has payments due of $750,000, plus interest, on March 31, 2006, September 30,
      2006 and March 31, 2006.





In
      addition to the License fee, beginning in January 2007 the Agreement requires
      the Company to pay royalties monthly based on the number of in-service
      redemption games during each day of the Agreement’s term.




42





Under
      the
      Agreement, the Company will have the right to have Bally provide transition
      training services so that Company employees may become familiar with the
      licensed technology. The Agreement also provides fixed pricing for the Company’s
      (i) purchase of electronic components containing the licensed technology, (ii)
      purchase of gaming cabinets in which to house redemption games employing the
      licensed technology, (iii) purchase of materials to convert the redemption
      games
      into video lottery terminals and/or Class III gaming machines (i.e., slot
      machines), and (iv) acquisition from Bally of other services on an hourly basis.
      The Company recognized an intangible asset representing it rights under the
      Agreement, which it is amortizing over five years.





**10.**  **Convertible
      Note Payable**





On
      May
      20, 2004, the Company received $1,100,000 in a convertible debt investment
      from
      Pandora Select Partners, L.P. (“Pandora”). The note was payable in interest
      only, at 10% per annum, through August 20, 2004, and thereafter is payable
      in
      equal monthly installments over the next 15 months. The note is convertible
      by
      Pandora into common stock of Spectre at $2.50 per share, and allows Spectre,
      subject to certain conditions and limitations, to make monthly installment
      payments with its common stock at a price per share equal to 90% of the average
      closing bid price of the common stock over the 30 trading days immediately
      preceding the payment date. In connection with the financing, Spectre paid
      a 3%
      origination fee, issued a fully-vested five-year warrant for the purchase of
      200,000 shares of Spectre’s common stock at $2.50 per share, and granted Pandora
      a security interest in the Company’s assets. The gross proceeds of $1,100,000
      were allocated between the convertible note and the common stock warrants based
      on the relative fair values of the securities at the time of issuance. The
      common stock warrants were valued using the Black-Scholes pricing model. The
      resulting original issue discount, the fair value of the warrants and the
      beneficial conversion of the note into common stock as defined in EITF 00-27,
      “Application of Issue No. 98-5 to Certain Convertible Instruments”, will be
      amortized over the life of the promissory note using the straight-line method,
      which approximates the interest method. The note is convertible by the holder
      any time in whole or in part upon written notice to the Company. Such conversion
      is limited to the extent the holder’s beneficial ownership interest would exceed
      4.99% of outstanding common stock at conversion. In addition, Spectre agreed
      to
      file a registration statement which was declared effective on January 24, 2005.
      In connection with the financing, the Company also paid a finder’s fee to Blake
      Capital Advisors, LLC (“Blake”), a Minnesota limited liability company wholly
      owned by Wayne W. Mills, a greater-than-five-percent shareholder of the Company,
      of $50,000 and issued a fully-vested five-year warrant for the purchase of
      50,000 shares of the Company’s common stock at $2.50 per share and a
      fully-vested five-year warrant for the purchase of 50,000 shares at $3.00 per
      share, and paid legal fees of $10,000. The fees and the value of the warrants
      were recorded as deferred financing costs and were amortized over the life
      of
      the convertible debt.





The
      allocation of the gross proceeds of the convertible note payable is summarized
      below as of December 31, 2005 and 2004:




**2005**
            
            **2004**Convertible
                note payable, total borrowed
            
            $
            1,100,000
            
            $
            1,100,000Value
                of 200,000 warrants allocated to additional paid in
                capital
            
            
            (450,000
            )
            
            (450,000
            )Value
                of beneficial conversion of note payable allocated to additional
                paid in
                capital
            
            
            (340,000
            )
            
            (340,000
            )Convertible
                note payable, net of original issue discount
            
            
            310,000
            
            
            310,000Amortization
                of original issue discount
            
            
            790,000
            
            
            324,212Principal
                payments on convertible note
            
            
            (1,100,000
            )
            
            (280,078
            )Convertible
                note payable, net at December 31,
            
            $
            0
            
            $
            354,134






43


**11.**  **Short-term
      Debt**





On
      September 10, 2004, the Company issued two $750,000 10% promissory notes. One
      note was issued to Pandora Select Partners, L.P. (“Pandora”) and the other note
      was issued to Whitebox Intermarket Partners, L.P. (“Whitebox”). The notes are
      payable interest only through March 10, 2005, at which time the principal is
      due. In connection with the financing, Spectre paid a 3% origination fee, issued
      five-year warrants for the purchase of 50,000 shares of Spectre’s common stock
      at $3.00 per share to both Pandora and Whitebox, and granted Pandora and
      Whitebox security interests in the Company’s assets. The gross proceeds of
      $1,500,000 were allocated between the notes and the common stock warrants based
      on the relative fair values of the securities at the time of issuance. The
      common stock warrants were valued using the Black-Scholes pricing model. The
      resulting original issue discount and the fair value of the warrants will be
      amortized over the life of the promissory note using the straight-line method,
      which approximates the interest method. In addition, Spectre agreed to file
      a
      registration with the SEC, which was declared effective on January 24,
      2005.





On
      March
      10, 2005, the Company signed amendments to the two $750,000 secured promissory
      notes issued to Pandora and Whitebox. The amendments extend the due date of
      the
      notes to June 10, 2005, which date was further extended by the Company to
      September 10, 2005. As part of the amendments the Company agreed to maintain
      assets whose value equals or exceeds the principal interest amounts then owned
      under the notes. For purposes of valuing the assets for compliance under this
      provision, the Company’s cash shall be valued at 100%, the Company’s accounts
      receivable shall be valued at 80% and the Company’s inventory and fixed assets
      shall be valued at 50% of their respective book values. As consideration for
      the
      amendments, the Company paid Pandora and Whitebox each $18,750 and amortized
      the
      expense over the first and second extension periods, respectively. 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.





The
      allocation of the gross proceeds of the short-term debt is summarized below
      as
      of December 31, 2005 and 2004:




**2005**
            
            **2004**Short-term
                debt, total borrowed
            
            $
            1,500,000
            
            $
            1,500,000Value
                of 100,000 warrants allocated to additional paid in
                capital
            
            
            (325,000
            )
            
            (325,000
            )Short-term
                debt, net of original issue discount
            
            
            1,175,000
            
            
            1,175,000Amortization
                of original issue discount
            
            
            325,000
            
            
            198,611Total
                short-term debt, net
            
            $
            1,500,000
            
            $
            1,373,611





Between
      September 30, 2005 and October 17, 2005, the Company issued nine unsecured
      short-term promissory notes to nine separate investors in exchange for a total
      of $1,030,000. All of the promissory notes accrued interest at the rate of
      6%
      per annum, and became due and payable in full on October 21, 2005. The
      promissory notes (including accrued interest) were convertible, at the option
      of
      the noteholders and subject to certain conditions, into shares of the Company
      Series B Preferred Stock on or prior to their maturity date. One of the
      investors is D. Bradly Olah, the Company's President, and another investor
      is a
      corporation that is affiliated with Russell C. Mix, the Company's Chief
      Executive Officer.





In
      connection with the financing, the Company issued to the investors five-year
      warrants to purchase an aggregate of 2,060,000 shares of the Company's common
      stock for one dollar per share. The proceeds of $1,030,000 were allocated
      between the short-term notes and the warrants based on the relative fair market
      values of the securities at the time of issuance. The warrants were valued
      using
      the Black Scholes pricing model. The resulting original issue
      discount is being amortized over the life of the short-term notes using the
      straight-line method, which approximates the interest method. The beneficial
      conversion of the promissory notes into the Company’s common stock was valued
      using the Black Scholes pricing model, and determined to be zero. 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.





44


On
      October 27, 2005, all of the unsecured short-term convertible promissory notes,
      totaling $1,030,000, were converted into an aggregate of 1,030 shares of the
      Company’s Series B Preferred Stock (see Note 5).





The
      allocation of the gross proceeds of the short-term debt is summarized below
      as
      of December 31, 2005:





Short-term
                debt, total borrowed
            
            $
            1,030,000Value
                of 1,760,000 warrants allocated to additional paid in
                capital
            
            
            (1,030,000
            )Short-term
                debt, net of original issue discount
            
            
            0Amortization
                of original issue discount
            
            
            1,030,000Short-term
                debt converted to preferred stock
            
            
            (1,030,000
            )Convertible
                note payable, net
            
            $
            0





**12.
      Bank Promissory Note**





On
      June
      21, 2005, the Company issued a $1.5 million unsecured promissory note to Crown
      Bank of Edina, Minnesota. The note was due on August 31, 2005 and bore interest
      at 1% above prime and was paid in full in October 2005. In connection with
      this
      loan the Company paid a two percent origination fee, which was amortized from
      June 21, 2005 until August 31, 2005. The loan was guaranteed by two persons,
      Ronald E. Eibensteiner (the Company’s former Chairman and Chief Executive
      Officer) and D. Bradly Olah, who became our President on August 2, 2005. In
      exchange for their guarantees, the Company issued each of the foregoing
      guarantors five-year warrants to purchase 150,000 shares of the Company’s common
      stock at the price of $2.20, the closing price of the common stock on the date
      of issuance. The warrants were valued at $578,064 using the Black Scholes
      pricing model and the value of the warrants was amortized from June 21, 2005
      until August 31, 2005 (see note 14). On September 29, 2005 the Company entered
      into a Forbearance and Extension Agreement with Crown Bank of Edina, Minnesota
      extending the due date of the $1.5 million unsecured promissory until October
      31, 2005.





On
      October 28, 2005, the Company paid in full the balance of the unsecured
      promissory note to Crown Bank with proceeds received from the Series B Variable
      Rate Convertible Preferred offering.





**13.**  **License
      Agreement**





On
      June
      30, 2004, the Company signed a three-year non-exclusive license agreement
      (“License Agreement”) with Bally Gaming Inc. (“Bally”). The License Agreement
      calls for the Company to purchase up to 3,000 game cabinets from Bally over
      the
      term of the License Agreement. Nevertheless, if the Company has purchased at
      least 70% of its Class II cabinet purchases from Bally during the term, Bally
      shall waive the 3,000 game cabinet purchase minimum. In addition, the Company
      was obligated to purchase at least 100 game cabinets from Bally, and incur
      certain minimum license-fee charges of $187,500, by June 30, 2004. As of
      December 31, 2005, the Company had not taken delivery of any of the products
      that include the license fee charges and therefore the minimum license fee
      paid
      is included in prepaid expenses at December 31, 2005 and December 31, 2004.
      Upon
      receipt of the machines that include the license fees and the placement of
      the
      machines, through a participation agreement, into service, the Company will
      begin amortizing the licenses over the three-year estimated useful life of
      the machines.
      In an August 12, 2005 letter agreement, Bally agreed to allow the prepaid
      license to be applied to Class III cabinet purchases. In connection with the
      termination, Bally agreed to allow the prepaid license fees of $187,500 to
      be
      applied to future Class III title purchases. The Company is in discussions
      with
      Bally to allow these fees to be applied against future AWP royalty fees due
      Bally.





45


**14.**  **Related
      Party Transactions**





The
      Company incurred expenses from corporations, owned by a former director of
      the
      Company and employing another former director and former officer of the Company,
      for rent and consulting services of approximately $149,000 and $102,000 during
      the years ended December 31, 2005 and 2004, respectively.





The
      Company incurred expenses from a corporation, partially owned by the CEO and
      director of the Company, for consulting services and expense reimbursements
      of
      approximately $214,000 and $81,000 during the years ended December 31, 2005
      and
      2004, respectively. The Company’s CEO also serves as a director of the
      corporation.





In
      February 2004, the Company entered into a consulting agreement with D. Bradly
      Olah, then a greater-than-five-percent shareholder of the Company. Pursuant
      to
      the consulting agreement, Mr. Olah received $12,500 per month for four months
      (ending as of May 31, 2004) in exchange for general consulting services. On
      June
      1, 2004, the Company entered into a new consulting agreement with Mr. Olah
      providing for payments of $12,500 per month for a two-year term. In connection
      with the new consulting agreement, Mr. Olah received options to purchase up
      to
      300,000 shares of the Company’s common stock at an exercise price of $2.15 per
      share (the fair value of the stock on the date of grant). Beginning on June
      15,
      2005, the option vests in 100,000-share increments on each June 15 through
      2007,
      and has a five-year term during which the options must be exercised or
      forfeited. The options were measured on the date performance was complete;
      until
      then variable plan accounting was applied using the Black-Scholes pricing model.
      The options had a value of $640,954 at June 30, 2005, of which $260,519 had
      been
      charged to expense through June 30, 2005. Effective as of August 2, 2005, the
      Company’s board of directors elected D. Bradly Olah as its President to replace
      Russell Mix, who continues to serve as the Company’s Chief Executive Officer.
      The Consulting Agreement with Mr. Olah was terminated as a result of his
      appointment as President. For his services as President, the Company will
      compensate Mr. Olah with an annual salary in the amount of $150,000 and, has
      granted Mr. Olah a ten-year non-qualified option to purchase up to 500,000
      shares of common stock at a per-share price of $2.55 (which was greater then
      the
      fair value of the stock on the date of grant). The option will vest ratably
      over
      three years in installments of 166,666, 166,666 and 166,668 shares on August
      2,
      2006, 2007 and 2008, respectively. Additionally, the Company and Mr. Olah have
      entered into a letter agreement amending an option agreement dated June 1,
      2004
      which the parties entered into in connection with the Consulting Agreement.
      Under the letter agreement, the parties agreed to (i) cease the vesting of
      200,000 unvested shares subject to the 2004 Option Agreement; and (ii) extend
      the term during which the vested options subject to the 2004 Option Agreement
      may be exercised through July 26, 2010 (subject to early termination in the
      event Mr. Olah ceases to serve as an employee of or consultant to the Company).
      The Company evaluated the accounting treatment of the options according to
      Emerging Issues Task Force 00-23 (EITF 00-23), "Issues related to the Accounting
      for Stock Compensation under APB Opinion No. 25, and FASB Interpretation No.
      44". Due to the modified stock options being fully- vested
      at
      the time of the modification, there was no additional compensation expense
      recognized related to the modification.




46


In
      connection with the convertible debt financing from Pandora, the Company paid
      $50,000 and issued two fully-vested three-year warrants to Blake Advisors,
      LLC,
      a Minnesota limited liability company wholly owned by Wayne W. Mills, a
      greater-than-five-percent shareholder of the Company. The warrants were issued
      in exchange for financial-advisory services rendered by Blake. One warrant
      grants Blake the right to obtain up to 50,000 shares of the Company’s common
      stock at an exercise price of $2.50 per share, and the second warrant grants
      Blake the right to obtain up to 50,000 shares of the Company’s common stock at
      an exercise price of $3.00 per share. The warrants were valued at $225,000
      using
      the Black-Scholes pricing model and will be expensed using the straight-line
      method over the term of the promissory note. The Company has recorded expense
      of
      $132,660 and $92,340 for the years ended December 31, 2005 and 2004
      respectively.





On
      December 9, 2005, the Company issued a fully vested, five year warrant to
      purchase 100,000 shares at $2.00 per share to Blake for services rendered in
      connection with Company financings. The Company recorded an expense of $180,464
      in 2005 related to the issuance of the warrant.





On
      June
      21, 2005 the Company secured a $1.5 million loan from Crown Bank of Edina,
      Minnesota. In connection with this loan the Company paid a two percent
      origination fee, which was amortized from June 21, 2005 until August 31, 2005.
      The loan was guaranteed by two persons, Ronald E. Eibensteiner (the Company’s
      former Chairman and Chief Executive Officer) and D. Bradly Olah, who became
      our
      President on August 2, 2005. In exchange for their guarantees, the Company
      issued each of the foregoing guarantors five-year warrants to purchase 150,000
      shares of the Company’s common stock at the price of $2.20, the closing price of
      the common stock on the date of issuance. The warrants were valued at $578,064
      using the Black Scholes pricing model and were amortized and recorded as an
      expense from June 21, 2005 until August 31, 2005.





**15.**  **Income
      Taxes**





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. The temporary differences principally
      relate to net operating loss carryforwards and depreciation.





As
      a
      result of various equity offerings that occurred previous to 2005, the Company
      experienced a change in ownership prior to 2005 under the net operating loss
      limitation rules. In the first quarter of 2006, the Company calculated a
      preliminary estimate of the net operating carryforward based upon the change
      of
      ownership. The net operating loss carryforward of approximately $11,070,000
      at
      December 31, 2005 is based upon this preliminary calculation. The Company’s
      estimate at December 31, 2005 of the net operating loss and research and
      development credit carryforwards are significantly lower than previously
      reported because the Company had not previously calculated an estimate since
      it
      experienced a change in control. The new estimate did not result in any change
      to the Company’s financial statements as a full valuation allowance was provided
      for against the net deferred tax asset at December 31, 2005 and
      2004.





The
      Company has recorded a full valuation allowance against the net deferred tax
      asset due to the uncertainty of realizing the related benefits as disclosed
      above as follows at December 31:




2005
            
            2004Deferred
                income tax assets:Net
                operating loss carryforwards
            
            $
            4,496,000
            
            $
            7,751,000Options
                and warrants issued for services
            
            
            459,000
            
            
            175,000Impairment
                of inventory and fixed assets
            
            
            918,000
            
            
            —Research
                and development credit carryforwards
            
            
            —
            
            
            101,000Less:
                valuation allowance
            
            
            (5,873,000
            )
            
            (8,027,000
            )Net
                deferred income tax assets
            
            $
            —
            
            $
            —




47




The
      change in the valuation allowance was $(2,154,000) and $1,960,000 for the years
      ended December 31, 2005 and 2004, respectively.





Income
      tax computed at the U.S. federal statutory rate reconciled to the effective
      tax
      rate is as follows for the years ended December 31:





2005
            
            2004Federal
                statutory tax rate benefits
            
            
            (34.0
            )%
            
            (34.0
            )%State
                tax, net of federal benefit
            
            
            (6.5
            )%
            
            (6.5
            )%Change
                in valuation allowance
            
            
            40.5
            %
            
            40.5
            %Effective
                tax rate
            
            
            0.0
            %
            
            0.0
            %





**16.
      Commitments**





The
      Company leased office space on a month-to-month basis from a company owned
      by
      the Company’s former chairman at a rate of $3,000 per month and since September
      2004 at a rate of $1,500 per month. The Company discontinued leasing this space
      effective December 31, 2005.





The
      Company leases office and warehouse facilities in El Cajon, CA pursuant to
      terms
      of a non-cancelable operating lease, as amended, that expires in May 2006.
      Under
      the terms of the lease, the Company is required to pay a portion of the lessor’s
      operating costs.





The
      Company leases space located in, Roseville, California, and pays $4,122 per
      month through August 31, 2006, $4,228 per month through August 31, 2007 and
      $4,334 per month through August 31, 2008, at which time the lease will expire.
      This facility houses the Company’s research and development operations.





Finally,
      the Company signed a leases office and warehouse space located in Minneapolis,
      Minnesota which serves as the Company’s headquarters. The Company will begin
      paying $2,980 per month from March 1, 2006 through December 31, 2007, and
      approximately $3,080 per month for the remaining term, ending December 31,
      2008.




The
      Company leases equipment pursuant to terms of a non-cancelable operating lease
      that expires in September 2009.





Rent
      expense, excluding operating expenses, was $141,835 and $81,825 for the years
      ended December 31, 2005 and 2004, respectively.




Scheduled
      minimum lease payments for the next five years are approximately as
      follows:




Year
                ending
              December
                31,2006
            
            $
            119,3052007
            
            
            92,0732008
            
            
            69,1692009
            
            
            1,249Totals
            
            $
            281,796




48


The
      Company has entered into various employment agreements with certain executives
      of the Company, which provide for severance payments subject to certain
      conditions and events.





On
      June
      30, 2004, the Company signed a three-year non-exclusive license agreement
      (“License Agreement”) with Bally Gaming Inc. (“Bally”). The License Agreement
      calls for the Company to purchase up to 3,000 game cabinets from Bally over
      the
      term of the Agreement. Nevertheless, if the Company has purchased at least
      70%
      of its Class II cabinet purchases from Bally during the term, Bally shall waive
      the 3,000 game cabinet purchase minimum. The agreement was subsequently
      terminated on August 12, 2005.





On
      September 23, 2005, the Company signed a non-binding 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 March 21, 2006, the Company had
      not
      closed on the credit facility.








**17.**  **Significant
      Customers**





Revenues from
      three customers was 72.3 % of total revenues in 2005.





**18.**  **Subsequent
      Events**





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





On
      March
      21, 2006, the Company signed a non-binding term sheet with PDS Gaming
      Corporation for a bridge loan in the amount of $1,500,000. The proceeds will
      be
      used to fund a down payment on a 2,000 AWP machine order from its supplier.
      The
      loan provides for interest at 18% and will have a term of the longer of four
      months or the delivery of 750 machines. The Company anticipates closing on
      the
      loan in late March or April 2006.





**Item
      8.**  **Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure**





None.




49





**Item
      8A.**  **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 December 31, 2005,
      of
      our disclosure controls and procedures (as defined in Rules 13a-14(c) and
      15d-14(c) of the Securities Exchange Act of 1934). Based upon that evaluation,
      made at the end of the period, our chief executive officer and chief financial
      officer concluded that our disclosure controls and procedures are effective
      in
      alerting them on a timely basis to material information required to be disclosed
      in our periodic reports to the SEC, and that there has been no significant
      change in such internal controls, or other factors which could significantly
      affect such controls including any corrective actions with regard to significant
      deficiencies or material weaknesses, since our evaluation. However, due to
      the
      limited number of Company employees engaged in the authorization, recording,
      processing and reporting of transactions, there is inherently a lack of
      segregation of duties. During the course of their audit of our consolidated
      financial statements for Fiscal 2005, 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.




**Item
      8B.**  **Other
      Information**





None.




50


**PART
      III**





**Item
      9.**  **Directors,
      Executive Officers, Promoters and Control Persons; Compliance With Section
      16(a)
      of the Exchange Act**





Our
      current board of directors and executive management team include:





Name
            
            Age
            
            PositionsKenneth
                W. Brimmer
            
            50
            
            Chairman
                of the BoardRussell
                C. Mix
            
            49
            
            Chief
                Executive Officer and DirectorD.
                Bradly Olah
            
            41
            
            President
                and DirectorRobert
                Bonev
            
            48
            
            DirectorNamon
                D. Witcher
            
            67
            
            DirectorKevin
                M. Greer
            
            49
            
            Chief
                Financial Officer





**Kenneth
      W. Brimmer,** 50
      has
      been a member of the Board of Directors and Chairman of Spectre since February
      2005. Mr. Brimmer has been the owner and chief manager of Brimmer Company,
      LLC,
      a private investment company, since December 2001. Mr. Brimmer has been the
      chief executive officer of STEN Corporation (Nasdaq-SC: STEN), since September
      2003, and has served as a member of its board of directors since February 1998
      and as chairman of its board of directors since March 2000. STEN Corporation,
      with offices in Minneapolis, Minnesota, sells, leases and services oxygen tanks
      for emergency medical use, and owns and operates 11 fast-food drive-through
      restaurants under the name “Burger Time.” At the request of Entrx Corporation’s
      Board of Directors, Mr. Brimmer acted as the chief executive officer and
      chairman of the board of directors of VioQuest Pharmaceuticals, Inc. (formerly
      Surg II, Inc. and Chiral Quest, Inc.) (OTCBB: VQPH.OB), from May 2002 until
      February 2003. VioQuest Pharmaceuticals, Inc. was a 90%-owned Entrx subsidiary
      during that period, until October 2003. Mr. Brimmer was the chief executive
      officer and chief financial officer of Active IQ Technologies, Inc. from March
      2000 until December 2001, and acted as chairman of its board of directors until
      June 2003. Active IQ Technologies, Inc. was engaged in providing accounting
      software services in Minnetonka, Minnesota, and is now in the precious metals
      exploration business under the name Wits Basin Precious Metals, Inc. (OTCBB:
      WITN.OB). Until April 2000, Mr. Brimmer was an executive officer of Rainforest
      Cafe, Inc., serving as its treasurer from 1995, and its president from April
      1997. Mr. Brimmer is currently a member and the chairman of the board of
      directors of Hypertension Diagnostics, Inc. (OTCBB: HDII.OB). He currently
      also
      serves as a board member at VioQuest Pharmaceuticals, Inc., Landry’s
      Restaurants, Inc. (NYSE: LNY) and Entrx Corporation (Nasdaq: ENTX). Mr. Brimmer
      has a Bachelor of Arts degree in accounting.




**Russell
      Mix** ,
      49, has
      served as a CEO and Director of the Company since November 2003. From
      November 2003 until August 2, 2005, Mr. Mix also served as the Company’s
      President. Mr. Mix
      is also currently CEO and Director of Prolific Publishing, Inc., a developer
      and
      publisher of computer software for the entertainment markets such as game
      consoles, gambling games and screensavers. Prior to that, Mr. Mix was Senior
      Vice President, General Counsel, Secretary and Director for Casino Data Systems,
      Inc. (“CDS”). He was a member of the executive management team which led CDS
      from inception to more than 500 employees in four years,
      with business operations in more than 20 jurisdictions and offices in four
      states. He served as counsel to CDS and was instrumental in taking the company
      public in April 1993. He also led corporate and banking teams in two subsequent
      offerings (February 1994 and March 1996) which cumulatively raised in excess
      of
      $90 million for CDS and $15 million for selling shareholders. Mr. Mix has a
      JD
      from McGeorge School of Law, University of the Pacific and while in private
      practice, concentrated in gaming and corporate law.





51


**D.
      Bradly Olah,** ** **41,** Mr.
      Olah
      has served as the Company’s President and director since August 2, 2005 and
      previously served as a consultant to the Company since September 2003. Mr.
      Olah,
      was the founder Chairman and Chief Executive Officer of Innovative Gaming
      Corporation of America from 1991 through February 1996 and also served as the
      Chief Financial Officer of that company from 1991 to 1993. Innovative Gaming
      Corporation of America was credited with launching the world’s first
      multi-station, multi-player electronic table games (Craps, Blackjack and
      Roulette). Mr. Olah served as a director, Chief Executive Officer and Chief
      Financial Officer of Wits Basin Precious Minerals, Inc. (OTCBB: WITM) and its
      predecessor, during various periods between April, 1996 and May, 2003. He also
      served as a director of Natural Resources Geophysical Corporation until its
      sale
      to Eagle Geophysical of Houston, Texas. Mr. Olah also owns and manages
      professional power sports racing teams.




**Robert
      Bonev** ,
      48, has
      served as a director of the Company since October 2004. Mr. Bonev has been
      the
      Vice President Sales/Marketing with Arctic Cat Inc. (NASDAQ: ACAT), a worldwide
      manufacturer and marketer of all-terrain vehicles (ATVs) and snowmobiles since
      June 2001. From February 1999 to January 2000, Mr. Bonev served as Vice
      President of Marketing for Outdoor Marine Corporation. From December 1998 to
      February 1999, Mr. Bonev was employed by Teledyne Continental Motors, a business
      segment of Teledyne Technologies Incorporated, as Vice President of
      Sales/Marketing. From June 1993 to December 1998, Mr. Bonev was Director of
      Marketing for Mercury Marine, a division of The Brunswick
      Corporation.




**N.D.
      “Butch” Witcher** ,
      67, has
      served as a director of the Company since January 2004. Mr. Witcher is currently
      the President of Casino Concepts and Design (CCD), a consulting business he
      established in 1997 to provide casino management services, product development,
      slot machine selection, floor layout and design, and employee training. His
      clients include Lakes Entertainment, Inc. (formerly Grand Casinos, Inc.),
      Harrah’s of New Orleans, Isle of Capri, Foxwoods Resort Casino and several
      others. Prior to founding CCD, Mr. Witcher was Corporate Vice President of
      Gaming during his seven year tenure at Grand Casinos, Inc. Previous to his
      Grand
      Casinos employment, he also held key executive positions at several leading
      Nevada casinos, including the Flamingo, Frontier, Tropicana and Dunes hotels,
      as
      well as Resorts International and Bally’s Park Place facilities in New
      Jersey.




**Kevin
      M. Greer** ,
      49, has
      served as the Company’s Chief Financial Officer since October 28, 2005. From
      2002 until joining the Company, Mr. Greer had an independent consulting practice
      providing accounting, tax and management services to a variety of companies
      ranging in size from start-ups to a Fortune 500 company. Mr. Greer served as
      Chief Financial Officer for eMedicalFiles, Inc. from 2000 to 2002. He also
      served as Chief Financial Officer for New Horizon Kid's Quest, Inc. (formerly
      Nasdaq SmallCap: KIDQ) from 1992 to 1999 and New Horizon Child Care, Inc. from
      1986 to 1999. From 1980 to 1986, Mr. Greer was with Arthur Andersen & Co.
      Mr. Greer is a Certified Public Accountant.





52


**Compliance
      with Section 16(a) of the Securities Exchange Act of 1934**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
      officers, directors and persons considered to be beneficial owners of more
      than
      ten percent of a registered class of the Company’s equity securities to file
      reports of ownership and changes in ownership with the Securities and Exchange
      Commission and Nasdaq. Officers, directors and greater-than-ten-percent
      shareholders are required by SEC regulations to furnish the Company with copies
      of all Section 16(a) forms they file. Based on a review of the copies of such
      forms furnished to the Company, or written representations that no applicable
      filings were required, the Company believes that all such filings were filed
      on
      a timely basis for the fiscal year 2005.





**Code
      of Ethics**





We
      have
      adopted a Code of Ethics which governs the conduct of our officers, directors
      and employees in order to promote honesty, integrity, loyalty and the accuracy
      of our financial statements. You may obtain a copy of the Code of Ethics without
      charge by writing us and requesting a copy, attention: Kevin M Greer, 14200
      23 rd Ave. N.,
      Minneapolis, Minnesota 55447. You may also request a copy by calling us at
      (763)
      553-7601.  Our
      Code
      of Ethics is listed as an exhibit to this annual report.





**Audit
      Committee and Audit Committee Financial Expert**





The
      Company has established an audit committee within the board of directors that
      currently consists of the entire board of directors. The board of directors
      has
      determined that each of the audit committee members is able to read and
      understand fundamental financial statements and that at least one member of
      the
      audit committee has past employment experience in finance or
      accounting.





The
      board
      of directors has determined that at least one member of the audit committee,
      Mr.
      Kenneth Brimmer, is an “audit committee financial expert” as that term is
      defined in Item 401(e)(2) of Regulation S-B promulgated under the Exchange
      Act.
      Mr. Brimmer’s relevant experience includes, among others, his service as the
      Chief Executive Officer of STEN Corporation and Chief Executive and Chief
      Financial Officer of ActiveIQ Technologies, Inc. and his educational background
      in accounting. As noted above, Mr. Brimmer qualifies as an “independent
      director,” as such term is defined in Section 4200(a)(15) of National
      Association of Securities Dealers’ listing standards, and meets the criteria for
      independence set forth in Rule 10A-3(b)(1) under the Exchange Act. The board
      of
      directors has determined that each of the audit committee members is able to
      read and understand fundamental financial statements and that at least one
      member of the audit committee has past employment experience in finance or
      accounting.





53


**Item
      10.**  **Executive
      Compensation**





The
      following table sets forth the total compensation paid by the Company during
      its
      last three fiscal years to the persons who served as President or Chief
      Executive Officer of the Company and each other executive officer of the Company
      whose total annual base salary plus bonus compensation for the most recent
      fiscal year exceeded $100,000. *




SUMMARY
      COMPENSATION TABLE




Annual
                  Compensation
              
              
              Long-Term
                  Compensation AwardsName
                  and Principal Position
              
              
              Year
              
              
              Salary
                ($)
              
              
              Bonus
                ($)
              
              
              Other
                  Annual Compensation
                ($)
              
              
              Securities
                  Underlying Options
                (#)Russell
                  C. Mix, President and CEO(1)
              
              
              2005
              
              
              170,000
              
              
              —
              
              
              —
              
              
              —2004
              
              
              120,417
              
              
              —
              
              
              7,083
              (2)
              
              616,667
              (3)2003
              
              
              —
              
              
              —
              
              
              —
              
              
              66,666
              (4)D.
                  Bradly Olah, President(5)
              
              
              2005
              
              
              62,202
              
              
              —
              
              
              87,500
              (6)
              
              500,000
              (7)2004
              
              
              —
              
              
              —
              
              
              137,500
              (6)
              
              300,000
              (8)2003
              
              
              —
              
              
              —
              
              
              —Ronald
                  E. Eibensteiner, President and
                  CEO(9)
              
              
              2005
              
              
              —
              
              
              —
              
              
              —
              
              
              —2004
              
              
              —
              
              
              —
              
              
              —
              
              
              —2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —


(1)
            Mr.
                Mix was appointed President and Chief Executive Officer on April
                16, 2004.
                Mr. Mix served as President until August 2, 2005.He
                continues to serve as our Chief Executive
                Officer.





(2)
            Compensation
                represents consulting fees paid to Mr. Mix prior to him becoming
                an
                employee of the Company.





(3)
            Includes
                an option for 16,667 shares of the Company’s common stock that was granted
                to Mr. Mix as a result of his appointment to the Company’s Board of
                Directors in 2003.





(4)
            These
                options were granted to Mr. Mix as a result of his appointment to
                the
                Company’s Board of Directors.





(5)
            Mr.
                Olah was appointed President on August 2,
                2005.





(6)
            Compensation
                represents consulting fees paid to Mr. Olah prior to him becoming
                an
                employee of the Company.





(7)
            These
                options were granted to Mr. Olah as a result of his appointment as
                President and to the Company’s Board of
                Directors.





(8)
            Mr.
                Olah was granted an option for 300,000 common shares in 2004 and
                200,000
                shares subject to that option were cancelled upon his appointment
                as
                President on August 2, 2005.





(9)
            Mr.
                Eibensteiner was appointed President and Chief Executive Officer
                on
                February 6, 2003 and resigned his positions as President and Chief
                Executive Officer effective April 16, 2004. Mr. Eibensteiner did
                not
                receive any salary while in these positions. Mr. Eibensteiner was
                Chairman
                of the Company from May 1996 until February
                2005.





*
            The
                Company hired Kevin M. Greer as its new Chief Financial Officer on
                October
                28, 2005. The Company agreed to pay Mr. Greer a base salary of $120,000,
                and granted Mr. Greer an option to purchase 250,000 shares of common
                stock
                at a purchase price of $1.60.






54


OPTION
      GRANTS DURING 2005 FISCAL YEAR





The
      following table sets forth the options that were granted to the officers whose
      compensation is disclosed in the Summary Compensation Table during
      the Company’s last fiscal year which ended December 31, 2005. *




Name
            
            
            Number
                of
              Securities
              Underlying
              Options
              Granted
                (#)
            
            
            Percent
                of
              Total
                Options/
              Granted
                to
              Employees
                in
              Fiscal
                Year
            
            
            Exercise
                or
              Base
                Price
              ($/Share)
            
            
            Expiration
              DateRussell
                C. Mix
            
            
            0
            
            
            0
            
            
            —
            
            
            —D.
                Bradly Olah
            
            
            500,000
            
            
            31.1
            %
            
            2.55
            
            
            8/02/2015Ronald
                E. Eibensteiner
            
            
            0
            
            
            0
            
            
            —
            
            
            —





*
            On
                November 28, 2005, the Company granted an option to purchase 250,000
                common shares at a purchase price of $1.60 to Kevin M. Greer, the
                Company’s Chief Financial Officer.








OPTION
      EXERCISES DURING FISCAL 2005


AND
      FISCAL YEAR-END OPTION VALUES





The
      following table provides certain information regarding the exercise of stock
      options to purchase shares of the Company’s common stock by the officers
      identified in the Summary Compensation Table  during
      the year ended December 31, 2005, and the fiscal year-end value of unexercised
      stock options held by such persons.




Name
            
            
            Number
                of
              Shares
                Acquired
              OnExercise
            
            
            Value
              Realized
              ($)
            
            
            Number
                of Unexercised
              Options
                at
              Fiscal
                Year End
              (exercisable
                / unexercisable)
            
            
            Value
                of Unexercised
              In-the-Money
                Options at Fiscal Year End ($)
              (exercisable
                / unexercisable)Russell
                C. Mix
            
            
            0
            
            
            0
            
            
            242,499/440,834
            
            $
            143,874/$191,959D.
                Bradly Olah
            
            
            0
            
            
            0
            
            
            100,000/600,000
            
            $
            0
                / $0Ronald
                E. Eibensteiner
            
            
            0
            
            
            0
            
            
            -
                / -
            
            $
            0
                / $0





(1)
            Based
                on a fiscal year end of December 31, 2005 and a closing bid price
                on the
                Over-the-Counter Bulletin Board of $1.90 per share on December 31,
                2005.
                The value of in-the-money options is calculated as the difference
                between
                the fair market value of the common stock underlying the options
                at fiscal
                year end and the exercise price of the options. Exercisable options
                refer
                to those options that are exercisable as of December 31, 2005, while
                unexercisable options refer to those options that become exercisable
                at
                various times thereafter.




55


**Employment
      Agreements**





*Compensation
      of Russell C. Mix.*  The Company is
      a
      party to an
      employment agreement with  Russell
      C. Mix dated April 16, 2004. Under that employment agreement, Mr. Mix
      agreed to serve
      as the Company’s President and Chief Executive Officer for three
      years ,
      and the
      Company agreed to pay Mr. Mix an annual salary of $170,000. In addition, Mr.
      Mix
      is eligible to receive a performance-based annual bonus .
      The
      employment agreement provides that
      Mr.
      Mix will salary
      payments for a one-year period if he is terminated without cause and in certain
      other limited circumstances including the
      Company’s breach of the employment agreement, a material and adverse change in
      Mr. Mix’s duties, responsibilities and authority, or a change
      in control of the Company. The employment agreement entitles Mr. Mix to
      participate in the Company’s employee-benefit plans on the same basis as
      benefits are made available to the Company’s other employees although the
      Company currently has
      no  benefit
      plans. A copy of the Company’s employment agreement with Mr. Mix was file
      with the SEC as an
      exhibit to the Company quarterly
      report on Form
      10-QSB for the quarter ended March 31, 2004.




In
      connection with Mr. Mix’s appointment as the Company’s President and Chief
      Executive Officer, the
      Company granted Mr.
      Mix a
      ten-year option to
      purchase up to 600,000 shares of the Company’s common stock at an exercise price
      of $1.50 per share (the fair value of the Company’s common stock on the date of
      grant) with
      respect to which 60,000
      shares were vested as
      of the grant date ( March
      22,
      2004) . 60,000
      shares subject
      to the
      option vest on each March
      22 beginning in 2005
      and
      ending in 2008.
      The remaining 300,000 shares subject
      to the
      option vest upon the earlier of a)
      March
      22, 2014 or (b )
      in
      60,000-share increments upon the trading of the Company’s common stock at
      certain threshold prices ranging from $3.00 to $10.00 per share. Notwithstanding
      the vesting schedule described above, all of the options (i) immediately vest
      upon a change
      in control of the Company, and
      (ii)
      are subject to early termination in the event Mr. Mix ceases to serve as an
      employee of the Company.




*Compensation
      of D. Bradly Olah* .
      On
      August 2, 2005, the Company hired D. Bradly Olah as its President. The Company
      does not have a written employment agreement with Mr. Olah,
      but
      has agreed to compensate Mr. Olah with an annual base salary of $150,000. In
      connection with Mr. Olah’s appointment as the Company’s President, the Company
      granted Mr. Olah a ten-year option to
      purchase up to 500,000 shares
      of the Company’s common stock at an exercise price of $ 2.55 per
      share (the fair value of the Company’s
      common stock
      on August
      2, 2005, the date
      of grant). The option vests ratably
      over three years in installments of approximately 166,666 shares on each August
      2 beginning in 2006 and ending in 2008. In addition, the Company and Mr. Olah
      entered into a letter agreement amending an earlier option agreement dated
      June
      1, 2004 which the parties entered into in connection with a consulting
      agreement. Under the letter agreement, the parties agreed to cease the vesting
      of 200,000 unvested shares that were subject to an earlier option agreement,
      and
      to extend, through July 26, 2010, the term during which the vested portion
      of
      that option (consisting of 100,000 shares) may be exercised. The purchase price
      for the vested option to purchase 100,000 shares is $2.15 per share.
      Notwithstanding the foregoing vesting schedule, all options are subject to
      early
      termination in the event Mr. Olah ceases to serve as an employee of or
      consultant to the Company.





56


**Director
      Compensation**





Directors
      do not presently receive any compensation from the Company for attending board
      of directors or committee meetings, although the Company does reimburse
      directors for expenses incurred in attending such meetings. The Company has
      no
      official plan or policy for compensating directors with stock options or stock
      awards.




In
      October 2004, the Company granted a director an option for 150,000 shares of
      the
      Company’s common stock at an exercise price of $3.20 per share, as an inducement
      for him to join the Company’s board of directors. This option vests in
      30,000-share increments on each October 8 of the years 2005, 2006, 2007, 2008
      and 2009. In January 2005, the Company granted a director an option for 150,000
      shares of the Company’s common stock at an exercise price of $3.20 per share, as
      an inducement for him to join the Company’s board of directors. This option
      vests in 30,000-share increments on each January 24 of the years 2006, 2007,
      2008, 2009 and 2010. In February 2005, the Company granted an option for 250,000
      shares of the Company’s common stock at an exercise price of $2.00 per share, as
      an inducement to join the Company’s Board of Directors. This option vests as to
      25,000 shares immediately and in 75,000-share increments on February 9 of the
      years 2006, 2007 and 2008.




**Item
      11.**  **Security
      Ownership of Certain Beneficial Owners and Management**





The
      following table sets forth certain information with respect to beneficial
      ownership of the Company’s common stock as of the February 28, 2006 by: (i) each
      director of the Company, (ii) each person named in the Summary Compensation
      Table, (iii) all current directors and executive officers of the Company as
      a
      group, and (iv) each person or entity known by the Company to own beneficially
      more than five percent (5%) of the Company’s common stock. Unless otherwise
      indicated, the address of each of the following persons is 14200 23 rd Avenue
      N., Minneapolis, MN 55447, and each such person has sole voting and investment
      power with respect to the shares of common stock set forth opposite their
      respective names.


Name
                and Address of Shareholder
            
            
            Number
                of
              Shares
                Beneficially
              Owned
                (1)
            
            
            Percent
                of Outstanding
              Shares
                (1)Kenneth
                Brimmer (2)
            
            
            100,000
            
            
            *Robert
                Bonev (3)
              c/o
                Artic Cat, Inc.
              601
                Brooks Ave. S.
              Thief
                River Falls, MN 56701
            
            
            96,666
            
            
            *Russell
                Mix (4)
              1400
                West Burbank Blvd.
              Burbank,
                CA 91506
            
            
            542,038
            
            
            3.8
            %D.
                Bradley Olah (5)
            
            
            1,161,250
            
            
            8.0
            %Namon
                D. Witcher (6)
              825
                Jefferson St.
              Monterey,
                CA 93940
            
            
            30,000
            
            
            *






57




Name
                and Address of Shareholder
            
            
            Number
                of
              Shares
                Beneficially
              Owned
                (1)
            
            
            Percent
                of Outstanding
              Shares
                (1)


All
                current executive officers and
              directors
                as a group (six persons) (7)
            
            
            1,929,999
            
            
            12.6
            %Perkins
                Capital Management, Inc. (8)
              730
                East Lake Street
              Wayzata,
                MN 55391
            
            
            4,168,506
            
            
            25.3
            %Ronald
                E. Eibensteiner (9)
              U
                S
                Bancorp Building
              800
                Nicollet Mall, Suite 2690
              Minneapolis,
                MN 55402
            
            
            930,696
            
            
            6.7
            %Wayne
                W. Mills (10)
              5020
                Blake Rd. S.
              Edina,
                MN 55436
            
            
            1,312,857
            
            
            9.1
            %Morgan
                Street Partners, LLC (11)
              800
                Nicollet Mall, Suite 2690
              Minneapolis,
                MN 55402
            
            
            743,196
            
            
            5.4
            %Omicron
                Master Trust (12)
              650
                Fifth Avenue, 24th Floor
              New
                York, NY 10019
            
            
            2,125,000
            
            
            13.4
            %Amatis
                Limited (13)
              c/o
                Amaranth Advisors L.L.C.
              One
                American Lane
              Greenwich,
                CT 06831
            
            
            1,250,000
            
            
            8.4
            %Merriman
                Curhan Ford & Co. (14)
              600
                California Street, 9th Floor
              San
                Francisco, CA 94108
            
            
            1,258,124
            
            
            8.4
            %Gary
                Watkins (15)
              1611
                S. Yutica, No. 194
              Tulsa,
                OK 79104
            
            
            1,000,000
            
            
            7.2
            %




*
            less
                than 1 percent





(1)  Beneficial
      ownership is determined in accordance with the rules of the SEC and includes
      general voting power and/or investment power with respect to securities. Shares
      of common stock subject to options or warrants currently exercisable or
      exercisable within 60 days of the record rate are deemed outstanding for
      computing the beneficial ownership percentage of the person holding such options
      or warrants but are not deemed outstanding for computing the beneficial
      ownership percentage of any other person. Except as indicated by footnote,
      the
      persons named in the table above have the sole voting and investment power
      with
      respect to all shares of common stock shown as beneficially owned by
      them.




58


(2)  Includes
      100,000 shares which Mr. Brimmer may purchase under currently exercisable
      options for Spectre’s common stock.




(3)  Includes
      30,000 shares which Mr. Bonev may purchase under currently exercisable options
      for Spectre’s common stock ,
      and
      66,666 common shares owned directly by Mr. Bonev .




(4)  Includes
      323,333 shares which Mr. Mix may purchase under currently exercisable options
      for Spectre’s common stock, 555 shares held in trust for the benefit of Mr.
      Mix’s children, 20,000 shares of common stock owned by Prolific Publishing,
      Inc., a company of which Mr. Mix is an affiliate, 34,375 shares upon conversion
      of Series B Variable Rate Convertible  Preferred
      Stock owned by Prolific Publishing  and
      164,375 shares of common stock issuable upon exercise of currently exercisable
      warrants owned by Prolific Publishing .




(5)  Includes
      234,000 shares held directly, 100,000 shares which Mr. Olah may purchase under
      currently exercisable options for Spectre’s common stock, 806,250 shares of
      common stock issuable upon exercise of currently exercisable warrants, and
      21,000 shares held in trust for Mr. Olah’s children (with respect to which
      shares Mr. Olah disclaims beneficial ownership).




(6)  Includes
      30,000 shares which Mr. Witcher may purchase under currently exercisable options
      for Spectre’s common stock.




(7)  Includes
      Messrs. Brimmer, Bonev, Mix, Olah, Greer and Witcher.




(8)  As
      disclosed in a Schedule 13G/A filed on January 27, 2006, includes 3,060,881
      of
      common stock equivalents and 1,107,625 shares subject to currently exercisable
      warrants for Spectre’s common stock. Perkins Capital Management, Inc. has sole
      power to vote or direct the vote for only 1,377,610 shares listed in the table
      as beneficially owned by it.




(9)  As
      disclosed in a Schedule 13G/A filed on February  14, 2006.
      Includes (i)
      743,196 shares
      held by Morgan Street Partners, LLC, of which Mr. Eibensteiner is the sole
      executive officer , and (ii) 93,750
      shares upon conversion of Series B Variable Rate Convertible Preferred
      Stock together
      with 93,750
      shares of common stock issuable upon exercise of currently exercisable
      warrants ,
      all of
      which are owned by
      Wyncrest Capital, Inc., a corporation wholly
      owned by Mr. Eibensteiner.




(10)  Includes
      537,857 shares held directly, 650,000 shares issuable upon exercise of warrants
      held by Blake Advisors, LLC, a limited liability company of which Mr. Mills
      is
      the sole member and manager, 62,500 shares upon conversion of Series B Variable
      Rate Convertible Preferred
      Stock , and
      62,500 shares of common stock issuable upon exercise of currently exercisable
      warrants owned by Hunter Ridge Partners, LLC, a limited liability company of which
      Mr.
      Mills is a manager and member.




(11)  As
      disclosed in a Schedule 13D/A filed on February 13, 2006, Morgan Street
      Partners, LLC , a
      limited liability company owned by Ronald
      E .
      Eibensteiner’s spouse and daughter .




59


(12)  Includes
      937,500 shares upon conversion of Series B Variable Rate Convertible Preferred
      Stock and 1,187,500 shares of common stock issuable upon exercise of currently
      exercisable warrants.




(13)  Includes
      625,000 shares upon conversion of Series B Variable Rate Convertible Preferred
      Stock and 625,000 shares of common stock issuable upon exercise of currently
      exercisable warrants.




(14)  Includes
      156,250 shares upon conversion of Series B Variable Rate Convertible Preferred
      Stock and 1,101,874 shares of common stock issuable upon exercise of currently
      exercisable warrants.




(15)  Includes
      200,000 shares which Mr. Watkins may purchase under currently exercisable
      options for Spectre’s common stock and 800,000 shares of common stock subject to
      certain forfeiture restrictions.







**Equity
      Compensation Plan Information**


**Plan
                Category**
            
            
            **Number
                of Securities to be issued upon exercise of outstanding options,****warrants
                and rights**
            
            
            **Weighted-average
                exercise price of outstanding options,****warrants
                and rights**
            
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in****column
                (a))**(a)
            
            
            (b)
            
            
            (c)Equity
                compensation plans approved by security holders
            
            
            1,930,874
            
            $
            2.16
            
            
            275,626Equity
                compensation plans not approved by security holders
            
            
            11,968,930
            
            $
            2.07
            
            
            noneTotal
            
            
            13,899,804
            
            $
            2.08
            
            
            275,626








**1999
      Stock Option Plan**





In
      1999,
      the Company’s board of directors adopted, subject to shareholder approval, the
      1999 Non-Qualified Stock Option Plan (the “1999 Plan”) pursuant to which 400,000
      shares of common stock were reserved for issuance. On April 18, 2000, the board
      of directors approved an amendment to the 1999 Plan to increase the number
      of
      shares reserved for issuance thereunder by 200,000. Company shareholders
      approved the 1999 Plan (and the April 18, 2000 amendment) at the Company’s
      annual shareholder meeting held on May 23, 2000. Effective upon the Company’s
      one-for-three stock combination (i.e., reverse split) on December 2, 2003,
      the
      total number of shares reserved for issuance under the 1999 Plan was reduced
      to
      200,000. In July 2004, the board of directors approved an amendment to the
      1999
      Plan to increase the number of shares reserved for issuance thereunder by
      100,000, bringing the total number of shares reserved for issuance to 300,000.
      The shareholders approved this amendment to the 1999 Plan at the Company’s
      annual shareholder meeting held on August 26, 2004. Under the 1999 Plan, only
      Company officers and directors may receive options. Furthermore, only
      non-statutory options (i.e., options other than “incentive stock options” under
      the Internal Revenue Code of 1986, as amended) may be granted under the 1999
      Plan.





60


**2004
      Stock Option Plan**





In
      July
      2004, the Company’s board of directors passed a resolution adopting the Spectre
      Gaming Inc. 2004 Stock Option Plan (the “2004 Plan”). The Company has reserved
      2,000,000 shares of common stock for issuance under the 2004 Plan. The Company’s
      shareholders approved the 2004 Plan at the Company’s annual shareholder meeting
      held on August 26, 2004. As of March 15, 2005, 662,500 options have been granted
      under the 2004 Plan. The 2004 Plan provides for the grant of both incentive
      and
      non-statutory stock options. Incentive stock options granted under the 2004
      Plan
      are intended to qualify as “incentive stock options” under the Internal Revenue
      Code of 1986, as amended. Non-statutory stock options granted under the 2004
      Plan will not qualify as incentive stock options. The board of directors adopted
      the 2004 Plan to provide a means by which Company employees, directors, officers
      and consultants may be given an opportunity to purchase stock in the Company,
      to
      assist in retaining the services of such persons, to secure and retain the
      services of persons capable of filling such positions and to provide incentives
      for such persons to exert maximum efforts for the success of the
      Company.





**Item
      12.**  **Certain
      Relationships and Related 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 $149,000 and $102,166 during the years ended
      December 31, 2005 and 2004, respectively. Management believes that all of the
      above-described transactions were conducted on terms no less favorable to the
      Company than could be obtained from unrelated third parties.





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 $214,000 and $81,000 during the years ended December 31, 2005
      and
      2004, respectively. The Company’s CEO also serves as a director of the
      corporation. Management believes that all of the above-described transactions
      were conducted on terms no less favorable to the Company than could be obtained
      from unrelated third parties.





In
      February 2004, the Company entered into a consulting agreement with D. Bradly
      Olah, a greater-than-five-percent shareholder of the Company. Pursuant to the
      consulting agreement, Mr. Olah received $12,500 per month for four months
      (ending as of May 31, 2004) in exchange for general consulting services. On
      June
      1, 2004, the Company entered into a new consulting agreement with Mr. Olah
      that
      contained a two-year term. In connection with the new consulting agreement,
      Mr.
      Olah received a five year option to purchase up to 300,000 shares of the
      Company’s common stock at an exercise price of $2.15 per share (the fair value
      of the stock on the date of grant). Beginning on June 15, 2005, the option
      vests
      in 100,000-share increments on each June 15 through 2007. The options were
      valued on the date performance was complete under variable plan accounting
      using
      the Black-Scholes pricing model. The options had a value of $750,000 at December
      31, 2004, of which $218,750 had been charged to expense during the year ended
      December 31, 2004.




Effective
      as of August 2, 2005, the Company’s board of directors appointed D.
      Bradly Olah as its President to replace Russell Mix, who continues to serve
      as
      the Company’s Chief Executive Officer. A
      prior
      consulting agreement with Mr.
      Olah was terminated as a result of this
      appointment. The Company does not have a written employment agreement with
      Mr.
      Olah, but has agreed to compensate Mr. Olah with an annual base
      salary of $150,000. In connection with Mr. Olah’s appointment as the Company’s
      President, the Company granted
      Mr. Olah a ten-year option
      to
      purchase up to 500,000 shares of the
      Company’s common
      stock at an
      exercise price of
      $2.55 per
      share ( the
      fair
      value of the Company’s
      common stock
      on August
      2,
      2005, the
      date
      of grant). The
      option vests ratably
      over three years in installments of approximately 166,666 shares
      on
      each August 2 beginning in 2006 and ending in 2008. In addition ,
      the
      Company and Mr. Olah entered
      into a letter agreement amending an earlier option
      agreement dated June 1, 2004 which the parties entered into in connection with a
      consulting agreement. Under
      the
      letter agreement, the parties agreed to cease
      the
      vesting of 200,000 unvested shares that
      were subject
      to an
      earlier option agreement, and to extend, through July 26, 2010, the term
      during which vested
      portion of that option (consisting of 100,000 shares) may be exercised. The
      purchase price for the vested option to purchase 100,000 shares is $2.15 per
      share. Notwithstanding the foregoing vesting schedule, all options are subject
      to early termination in the event Mr. Olah ceases to serve as an employee of
      or
      consultant to the Company .  The
      Company evaluated the accounting treatment of the options according to Emerging
      Issues Task Force 00-23 (EITF 00-23), "Issues related to the Accounting for
      Stock Compensation under APB Opinion No. 25, and FASB Interpretation No. 44".
      Due to the modified stock options being fully-vested at the time of the
      modification, there was no additional compensation expense recognized related
      to
      the modification.





61


On
      May
      20, 2004, the Company closed on a $1.1 million loan from Pandora Select
      Partners, L.P., in exchange for a convertible promissory note. In connection
      with the convertible debt financing from Pandora, the Company paid $50,000
      and
      issued two three-year warrants to Blake Advisors, LLC, a Minnesota limited
      liability company wholly owned by Wayne W. Mills, a greater-than-five-percent
      shareholder of the Company. The warrants were issued in exchange for
      financial-advisory services rendered by Blake Advisors. One warrant grants
      Blake
      Advisors the right to obtain up to 50,000 shares of the Company’s common stock
      at an exercise price of $2.50 per share, and the second warrant grants Blake
      Advisors the right to obtain up to 50,000 shares of the Company’s common stock
      at an exercise price of $3.00 per share. For
      accounting purposes, the  warrants
      were valued at $225,000 using the Black-Scholes pricing model and will be
      expensed using the straight-line method over the term of the promissory note.
      For the year ended December 31, 2004, the Company recorded expense of $92,340
      related to these warrants.





On
      December 9, 2005, the Company issued a fully vested, five year warrant to
      purchase 100,000 shares at $2.00 per share to Blake for services rendered in
      connection with Company financings. The Company recorded an expense of $180,464
      in 2005 related to the issuance of the warrant.





On
      September 10, 2004, the Company closed on second loan from Pandora and Whitebox
      in the aggregate amount of $1.5 million. At the time of this transaction,
      Pandora beneficially owned greater than five percent of the Company’s common
      stock. The September 2004 promissory notes are secured by the Company’s assets,
      and are payable in interest only, at an annual rate of ten percent commencing
      October 2004, with the principal balance due in March 2005. These promissory
      notes are not convertible into our common stock. In connection with this
      financing, the Company issued to each of Pandora and Whitebox five-year warrants
      to purchase 50,000 shares of common stock at a price of $3.00 per share. In
      connection with the financing, the Company paid a three percent origination
      fee
      to an affiliate of the lenders.





On
      June
      21, 2005, the Company issued a $1.5 million unsecured promissory note to Crown
      Bank of Edina, Minnesota. The note was due on August 31, 2005 and bears interest
      at 1% above prime (7.25% at June 30, 2005). In connection with this loan the
      Company paid a two percent origination fee, which was amortized from June 21,
      2005 until August 31, 2005. The loan was guaranteed by two persons, Ronald
      E.
      Eibensteiner (the Company’s former Chairman and Chief Executive Officer) and D.
      Bradly Olah, who became our President on August 2, 2005. In exchange for their
      guarantees, the Company issued each of the foregoing guarantors five-year
      warrants to purchase 150,000 shares of the Company’s common stock at the price
      of $2.20, the closing price of the common stock on the date of issuance. For
      Accounting purposes, the warrants were valued at $578,064 using the Black
      Scholes pricing model and the value of the warrants was amortized from June
      21,
      2005 until August 31, 2005.





62


**Item
      13.**  **Exhibits**








Number
            
            Description3.1
            
            Articles
                of Incorporation (incorporated by reference to the registrant’s
                registration Statement on Form SB-2 (File No. 33-90084C) filed on
                March 7,
                1995).3.2
            
            Bylaws
                (incorporated by reference to the registrant’s registration statement on
                Form SB-2 (File No. 33-90084C) filed on March 7, 1995).3.3
            
            Amendment
                of Amended and Restated Articles of Incorporation (incorporated by
                reference to Exhibit 3.3 to the registrant’s annual report on Form 10-KSB
                for the year ended December 31, 2003).3.4
            
            Articles
                of Merger (incorporated by reference to Exhibit 3.4 to the registrant’s
                annual report on Form 10-KSB for the year ended December 31, 2003
                ).3.5
            
            Articles
                of Amendment to Amended and Restated Articles of Incorporation, as
                amended
                (incorporated by reference to Exhibit 3.1 to the registrant’s current
                report on Form 8-K filed on September 16, 2004).3.6
            
            Certificate
                of Designation for Series A Preferred Stock (incorporated by reference
                to
                Exhibit 4.1 to the registrant’s annual report on Form 10-KSB filed on
                September 13, 2002).3.7
            
            Certificate
                of Designation for Series B Variable Rate Convertible Preferred Stock,
                as
                amended(incorporated by reference toExhibits
                3.1, 3.2 and 3.3 to the Company’s current report on Form 8-Kfiled onOctober
                28, 2005).






63




10.1
            
            Employment
                Agreement by and between Spectre Gaming, Inc. and Gary Watkins, dated
                March 4, 2004 (incorporated by reference to Exhibit 10.3 to the
                registrant’s quarterly report on Form 10-QSB for the quarter ended March
                31, 2004).10.2
            
            Software
                Development Agreement with MET Games, Inc., dated March 4, 2004
                (incorporated by reference to Exhibit 10.2 to the registrant’s quarterly
                report on Form 10-QSB for the quarter ended March 31,
                2004).10.3
            
            Employment
                Agreement by and between Spectre Gaming, Inc. and Russell Mix, dated
                April
                16, 2004 (incorporated by reference to Exhibit 10.1 to the registrant’s
                quarterly report on Form 10-QSB for the quarter ended March 31,
                2004).10.4
            
            Purchase
                Agreement by and between Spectre Gaming, Inc. and Pandora Select
                Partners,
                L.P., dated May 20, 2004 (incorporated by reference to Exhibit 10.1
                to the
                registrant’s current report on Form 8-K filed on May 27,
                2004).10.5
            
            Secured
                Convertible Promissory Note in favor of Pandora Select Partners,
                L.P.,
                dated May 20, 2004 (incorporated by reference to Exhibit 10.2 to
                the
                registrant’s current report on Form 8-K filed on May 27,
                2004).10.6
            
            Registration
                Rights Agreement with Pandora Select Partners, L.P., dated May 20,
                2004
                (incorporated by reference to Exhibit 10.3 to the registrant’s current
                report on Form 8-K filed on May 27, 2004).10.7
            
            License
                Agreement with Bally Gaming, Inc., dated June 30, 2004 (incorporated
                by
                reference to Exhibit 10.1 to the registrant’s quarterly report on Form
                10-QSB for the quarter ended June 30, 2004).10.8
            
            Purchase
                Agreement with Pandora Select Partners, L.P. and Whitebox Intermarket
                Partners, L.P., dated September 10, 2004 (incorporated by reference
                to
                Exhibit 10.1 to the registrant’s current report on Form 8-K filed on
                September 16, 2004).10.9
            
            Promissory
                Note in favor of Pandora Select Partners, L.P., dated September 10,
                2004
                (incorporated by reference to Exhibit 10.6 to the registrant’s current
                report on Form 8-K filed on September 16, 2004).10.10
            
            Promissory
                Note in favor of Whitebox Intermarket Partners, L.P., dated September
                10,
                2004 (incorporated by reference to Exhibit 10.5 to the registrant’s
                current report on Form 8-K filed on September 16,
                2004).10.11
            
            Amendment
                to Promissory Note by and between Spectre Gaming, Inc. and Pandora
                Select
                Partners, L.P., dated May 10, 2005 (incorporated by reference to
                Exhibit
                10.9 to the registrant’s annual report on Form 10-KSB for the year ended
                December 31, 2004).






64




10.12
            
            Amendment
                to Promissory Note by and between Spectre Gaming, Inc. and Whitebox
                Intermarket Partners, L.P., dated May 10, 2005 (incorporated by reference
                to Exhibit 10.10 to the registrant’s annual report on Form 10-KSB for the
                year ended December 31, 2004).10.13
            
            Redemption
                Technology and Supply Agreement with Bally Gaming, Inc., dated May
                24,
                2005 (incorporated by reference to Exhibit 10.1 to the registrant’s
                current report on Form 8-K/A filed on June 22, 2005).10.14
            
            Securities
                Purchase Agreement with purchasers of Series B Variable Rate Convertible
                Preferred Stock, dated October 27, 2005 (incorporated by reference
                to
                Exhibit 10.1 to the registrant’s current report on Form 8-K on October 28,
                2005).10.15
            
            Form
                of Warrant to Purchase Common Stock (entered into with purchasers
                of
                Series B Variable Rate Convertible Preferred Stock, dated October
                27, 2005
                (incorporated by reference to Exhibit 10.2 to the registrant’s current
                report on Form 8-K on October 28, 2005).10.16
            
            Registration
                Rights Agreement with purchasers of Series B Variable Rate Convertible
                Preferred Stock, dated October 27, 2005 (incorporated by reference
                to
                Exhibit 10.3 to the registrant’s current report on Form 8-K on October 28,
                2005).14
            
            Code
                of Ethics (incorporated by reference to Exhibit 14 to the registrant’s
                annual report on Form 10-KSB for the year ended December 31,
                2004).23.1
            
            Consent
                of Virchow, Krause & Company, LLP (filed herewith).31.1
            
            Rule
                13a-14(a) Certification of Chief Executive Officer (filed
                herewith).31.2
            
            Rule
                13a-14(a) Certification of Chief Financial Officer (filed
                herewith).32.
            
            Section
                1350 Certification (filed
                herewith).








65
 **Item
        14.**  **Principal
        Accountant Fees and Services**





The
      Board
      of Directors of the Company selected Virchow, Krause & Company, LLP,
      certified public accountants with offices in Minneapolis, Minnesota, to audit
      the Company’s financial statements for the years ended December 31, 2005 and
      2004. The following table details the fees paid to Virchow Krause for the years
      ended December 31, 2005 and 2004.




**2005**
            
            
            **2004**Audit
                Fees
            
            $
            65,415
            
            $
            39,400Audit-Related
                Fees
            
            
            13,040
            (1)
            
            1,000
            (1)Tax
                Return Preparation Fees
            
            
            3,632
            
            
            1,500All
                Other Fees
            
            
            0
            
            
            12,450
            (2)Total
            
            $
            82,087
            
            $
            54,350





(1)
            Fees
                related to review of Form SB-2
                filing.


(2)
            Fees
                related to audit of potential acquisition and general research
                projects.





The
      policy of the Company’s audit committee is to review and preapprove both audit
      and non-audit services to be provided by the independent auditors (other than
      with *de
      minimis* exceptions permitted by the Sarbanes-Oxley Act of 2002). This duty may be
      delegated to one or more designated members of the audit committee with any
      such
      approval reported to the committee at its next regularly scheduled meeting.
      Approval of non-audit services shall be disclosed to investors in periodic
      reports required by section 13(a) of the Securities Exchange Act of 1934.
      Approximately 100% of the fees paid to Virchow Krause were pre-approved by
      the
      full board of directors in-lieu of the audit committee.




No
      services in connection with appraisal or valuation services, fairness opinions
      or contribution-in-kind reports were rendered by Virchow Krause. Furthermore,
      no
      work of Virchow Krause with respect to its services rendered to the Company
      was
      performed by anyone other than Virchow Krause.




66


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) 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:
              March 24, 2006
            By:
            /s/ Kevin
              M.
              GreerKevin
              M. GreerChief
              Financial Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




**Signatures**
              
              **Title**
              
              **Date**/s/
                  Kenneth Brimmer
                Kenneth
                  Brimmer
              
              Chairman
              
              March
                  24, 2006/s/
                  Russell Mix
                Russell
                  Mix
              
              Chief
                  Executive Officer and Director(Principal
                Executive
                  Officer)
              
              March
                  24, 2006/s/
                  Kevin M. Greer
                Kevin
                  M. Greer
              
              Chief
                  Financial Officer (Principal
                  Financial and
                Accounting
                  Officer)
              
              March
                  24, 2006/s/
                  D. Bradly Olah
                D.
                  Bradly Olah
              
              Director
              
              March
                  24, 2006/s/
                  Robert Bonev
                Robert
                  Bonev
              
              Director
              
              March
                  24, 2006/s/
                  N.D. Witcher
                N.D.
                  Witcher
              
              Director
              
              March
                  24, 2006







67