**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, 2006





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. 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 x No 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, 2006 totaled $550,498.





The
      aggregate market value of the common stock held by non-affiliates of the
      registrant as of April 10, 2007 was approximately $4,923,996 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 April 10,
      2007 was 16,366,749.





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 and Small Business
                  Issuer Purchases of Equity Securities
              14Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              16Item
                  7.
              Financial
                  Statements
              23Item
                  8.
              Changes
                  In and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              51Item
                  8A.
              Controls
                  and Procedures
              51Item
                  8B.
              Other
                  Information
              52PART
                  III
              
              53Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance With
                  Section
                  16(a) of the Exchange Act
              53Item
                  10.
              Executive
                  Compensation
              56Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management
              60Item
                  12.
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              62Item
                  13.
              Exhibits
              64Item
                  14.
              Principal
                  Accountant Fees and Services
              66


This
      annual report on Form 10-KSB contains certain statements that are in the nature
      of “forward-looking statements” and includes, among other things, discussions of
      the strategies, future operations and capital resources of Spectre Gaming,
      Inc.
      Words such as, but not limited to, “may,” “likely,” “anticipate,” “expect” and
“believes” indicate forward-looking statements. Although Spectre Gaming 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 Spectre Gaming’s
      operations are subject to a number of uncertainties, risks and other influences,
      most of which are outside Spectre Gaming’s control, and any one or combination
      of which could materially and adversely affect the Spectre Gaming’s financial
      condition or its results of 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 Spectre Gaming’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 Spectre Gaming 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 for
      Class II and Class III gaming. Class II gaming is generally defined to include
      bingo and bingo-style games, while Class III gaming is typically associated
      with
      Las Vegas style casinos games such as slot machines.





In
      May
      2005, the Company acquired the exclusive license to certain proprietary software
      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. In June 2006, the Company terminated the agreement pursuant to which
      it
      had obtained exclusive license rights to the AWP-related software technology
      mentioned above, and shortly thereafter completed testing on its own AWP
      software technology. So far, the Company has purchased 875 game cabinets built
      by a third-party manufacturer and has been converting them for use in the AWP
      market. In addition, the Company has converted 256 of its own game cabinets,
      previously used in its discontinued (Class III) operations, for use in the
      AWP
      market. To date, the Company has installed approximately 850 games in the states
      of Florida and Texas. The games are leased to operators that are located in
      bingo halls, adult amusement arcades and Disabled American Veteran chapter
      locations. Because of the high costs of purchasing and financing game cabinets
      from third parties, the Company has developed its own AWP game cabinet which
      it
      intends to manufacture (or have manufactured on a contract basis) for use in
      future AWP games. Currently, the Company has redeployed or is in the process
      of
      moving 529 of its installed games to different locations where the Company
      expects greater utilization. The Company has contracted with a third-party
      content provider to provide game software for use in its game cabinets. To
      date,
      the Company has 20 game titles and three of its own internally developed game
      titles.




2





After
      we
      obtained the license rights for proprietary AWP-related technology in May 2005,
      we abandoned our Class II and Class III related gaming efforts. 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 item
      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 document
      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.





The
      Company had net losses for the years ended December 31, 2006 and 2005, had
      an
      accumulated deficit at December 31, 2006, and does not have adequate liquidity
      to fund its operations through fiscal 2007. Since the Company does not have
      significant operating history in the AWP market, it is uncertain whether the
      Company can generate revenues necessary to sustain its business. At this time,
      the Company requires additional capital to fund operating losses. Without
      additional financing, our management currently believes we will not have cash
      sufficient to continue operations through April 2007.





As
      of the
      date of this annual report, the Company’s current liabilities exceed current
      assets. To service its debt, the Company must produce sufficient operating
      revenue or raise additional capital. If the Company relies in whole or in part
      on financing, debt financing may involve restrictive covenants and equity
      financing will result in dilution to our common shareholders. Nevertheless,
      the
      Company may not be able to successfully obtain any financing at all. If we
      cannot produce revenue sufficient to service and repay our debt, or successfully
      obtain financing for that purpose, the Company will likely be forced to consider
      various strategic alternatives, including but not limited to liquidating some
      or
      all assets, ceasing some or all operations, and bankruptcy. In addition, the
      Company may be subject to foreclosures by its secured creditors.





As
      of
      April 13, 2007, the Company had not made a principal payment of $229,000, plus
      accrued interest, that originally became due December 31, 2006, on a promissory
      note held by Parklane Associates LLC and secured by substantially all of the
      assets of the Company. The note was originally issued and due to Pandora Select
      Partners, L.P. on September 10, 2004, but was acquired by Parklane in May 2006.
      Parklane paid for this purchase by issuing a substantially identical promissory
      note to Pandora Select Partners. Since January 1, 2007, the Company has made
      principal payments to Parklane in the aggregate amount of $146,000. In addition,
      the Company had not made interest payments on its Variable Rate Convertible
      Debentures totaling approximately $298,500 and dividends on its Series B
      Variable Rate Convertible Preferred Stock totaling approximately $63,500, which
      were due on December 31, 2006 and January 1, 2007, respectively. Since such
      due
      dates, the Company has received consents, representing 98% of amounts due to
      debenture holders and 100% of amounts due to preferred holders, to defer such
      interest and dividends due on January 1, 2007 and any additional amounts that
      will accrue and become payable in 2007, until January 1, 2008.


Pursuant
        to the Master Loan Agreement entered into with PDS Gaming Corporation on
        June
        29, 2006, it is an event of default if the Company does not pay its principal
        and interest payments when due or if the Company becomes insolvent, defined
        as
        liabilities greater than assets. At December 31, 2006, the Company was insolvent
        and subsequently, the Company was delinquent on its principal and interest
        payments. Upon an occurrence of an event of default, PDS may at any time
        declare
        all unmatured obligations immediately due and payable. As of April 17, 2007,
        the
        Company has not received notice from PDS declaring the Company’s obligations
        immediately due and payable.
 
 As
        a
        result of the defaults on the PDS Gaming Corporation promissory notes, pursuant
        to the Company’s outstanding Variable Rate Convertible Debentures due February
        18, 2009, an event of default occurs if the Company is in default under any
        other indebtedness obligation exceeding $150,000. As a result of the defaults
        on
        the PDS Gaming Corporation promissory notes, the Company is in default on
        those
        certain covenants in the Variable Rate Convertible Debentures. Upon an event
        of
        default, at the debentureholders’ election, the amount owing the holders will
        become immediately due and payable at 130% of the outstanding balance along
        with
        interest at the lesser of 18% or the maximum rate permitted under applicable
        law. As of April 14, 2007, the Company has not received notice from any
        debentureholders requiring acceleration of amounts due under the
        debenture.


On
      February 8, 2007, Pandora Select Partners filed a confession of judgment against
      Parklane and three individual grantors of the debt Parklane owes to Pandora
      Select Partners, including Ronald E. Eibensteiner, D. Bradly Olah, and Wayne
      W.
      Mills. As of April 13, 2007, however, the Company had not received any notice
      of
      default from Parklane. In the event the Company receives such a notice, it
      will
      have ten days to make payment in full to Parklane prior to defaulting under
      the
      terms of the promissory note.





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, or submarkets, of the AWP market
      to focus on: countertop and touchscreen machines, redemption and novelty,
      eight-liner/video poker, and other aspects that we believe are untapped. The
      games currently in operation in these markets consist primarily of stand-alone
      games that 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 glass or cabinet to change games
      and play. These changes to a game are often required after they have been in
      the
      market for a period of time and players tire of playing it. Because the Spectre
      system permits games to be changed remotely from a central server, we believe
      that the Spectre server-based AWP system will facilitate the changing of games
      once they have met their normal play cycle and at a fraction of the cost of
      stand-alone games. The Company also believes that because of the technology
      employed in its games, it can provide better game content, superior graphics
      and
      an overall high quality experience for its players.




3





*Countertops/Touchscreens* —
The
      countertop/slant-top game submarket exists in bars, lounges and truck stops
      across the United States. This submarket is primarily serviced by amusement
      operators that distribute juke boxes, pool tables, electronic dart boards and
      other amusement devices.





*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. 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.





*Other*  *Untapped
      Markets* —
We
      believe that an important and largely untapped marketplace exists in
      jurisdictions and locations within the United States where no form of gambling
      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 is currently a market for several hundred
      thousand AWP devices in these locations.




**Product
      Offerings**





The
      Company develops amusement-with-prize entertainment devices that appear and
      play
      like traditional Las Vegas style slot machines, which it believes are legally
      compliant with state amusement/arcade laws. Currently, the Company manufactures
      and distributes a complete AWP system that includes a backend accounting and
      reporting system, applications including point-of-sale, redemption and player
      tracking, and gaming devices offering dual monitors and downloadable games.
      This
      AWP system incorporates games and titles developed by Spectre and games and
      titles licensed from a third-party provider.





The
      Company’s AWP product offerings are designed around proprietary
      client/server-based technology internally developed by Spectre. Our games allow
      players to accumulate points that can be redeemed for prizes. Depending on
      the
      facility where a particular game is operating, players can trade their
      redemption points for prizes either at the facility or directly on the game
      terminal over the Company’s closed-loop redemption system. The Company
      manufactures and acquires machine terminals that can be configured in a wide
      variety of physical appearances, and the games titles themselves can be easily
      updated or changed on the terminals based on market and customer
      needs.





**Research
      and Development**





Our
      research and development activities primarily focus on the development of new
      game systems, gaming engines, gaming platforms and content, and enhancements
      to
      our existing product lines. 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 $1,908,541 and $963,272 during the years ended December 31,
      2006
      and 2005, respectively.





**Sales
      and Distribution Strategy**





The
      Company’s overall plan involves focused marketing and sales efforts in adult
      amusement arcades, bingo halls and other entertainment venues, initially in
      the
      States of Florida and Texas. The Company has targeted Florida and Texas for
      its
      initial installations. These markets were chosen because both are rapidly
      growing AWP markets that have limited or no regulatory compliant games available
      in the market. As opportunities arise, the Company intends to expand into other
      states and into the charitable gaming market. The Company may also consider
      licensing certain aspects of its proprietary gaming system to third parties
      for
      licensing and royalty fees.




4





Generally,
      we place our AWP machines on a lease or revenue-sharing basis to game room
      operators or “route” operators that place and service the machines in game room
      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
      software technology that we acquired through the asset acquisition of Streamline
      Development Company, Inc. in December 2004. This technology allows players
      on
      different and multiple machine terminals to interact, compete against one
      another, or play together toward a common result. In addition, the Company
      has
      developed (and continues to develop) proprietary software to be used in its
      AWP
      machines and systems. Our propriety software technology, combined with certain
      licensed trademark, image and likeness, other moral rights, and certain other
      assets, make up the bulk of our current intellectual property portfolio. 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 intellectual property.





Most
      of
      our AWP machines are or will be sold or leased using our owned or licensed
      trademarks and copyrights which we believe will provide AWP product and brand
      recognition and promote widespread acceptance of our brand and AWP products
      in
      the marketplace. Our machines may also contain actual game content licensed
      from
      third parties, such as trademarks, fictional characters, names and likenesses
      or
      storylines, which licenses we may acquire from time to time.





Our
      ability to enforce our rights to our owned and licensed 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 subjected to claims that the intellectual-property right
      is
      invalid, or is licensed to the party against whom the claim is being asserted.
      We cannot be certain that our intellectual-property rights will not be infringed
      upon, that others will not develop products in violation of our
      intellectual-property rights, or that others may assert, rightly or wrongly,
      that our intellectual-property rights are invalid or unenforceable. Although
      we
      have entered into confidentiality, non-compete and invention-assignment
      agreements with certain of our key employees and consultants, and otherwise
      limit access to, and distribution of, our intellectual properties, we cannot
      prevent our key employees or consultants from breaching those agreements, and
      we
      cannot be certain that we would have adequate remedies for any such breach
      or
      that our trade secrets will not otherwise become independently developed or
      discovered by competitors. In general, defending intellectual-property rights
      is
      expensive and consumes considerable time and attention of management. The
      Company’s involvement in intellectual-property litigation would likely have a
      materially adverse effect on the Company, even if the Company were ultimately
      successful in defending its intellectual-property rights.


5




**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, many states do not have a defined
      regulatory agency charged with the development of regulations, interpretation
      and enforcement of laws, or the regulation of business practices relating to
      AWP. To our knowledge, there currently 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.





Where
      explicit AWP regulation exists, such regulations generally limit the nature
      and
      the amount of the bet or wager allowed per play, limit the value of a prize
      which may be won with a single wager, and prescribe certain rules pertaining
      to
      the exchange of the win from a game for a physical prize, as well as various
      other prize limitations. In addition, each AWP system, and the manner in which
      the AWP business enterprise is conducted, must comply with state law
      requirements that 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 machines to ensure that
      the
      deployed system will be jurisdictionally compliant in each respective
      county.





We
      are
      aware, however, of some jurisdictions that do not have any explicit AWP laws
      or
      regulations and which attempt to regulate AWP business under existing laws
      and
      regulations designed for traditional gambling activities. In those states,
      we
      may be required to apply for and obtain licenses to engage in activities such
      as
      manufacturing, testing and operating our AWP machines. Often, compliance with
      the ordinary gambling-regulatory scheme that state authorities may claim applies
      to Spectre and its business will be costly and time consuming. As our business
      activities expand, we may encounter these types of regulatory matters with
      some
      frequency. In these instances, we may consider our various options for
      conducting AWP business in these jurisdictions, including:





·
            complying
                with the regulatory regime proponed by state
                authorities





·
            challenging
                the application of the regulatory scheme to our AWP business, through
                administrative and judicial
                processes





·
            lobbying
                appropriate state authorities for a change in the law that would
                formally
                recognize AWP and its related business activities as outside the
                scope of
                traditional gambling, or





·
            abandoning
                the jurisdiction.





**Employees**





As
      of
      December 31, 2006, the Company had 15 full-time employees and one part-time
      employee.





**Risk
      Factors**




***We
      have no meaningful 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 our 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. In particular, we anticipate that we will
      incur
      losses for the foreseeable future.




6





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





We
      have
      only recently begun generating revenue. Based on the limited revenue history
      of
      the Company, we are unable to predict with any certainty as to whether we can
      generate revenues to sustain operations. The Company will require additional
      financing for working capital and to fund its anticipated game cabinet
      manufacturing operations, which the Company expects will involve the manufacture
      of AWP game cabinets, entering into contracts with third parties for their
      manufacture of our cabinets on our behalf, or a combination of such activities.
      If the Company is unable to obtain financing, then management currently believes
      the Company will not have cash sufficient to continue operations through April
      2007. Any additional financing will likely involve dilution of our existing
      shareholders.





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.


***The
        Company is currently in default under the terms of a material agreement and
        outstanding debt securities, both secured and unsecured, which is likely
        to have
        a material adverse effect on the Company’s business, prospects for success and
        ability to raise needed additional financing.***
 
 The
        Company is currently in default under the terms of a Master Loan Agreement
        with
        PDS Gaming Corporation dated June 29, 2006. The default arises by virtue
        of the
        Company not having paid amounts due under loans advance pursuant to that
        agreement, and the Company being “insolvent” as that term is defined under that
        agreement. The existence of these defaults gives PDS Gaming Corporation the
        right, at any time and without notice to the Company, to accelerate and demand
        full payment for outstanding liabilities relating to the Master Loan Agreement.
        These liabilities currently total approximately $4,981,328, plus accrued
        and
        unpaid interest thereon.
 
 The
        event
        of default under the above-referenced Master Loan Agreement results in a
        corresponding default under the terms of the Company’s Variable Rate Convertible
        Debentures due 2009. This defaults gives the holders of such debentures the
        right, at any time and without notice to the Company, to accelerate and demand
        full payment for outstanding liabilities relating to the debentures, plus
        a
        premium provided for in the debentures as part of a default. These liabilities,
        including the default premium, currently total approximately $10,715,314,
        plus
        accrued and unpaid interest thereon.
 
 The
        obligations owed to PDS Gaming Corporation in connection with the Master
        Loan
        Agreement are secured by Company AWP machines purchased with the proceeds
        of the
        related loans. As a result, if PDS Gaming Corporation demands payment of
        the
        loans advanced under the Master Loan Agreement and the Company does not pay
        such
        amount, PDS Gaming Corporation will have the right to foreclose on the relevant
        AWP machines, from which most of our existing revenues are derived. In contrast,
        the obligations owed to holders of the Company’s Variable Rate Convertible
        Debentures due 2009 are unsecured. If some or all of the holders of the
        above-described debt determine to demand payment under their relevant agreements
        and securities, the Company and its business would be materially and adversely
        affected. Because of these defaults, the Company could lose title to AWP
        machines critical to producing revenue, and if this occurs the Company would
        be
        forced to consider a number of strategic alternatives, including but not
        limited
        to bankruptcy or liquidation.
 
 Finally,
        the existence of these defaults, even in the absence of any acceleration
        and
        demand for payment by PDS Gaming Corporation or any one or more holders of
        the
        debentures, will likely significantly compromise the Company’s efforts to raise
        additional financing needed to fund its operating losses and sustain
        operations.




***One
      Florida State Attorney has taken the position that the Company’s games do not
      comply with applicable state law, which presents the risk that our games in
      certain locations in Florida locations must be moved, or be seized, and that
      other Florida authorities could take the same position, any of which could
      materially and adversely affect the Company’s operating results and business
      prospects.***





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





At
      this
      time, the operator has indicated that they will comply with the order and shut
      down operations for a period of time while seeking a resolution of this matter.
      The Company does not agree with the State Attorney’s position and is currently
      evaluating its options. The operator and its legal counsel have responded to
      the
      State Attorney’s letter. These games currently account for approximately 18% of
      the Company’s revenues. The Company may remove the games and move them to
      another location within the State of Florida. In the event the Company
      determines to relocate the games, the Company estimates that it may take between
      four to six weeks to successfully place and begin operating the games again
      if a
      move is necessary. Alternatively, the Company may permit the operator to
      continue operating the games at the current location. In such a case, Florida
      state or county authorities could seize the Company’s games pending resolution
      of the matter through litigation or a settlement. Finally, if the matter
      proceeds to litigation, it is possible that the Company’s games could be found
      to be non-compliant with Florida state law. Such a determination would result
      in
      the Company being forced to remove all of its games in Florida, or else have
      them seized.





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





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





We
      had
      net losses attributed to common shareholders for each of the years ended
      December 31, 2006 and 2005, in the amounts of $13,660,555 and $13,645,479,
      respectively, and we had an accumulated deficit as of December 31, 2006 of
      $47,914,045. 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 generate sufficient revenues, obtain necessary
      equipment financing and if necessary, raise additional capital through financing
      transactions. If we are unable to raise additional capital, we may be forced
      to
      discontinue our business.




7





***The
      Company has significant debt at various rates of interest and maturity dates,
      and current liabilities that exceed its current assets, which poses significant
      risks to investors in the event we cannot produce revenue or obtain additional
      financing to service and repay such debt.***





The
      Company has been significantly financed through the issuance of debt. As of
      April 10, 2007, the Company had total debt of $16,851,581. This debt matures
      at
      various times and is subject to various rates of interest ( *per
      annum* ),
      as set
      forth below:





**Secured
                Debt**
            
            **Amount**
            
            **Interest**
            
            **Maturity**Rockmore
                Investment Master Trust Ltd.
            
            
            750,000
            
            
            10
            %
            
            9/30/2007Parklane
                Associates LLC
            
            
            229,000
            
            
            15
            %
            
            12/31/2006PDS
                Gaming Corporation
            
            
            4,660,928
            
            
            13
            %
            
            8/01/2010Hawkeye
                Commodity Promotions, Inc.
            
            
            1,261,604
            
            
            14.5
            %
            
            7/25/2008PDS
                Gaming Corporation
            
            
            320,400
            
            
            55%
                (payable in common stock valued at $1.10 per share)
            
            
            12/18/07Ford
                Motor Credit
            
            
            23,138
            
            
            2.9
            %
            
            8/29/2011




**Unsecured
                Debt**
            
            **Amount**
            
            **Interest**
            
            **Maturity**Variable
                Rate Convertible Debentures due February 18, 2009
            
            
            8,242,549
            
            
            6
                Mth LIBOR + 4 %
            
            
            2/18/2009Notes
                payable
            
            
            626,650
            
            
            55%
                (payable in common stock valued at $1.10 per share)
            
            
            12/18/2007
                - 1/29/2007Notes
                payable
            
            
            737,312
            
            
            -
            
            
            3/29/2008-4/12/2008





As
      of the
      date of this annual report, our current liabilities exceed current assets.
      To
      service its debt, the Company must produce sufficient operating revenue or
      raise
      additional capital. If the Company relies in whole or in part on financing,
      debt
      financing may involve restrictive covenants and equity financing will result
      in
      dilution to our common shareholders. Nevertheless, the Company may not be able
      to successfully obtain any financing at all. If we cannot produce revenue
      sufficient to service and repay our debt, or successfully obtain financing
      for
      that purpose, the Company will likely be forced to consider various strategic
      alternatives, including but not limited to liquidating some or all assets,
      ceasing some or all operations, and bankruptcy. In addition, the Company may
      be
      subject to foreclosures by its secured creditors.


Pursuant
        to the Master Loan Agreement entered into with PDS Gaming Corporation on
        June
        29, 2006, it is an event of default if the Company does not pay its principal
        and interest payments when due or if the Company becomes insolvent, defined
        as
        liabilities greater than assets. At December 31, 2006, the Company was insolvent
        and subsequently, the Company was delinquent on its principal and interest
        payments. Upon an occurrence of an event of default, PDS may at any time
        declare
        all unmatured obligations immediately due and payable. As of April 17, 2007,
        the
        Company has not received notice from PDS declaring the Company’s obligations
        immediately due and payable.
 
 As
        a
        result of the defaults on the PDS Gaming Corporation promissory notes, pursuant
        to the Company’s outstanding Variable Rate Convertible Debentures due February
        18, 2009, an event of default occurs if the Company is in default under any
        other indebtedness obligation exceeding $150,000. As a result of the defaults
        on
        the PDS Gaming Corporation promissory notes, the Company is in default on
        those
        certain covenants in the Variable Rate Convertible Debentures. Upon an event
        of
        default, at the debentureholders’ election, the amount owing the holders will
        become immediately due and payable at 130% of the outstanding balance along
        with
        interest at the lesser of 18% or the maximum rate permitted under applicable
        law. As of April 14, 2007, the Company has not received notice from any
        debentureholders requiring acceleration of amounts due under the debenture.


As
      of
      April 13, 2007, the Company had not made a principal payment of $229,000 plus
      accrued interest, on a promissory note due to Parklane Associates LLC on
      December 31, 2006 and secured by substantially all of the assets of the Company.
      The note was originally issued and due to Pandora Select Partners, L.P. on
      September 10, 2004, but was acquired by Parklane Associates in May 2006.
      Parklane paid for this purchase by issuing a substantially identical promissory
      note to Pandora Select Partners. In addition, the Company had not made interest
      payments on its Variable Rate Convertible Debentures totaling approximately
      $298,500 and dividends on its Series B Variable Rate Convertible Preferred
      Stock
      totaling approximately $63,500, which were due on December 31, 2006 and January
      1, 2007, respectively. The Company has since received consents representing
      98%
      of amounts due to debenture holders and 100% of amounts due to preferred
      holders, to defer such interest and dividends due on January 1, 2007 and any
      additional amounts that will accrue and become payable in 2007, until January
      1,
      2008.




8





In
      the
      event the Company is not able to satisfy its obligations under the Parklane
      note
      or obtain an extension and forbearance from the noteholder, Parklane Associates
      (or from Pandora Select Partners, in the event that it forecloses on the
      promissory note that Parklane Associates delivered to Pandora as payment for
      its
      purchase of the Company’s promissory note), then the holder of the note will,
      after delivery of ten days’ prior notice of default to the Company, be able to
      declare a default in payment and foreclose upon Company assets.




On
      February 8, 2007, Pandora Select Partners filed a confession of judgment against
      Parklane and three individual grantors of the debt Parklane owes to Pandora
      Select Partners, including Ronald E. Eibensteiner, D. Bradly Olah, and Wayne
      W.
      Mills. As of the date of this annual report, the Company has not received any
      notice of default from Parklane.




***Our
      AWP products may not be accepted by the marketplace.***





Our
      AWP
      systems and products may not be accepted by the marketplace or successfully
      compete against other systems, games and products in the marketplace.





***We
      depend in part upon others for the manufacture of certain products that we
      use
      in our AWP machines, and we expect in the future to depend on third parties
      for
      the manufacture of a material amount of a AWP machines and/or their components,
      all of which subjects our business to the risk that we will be unable to fully
      control the supply of our products to the market.***





Our
      ability to successfully manufacture and commercialize our AWP products depends
      upon our ability to enter into and maintain contractual and collaborative
      arrangements with third parties. Although we currently assemble and complete
      the
      manufacture of our AWP machines, we do not intend to manufacture a significant
      portion of our proposed products in the future; and instead intend to retain
      contract manufacturers for that purpose. The manufacturers with whom we
      collaborate may not be able to supply our parts or machines in the required
      quantities, at appropriate quality levels, at acceptable costs or at acceptable
      times. 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 timely and cost-efficient
      manner, we would likely suffer interruptions of delivery while we arrange for
      alternative manufacturing sources. Any extended disruption in the delivery
      of
      our products could result in our inability to satisfy customer demand, and
      could
      impair any competitive advantages we derive from our systems, products and
      market position. Consequently, our inability to obtain alternative sources
      on a
      timely basis may have a material adverse effect on our business and results
      of
      operations.





***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 intend to market and commercialize products manufactured in
      significant part 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 AWP product themes 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
      almost certainly 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 could in turn
      significantly increase our capital requirements and may delay the development,
      manufacture and installation of our AWP machines at our customers’ locations. If
      we cannot find ways of addressing these capital requirements, we would likely
      be
      forced to sell or abandon our business.




9




***We
      may not be able to protect our intellectual property, which failure could impair
      our ability to compete.***





Our
      success and ability to compete depends in part upon proprietary intellectual
      property. The intellectual property we currently use consists of certain
      internally developed proprietary technology in tandem with certain licensed
      proprietary technology, the sum of which is critical to our business. In
      addition, we use other trademark, image and likeness, moral rights, and certain
      other intellectual property assets in our business. We currently rely and intend
      to rely in the future on a combination of copyright, trademark, patent, trade
      secret laws, and nondisclosure agreements to protect our proprietary technology.
      Although we have entered into confidentiality, non-compete and invention
      assignment agreements with our employees and otherwise limit access to, and
      distribution of, our proprietary technology, there can be no assurance that
      such
      agreements will not be breached, that we would have adequate remedies for any
      breach, or that our trade secrets will not otherwise become independently
      developed or discovered by competitors.





***The
      AWP market lacks regulatory clarity and consistency, which could impair our
      ability to place redemption gaming machines in some
      jurisdictions.***





AWP
      is
      generally 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. In some jurisdictions,
      state authorities take the position that AWP games are no different than
      traditional Class III gaming. The lack of clarity or guidance can lead to errors
      in legal interpretation, 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 that Company personnel may be
      arrested for violations of law.





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, such
      authority may change its position or the person rendering the advice 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 regulatory approvals or regulatory interpretations arising as a result of
      the
      spread of AWP games, or otherwise affecting amusement gaming or gambling, may
      adversely effect the Company and its AWP operations.***





If
      a
      state were to change the laws under which redemption or AWP activities are
      conducted, such as outlawing the games entirely or further limiting bet, play
      and prize restrictions, there would likely be a negative impact on the placement
      of our games and the conduct of our operations, if any, in such state. Another
      risk lies in the fact that a state may determine to legalize other forms of
      gaming, such as traditional Class III slot machine gaming. We expect that any
      liberalization of gaming laws applicable to such activity 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 materially rely on third-party operators and distributors for
      the
      installation and maintenance of its AWP devices.***





The
      Company intends to establish partnerships with various distribution and service
      companies (location operators) which are doing business in the jurisdictions
      in
      which Spectre will conduct AWP operations. These operators will likely provide
      sales and service support, as well as money and data collection. Failure to
      find
      sufficient or capable partners in a particular area may delay the rollout of
      our
      operations in that area. Even if we are able to establish a relationship with
      an
      operator, that operator may not move quickly enough to exploit any market
      advantages the Company may have. In addition, our operators may not provide
      a
      sufficient level of service, which could be expected to negatively affect the
      performance of AWP machines in that operator’s jurisdiction and the future
      placement of additional AWP machines. Finally, our operators will generally
      not
      be exclusive partners of the Company, and their other business activities may
      conflict with the Company’s business.




10





***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.), and such areas are instead markets primarily for small
      second or third-tier manufacturers. The entry of well-financed, established
      competitors into the AWP market in such states could have a material and
      negative impact on Spectre’s ability to place AWP machines and to increase or
      even maintain the number of AWP machines in the field.





***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 D. Bradly Olah, a director of the Company and our Chief
      Executive Officer, and Kevin M. Greer, our Chief Financial Officer. We also
      are
      party to a Consulting Agreement with Russell C. Mix, a Company director and
      our
      former Chief Executive Officer from November 2003 until September 12, 2006.
      If
      any of the foregoing persons should no longer serve the Company in their present
      capacities it would likely have a materially adverse impact on our business,
      financial condition and operations. Importantly, we do not have an employment
      agreement with Mr. Olah, and the Company has not secured any “key person” life
      insurance covering the lives of any of Messrs. Olah or Greer.





Our
      success also depends on our ability to identify, hire, train, retain and
      motivate highly skilled technical, managerial, sales and marketing personnel.
      We
      hope to hire a number of sales, business development, marketing, technical
      and
      administrative personnel in the future. Competition for such personnel is
      intense and we may be unable to 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
      April 10, 2007, our officers and directors collectively possessed beneficial
      ownership of approximately 3,657,042 shares of our common stock, which
      represents approximately 18.6% of our common stock. Certain other significant
      shareholders, including Perkins Capital Management, Inc., White Pine Capital,
      LLC, and Wayne W. Mills collectively possessed beneficial ownership of
      approximately 7,373,468 of common stock on such date, which represents
      approximately 31.9% of our common stock. When taken together, our directors,
      officers and the significant shareholders identified above collectively have
      beneficial ownership of approximately 41.8% 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 the
      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.




11





***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 failure to obtain regulatory approvals in favor of us or other
                purchasers of our products,





·
            announcements
                of technological innovations or new commercial
                products,





·
            developments
                concerning our proprietary technological
                rights,





·
            regulatory
                developments in the United States, or the several states, relating
                to the
                AWP industry and 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 our 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 further action by our 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.
      Furthermore, the issuance of additional shares having preferential rights could
      adversely affect other rights appurtenant to the shares of common stock offered
      hereby. Any such issuances will dilute the percentage of ownership interest
      of
      our shareholders and may dilute the per-share book value of the
      Company.





As
      of
      April 10, 2007, we had 16,366,749 shares of common stock outstanding, and
      49,616,803 shares of common stock reserved for issuance as follows:





·
            4,170,000
                shares under our existing stock plans, of which options relating
                to
                3,146,666 shares are currently outstanding, and 125,000 shares are
                issuable to directors.





·
            1,056,666
                shares relating to additional options granted outside of our stock
                option
                plans





·
            97,798
                shares upon conversion of outstanding Series A Preferred
                Stock





·
            2,250,950
                shares upon conversion of outstanding Series B Variable Rate Convertible
                Preferred Stock





·
            33,798,840
                shares upon the exercise of outstanding warrants,
                and





·
            8,242,549
                shares upon conversion of outstanding convertible
                debentures.




12




***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, our common stock is thinly traded. 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.





The
      penny-stock rules materially limit the liquidity of securities in the secondary
      market, and many brokers choose not to participate at all 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 leases 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 serves as
      Spectre’s headquarters.





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.





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




13





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





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





At
      this
      time, the operator has indicated that they will comply with the order and shut
      down operations for a period of time while seeking a resolution of this matter.
      The Company does not agree with the State Attorney’s position and is currently
      evaluating its options. The operator and its legal counsel have responded to
      the
      State Attorney’s letter. These games currently account for approximately 18% of
      the Company’s revenues. The Company may determine to remove the games and move
      them to another location within the State of Florida. In the event the Company
      determines to relocate the games, the Company estimates that it may take between
      four to six weeks to successfully place and begin operating the games again
      if a
      move is necessary. Alternatively, the Company may permit the operator to
      continue operating the games at the current location. In such a case, Florida
      state or county authorities could seize the Company’s games pending resolution
      of the matter through litigation or a settlement. Finally, if the matter
      proceeds to litigation, it is possible that the Company’s games could be found
      to be non-compliant with Florida state law. Such a determination would result
      in
      the Company being forced to remove all of its games in Florida, or else have
      them seized.





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





**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 2006 and 2005. These quotations reflect inter-dealer
      prices, without retail mark-up, markdown, or commission, and may not represent
      actual transactions. Trading in the Company’s common stock during the period
      represented was sporadic, exemplified by low trading volume and many days during
      which no trades occurred.





Year
                Ended December 31, 2006High
            
            LowFirst
                Qtr.
            
            $
            1.95
            
            $
            0.97Second
                Qtr.
            
            
            1.55
            
            
            1.00Third
                Qtr.
            
            
            1.25
            
            
            0.74Fourth
                Qtr.
            
            
            1.00
            
            
            0.36




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




14




The
      approximate number of shareholders of record of the Company’s common stock as of
      April 2, 2007 was 126.





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 Certificate of Designation for the Company’s Series B Variable Rate
      Convertible Preferred Stock, and the Company’s Variable Rate Convertible
      Debentures due 2009, prohibit the Company from paying cash dividends to holders
      of common equity.





The
      following table sets forth certain information regarding sales of equity
      securities by the Company during the calendar year 2006 in transactions which
      were not registered under the Securities Act of 1933.





Date
                of Sale
            
            Securities
                Sold
            
            Persons
                to Whom Sold
            
            Consideration
                Paid
            
            Exemption
                from Registration Relied UponVarious
                dates
              1/20/06
                - 12/19/06
            
            Options
                to purchase 3,062,500 shares of common stock
            
            16
                employees and directors of the Company
            
            Services
            
            Section
                4(2) of Securities ActVarious
                dates 1/31/06 - 12/20/06
            
            2,060,150shares of common stock
            
            10
                entities
            
            Conversion
                of Series B Preferred Stock
            
            Section
                4(2) and 4(6) of Securities Act2/29/2006
                and 4/13/06
            
            127,487
                shares of common stock
            
            33
                entities
            
            Preferred
                stock dividend
            
            Section
                4(2) of Securities Act3/7/06
                and 3/8/06
            
            7,348
                common shares
            
            2
                warrant holder
            
            Cashless
                exercise of warrants.
            
            Sections
                4(2) of Securities Act5/5/06
                & 5/9/06
            
            Warrants
                to purchase 1,200,000 shares of common stock
            
            5
                entities
            
            Short-term
                debt financing
            
            Sections
                4(2)and4(6)
                of the Securities Act5/12/06
            
            Warrants
                to purchase 1,000,000 shares of common stock
            
            2
                entities
            
            Short-term
                debt extension
            
            Sections
                4(2)and4(6)
                of the Securities Act5/24/06
            
            Warrants
                to purchase 200,000 shares of common stock
            
            1
                entity
            
            Equipment
                Financing
            
            Sections
                4(2)and4(6)
                of the Securities Act6/27/06
            
            75,000
                shares of common stock
            
            1
                consultant
            
            Services
            
            Section
                4(2) of Securities Act7/7/06
            
            Warrants
                to purchase 1,260,000 shares of common stock
            
            1
                entity.
            
            Short-term
                debt financing
            
            Sections
                4(2)and4(6)
                of the Securities Act7/28/06
            
            Warrants
                to purchase 410,000 shares of common stock
            
            1
                entity
            
            Short-term
                debt extension
            
            Sections
                4(2)and4(6)
                of the Securities Act8/18/06
            
            $8,242,542
                in Variable Rate Convertible Debentures due 2009 and Warrants to
                purchase
                10,343,474 shares of common stock
            
            19
                entities
            
            Long-term
                debt financing
            
            Sections
                4(2)and4(6)
                of the Securities Act9/12/06
            
            125,000
                common shares - restricted stock issued but not
                outstanding
            
            5
                directors
            
            Services
            
            Section
                4(2) of Securities Act11/07/6
            
            280,000
                common shares
            
            1
                entity
            
            Purchase
                research and development
            
            Section
                4(2) of Securities Act12/14/06
            
            Warrants
                to purchase 649,892 shares of common stock
            
            43
                entities
            
            Consents
                to debt financing
            
            Section
                4(2) of Securities Act




15




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





**Overview:**





Summary
      financial data for our results of operation for the year ended December 31,
      2006
      appears below:





**Year
                Ended**
              **December
                31, 2006**Revenue
                from continuing operations
            
            $
            550,498Net
                loss
            
            $
            (13,137,513
            )Net
                loss attributable to common shareholders
            
            $
            (13,660,555
            )





The
      Company had net losses for the years ended December 31, 2006 and 2005, had
      an
      accumulated deficit at December 31, 2006, and does not have adequate liquidity
      to fund its operations through fiscal 2007. Since the Company does not have
      significant operating history in the AWP market, it is uncertain whether the
      Company can generate revenues necessary to sustain its business. At this time,
      the Company requires additional capital to fund operating losses. Without
      additional financing, our management currently believes we will not have cash
      sufficient to continue operations through April 2007.





For
      the
      first quarter of 2007, the Company expects revenues to be below that of the
      fourth quarter of 2006 due to the removal and redeployment of some of its games
      during the quarter. The Company’s revenue growth has also been constrained due
      to a lack of necessary operating capital. Provided the Company can raise the
      necessary operating capital, the Company anticipates revenues to increase in
      subsequent quarters as it installs more of its games.





The
      Company currently has installed approximately 850 games, of which 529 games
      have
      been redeployed to other locations or are in the process of being moved. The
      Company has agreements signed and a backlog of over 4,000 machines as of April
      13, 2007, which orders the Company expects to fulfill in the next 12 to 24
      months.


Pursuant
        to the Master Loan Agreement entered into with PDS Gaming Corporation on
        June
        29, 2006, it is an event of default if the Company does not pay its principal
        and interest payments when due or if the Company becomes insolvent, defined
        as
        liabilities greater than assets. At December 31, 2006, the Company was insolvent
        and subsequently, the Company was delinquent on its principal and interest
        payments. Upon an occurrence of an event of default, PDS may at any time
        declare
        all unmatured obligations immediately due and payable. As of April 17, 2007,
        the
        Company has not received notice from PDS declaring the Company’s obligations
        immediately due and payable.
 
 As
        a
        result of the defaults on the PDS Gaming Corporation promissory notes, pursuant
        to the Company’s outstanding Variable Rate Convertible Debentures due February
        18, 2009, an event of default occurs if the Company is in default under any
        other indebtedness obligation exceeding $150,000. As a result of the defaults
        on
        the PDS Gaming Corporation promissory notes, the Company is in default on
        those
        certain covenants in the Variable Rate Convertible Debentures. Upon an event
        of
        default, at the debentureholders’ election, the amount owing the holders will
        become immediately due and payable at 130% of the outstanding balance along
        with
        interest at the lesser of 18% or the maximum rate permitted under applicable
        law. As of April 14, 2007, the Company has not received notice from any
        debentureholders requiring acceleration of amounts due under the debenture.




**Results
      of Operations:**





**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**





*Revenues.* The
      Company’s revenues from continuing operations for the years ended December 31,
      2006 and 2005 were $550,498 and $0 respectively. The revenues reported relate
      to
      the AWP business, which began generating revenues in August 2006. The Company
      had no revenue-producing sales in 2005.




16





*Cost
      of Revenues and Gross Profit* .
      The
      Company’s cost of revenues from continuing operations for the year ended
      December 31, 2006 was $1,247,576, compared to $1,517 for the year ended December
      31, 2005. The large increase resulted from the Company beginning to place and
      generate revenue from its AWP machines in 2006. The cost of revenues in 2005
      relate to installation of the Company’s games on a trial basis.





Gross
      loss for the year ended December 31, 2006 was $697,078 compared to $1,517 for
      the year ended December 31, 2005. The loss was due to low recurring revenue
      from
      initial placements in 2006 relative to initial installation, maintenance,
      depreciation and other costs arising from initial installations. The 2005 loss
      was due to no revenue being generated for the initial installation of AWP
      machines on a trial basis.





*Research
      and Development Expenses* .
      Research and development expenses for continuing operations for the year ended
      December 31, 2006 were $1,908,541, compared to $963,272 for the year ended
      December 31, 2005. The increase was due to the Company shifting development
      from
      its Class II and Class III business in 2005 to exclusive development of its
      AWP
      products for the entire 2006 fiscal year. Included in research and development
      expense was non-recurring amortization of long-term technology and distribution
      rights of $416,667 and $602,151 for the years ended December 31, 2006 and 2005,
      respectively. Management expects that expenditures for research and product
      development may increase in future quarters as the Company continues placing
      its
      AWP machines in the market and continues to develop and broaden its library
      of
      games and titles.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses for the year ended December 31, 2006 were $275,605,
      compared to $40,492 for the year ended December 31, 2005. The **** increases
      in expense primarily resulted from the Company commencing operations in
      the **** AWP
      market with the largest increases consisting of marketing consulting.





*General
      and Administrative Expenses* .
      General
      and administrative expenses from continuing operations for the year ended
      December 31, 2006 were $3,371,639, compared to $2,130,374 for the year ended
      December 31, 2005, an increase of 58%. The increase was due primarily to
      $1,324,543, of expense related to employee stock options in connection with
      the
      adoption of FASB 123(R) which requires stock options to be expensed as they
      vest. This was partially offset by a reduction in consultant option and warrant
      expense of $437,721 which was due to a decrease in the Company’s stock price,
      resulting in adjustments to the value of the consultant options. In addition,
      the Company incurred additional costs relating to corporate staff salaries
      of
      $332,024 and other corporate expenses.





*Termination
      of Long-Term Technology and Distribution Rights Agreement* .
      The
      Company recorded a charge for the termination of its long-term technology and
      distribution rights agreement of $1,707,582 for the year ended December 31,
      2006. The charge was necessary due to the Company entering into a Termination
      and Settlement Agreement with Bally Gaming, Inc. whereby the Company agreed
      to
      return all technology and relinquish all distributions rights acquired from
      Bally. The charge reflects the unamortized balance of the technology and
      distribution rights asset of $3,981,184 and prepaid license fees of $187,500,
      less the note payable balance due Bally of $2,250,000 and accrued interest
      and
      other liabilities due Bally and from which they released the Company pursuant
      to
      the agreement.





*Other
      Expense.* Other
      expense was $4,931,471 for the year ended December 31, 2006, compared to
      $2,950,180 for the year ended December 31, 2005. The increase in other expense
      is primarily due to $2,030,940 of debt extinguishment expense associated with
      modifications to debt arrangements, including warrants issued relating to debt
      issuance of $553,720; an increase of $219,879 of amortization of original issue
      discount, offset in part by a decrease of $763,647 in the amortization of the
      debt issuance costs.





*Loss
      From Discontinued Operations.* The
      loss
      from discontinued operations was $245,597 and $4,035,500 for the years ended
      December 31, 2006 and 2005 respectively. The decrease in loss between the
      comparable periods was due to the Company’s decision to discontinue its Class II
      and Class III business in December 2005, which resulted in very little
      discontinued operations activity in 2006. 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.




17





*Preferred
      Stock Dividend.* Preferred
      stock dividends were $532,042 and $3,524,144 for the years ended December 31,
      2006 and 2005, respectively. The 2005 amount included a deemed dividend of
      $3,412,860 associated with a beneficial conversion feature on the Series B
      Variable Rate Convertible Preferred Stock.





*Net
      Loss Attributable to Common Shareholders* .
      The
      Company incurred a net loss of $13,660,555 for the year ended December 31,
      2006,
      compared to a net loss of $13,645,479 for the prior year. The net losses for
      2006 differed from the 2005 loss due primarily to increased research and
      development, general and administrative, impairment
      of long-term technology and distribution rights and prepaid license
      fees and
      interest expense in 2006, offset by greater losses from discontinued operation
      and the deemed dividend on preferred stock in 2005.





**Liquidity
      and Capital Resources:**





***Overview***





The
      Company had negative working capital of $10,538,790 and positive working capital
      of $1,260,338 at December 31, 2006 and 2005, respectively. During 2006, cash
      used in operations was $9,588,592, and the primary uses of cash were to fund
      the
      Company’s net loss, acquire inventory and purchase redemption product licenses.
      These uses were partially offset by non-cash charges related to stock options
      and warrants issued for services, amortization of original issue discount,
      stock
      based compensation expense, impairment charges, debt extinguishment expenses
      and
      depreciation and amortization. During 2005, cash used in operations was
      $3,937,338, and the primary uses of cash were to fund the Company’s net loss.
      These uses were partially offset by non-cash charges related to stock options
      and warrants issued for services, amortization of original issue discount,
      stock
      based compensation expense, impairment charges, and depreciation and
      amortization.





Cash
      used
      in investing activities was $325,247 and $2,212,066 for the years ended December
      31, 2006 and 2005, respectively. For the year ended December 31, 2006, $210,612
      was used to purchase property and equipment. 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 and $215,238 was used to purchase property and
      equipment.





Cash
      provided by financing activities was $8,257,258 and $5,374,955 for the years
      ended December 31, 2006 and 2005, respectively. Cash provided by financing
      activities in 2006 included $5,117,947 of long-term equipment financing, sale
      of
      convertible debentures of $3,954,915, short-term debt of $1,455,000, offset
      by
      cash payments on notes payable of $1,391,183 and $844,896 of preferred stock
      dividends and debt financing costs.





***Financings***





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
      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 were originally 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 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 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
      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.




18





Pursuant
      to the rights included in the Series B Variable Rate Convertible Preferred
      Stock
      Certificate of Designation (as amended), the Company offered shares of the
      Company’s common stock in lieu of a cash payment for dividends payable on April
      1, 2006, to the holders of such preferred shares. For such payment, the
      Company’s board of directors approved a conversion rate of $1.10 per share.
      Shareholders representing 86% of the outstanding preferred shares elected to
      receive common shares in lieu of cash. Also pursuant to the terms of the
      Certificate of Designation, the conversion price of the preferred shares was
      reduced to $1.00 on August 18, 2006, as a result of the Company’s offer and sale
      of its Variable Rate Convertible Debentures due 2009.





On
      May
      25, 2006, the Company entered into a Master Loan Agreement with PDS Gaming
      Corporation, a Minnesota corporation, for a $20 million credit facility to
      finance the purchase of AWP gaming equipment. The Master Loan Agreement was
      subsequently amended and restated as of June 29, 2006. Under the Master Loan
      Agreement, Spectre has the right to request advances, from time to time, in
      amounts not to exceed $10 million or be less than $650,000. Advance requests
      under the Master Loan Agreement are subject to certain funding contingencies
      set
      forth in the agreement, and the discretion of PDS Gaming. The Master Loan
      Agreement provides for interest on advanced funds in an amount equal to 13% *per
      annum* .
      Upon
      each advance under the Master Loan Agreement, the Company will deliver a
      promissory note in agreed form to PDS Gaming, providing for payments of interest
      first, and then principal, over a 36-month period. Promissory notes may not
      be
      prepaid for a period of 12 months after their issuance. As of the date of this
      report, the Company has received advances under the agreement and delivered
      promissory notes in the amounts of $3,182,854 and $1,910,000.





Pursuant
      to the Master Loan Agreement, it is an event of default if the Company
      becomes insolvent, defined as liabilities greater than assets. In addition,
      after the first twelve months after the first closing date, the Company is
      required to maintain a targeted fixed charge coverage ratio of at least 1.1
      to 1
      for the following twelve months. The fixed charge coverage ratio is defined
      as
      EBITDA for such period to fixed charges, defined as required principal payments
      on all debt during the same period plus taxes payable during the same
      period.





Between
      May 5 and May 9, 2006, the Company obtained a total of $600,000 of short-term
      loans for operating capital. In connection with these transactions, the Company
      issued promissory notes accruing interest at a *per
      annum* rate
      equal to one plus the prime rate, and originally due on July 31, 2006. The
      Company also issued the lenders five-year warrants for the purchase of an
      aggregate of 1,200,000 shares of common stock at $1.84 per share. On August
      18,
      2006, one of the notes was exchanged for $100,000 of the Company’s newly issued
      convertible debentures. The remaining notes and accrued interest were
      subsequently paid in cash.





On
      July
      7, 2006, the Company issued a secured short-term promissory note to Rockmore
      Investment Master Fund, Ltd. in exchange for a total of $630,000 to be used
      for
      operating capital. The promissory note accrued interest at the rate of 11% *per
      annum* ,
      with
      all principal and interest under the note originally due no later than August
      7,
      2006. The Company also issued the lender a five-year warrant to purchase up
      to
      1,260,000 shares of common stock at $1.84 per share. At the noteholder’s option,
      the promissory note (including accrued interest) was convertible into any
      Company securities sold in a subsequent offering consummated during the time
      the
      note was outstanding. On August 18, 2006, all principal and interest under
      this
      note was converted into our Variable Rate Convertible Debentures due 2009,
      pursuant to a Securities Purchase Agreement dated August 17, 2006 (see
      below).





On
      July
      25, 2006 the Company entered into a financing transaction with Hawkeye
      Commodity Promotions, Inc. for
      the
      purchase of inventory. Total indebtedness equaled $1,463,000 and provides for
      interest at 14.5% *per
      annum* ,
      and
      payments computed on a 36-month amortization but with a balloon payment due
      after 24 months (i.e., on July 25, 2008).




19





On
      August
      18, 2006, Spectre offered and sold an aggregate of $8,242,549 in Variable Rate
      Convertible Debentures due 2009, together with warrants to purchase an aggregate
      of 10,343,474 shares of common stock at $1.10 per share, solely to accredited
      investors in a private placement offering exempt from registration under the
      Securities Act of 1933. In connection with this transaction, the Company entered
      into a Securities Purchase Agreement pursuant to which securities were offered
      and sold in exchange for cash subscriptions, the surrender and cancellation
      of
      certain bridge promissory notes, and the surrender and cancellation of certain
      shares of Series B Variable Rate Convertible Preferred Stock. At the holder’s
      option, the debentures are convertible into common stock at a conversion price
      of $1.00 per share, subject to adjustment. In the transaction, the Company
      received gross cash subscriptions aggregating $4,433,953, surrendered bridge
      promissory notes (plus accrued interest thereon) aggregating $737,784, and
      surrendered Series B Variable Rate Convertible Preferred Stock (plus accrued
      dividends thereon) aggregating $3,070,811.





From
      December 18, 2006 through January 29, 2007, the Company sold to 29 investors
      unsecured term promissory notes in the aggregate principal amount of $626,650.
      All principal due under the notes is payable in cash only and due and payable
      in
      full on the one-year anniversary of the issuance of the notes. Interest on
      the
      principal amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. Payments
      of
      principal under the notes are subordinate to the Company’s obligations under
      Variable Rate Convertible Debentures due 2009.





On
      March
      16, 2007, the Company delivered to PDS Gaming Corporation a Term Promissory
      Note
      dated December 18, 2006, in the principal amount of $320,400, with interest
      payable in Company common stock with interest at 55% *per
      annum* ,
      valued
      at $1.10 per share. The note is due on December 18, 2007. The purpose of the
      note was to defer certain payments to PDS Gaming under a Royalty Agreement
      entered into on June 29, 2006, which were, or were to become, due from December
      1, 2006 through November 1, 2007.





***Anticipated
      Financing Needs***





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





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


Pursuant
        to the Master Loan Agreement entered into with PDS Gaming Corporation on
        June
        29, 2006, it is an event of default if the Company does not pay its principal
        and interest payments when due or if the Company becomes insolvent, defined
        as
        liabilities greater than assets. At December 31, 2006, the Company was insolvent
        and subsequently, the Company was delinquent on its principal and interest
        payments. Upon an occurrence of an event of default, PDS may at any time
        declare
        all unmatured obligations immediately due and payable. As of April 17, 2007,
        the
        Company has not received notice from PDS declaring the Company’s obligations
        immediately due and payable.
 
 As
        a
        result of the defaults on the PDS Gaming Corporation promissory notes, Pursuant
        to the Company’s outstanding Variable Rate Convertible Debentures due February
        18, 2009, an event of default occurs if the Company is in default under any
        other indebtedness obligation exceeding $150,000. As a result of the defaults
        on
        the PDS Gaming Corporation promissory notes, the Company is in default on
        those
        certain covenants in the Variable Rate Convertible Debentures. Upon an event
        of
        default, at the debentureholders’ election, the amount owing the holders will
        become immediately due and payable at 130% of the outstanding balance along
        with
        interest at the lesser of 18% or the maximum rate permitted under applicable
        law. As of April 14, 2007, the Company has not received notice from any
        debentureholders requiring acceleration of amounts due under the
        debenture.


As
      of
      April 13, 2007, the Company had not made a principal payment of $229,000, plus
      accrued interest, that originally became due December 31, 2006, on a promissory
      note held by Parklane Associates LLC and secured by substantially all of the
      assets of the Company. The note was originally issued and due to Pandora Select
      Partners, L.P. on September 10, 2004, but was acquired by Parklane in May 2006.
      Parklane paid for this purchase by issuing a substantially identical promissory
      note to Pandora Select Partners. Since January 1, 2007, the Company has made
      principal payments to Parklane in the aggregate amount of $146,000. In addition,
      the Company had not made interest payments on its Variable Rate Convertible
      Debentures totaling approximately $298,500 and dividends on its Series B
      Variable Rate Convertible Preferred Stock totaling approximately $63,500, which
      were due on December 31, 2006 and January 1, 2007, respectively. Since such
      due
      dates, the Company has received consents, representing 98% of amounts due to
      debenture holders and 100% of amounts due to preferred holders, to defer such
      interest and dividends due on January 1, 2007 and any additional amounts that
      will accrue and become payable in 2007, until January 1, 2008.




20





On
      February 8, 2007, Pandora Select Partners filed a confession of judgment against
      Parklane and three individual grantors of the debt Parklane owes to Pandora
      Select Partners, including Ronald E. Eibensteiner, D. Bradly Olah, and Wayne
      W.
      Mills. As of April 13, 2007, however, the Company had not received any notice
      of
      default from Parklane. In the event the Company receives such a notice, it
      will
      have ten days to make payment in full to Parklane prior to defaulting under
      the
      terms of the promissory note.





The
      following summarizes the Company’s contractual obligations at December 31, 2006
      (See Notes 10-14, 18).





Total
            
            1
                Year or Less
            
            1-3
                Years
            
            4-5
                Years
            
            Over
                5 YearsShort-term
                debt
            
            $
            14,657,773
            
            $
            14,657,773
            
            $
            -
            
            $
            -
            
            $
            -Long-term
                debt
            
            
            1,320,175
            
            
            450,462
            
            
            860,943
            
            
            8,770
            
            
            -Operating
                leases
            
            
            164,013
            
            
            92,834
            
            
            71,179
            
            
            -
            
            
            -Consultants
                & Royalties(1)
            
            
            1,359,500
            
            
            479,375
            
            
            694,625
            
            
            185,500
            
            
            -Total
            
            $
            17,501,461
            
            $
            3,775,836
            
            $
            12,509,468
            
            $
            1,216,157
            
            $
            -




(1)
      Excludes undeterminable royalties due Mirabella, Smith, & McKinnon Inc.
      based on performance of AWP machines





***License-Related
      Obligations***





On
      May
      24, 2005, the Company entered into a Redemption Technology and Supply Agreement
      with Bally Gaming, Inc., a Nevada corporation, pursuant to which the Company
      acquired a license for certain AWP technology, including exclusive distribution
      rights to that technology and follow-on exclusive distribution rights for video
      lottery terminals, should such terminals become legal. This agreement and the
      license were to last for an initial term of five years, subject to extension
      if
      the Company met certain performance targets. Under the agreement, the Company
      was obligated to pay an upfront $5 million licensing fee. Of this amount, the
      Company paid $2 million in cash, and on September 9, 2005 delivered an unsecured
      two-year promissory note for the remaining $3 million.





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





Effective
      June 28, 2006, the Company also entered into a Technology Agreement governing
      the Company’s use of certain intellectual property of Bally and related matters.
      The Technology Agreement provides that (i) Bally grants the Company a perpetual
      non-exclusive license to use certain proprietary technology of Bally in
      connection with up to a maximum of 875 “redemption product licenses,” (ii) the
“redemption product licenses” may be used with respect to any new or used gaming
      cabinet manufactured by Bally that will be used as AWP or redemption gaming
      machines, (iii) the Company purchases from Bally 175 gaming cabinets at a price
      of $8,250 per cabinet, (iv) the Company purchases from Bally 500 redemption
      product licenses at a cost of $3,000 per license, and (v) the Company will
      order
      from Bally 375 additional redemption product licenses on or prior to July 10,
      2006 at a cost of $1,600 per license. At December 31, 2006, the Company had
      completed the purchase of the 175 game cabinets and all 875 redemption
      technology licenses from Bally, and has recorded an asset for prepaid product
      licenses of $2,100,000 with a remaining balance of $64,000 at December 31,
      2006.
      As the Company placed its AWP machines that include Bally hardware, the Company
      has added the cost of a prepaid product license to the leased machine cost
      and
      is depreciating that cost over the life of the asset.





21





**Off-Balance-Sheet
      Arrangements**





The
      Company has no off-balance-sheet arrangements.





**New
      Accounting Pronouncements**





In
      September 2006, the FASB has issued SFAS No. 157, ** “Fair
      Value Measurements,” to eliminate the diversity in practice that exists due to
      the different definitions of fair value and the limited guidance for applying
      those definitions in GAAP that are dispersed among the many accounting
      pronouncements that require fair value measurements. SFAS No. 157 retains the
      exchange price notion in earlier definitions of fair value, but clarifies that
      the exchange price is the price in an orderly transaction between market
      participants to sell an asset or liability in the principal or most advantageous
      market for the asset or liability. Moreover, SFAS No. 157 states that the
      transaction is hypothetical at the measurement date, considered from the
      perspective of the market participant who holds the asset or liability.
      Consequently, fair value is defined as the price that would be received to
      sell
      an asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date (an exit price).





SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition.





SFAS
      No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. The Company is currently evaluating the effect of
      adopting SFAS No. 157 on its financial statements.





The
      Financial Accounting Standards Board has published FASB interpretation No.
      48
      (FIN No. 48), “Accounting for Uncertainty of Income Taxes”, to address the
      non-comparability in reporting income tax assets and liabilities resulting
      from
      a lack of specific guidance in FASB Statement of Financial Accounting Standards
      No. 109 (SFAS 109), “Accounting for Income Taxes”, on the uncertainty in income
      taxes recognized in an enterprise’s financial statements. Specifically, FIN No.
      48 prescribes (a) a consistent recognition threshold and (b) a measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return, and provides related
      guidance on de-recognition, classification, interest and penalties, accounting
      interim periods, disclosures and transition. FIN No. 48 applies to fiscal years
      beginning after December 15, 2006, with the earlier adoption permitted. The
      Company is currently evaluating the effects of FIN No. 48 but does not expect
      the adoption of FIN No. 48 to have a material impact on the financial
      statements.





**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 (e) the valuation of stock-based compensation awarded
      and
      (f) accounting for debt with detachable warrants. The Company derives its
      revenues primarily two ways, through fixed rate leasing and participation
      arrangements with its customers. Under both arrangements, the Company retains
      ownership of the equipment installed at a customer site and under the
      participation arrangements, receives revenue based on a percentage of the hold
      per day generated by each AWP game system, which is generally considered both
      realizable and earned at the end of each day. The Company accounts for the
      participation agreements as operating leases. Property, equipment and leasehold
      improvements and leased 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 AWP 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. Effective January 1, 2006, the Company adopted Statement of
      Financial Accounting Standard No. 123 (revised 2004), *Share-Based
      Payment* (SFAS
      123(R)), which requires the measurement and recognition of compensation expense
      for all share-based payment awards made to employees and directors including
      employee stock options based on fair values. The Company’s determination of fair
      value of share-based payment awards is based on the date of grant using an
      option-pricing model which incorporates a number of highly complex and
      subjective variables. These variables include, but are not limited to, the
      Company’s expected stock price volatility and estimates regarding projected
      employee stock option exercise behaviors and forfeitures. The Company recognizes
      the expense related to the fair value of the award straight-line over the
      vesting period. The gross proceeds on debt 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 is amortized over the life of the promissory notes using
      the straight-line method, which approximates the interest method.





22




**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, 2006 and 2005, and the related statements of operations, shareholders’
equity (deficit) 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. 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.





As
      discussed in Note 2 to the financial statements, effective January 1, 2006,
      the
      Company adopted Financial Accounting Standards Board Statement No. 123(R),
      “Share-Based Payment.”





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, 2006 and 2005, 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, 2006
      and
      2005, had an accumulated deficit at December 31, 2006 and may not have adequate
      liquidity to fund its operations through out fiscal 2007. These conditions
      raise
      substantial doubt about its ability to continue as a going concern. Management’s
      plans regarding these 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, LLP


Minneapolis,
      Minnesota


April
      13,
      2007





23


**Spectre
      Gaming, Inc.**


**Balance
      Sheets**


As
                of December 31,2006
            
            2005**ASSETS**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            250
            
            $
            1,656,831Accounts
                receivable, net
            
            
            38,519
            
            
            -Other
                receivables, net
            
            
            12,593
            
            
            9,722Inventories
            
            
            430,498
            
            
            300,009Deposits
            
            
            280
            
            
            20,050Current
                assets of discontinued operations
            
            
            102,634
            
            
            536,217Prepaid
                royalties
            
            
            293,275
            
            
            -Prepaid
                expenses
            
            
            148,440
            
            
            57,566Debt
                issuance costs, net
            
            
            801,399
            
            
            -*Total
                current assets:*
            
            
            1,827,888
            
            
            2,580,395Property,
                equipment and leasehold improvements, net
            
            
            154,593
            
            
            66,231Leased
                equipment, net
            
            
            7,207,828
            
            
            109,629Long-term
                technology and distribution rights, net
            
            
            -
            
            
            4,397,849Prepaid
                license fees
            
            
            -
            
            
            187,500Debt
                issuance costs, net
            
            
            21,409
            
            
            -Prepaid
                redemption product licenses, net
            
            
            257,333
            
            
            -Other
                assets of discontinued operations
            
            
            -
            
            
            163,500Other
                assets
            
            
            11,436
            
            
            11,436*Total
                Assets:*
            
            $
            9,480,487
            
            $
            7,516,540





**LIABILITIES
                AND SHAREHOLDERS’ EQUITY (DEFICIT)**CURRENT
                LIABILITIES:Current
                portion of long-term debt
            
            $
            450,271
            
            $
            1,500,000Short-term
                debt, net
            
            
            1,670,400
            
            
            1,500,000Equipment
                financing debt
            
            
            4,551,881
            
            
            -Debentures
                payable, net
            
            
            4,154,164
            
            
            -Accounts
                payable
            
            
            843,343
            
            
            69,635Accrued
                expenses
              Liabilities
                of discontinued operations
            
            
            696,619
              -
            
            
            467,870
              303,228*Total
                current liabilities:*
            
            
            12,366,678
            
            
            3,840,733Long-term
                debt, less current portion
            
            
            869,907
            
            
            750,000*Total
                liabilities*SHAREHOLDERS’
                EQUITY (DEFICIT):
            
            
            13,236,585
            
            
            4,590,733Capital
                stock, par value $.01 per share, 100,000,000 shares
                authorized:Series
                A Convertible Preferred Stock, par value $.01 per share:Authorized
                shares -- 466,666Issued
                and outstanding shares: 43,334 shares ($65,001 liquidation
                preference)
            
            
            433
            
            
            433Series
                B Variable Rate Convertible Preferred Stock, par value $.01 shares:
              Authorized
                shares -- 30,000
              Issued
                and outstanding shares: 2,251 and 7,420 shares at December 31, 2006
                and
              2005,
                respectively ($2,250,950 and $7,420,000 liquidation preference at
                December
                31, 2006 and 2005, respectively)
            
            
            23
            
            
            74Common
                stock, par value $.01 per share: Authorized shares - 99,503,334Issued
                shares, 16,231,924 and 13,520,439 at December 31, 2006 and 2005
                respectively; outstanding shares, 16,106,924 and 13,520,439 at December
                31, 2006 and 2005, respectively
            
            
            161,069
            
            
            135,204Additional
                paid-in capital
            
            
            44,042,445
            
            
            37,208,067Accumulated
                deficit
            
            
            (47,914,045
            )
            
            (34,253,490
            )Deferred
                equity compensation
            
            
            (46,023
            )
            
            (164,481
            )*Total
                shareholders’ equity (deficit):*
            
            
            (3,756,098
            )
            
            2,925,807*Total
                liabilities and shareholders’ equity (deficit):*
            
            $
            9,480,487
            
            $
            7,516,540




See
      accompanying notes to financial statements.




24


**Spectre
      Gaming, Inc.**


**Statements
      of Operations**





For
                the Years ended
              December
                31,2006
            
            2005REVENUE:Sales
            
            $
            550,498
            
            $
            -Cost
                of revenues
            
            
            1,247,576
            
            
            1,517*Gross
                loss*
            
            
            (697,078
            )
            
            (1,517
            )OPERATING
                EXPENSES:Research
                and development
            
            
            1,908,541
            
            
            963,272Sales
                and marketing
            
            
            275,605
            
            
            40,492General
                and administrative
            
            
            3,371,639
            
            
            2,130,374Termination
                of long-term technology and distribution rights agreement and prepaid
                license fees
            
            
            1,707,582
            
            
            -*Total
                Operating Expenses:*
            
            
            7,263,367
            
            
            3,134,138Operating
                loss
            
            
            (7,960,445
            )
            
            (3,135,655
            )OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            31,045
            
            
            31,126Interest
                expense
            
            
            (2,931,576
            )
            
            (2,981,306
            )Debt
                Extinguishment
            
            
            (2,030,940
            )
            
            -*Other
                income (expense)*
            
            
            (4,931,471
            )
            
            (2,950,180
            )*Loss
                from Continuing operations*
            
            
            (12,891,916
            )
            
            (6,085,835
            )Loss
                from discontinued operations
            
            
            (245,597
            )
            
            (4,035,500
            )*Net
                Loss:*
            
            
            (13,137,513
            )
            
            (10,121,335
            )Preferred
                Stock Dividends
            
            
            523,042
            
            
            3,524,144*Net
                Loss attributable to common shareholders*
            
            $
            (13,660,555
            )
            
            $
                (13,645,479
            )NET
                LOSS PER COMMON SHARE BASIC AND DILUTED:Loss
                from continuing operations
            
            $
            (0.90
            )
            $
            (0.45
            )Loss
                from discontinued operations
            
            
            (0.02
            )
            
            (0.30
            )NET
                LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
            
            
            (0.96
            )
            
            (1.01
            )WEIGHTED-AVERAGE
                NUMBER OF SHARES OUTSTANDING:Basic
                and diluted
            
            
            14,298,304
            
            
            13,456,045




See
      accompanying notes to financial statements.





25


**Spectre
      Gaming, Inc.**


**Statements
      of Shareholders’ Equity (Deficit)**




Series
                    A Convertible Preferred Stock
                
                Series
                    B Variable Rate Convertible Preferred Stock
                
                Common
                    Stock
                
                Additional
                    Paid-In
                
                Deferred
                    Equity
                
                Accumulated
                
                Total
                    Shareholders’ EquityShares
                
                Amount
                
                Shares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Compensation
                
                Deficit
                
                (Deficit)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
                    loss*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (10,121,335
                )
                
                (10,121,335
                )*Preferred
                    stock dividends*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,412,860
                
                
                -
                
                
                (3,524,144
                )
                
                (111,284
                )Balance
                    at December 31, 2005
                
                
                43,334
                
                
                433
                
                
                7,420
                
                
                74
                
                
                13,520,439
                
                
                135,204
                
                
                37,208,067
                
                
                (164,481
                )
                
                (34,253,490
                )
                
                2,925,807*Issuance
                    costs on sale of preferred stock*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (40,000
                )
                
                -
                
                
                -
                
                
                (40,000
                )*Issuance
                    of common stock to replace stock options (Note 5)*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                75,000
                
                
                750
                
                
                (750
                )
                
                -
                
                
                -
                
                
                -*Conversion
                    of preferred stock to common stock*
                
                
                -
                
                
                -
                
                
                (2,154
                )
                
                (21
                )
                
                2,060,150
                
                
                20,602
                
                
                (20,581
                )
                
                -
                
                
                -
                
                
                -*Exercise
                    of stock options*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                36,500
                
                
                365
                
                
                5,110
                
                
                -
                
                
                -
                
                
                5,475*Cashless
                    exercise of warrants*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                7,348
                
                
                73
                
                
                (73
                )
                
                -
                
                
                -
                
                
                -*Issuance
                    of options and warrants for services*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,459,205
                
                
                -
                
                
                -
                
                
                1,459,205*Amortization
                    of deferred equity compensation*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (34,762
                )
                
                118,458
                
                
                -
                
                
                83,696*Issuance
                    of stock warrants related to notes payable and debt
                    extinguishment*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,344,271
                
                
                -
                
                
                -
                
                
                3,344,271*Issuance
                    of common stock for purchased research and
                    development*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                280,000
                
                
                2,800
                
                
                179,700
                
                
                -
                
                
                -
                
                
                182,500*Conversion
                    of preferred stock to debentures payable*
                
                
                -
                
                
                -
                
                
                (3,015
                )
                
                (30
                )
                
                -
                
                
                -
                
                
                (3,015,120
                )
                
                -
                
                
                -
                
                
                (3,015,150
                )*Discount
                    on debentures payable*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,809,863
                
                
                -
                
                
                -
                
                
                4,809,863*Compensation
                    expense related to restricted stock awards*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                8,554
                
                
                -
                
                
                -
                
                
                8,554*Common
                    stock issued in lieu of cash for preferred stock
                    dividends*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                127,487
                
                
                1,275
                
                
                138,961
                
                
                -
                
                
                -
                
                
                140,236*Net
                    loss*
                
                
                -
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (13,137,513
                )
                
                (13,137,513
                )*Preferred
                    stock dividends*
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (523,042
                )
                
                (523,042
                )Balance
                    at December 31, 2006
                
                
                43,334
                
                $
                433
                
                
                2,251
                
                $
                23
                
                
                16,106,924
                
                $
                161,069
                
                $
                44,042,445
                
                $
                (46,023
                )
                $
                (47,914,045
                )
                $
                (3,756,098
                )
  See
          accompanying notes to financial statements.





26


**Spectre
      Gaming, Inc.**


**Statements
      of Cash Flows**




For
                the Years ended December 31,2006
            
            2005**Operating
                activities**Net
                loss
            
            $
            (13,137,513
            )
            $
            (10,121,335
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            452,420
            
            
            233,242Loss
                on sale of property and equipment
            
            
            27,469
            
            
            4,811Common
                stock issued for purchased research and development
            
            
            182,500
            
            
            -Impairment
                of AWP equipment in inventory
            
            
            106,810
            
            
            1,361,594Impairment
                    of leased equipment
            
            
            -
            
            
            907,058Impairment
                of long-term technology and distribution rights
            
            
            1,707,582
            
            
            -Common
                stock issued for distribution agreements
            
            
            -
            
            
            -Stock,
                stock options, warrants and restricted stock issued for services
                and
                compensation expense
            
            
            1,551,455
            
            
            702,264Amortization
                of original issue discount
            
            
            1,842,056
            
            
            1,622,177Amortization
                of debt issuance costs
            
            
            126,354
            
            
            890,001Amortization
                of long-term technology and distribution rights
            
            
            416,665
            
            
            602,151Debt
                extinguishment
            
            
            2,030,940
            
            
            -Change
                in allowance for doubtful accounts
            
            
            9,965
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (48,484
            )
            
            7,347Other
                receivables
            
            
            33,885
            
            
            (105,126
            )Inventories
            
            
            (3,632,504
            )
            
            (111,695
            )Prepaid
                redemption product licenses
            
            
            (2,100,000
            )
            
            -Deposits
            
            
            31,603
            
            
            14,589Prepaid
                expenses
            
            
            (82,662
            )
            
            (28,839
            )Accounts
                payable and accrued expenses
            
            
            892,867
            
            
            84,423*Net
                cash used in operating activities:*
            
            
            (9,588,592
            )
            
            (3,937,338
            )**Investing
                activities**Net
                proceeds from sale of property and equipment
            
            
            25,365
            
            
            3,172Purchases
                of property, equipment and leasehold improvements
            
            
            (210,612
            )
            
            (215,238
            )Purchase
                of video redemption game licenses
            
            
            (140,000
            )
            
            -Technology
                and distribution rights
            
            
            -
            
            
            (2,000,000
            )*Net
                cash used in investing activities:*
            
            
            (325,247
            )
            
            (2,212,066
            )**Financing
                activities**Debt
                financing costs
            
            
            (470,124
            )
            
            (105,000
            )Exercise
                of stock options
            
            
            5,475
            
            
            14,025Proceeds
                from sale of convertible debenture, net of issuance costs
            
            
            3,954,915Proceeds
                from the sale of preferred stock, net of issuance costs
            
            
            -
            
            
            5,575,000Proceeds
                from notes payable and common stock warrants issued
            
            
            -
            
            
            2,530,000Proceeds
                from short-term debt
            
            
            1,455,000
            
            
            -Proceeds
                from long-term debt
            
            
            5,117,947
            
            
            -Payments
                on short-term and long-term debt
            
            
            (1,391,183
            )
            
            (2,527,786
            )Issuance
                costs from sale of preferred stock
            
            
            (40,000
            )Preferred
                stock dividend
            
            
            (374,772
            )
            
            (111,284
            )*Net
                cash provided by financing activities:*
            
            
            8,257,258
            
            
            5,374,955Decrease
                in cash and cash equivalents
            
            
            (1,656,581
            )
            
            (774,449
            )Cash
                and cash equivalents at beginning of year
            
            
            1,656,831
            
            
            2,431,280*Cash
                and cash equivalents at end of year:*
            
            $
            250
            
            $
            1,656,831**Supplemental
                cash flow information**Cash
                paid for interest
            
            $
            618,176
            
            $
            392,087**Non-cash
                Investing and Financing Activities:**Common
                stock issued for payment on convertible notes payable
            
            
            -
            
            
            342,136Warrants
                issued relating to debt issuance
            
            
            553,720
            
            
            723,775Conversion
                of preferred stock to common stock
            
            
            20,602
            
            
            3,686Conversion
                of Series B convertible preferred stock to convertible debentures
                payable
            
            
            3,015,150
            
            
            -Conversion
                of preferred dividends to convertible debentures payable
            
            
            55,661
            
            
            -Warrants
                issued for guarantees on bridge loans
            
            
            -
            
            
            578,064Conversion
                of preferred dividends to common stock
            
            
            140,236Warrants
                issued in connection with short-term and long-term debt
            
            
            3,821,697
            
            
            1,030,000Inventory
                transferred to leased AWP equipment, net of reserve
            
            
            7,271,037
            
            
            523,775Note
                payable in exchange for inventory
            
            
            1,463,050
            
            
            -Unsecured
                promissory note in exchange for long-term technology and distribution
                rights
            
            
            -
            
            
            3,000,000Return
                of fixed assets and inventory for credit against accounts
                payable
            
            
            -
            
            
            100,000Accrued
                expenses in exchange video redemption game licenses
            
            
            100,000
            
            
            -Conversion
                of short-term debt to convertible debentures
            
            
            730,000
            
            
            -Conversion
                of accrued interest on short-term debt to convertible
                debentures
            
            
            7,784
            
            
            -Conversion
                of notes payable to preferred stock
            
            
            -
            
            
            1,230,000Other
                receivable in exchange for the sale of property and
                equipment
            
            
            -
            
            
            7,768Deemed
                preferred stock dividend
            
            
            -
            
            
            3,412,860Short-term
                promissory note issued for prepaid royalties
            
            
            320,400
            
            
            -Redemption
                product licenses transferred to leased AWP equipment
            
            
            2,036,000
            
            
            -




See
      accompanying notes to financial statements.




27


**Spectre
      Gaming, Inc.**


**Notes
      to Financial Statements**


**For
      the years ended December 31, 2006 and 2005**





**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 developed AWP games and
      distributes the games to operators at various retail, commercial and
      entertainment venues in the United States which allow for such devices. In
      December 2005, the Company made the decision to focus its efforts exclusively
      in
      the AWP market.





The
      accompanying financial statements have been prepared on the basis that the
      Company will continue as a going concern. The Company had net losses for the
      years ended December 31, 2006 and 2005, had an accumulated deficit at December
      31, 2006 and does not have adequate liquidity to fund its operations through
      fiscal 2007. As of the date of this annual report, the Company’s current
      liabilities exceed current assets. To service its debt, the Company must produce
      sufficient operating revenue or raise additional capital. If the Company relies
      in whole or in part on financing, debt financing may involve restrictive
      covenants and equity financing will result in dilution to our common
      shareholders. Nevertheless, the Company may not be able to successfully obtain
      any financing at all. If we cannot produce revenue sufficient to service and
      repay our debt, or successfully obtain financing for that purpose, the Company
      will likely be forced to consider various strategic alternatives, including
      but
      not limited to liquidating some or all assets, ceasing some or all operations,
      and bankruptcy. In addition, the Company may be subject to foreclosures by
      its
      secured creditors. Since the Company does not have significant operating history
      in the AWP market, it is uncertain whether the Company can generate net cash
      flows necessary to sustain its business. The Company is currently engaged in
      fund raising activities and continues to seek opportunities to maximize the
      utilization and revenue generating potential of its assets. However, the
      Company’s management has been focused on procuring funds to operate the business
      and recently has been unable to invest the necessary resources required for
      further placement of games. Nevertheless, there can be no assurance the Company
      will raise the necessary capital to fund its business. If the Company is not
      successful in raising additional funds it will not be able to continue as a
      going concern. This could result in bankruptcy and/or liquidation of its assets,
      in which case the Company may not realize the carrying value of its assets.
      The
      financial statements do not include any adjustments that might result from
      the
      outcome of this condition.


Pursuant
        to the Master Loan Agreement entered into with PDS Gaming Corporation on
        June
        29, 2006, it is an event of default if the Company does not pay its principal
        and interest payments when due or if the Company becomes insolvent, defined
        as
        liabilities greater than assets. At December 31, 2006, the Company was insolvent
        and subsequently, the Company was delinquent on its principal and interest
        payments. Upon an occurrence of an event of default, PDS may at any time
        declare
        all unmatured obligations immediately due and payable. As of April 13, 2007,
        the
        Company has not received notice from PDS declaring the Company’s obligations
        immediately due and payable.
 
 As
        a
        result of the defaults on the PDS Gaming Corporation promissory notes, pursuant
        to the Company’s outstanding Variable Rate Convertible Debentures due February
        18, 2009, an event of default occurs if the Company is in default under any
        other indebtedness obligation exceeding $150,000. As a result of the defaults
        on
        the PDS Gaming Corporation promissory notes, the Company is in default on
        those
        certain covenants in the Variable Rate Convertible Debentures. Upon an event
        of
        default, at the debentureholders’ election, the amount owing the holders will
        become immediately due and payable at 130% of the outstanding balance along
        with
        interest at the lesser of 18% or the maximum rate permitted under applicable
        law. As of April 14, 2007, the Company has not received notice from any
        debentureholders requiring acceleration of amounts due under the
        debenture.




The
      Company will work with PDS Gaming Corporation and
      the Variable Rate Convertible Debenture holdings to obtain waivers for the
      defaults and/or cure and avoid future events of default.




**2.**
            **Summary
                of Accounting Policies**





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




28





Based
      on
      discussions with potential buyers, industry operators, sales efforts and limited
      sales results, the Company determined that the assets of discontinued operations
      were impaired. The Company recognized impairment charges in 2005 of $1,361,594
      on its gaming equipment in inventory and $907,058 on its previously leased
      gaming equipment and other fixed assets. During 2006, the Company recorded
      an
      additional impairment charge of $106,810 on its gaming equipment in inventory.
      The remaining assets of discontinued operations are classified as “Current
      assets of discontinued operations” and “Other assets of discontinued operations”
on the balance sheet. Since the remaining value of those assets was based on
      limited data and management’s best estimate, the Company cannot be certain that
      it will realize the remaining carrying value of those assets upon their
      disposition.





In
      accordance with the provisions of Statement of Financial Accounting
      Standards (“ SFAS”)
      144, the Company has not included the results of operations of its Class II
      and
      Class III business in the results from continuing operations. The results of
      operations for this business have been reflected as discontinued operations.
      The
      loss from discontinued operations for the years ended December 31, 2006 and
      2005, respectively, consist of the following:


For
                the Years ended
              December
                31,2006
            
            2005REVENUE:Sales
            
            $
            5,450
            
            $
            474,074Cost
                of revenues
            
            
            20,568
            
            
            367,769*Gross
                profit*
            
            
            (15,118
            )
            
            106,305OPERATING
                EXPENSES:Research
                and development
            
            
            -
            
            
            240,482Sales
                and marketing
            
            
            18,462
            
            
            1,011,951General
                and administrative
            
            
            105,207
            
            
            620,720Impairment
                of gaming equipment in inventory
            
            
            106,810
            
            
            1,361,594Impairment
                of leased gaming equipment
            
            
            -
            
            
            907,058*Total
                Operating Expenses:*
            
            
            230,479
            
            
            4,141,805Net
                loss from discontinued operations
            
            $
            (245,597
            )
            $
            (4,035,500
            )





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





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





*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. The
      Company recorded a reserve for bad debts of $9,965 against its receivables
      at December 31, 2006. No allowance was considered necessary at December 31,
      2005.





*Inventories.* Inventories
      which consists principally of AWP game products and related materials, is stated
      at the lower of cost (determined on the specific identification method) or
      market. At December 31, 2006 the Company had $319,604 of finished goods
      inventory and $110,894 of spare parts and game cabinets. At December 31, 2005
      the Company had $120,516 of finished goods inventory and $179,493 of spare
      parts
      and game cabinets.




29





*Prepaid
      Royalties* .
      Prepaid
      royalties relate to royalties due to PDS Gaming Corporation that were prepaid
      with the issuance of a short-term note payable (Notes 11 and 13). The prepaid
      royalties are being amortized over a twelve month period. The Company expensed
      $27,125 in the year ended December 31, 2006 and will expense the remaining
      $293,275 in the year ending December 31, 2007.





*Leased
      Equipment and Property, Equipment and Leasehold Improvements* .
      Leased
      equipment and property, equipment and leasehold improvements were stated at
      cost. AWP machines placed with customers under participation arrangements are
      included in leased equipment. Depreciation of these assets is recognized on
      the
      straight-line basis over the asset’s estimated useful life ranging from three to
      five years. Leasehold improvements were amortized using the straight-line method
      over the shorter of the lease term or the estimated useful life. Maintenance,
      repairs and minor renewals are expensed when incurred. Sales and retirements
      of
      depreciable property were recorded by removing the related cost and accumulated
      depreciation from the accounts. Gains or losses on sales and retirements of
      property are reflected in the Company’s results of operations. During 2006, the
      Company temporarily removed 301 machines form service and discontinued
      depreciation on those machines. Upon redeployment at new locations, the Company
      will depreciate those machines over their remaining useful life. Depreciation
      and amortization expense on leased equipment and property, equipment and
      leasehold improvements was $405,753 and $19,398 for the years ended December
      31,
      2006 and 2005, respectively.





Management
      reviews long-lived assets for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to its fair value, which considers
      the future undiscounted cash flows expected to be generated by the asset. If
      such assets are considered to be impaired, the impairment recognized is measured
      by the amount by which the carrying amount of the assets exceeds their fair
      value. Assets to be disposed of are reported at the lower of the carrying amount
      or the fair value less costs of disposal. In connection with the change to
      focus
      the business on the AWP market, the Company recorded an impairment of $907,058
      for the year ended December 31, 2005. There was not an adjustment to the value
      of the long-lived assets, other than the long-term technology and distribution
      rights, during the year ended December 31, 2006. Provided the Company can raise
      sufficient capital to fund its operations, its estimated cash flows on its
      leased AWP games is adequate to realize their value. However, the Company still
      has limited operating history in the AWP market and will continue to evaluate
      the carrying values of is assets in future periods as it gains more operating
      history, which may result in impairment charges.





*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 were being amortized over the five-year term of the
      agreement until the agreement was terminated in June 2006. (Note 9)





*Prepaid
      License Fees.* Prepaid
      license fees were originally related to licenses associated with the themes
      of
      certain gaming machines which were to be licensed from Bally Gaming, Inc.
      Effective March 29, 2006, the Company entered into an agreement with Bally
      to
      apply these prepaid license fees to future royalty payments, relating to AWP,
      which were to become due in 2007 and 2008 under the Redemption Technology and
      Supply Agreement between the Company and Bally, dated May 24, 2005 (as amended).
      Effective June 28, 2006, the Company entered into a Termination and Settlement
      Agreement with Bally which resulted in an impairment charge of $187,500 for
      the
      balance of the prepaid license fees (Note 9).





*Debt
      Issuance Costs* .
      The
      Company capitalizes the costs associated with obtaining debt financing and
      it
      amortizes the costs over the term of the debt on a straight-line basis which
      approximates the effective interest method. Amortization expense for the 2006
      was $126,354 and for 2005 was $890,001 respectively. The Company amortizes
      the
      costs over the term of the debt which ranges from 30 to 48 months and will
      have
      additional amortization of $325,203 in 2007, $430,794 in 2008, $136,131 in
      2009
      and $57,680 in 2010.





*Prepaid
      Redemption Product Licenses* .
      As of
      June 30, 2006, the Company had completed the purchase of 875 redemption
      technology licenses from Bally and recorded an asset for prepaid product
      licenses of $2,100,000. As the Company places its AWP machines that include
      Bally hardware, the cost of the license is added to the machine cost and
      depreciated over the life of the asset (Note 9). As of December 31, 2006, the
      Company had placed 835 AWP machines in service and had allocated $2,036,000
      of
      license fees to those machines and transferred the value to leased equipment
      with a remaining balance of $64,000.




30





On
      April
      30, 2006, the Company entered into a Development and License Agreement with
      Global Gaming Group to provide game content. The Company capitalized payments
      of
      $240,000 to Global Gaming Group and is amortizing them over the three-year
      life
      of the agreement. The Company recorded amortization expense of $46,667 in 2006.
      For the years ending December 31, 2007, 2008 and 2009, the Company will have
      amortization expense of $80,000, $80,000 and $33,333, respectively.





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





*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 value of PDS debt and debentures
      payable should approximate the carrying amounts because of the variable
      borrowing rate on the debt. However given the significant liquidity issues
      and
      lack of operating history it is likely the fair value of this debt is less
      than
      the carrying amount. The Company cannot reasonably estimate the respective
      fair
      values.





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





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





*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
      $1,908,541 and $963,272 for the years ended December 31, 2006 and 2005,
      respectively.





*Net
      Loss Per Common Share* .
      Basic
      and diluted loss per common share is computed by dividing net loss by the
      weighted-average number of common shares outstanding for the reporting period.
      Dilutive common-equivalent shares have not been included in the computation
      of
      diluted net loss per share because their inclusion would be antidilutive.
      Antidilutive common-equivalent shares issuable based on future exercise of
      stock
      options, warrants or restricted stock totaling 38,027,172 shares, could
      potentially dilute basic loss per common share in subsequent years. All options,
      warrants and restricted stock outstanding were antidilutive for the years ended
      December 31, 2006 and 2005. (See Note 6)





*Advertising
      Expense.* Advertising
      costs are charged to operations when incurred. Advertising expense for
      continuing operations was $10,388 and $9,594 for the years ended December 31,
      2006 and 2005, respectively.





*Stock-Based
      Compensation - Employees* .
      On
      December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
      SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123 and
      supersedes Accounting Principles Board (“APB”) Opinion No. 25. SFAS No. 123(R)
      requires all share-based payments to employees, including grants of employee
      stock options, to be valued at fair value on the date of grant, and to be
      expensed over the applicable vesting period. Pro forma disclosure of the income
      statement effects of share-based payments is no longer an alternative. For
      the
      Company, SFAS No. 123(R) is effective for all share-based awards granted on
      or
      after January 1, 2006. In addition, companies must also recognize compensation
      expense related to any awards that are not fully vested as of the effective
      date. Compensation expense for the unvested awards will be measured based on
      the
      fair value of the awards previously calculated in developing the pro forma
      disclosures in accordance with the provisions of SFAS No. 123. We implemented
      SFAS No. 123(R) on January 1, 2006 using the modified prospective method. The
      amount of expense recorded for the twelve months ended December 31, 2006 was
      $1,459,205 ($0.10 per share). Based on options and restricted stock grants
      outstanding at December 31, 2006, the Company estimates the expense to be
      $2,495,000 from 2007 through 2010.




31





On
      September 12, 2006, the Company cancelled options for 1,550,000 shares held
      by
      certain officers and directors and an option for 600,000 shares related to
      a
      separation agreement entered into with the Company’s former CEO, and reissued
      options for 2,000,000 shares at $0.88 per share to those same individuals.
      This
      cancellation and reissuance of stock options will result in additional expense
      of approximately $66,000 over the remaining vesting term of the stock options.
      The options reissued to the former CEO for 450,000 shares vest immediately.
      This
      award was accounted for as a modification of awards of equity instruments
      pursuant to SFAS No. 123(R) and the Company has recognized additional
      compensation cost of $347,344 for 2006, for the change in fair values of the
      modified awards.





Prior
      to
      January 1, 2006, in accordance with APB Opinion No. 25 and related
      interpretations, the Company used the intrinsic value-based method for measuring
      stock-based compensation cost which measures compensation cost as the excess,
      if
      any, of the quoted market price of the Company’s common stock at the grant date
      over the amount the employee must pay for the stock. The Company’s general
      policy is to grant stock options and warrants at fair value at the date of
      grant. Options and warrants issued to employees are recorded at fair value,
      as
      required by SFAS No. 123 “Accounting for Stock Based Compensation,” using the
      Black-Scholes pricing model. The Company had adopted the disclosure only
      provision of SFAS No. 148, “Accounting for Stock Based
      Compensation.”





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




For
                The Year Ended
              December
                31, 2005Net
                loss:As
                reported
            
            $
            (13,645,479
            )Pro
                forma
            
            
            (14,575,696
            )Basic
                and diluted net loss per common shareAs
                reported
            
            $
            (1.01
            )Pro
                forma
            
            
            (1.08
            )Stock-based
                compensationAs
                reported
            
            $
            -Pro
                forma
            
            
            930,217





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





Year
                Ended December 31,2006
            
            2005Risk
                Free interest rate
            
            
            4.67
            %
            
            4.10
            %Expected
                life
            
            
            4.01
                years
            
            
            4.51
                yearsExpected
                volatility
            
            
            192
            %
            
            158
            %Expected
                dividends
            
            
            0
            %
            
            0
            %





32





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








Non-employees





At
      December 31, 2006 and 2005, the Company had outstanding options and warrants
      to
      purchase 1,516,666 shares of the Company’s common stock to non-employees, mostly
      consultants, with exercise prices ranging from $0.75 per share to $3.30 per
      share and expiring at various times through June 2014. Pursuant to Emerging
      Issues Task Force 96-18 (EITF 96-18), “Accounting for Equity Instruments that
      are Issued to Other Than Employees for Acquiring, or in Conjunction with
      Selling, Goods or Services,” the Company will value and record an expense
      related to the options on the earlier of the date a performance commitment
      is
      met or the date the performance is complete. The Company recorded an expense
      of
      $83,696 and $702,264 for the years ended December 31, 2006 and 2005,
      respectively, in accordance with EITF 96-18. During the years ended December
      31,
      2006 and 2005, options for 75,000 and 295,000 shares respectively 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 (deficit).





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





In
      September 2006, the FASB has issued SFAS No. 157, ** “Fair
      Value Measurements,” to eliminate the diversity in practice that exists due to
      the different definitions of fair value and the limited guidance for applying
      those definitions in GAAP that are dispersed among the many accounting
      pronouncements that require fair value measurements. SFAS No. 157 retains the
      exchange price notion in earlier definitions of fair value, but clarifies that
      the exchange price is the price in an orderly transaction between market
      participants to sell an asset or liability in the principal or most advantageous
      market for the asset or liability. Moreover, SFAS No. 157 states that the
      transaction is hypothetical at the measurement date, considered from the
      perspective of the market participant who holds the asset or liability.
      Consequently, fair value is defined as the price that would be received to
      sell
      an asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date (an exit price).




33





SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition.





SFAS
      No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. The Company is currently evaluating the effect of
      adopting SFAS No. 157 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.





During
      2006, an additional 280,000 shares of the Company’s common stock were issued to
      Streamline upon the achievement of certain development milestones. The shares
      were valued at the trading price of the Company’s common stock, on the day the
      milestone was achieved, at $0.65 per share and $182,500 was expensed as
      purchased research and development. Streamline is majority owned by two
      individuals who became employees of the Company in 2004.





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.





34





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





At
      December 31, 2006 and 2005, the Company’s leased equipment and property,
      equipment and leasehold improvements consisted of the following:





**2006**
            
            **2005**
            
            **Estimated
                Useful Lives**Furniture
                and equipment
            
            $
            219,046
            
            $
            79,124
            
            
            3-5
                yearsLeasehold
                improvements
            
            
            5,380
            
            
            11,931
            
            
            12-24
                monthsTotal
                property, equipment and leasehold improvements
            
            
            224,426
            
            
            91,055Less
                accumulated depreciation
            
            
            (69,833
            )
            
            (24,824
            )Total
                property, equipment and leasehold improvements, net
            
            $
            154,593
            
            $
            66,231Leased
                equipment
            
            $
            7,551,236
            
            $
            111,532
            
            
            3-4.5
                yearsLess
                accumulated depreciation
            
            
            (343,408
            )
            
            (1,903
            )Total
                leased equipment
            
            $
            7,207,828
            
            $
            109,629





Leased
      equipment at December 31, 2005 included 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**





During,
      2006, the Company issued 127,487 shares of its common stock, in lieu of cash,
      as
      payment of dividends of $140,236 owed to owners of its Series B Variable Rate
      Convertible Preferred Stock.





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





**Preferred
      Stock**





The
      Company has issued and outstanding Series A Convertible Preferred Stock which
      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.




35





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, 2006 and 2005, there were outstanding
      43,334 shares of Series A Convertible Preferred Stock which are 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. Pursuant to the terms of the Certificate of Designation, the preferred
      shares are convertible into an aggregate of 4,637,500 of common stock at a
      conversion price of $1.60 per share.





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





The
      Company used the Black Scholes pricing model to determine the value of the
      4,637,500 warrants and the Series B Variable Rate Convertible Preferred Stock.
      The value of the preferred stock itself was assumed to be the face value because
      we were unable to obtain a comparable market based value for the stock. The
      Company allocated the proceeds received based on the relative fair values.
      Pursuant to EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible
      Instruments”, the Company recognized a deemed dividend on the embedded
      conversion feature of the preferred stock of $3,412,860.





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 subsequently determined that
      it
      could convert the machines for use in AWP, with such conversion subsequently
      completed.





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.




36





On
      August
      18, 2006, owners of 3,015.15 shares of Series B Variable Rate Convertible
      Preferred Stock exchanged their preferred shares (together with related accrued
      dividends of $55,661) for an aggregate of $3,070,811 of the Company’s newly
      issued Variable Rate Convertible Debentures (Note 14).





During
      2006, owners of 2153.9 shares of Series B Variable Rate Convertible Preferred
      Stock converted those shares into an aggregate of 2,060,150 shares of common
      stock.





**6.**  **Warrants,
      Stock Options and Restricted Stock**





**Warrants**





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, 2006 and 2005, no expense has been recorded related to these
      warrants as no milestones were achieved.





In
      March
      2006, the Company issued 7,348 common shares in a cashless exercise of warrants
      to purchase 14,140 shares.





In
      June
      2006, the Company entered into a letter agreement with Wayne Mills to reprice
      650,000 warrants held by Mr. Mills and entities controlled by him to $1.84.
      The
      Company also gave him certain purchase-price adjustment provisions which provide
      for price and share adjustments if the Company does any dilutive equity
      offerings. The agreement was entered into as partial consideration for a
      subordination given by Parklane Associates LLC on a note payable due from
      Spectre. The Company recorded additional expense of $17,932 related to the
      repricing.





In
      August
      2006, the completion of the Company’s sale of Variable Rate Convertible
      Debentures (Note 14) triggered anti-dilution provisions in outstanding warrants
      to purchase 10,053,125 shares. The effect was to increase the number of warrant
      shares by an additional 8,292,625 and lower their exercise prices from $1.84
      to
      $2.00 down to $1.00 per share. There was no effect on earnings from the
      transaction as the warrant instruments required the adjustments be
      made.




In
        December 2006, the Company issued 649,892 warrants to purchase common stock
        at
        $1.50 per share to holders of the Company’s Series B Variable Rate Convertible
        Preferred Stock and Variable Rate Convertible Debentures as consideration
        for
        consenting to the Company’s short-term debt offering. The Company recorded debt
        extinguishment expense of $553,720 relating to the issuance of the warrants.


At
      December 31, 2006, the Company had 33,798,840 warrants outstanding with exercise
      prices ranging from $0.75 to $3.75. The weighted average price is $1.20 per
      share. The warrants expire serially through December 2011.




**Stock
      Options**





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.





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.




37





In
      September 2006, the Company’s board of directors adopted the Company’s 2006
      Stock Incentive Plan (the “2006 Plan”), and reserved 2,000,000 shares of common
      stock for issuance under the 2006 Plan. The 2006 Plan permits the grant of
      both
      incentive and non-statutory stock options; however, the Company’s shareholders
      must approve the 2006 Plan on or prior to September 12, 2007 for the Company
      to
      issue incentive stock options in conformity with IRS regulations. 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
      2006 and 2005, the Company issued options for 450,000 and 2,005,000 shares,
      respectively, of the Company’s common stock outside of the Company’s stock
      option plans.





At
      December 31, 2006, the Company had 1,407,496 exercisable options outstanding
      with a weighted-average exercise price of $1.20, and a weighted-average
      remaining contractual life of 4.62 years. 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.





The
      weighted-average grant date fair market value of options granted to employees
      during the years ended December 31, 2006 and 2005 was $0.61 and $1.92,
      respectively.





Using
      the
      closing stock price of $0.65 on December 29, 2006, there were options
      outstanding and exercisable with an intrinsic value of $1,667 at December 31,
      2006. The intrinsic value of options exercised in 2006 and 2005 amounted to
      $35,300 and $150,325 respectively.




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, 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
              
              
              2.07Granted
              
              
              3,137,500
              
              
              0.90
              
              $
              0.76
                  to $1.50
              
              
              15,063,367
              
              
              1.32Exercised
              
              
              (36,500
              )
              
              0.15
              
              $
              0.15
              
              
              (14,140
              )
              
              .75Canceled/expired
              
              
              (2,440,484
              )
              
              1.90
              
              $
              1.50
                  to $3.20
              
              
              -
              
              
              -Anti-dilution
                  adjustments
              
              
              -
              
              
              
              
              
              
              
              
              8,292,625Balance
                  at December 31, 2006
              
              
              4,103,332
              
              $
              1.22
              
              $
              0.15
                  to $6.00
              
              
              33,798,840
              
              $
              1.20





The
      following table summarizes information about stock options outstanding at
      December 31, 2006:




Options
                  outstanding
              
              Options
                  exercisableExercise
                Prices
              
              Number
                Outstanding
              
              Weighted-
                Average
                Remaining
                Contractual
                Life
              
              Weighted-
                Average
                Exercise
                Price
              
              Number
                Exercisable
              
              Weighted-
                Average
                Exercise
                Price$0.15
              
              
              3,333
              
              
              6.75
              
              $
              0.15
              
              
              3,333
              
              $
              0.15$0.75
                  - $1.10
              
              
              3,213,333
              
              
              5.61
              
              
              0.89
              
              
              1,131,665
              
              
              0.92$1.50
                  - $2.25
              
              
              280,000
              
              
              3.33
              
              
              2.17
              
              
              165,832
              
              
              2.21$2.40
                  - $2.50
              
              
              600,000
              
              
              6.63
              
              
              2.48
              
              
              100,000
              
              
              2.40$6.00
              
              
              6,666
              
              
              2.70
              
              
              6.00
              
              
              6,666
              
              
              6.00$0.15
                  to $6.00
              
              
              4,103,332
              
              
              5.60
              
              $
              1.22
              
              
              1,407,496
              
              $
              1.20




38




**Restricted
      Stock**





In
      September 2006, the Company made restricted stock grants of 125,000 shares
      to
      the members of its Board of Directors. Restricted stock awards are awards of
      common stock that are subject to restrictions on transfer and to a risk of
      forfeiture if the grantee leaves the Company before the restrictions lapse.
      The
      holder of a restricted stock award is generally entitled at all times on and
      after the date of issuance of the restricted shares to exercise the rights
      of a
      shareholder of the Company, including the right to vote the shares and the
      right
      to receive dividends on the shares. The value of such stock was established
      by
      the market price on the date of the grant. Compensation expense is being
      recorded over the applicable restricted stock vesting periods of three years,
      using straight line vesting. There were no restricted stock awards granted
      prior
      to 2006. A summary of the Company’s restricted stock activity for the year ended
      December 31, 2006 is presented in the following table:





Shares
            
            Grant
                Date Fair ValueUnvested,
                end of year, December 31, 2005
            
            
            -
            
            
            -Granted
            
            
            125,000
            
            $
            0.88Vested
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Unvested,
                end of year, December 31, 2006
            
            
            125,000
            
            $
            0.88




As
      of
      December 31, 2006, there was $101,446 of total unrecognized compensation
      costs related to the outstanding restricted stock awards which is expected
      to be
      recognized over the remaining vesting period of 2.7 years. Recognized
      compensation expense related to restricted stock awards was $8,554 for the
      year
      ended December 31, 2006.





**7.**  **Software**





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. In 2006, the Company wrote down the receivable
      by $35,000 and has included the balance of $65,000 in assets of discontinued
      operations.





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 if the Company
      is still purchasing machines pursuant to 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, 2006 and 2005, there was no expense recorded for
      these
      options since it is not likely the Company will meet the 500 machine
      requirement. As of December 31, 2006 and 2005, the Company had placed only
      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.




39





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 $0 and $100,000 for the years ended December 31, 2006 and
      2005, respectively.





With
      the
      decision to exit the Class III market, the Company ceased distributing GOC
      games
      as of December 31, 2005. The Company had not purchased any additional games
      since March 2005 and has not issued any additional shares of stock to
      GOC.





**9.
      Redemption Technology and Supply Agreement**





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





Under
      the
      Redemption Technology and Supply 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. In addition to obtaining the foregoing licenses, the agreement
      provided the Company with the right to exclusively license Bally-owned game
      themes for use with the Company’s redemption games and systems.





The
      Redemption Technology and Supply Agreement was subsequently amended on multiple
      occasions, which amendments altered the terms and financial commitments due
      Bally by the Company.





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





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




40





Effective
      on June 28, 2006, and simultaneously with the above-described Termination and
      Settlement Agreement, the Company entered into a Technology Agreement that
      governs the Company’s use of intellectual property of Bally and certain related
      matters. In particular, the Technology Agreement provides that (i) Bally grants
      the Company a perpetual non-exclusive license to use certain proprietary
      technology of Bally in connection with up to a maximum of 875 “redemption
      product licenses,” (ii) “redemption product licenses” may be used with respect
      to any new or used game cabinet manufactured by Bally that will be used as
      AWP
      or redemption game machines, (iii) the Company purchased from Bally 175 game
      cabinets as of June 28, 2006, at a price of $8,250 per cabinet, (iv) the
      Company purchased from Bally 500 redemption product licenses as of June 28,
      2006, at a per-license cost of $3,000, and (v) the Company will order from
      Bally
      375 additional redemption product licenses on or prior to July 10, 2006 for
      an
      aggregate of $600,000 or a per license cost of $1,600.





The
      Company completed the purchase of the 175 game cabinets in June 2006 and
      recorded $1,443,750 of inventory and the 875 redemption technology licenses
      from
      Bally and has recorded an asset for prepaid product licenses of $2,100,000.
      As
      the Company places its AWP machines that include Bally hardware, it will add
      the
      cost of a license to the machine cost and depreciate it over the life of the
      asset. The Company paid the amounts due Bally with proceeds from the notes
      payable to PDS Gaming Corporation (Note 13). As of December 31, 2006, the
      Company had allocated licenses totaling $2,036,000 to leased equipment with
      a
      balance of $64,000 remaining.





**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 was 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
      note
      was paid in full in 2005. The allocation of the gross proceeds of the
      convertible note payable is summarized below as of December 31,
      2005:




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




41




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





On
      September 10, 2004, the Company issued two $750,000 promissory notes bearing
      interest at the rate of 10% *per
      annum* .
      One
      note was issued to Pandora Select Partners, L.P. and the other note was issued
      to Whitebox Intermarket Partners, L.P. The notes were payable in interest only
      through March 10, 2005, at which time principal was due. In connection with
      this
      financing, the Company paid a three percent origination fee, issued five-year
      warrants for the purchase of 50,000 shares of common stock at $3.00 per share
      to
      both Pandora and Whitebox, and granted Pandora and Whitebox a security interest
      in substantially all of the Company’s assets. The warrants contain provisions
      that provide for the exercise price to be adjusted downward if the Company
      issues additional common stock or common stock equivalents with a lower exercise
      price. The gross proceeds of $1,500,000 were allocated between the notes and
      the
      common stock warrants based on the relative fair values of the securities at
      the
      time of issuance. The common stock warrants were valued using the Black-Scholes
      pricing model. The resulting original issue discount and the fair value of
      the
      warrants was amortized over the life of the promissory notes using the
      straight-line method, which approximates the interest method. The value of
      the
      warrants was fully expensed during the year ended December 31, 2005. In
      connection with the financing, the Company agreed to file with the SEC a
      registration statement by February 1, 2005, covering the issuance or resale
      of
      the shares of common stock underlying the warrants issued to Pandora and
      Whitebox. The Company filed the registration statement on November 30, 2004,
      and
      the registration statement was declared effective on January 24,
      2005.





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





On
      May
      12, 2006, the Whitebox and Pandora notes were assumed by Rockmore
      Investment Master Trust Ltd. and Parklane Associates LLC, respectively.  In
      connection with the note transfer, on May 25, 2006, the Company issued a
      five-year warrant to purchase up to 500,000 shares of common stock at a
      per-share price of $1.84 to each of Rockmore and Parklane. The 1,000,000
      warrants were issued in consideration for the agreement of such entities to
      subordinate the Company’s obligations under the acquired notes to the Company’s
      obligations under the Master Loan Agreement entered into with PDS Gaming
      Corporation.  The Company determined the issuance of warrants in exchange
      for the subordination should be treated as a modification of debt. In accordance
      with EITF 96-19, “Debtor’s Accounting for a Modification of Exchange of Debt
      Instruments,” the Company accounted for the fair value of the warrants, using
      the Black-Scholes pricing model, as debt extinguishment and recorded an expense
      of $1,104,178 for the year ended December 31, 2006.





Effective
      July 28, 2006, the note acquired by Rockmore was further modified by extending
      the due date of that note until September 30, 2007. In connection with the
      note
      extension, the Company issued Rockmore a five-year warrant to purchase up to
      410,000 shares of common stock at a per-share price of $1.84.  The Company
      determined the issuance of warrants in exchange for the subordination should
      be
      treated as a modification of debt. In accordance with EITF 96-19, “Debtor’s
      Accounting for a Modification of Exchange of Debt Instruments,” the Company
      accounted for the warrants at fair value using the Black-Scholes pricing model,
      as debt extinguishment and recorded an expense of $373,042 for the year ended
      December 31, 2006.




42





As
      of
      September 30, 2006 the Company had not made the payment due Parklane under
      the
      note it acquired from Pandora. Nevertheless, on November 3, 2006, the Company
      paid $375,000 of the amount due on the Parklane note and entered into a
      Forbearance and Extension Agreement with Parklane and Pandora, providing for
      (i)
      the remaining principal to be due on December 31, 2006, and (ii) an increased
      interest of 15% *per
      annum* for the
      remaining term. As of December 31, 2006, the Company had not made the payment
      due Parklane.





The
      balance outstanding at December 31, 2006 on the Rockmore and Parklane notes
      was
      $1,125,000 plus accrued interest of $6,164.





On
      February 8, 2007, Pandora Select Partners filed a confession of judgment against
      Parklane and three individual guarantors of the debt Parklane owes to Pandora
      Select Partners, including Ronald E. Eibensteiner, D. Bradly Olah, and Wayne
      W.
      Mills, to enforce their guaranties. As of April 13, 2007, however, the Company
      has not received any notice of default from Parklane.





On
      May 5,
      2006, the Company borrowed an aggregate of $300,000 and issued three short-term
      $100,000 promissory notes and on May 9, 2006, borrowed an additional $300,000
      and issued two short-term $150,000 promissory notes. The promissory notes were
      originally fully due and payable on July 31, 2006 and bore interest through
      such
      date at the per annum rate of prime plus one. As inducement to loan funds to
      the
      Company, the Company issued the lenders five-year warrants to purchase up to
      1,200,000 shares of common stock at the purchase price of $1.84 per share,
      subject to adjustment. One of the lenders in the May 9, 2006 transaction was
      D.
      Bradly Olah, the Company’s President. Mr. Olah loaned the Company $150,000 in
      exchange for a promissory note for that principal amount. The terms granted
      to
      Mr. Olah in the promissory note and warrant issued to him were the same terms
      as
      those granted to other lenders. A second lender, who was the former Chairman
      and
      CEO and a greater than 5% shareholder during 2006, but no longer a greater
      than
      5% shareholder as of April 13, 2007, loaned the Company $150,000 under the
      same
      terms as the other lenders.




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




Both
      the
      promissory notes and warrants granted the lenders piggyback registration rights
      in the event the Company or any of its security holders offers any Company
      securities.





The
      common stock warrants were valued using the Black-Scholes pricing model. The
      calculated value of the warrants and beneficial conversion feature were $190,760
      and $272,281, respectively. The resulting original issue discount and the fair
      value of the warrants were amortized over the life of the promissory notes
      using
      the straight-line method, which approximates the interest method.





The
      due
      date of each of the notes was extended until August 21, 2006. On August 18,
      2006, one of the notes, in the principal amount of $100,000, was exchanged
      for
      $100,000 of the Company’s newly issued Variable Rate Convertible Debentures
      (Note 14). On the same date, the remaining notes, plus accrued interest, were
      paid in full. As a result of the Debenture financing, the exercise price of
      the
      warrants issued to the short-term lenders adjusted to $1.00 per
      share.





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




43





On
      August 18, 2006, the Rockmore note, in the principal amount of $630,000 plus
      accrued interest of $7,784, was exchanged for $637,784 of the Company’s newly
      issued Variable Rate Convertible Debentures (Note 14). As a result of the
      Debenture financing, the exercise price of the warrants issued to Rockmore
      in
      connection with the short-term note adjusted to $1.00 per share.





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





From
      December 18, 2006 through December 28, 2006, the Company sold to 6 investors
      unsecured term promissory notes in the aggregate principal amount of $225,000.
      All principal due under the notes is payable in cash only and due and payable
      in
      full on the one-year anniversary of the issuance of the notes. Interest on
      the
      principal amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. Payments
      of
      principal under the notes are subordinate to the Company’s obligations under
      variable rate convertible debentures issued on August 18, 2006, in aggregate
      principal amount of $8,242,549 (Note 14).





On
      March 16, 2007, the Company finalized a secured term promissory note, effective
      December 18, 2006, to PDS Gaming Corporation in the principal amount of $320,400
      as payment for amounts due under a royalty agreement from December 2006 through
      November 2007 (Note 13). All principal due under the notes is payable in cash
      only and due and payable in full on the one-year anniversary of the issuance
      of
      the notes. Interest on the principal amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. Payments
      of
      principal under the notes are subordinate to the Company’s obligations under
      variable rate convertible debentures issued on August 18, 2006, in aggregate
      principal amount of $8,242,549 (Note 14). As additional consideration for
      entering onto the note, the Company entered into a five year license to its
      AWP
      technology to be used by PDS in the event it was to foreclose on any AWP
      machines owned by the Company.





Total
      short-term debt outstanding at December 31, 2006 and 2005 was $1,670,400 and
      $1,500,000 respectively.





**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. 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.




44





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 Stock offering.





**13.
      Equipment Financing**





On
      May
      25, 2006, the Company entered into a Master Loan Agreement with PDS Gaming
      Corporation, a Minnesota corporation, providing for purchase-money
      amusement-with-prize machine financing in an amount aggregating up to $20
      million. Under the Master Loan Agreement, the Company has the right to request
      advances, from time to time, in amounts not to exceed $10 million or to be
      less
      than $650,000. Advance requests are subject to certain funding contingencies
      set
      forth in the agreement, and the discretion of PDS Gaming. On May 25, 2006,
      PDS
      Gaming advanced $1,464,104 to Spectre under the Master Loan Agreement. The
      Master Loan Agreement provides for interest on advanced funds in an amount
      equal
      to 13% *per
      annum* .
      Upon
      each advance under the Master Loan Agreement, the Company will deliver a
      promissory note in agreed form to PDS Gaming, providing for payments of interest
      first, and then principal, over a 36-month period. Promissory notes may not
      be
      prepaid for a period of 12 months after their issuance.





In
      connection with entering into the Master Loan Agreement, the Company issued
      PDS
      Gaming a five-year warrant to purchase 200,000 common shares at $1.84 per share.
      The Company valued the warrant at $220,290 using the Black-Scholes pricing
      model. In accordance with EITF 98-5, the resulting fair value of the warrant
      was
      treated as original issue discount and will be amortized over the life of the
      promissory notes using the straight-line method, which approximates the interest
      method.




On
      June
      28, 2006, the Company entered into a Master Loan Agreement which replaced the
      May 25, 2006 agreement. In addition, the Company entered into two new promissory
      notes in the amounts of $3,182,854 and $1,910,000. The promissory note dated
      May
      25, 2006 was cancelled, with the proceeds being rolled into the $3,182,854
      promissory note. Both notes bear interest at a rate of 13% *per
      annum* ,
      have
      48-month terms and may not be prepaid for a period of 12 months after their
      issuance. Proceeds of the notes are to fund the purchase of 875 redemption
      product licenses form Bally Gaming, Inc. (Note 9) and purchase AWP equipment.
      As
      additional consideration for entering into the promissory notes, the Company
      agreed to pay PDS a monthly royalty fee of $1.75 per day for 500 AWP devices
      for
      48 months commencing on August 1, 2006. During the year ended December 31,
      2006,
      the Company expensed $107,625 due PDS under the royalty agreement.





The
      PDS
      notes are collateralized by the equipment and redemption product licenses which
      the notes funded. In addition, the Company is required to enter into a Security
      Assignment of Revenue Share Agreement for each customer location where the
      PDS
      secured equipment is located.


Pursuant
        to the Master Loan Agreement, it is an event of default if the Company does
        not
        pay its principal and interest payments when due or if the Company becomes
        insolvent, defined as liabilities greater than assets. At December 31, 2007,
        the
        Company was insolvent and subsequently, the Company was delinquent on its
        principal and interest payments. Upon an occurrence of an event of default,
        PDS
        may at any time declare all unmatured obligations immediately due and payable.
        The Company has not received notice from PDS declaring the Company’s obligations
        immediately due and payable. In addition, after the first twelve months after
        the first closing date, the Company is required to maintain a targeted fixed
        charge coverage ratio of at least 1.1 to 1.0 for the following twelve months.
        The fixed charge coverage ratio is defined as EBITDA for such period to fixed
        charges, defined as required principal payments on all debt during the same
        period plus taxes payable during the same period.
 
 Because
        PDS can declare the Company’s obligations immediately due and payable, without a
        cure period, the Company has classified the amounts due PDS as short-term
        debt.


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





The
      allocation of the gross proceeds of the equipment financing debt, less
      repayments made, is summarized below as of December 31, 2006:


Equipment
                  financing debt, net of repayments
              
              $
              6,041,282Value
                  of 200,000 warrants allocated to additional paid in
                  capital
              
              
              (220,290
              )Equipment
                  financing debt, net of original issue discount
              
              
              5,820,992Amortization
                  of original issue discount
              
              
              27,536Equipment
                  financing debt
              
              
              5,848,528Less
                  PDS debt classified as short-term
              
              
              (4,551,881
              )Other
                  long-term debt
              
              
              23,531Long-term
                  debt, net
              
              
              1,320,178Current
                  portion of long-term debt
              
              
              (450,271
              )Total
                  long-term debt, net
              
              $
              869,907




45




**14.**  **Convertible
      Debt Financing**





On
      August
      18, 2006, the Company offered and sold an aggregate of $8,242,549 in Variable
      Rate Convertible Debentures (“Debentures”), together with warrants to purchase
      an aggregate of 10,343,474 shares of the Company’s common stock, solely to
      accredited investors in a private placement exempt from registration under
      the
      Securities Act of 1933. Interest only payments on the Debentures are due on
      a
      quarterly basis beginning January 1, 2007 and is based on a *per
      annum* rate
      equal to the 6-month LIBOR on the day before the quarterly interest period,
      plus
      four percent. The principal balance of the Debentures are due February 18,
      2009.





In
      connection with the financing, the Company entered into a Securities Purchase
      Agreement with purchasers of the securities pursuant to which Debentures were
      offered and sold in exchange for cash subscriptions, the surrender and
      cancellation of certain bridge promissory notes, and the surrender and
      cancellation of certain shares of Series B Variable Rate Convertible Preferred
      Stock. The Debentures are convertible, immediately, into common stock at a
      conversion price of $1.00 per share, subject to adjustment. In the transaction,
      the Company received gross cash subscriptions aggregating $4,433,953,
      surrendered bridge promissory notes (plus accrued interest thereon) aggregating
      $737,784 (Note 11), and surrendered Series B Variable Rate Convertible Preferred
      Stock aggregating $3,070,811 in stated value (plus accrued dividends thereon)
      (Note 5).





As
      indicated above, the Company delivered five-year warrants to purchase an
      aggregate of 10,343,474 shares of the Company’s common stock at $1.10 per share
      to purchasers of the Debentures. The warrants contain customary provisions
      for
      adjustment to the exercise price in the event of stock splits, combinations
      and
      dividends, and include certain 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.





In
      connection with the financing, the Company entered into a Registration Rights
      Agreement with the purchasers of the securities, pursuant to which the Company
      agreed to file with the SEC a registration statement, covering the resale of
      shares of common stock underlying the Debentures and warrants, within 45 days of
      the closing and use its best efforts to obtain effectiveness of the registration
      statement thereafter. The Company filed the registration statement on October
      2,
      2006. The Company was limited on the number of shares it could register under
      Rule 415. An Amended registration statement was declared effective on February
      13, 2007.


Pursuant
        to the debenture agreements, an event of default occurs if the Company is
        in
        default under any other indebtedness obligation exceeding $150,000. The Company
        is in default on certain covenants of its equipment financing with PDS Gaming
        Corporation (Note 13). Upon an event of default, at the debentureholders’
election, the amount owing the holder will become immediately due and payable
        at
        130% of the outstanding balance along with interest at the lesser of 18%
        or the
        maximum rate permitted under applicable law. The Company has not received
        notice
        from any debentureholders requiring acceleration of amounts due under the
        debenture. The Company has classified the debentures payable as short-term
        debt.




The
      gross
      proceeds were allocated based upon the relative fair value of the Debentures,
      warrants and the debenture conversion feature. The warrants were valued using
      the Black-Scholes pricing model. The allocation of the gross proceeds of the
      Debentures is summarized below as of December 31, 2006:





Debentures
                payable
            
            $
            8,242,548Value
                of warrants allocated to additional paid in capital
            
            
            (2,508,366
            )Value
                of beneficial conversion option allocated to paid in
                capital
            
            
            (2,301,497
            )Debentures
                payable, net of original issue discount
            
            
            3,432,685Amortization
                of original issue discount
            
            
            721,479Total
                debentures payable, net
            
            $
            4,154,164




46




The
      sale
      of the Debentures with a conversion price of $1.00 triggered certain
      antidilution and repricing provisions with respect to 4,154.85 then outstanding
      shares of Series B Variable Rate Convertible Preferred Stock (Note 5)
      convertible into 2,596,781 common shares at $1.60 per share, and then
      outstanding warrants to purchase 10,053,125 common shares at various prices.
      After the transaction, the then outstanding shares of Series B Variable Rate
      Convertible Preferred Stock were convertible into 4,154,850 common shares at
      $1.00 per share, and the warrants became exercisable for 18,345,750 common
      shares at $1.00 per share. There was no effect on earnings from the transaction
      as the warrant instruments required the adjustments be made.





**15.**  **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. Upon receipt of the
      machines that included the license fees and the placement of the machines,
      through a participation agreement, into service, the Company was to amortize
      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.





As
      a
      result of entering into the Termination and Settlement Agreement with Bally
      (Note 9), the Company recorded an impairment charge for prepaid license fees
      of
      $187,500 during the year ended December 31, 2006.





**16.**  **Related
      Party Transactions**





The
      Company incurred expenses from corporations, owned by Ronald Eibensteiner,
      the
      former Chairman and CEO of the Company and employing Brian Niebur, another
      former director and former CFO of the Company, for rent and consulting services
      of approximately $11,000 and $149,000 during the years ended December 31, 2006
      and 2005, respectively.





The
      Company incurred expenses from a corporation, partially owned by Russell Mix,
      the former CEO and director of the Company, for consulting services and expense
      reimbursements of approximately $3,900 and $214,000 during the years ended
      December 31, 2006 and 2005, respectively.





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 continued to serve as the Company’s Chief Executive Officer
      until September 12, 2006. The Consulting Agreement with Mr. Olah was terminated
      as a result of his appointment as President. For his services as President,
      the
      Company compensated 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 vests 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 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.




47


In
      connection with the convertible debt financing from Pandora in 2004, 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 2004 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 the remaining expense of $132,660 for the year ended December 31,
      2005.





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 was
      President of the Company from August 2, 2005 until December 18, 2006 and who
      became CEO on September 12, 2006. In exchange for their guarantees, the Company
      issued in 2005 to 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.





On
      May 9,
      2006, D. Bradly Olah, the Company’s CEO, loaned the Company $150,000 and was
      issued a convertible promissory note and a warrant to purchase 300,000 shares
      of
      common stock for $1.84. The terms granted to Mr. Olah in the promissory note
      and
      warrant issued to him for the loan were the same terms as those granted to
      other
      lenders. (Note 11). A second lender, Ronald Eibensteiner, who was the Company’s
      former Chairman and CEO and greater than 5% shareholder during 2006, loaned
      the
      Company $150,000 under the same terms as the other lenders.





Effective
      August 2, 2006, the Company entered into an Equipment Revenue Share Agreement
      with Florida Arcade Corporation, an entity which is owned in part by Ronald
      Eibensteiner, the Company’s former Chairman and Chief Executive Officer, greater
      than 5% shareholder during 2006. The Company derived revenue of $55,961 in
      2006
      under this agreement.





In
      connection with the July 28, 2006 extension by Rockmore Investment Master Trust
      Ltd. of its promissory note (Note 11), D. Bradly Olah, the Company’s CEO, agreed
      to personally guaranty the Company’s obligation under the note. In exchange for
      the guaranty, Rockmore transferred to Mr. Olah, one-half of a warrant that
      Rockmore received for extending the note. The assignment occurred in September
      2006 and as a result of the assigement and the adjustment to the warrant that
      occurred as a result of the convertible debt financing, Mr. Olah received a
      warrant to purchase an aggregate of 377,200 shares of common stock.





**17.**  **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, stock based compensation, impairment
      of fixed assets and inventory and beneficial conversion features on notes
      payable.




48





As
      a
      result of various equity offerings that occurred prior 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 Federal net operating loss carryforward of approximately
      $16,750,000 at December 31, 2006 is based upon this preliminary calculation
      and
      the current year loss. 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, 2006 and 2005.





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:




2006
              
              2005Deferred
                  income tax assets:Net
                  operating loss carryforwards
              
              $
              6,780,000
              
              $
              3,388,000Options
                  and warrants issued for services
              
              
              2,052,000
              
              
              459,000Impairment
                  of inventory and fixed assets
              
              
              -
              
              
              918,000Other
              
              
              13,000
              
              
              9,000Amortization
              
              
              15,000
              
              
              234,000Deferred
                  income tax liabilities:Depreciation
              
              
              (93,000
              )
              
              -Difference
                  in basis of inventory and fixed assets
              
              
              (50,000
              )
              
              -Beneficial
                  Conversion on Notes Payable
              
              
              (791,000
              )
              
              -7,926,000
              
              
              5,008,000Less:
                  valuation allowance
              
              
              (7,926,000
              )
              
              (5,008,000
              )Net
                  deferred income tax assets
              
              $
              -
              
              $
              -


The
      change in the valuation allowance was $2,918,000 and $(3,019,000) for the years
      ended December 31, 2006 and 2005, respectively.





In
      September 2005, the FASB approved EITF Issue 05-8. “Income Tax Consequences of
      Issuing Convertible Debt with a Beneficial Conversion Feature” (EITF 05-8). EITF
      05-8 provides (i) that the recognition of a beneficial conversion feature
      creates a difference between book basis and tax basis of a convertible debt
      instrument (ii) that basis difference is a temporary difference for which a
      deferred tax liability should be recorded and (iii) the effect of recognizing
      the deferred tax liability should be charged to equity in accordance with SFAS
      No. 109. EITF 05-5 was effective for financial statements for periods beginning
      after December 15, 2005. The Company applied EITF 05-8 to the 2006 issuance
      of
      convertible debt and the remaining deferred tax liability at December 31, 2006
      was $791,000. Pursuant to EITF 05-8 Issue Summary No. 1 dated August 29, 2005
      paragraph 15, the Company offset the deferred tax liability against the deferred
      tax valuation allowance at December 31, 2006.





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:





2006
            
            2005Federal
                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
            %




49




**18.
      Commitments and Contingencies**





The
      Company leases space located in, Roseville, California, and pays $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.





The
      Company leases office and warehouse space located in Minneapolis, Minnesota
      which serves as the Company’s headquarters. The Company pays $2,980 per month
      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 $140,642 and $141,835 for the years
      ended December 31, 2006 and 2005, respectively.





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





Year
                endingDecember
                31,2007
            
            $
            92,8342008
            
            
            69,9302009
            
            
            1,249Totals
            
            $
            164,013





Effective
      December 1, 2005, the Company entered into a three year agreement with
      Mirabella, Smith & McKinnon, Inc. (“MSM”) to provide consulting services for
      market expansion and sales generation services. As consideration, the Company
      is
      to pay MSM a monthly fee of $5,000 plus expenses and a placement fee of $2.00
      per day for each machine, device, software, or game placed within the state
      of
      Florida during the term of the agreement. For the years ended December 31,
      2006
      and 2005, the Company incurred charges of $159,887 and $5,000, respectively,
      under the agreement.





Pursuant
      to revenue share agreements entered into with operators for the placement of
      the
      Company’s AWP games, the Company generally agrees to indemnify operators for
      damages, loss or liability for the delivery of a system or game which is not
      compliant with federal, state or local regulations or laws concerning such
      system or devices at the time of delivery. To date, the Company has incurred
      no
      material obligations with respect to its indemnification to
      operators.





**19.**  **Significant
      Customers**





Revenues
      from three customers was 85% of revenue from continuing operations in 2006.
      Revenues from
      three customers was 72.3 % of total revenues in 2005, which were included in
      discontinued operations.





**20.**  **Subsequent
      Events**





From
      January 10, 2007 through January 29, 2007, the Company sold to 23 investors
      unsecured term promissory notes in the aggregate principal amount of $401,650.
      All principal due under the notes is payable in cash only and due and payable
      in
      full on the one-year anniversary of the issuance of the notes. Interest on
      the
      principal amount accrues at the *per
      annum* rate of
      55%, and is payable, in advance, in shares of the Company’s common stock, valued
      at $1.10 per share, subject to adjustment as set forth in the notes. Payments
      of
      principal under the notes are subordinate to the Company’s obligations under
      variable rate convertible debentures issued on August 18, 2006, in aggregate
      principal amount of $8,242,549 (Note 14). No securities offered or sold in
      the
      private placement were registered under the Securities Act. Therefore, no such
      securities may be offered or sold in the United States absent registration
      or an
      applicable exemption from registration requirements. The Company offered and
      sold the above-referenced securities in reliance on the statutory exemption
      from
      registration in Section 4(2) of the Securities Act, and on Rule 506 under the
      Securities Act. The disclosure about the private placement and related
      agreements contained in this report does not constitute an offer to sell or
      a
      solicitation of an offer to buy any securities of the Company, and is made
      only
      as required under applicable rules for filing annual reports with the SEC,
      and
      as permitted under Rule 135c under the Securities Act.




50





As
      of
      January 1, 2007, the Company had interest due under its Variable Rate
      Convertible Debentures (Note 14) of $292,095 and dividends due under its
      Variable Rate Series B Convertible Preferred Stock of $63,657, both of which
      have not been paid. During February 2007 and March 2007, the Company received
      consents representing 98% of amounts due to debenture holders and 100% of
      amounts due to preferred holders, to defer such interest and dividends due
      on
      January 1, 2007 and any additional amounts that will accrue and become payable
      in 2007, until January 1, 2008.





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





In
      connection with the warrant repricing offering, the Company has received
      proceeds on the sale of bridge notes payables totaling $737,312. The notes
      are
      unsecured, mature in one year, and are convertible into the exercise of warrants
      which the Company is offering at a reduced exercise price. In connection with
      the private placement, the Company agreed to permit investors to exercise
      certain common stock purchase warrants, the shares issuable upon exercise of
      which are not registered for resale, on a cashless conversion basis. The
      warrants so affected, however, cannot be converted by investors for an amount
      of
      common shares exceeding eight times the dollar amount loaned to the Company
      in
      exchange for note. Currently, no investors have exercised their cashless
      conversion rights. No securities offered or sold in the private placement were
      registered under the Securities Act. Therefore, no such securities may be
      offered or sold in the United States absent registration or an applicable
      exemption from registration requirements. The Company offered and sold the
      above-referenced securities in reliance on the statutory exemption from
      registration in Section 4(2) of the Securities Act, and on Rule 506 under the
      Securities Act. The disclosure about the private placement and related
      agreements contained in this report does not constitute an offer to sell or
      a
      solicitation of an offer to buy any securities of the Company, and is made
      only
      as required under applicable rules for filing annual reports with the SEC,
      and
      as permitted under Rule 135c under the Securities Act.




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





None.





**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, 2006,
      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 2006, our independent registered public
      accounting firm, Virchow, Krause & Company, LLP, advised management and the
      audit committee of our Board of Directors that they had identified a deficiency
      in internal control. The deficiency is considered to be a material weakness
      as
      defined under standards established by the American Institute of Certified
      Public Accountants. The material weakness relates to the lack of segregation
      of
      duties within the financial processes in the Company. The Company periodically
      assesses the cost versus benefit of adding the resources that would remedy
      or
      mitigate this situation, and currently does not consider the benefits to
      outweigh the costs of adding additional staff in light of the limited number
      of
      transactions related to the Company’s operations.




51





The
      chief
      executive and chief financial officers also have indicated that there have
      been
      no changes in the Company’s internal controls over financial reporting during
      its fourth fiscal quarter ended December 31, 2006, that have materially affected
      or are reasonably likely to materially affect such controls.





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





None.




52


**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
            
            51
            
            Chairman
                of the BoardD.
                Bradly Olah
            
            42
            
            Chief
                Executive Officer and DirectorDavid
                Norris
            
            45
            
            President
                and Chief Operating OfficerKevin
                M. Greer
            
            50
            
            Chief
                Financial OfficerRussell
                C. Mix
            
            50
            
            DirectorRobert
                Bonev
            
            49
            
            DirectorNamon
                D. Witcher
            
            68
            
            DirectorCharley
                Price
            
            75
            
            Director





**Kenneth
      W. Brimmer,** 51
      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.” From May 2002 until February 2003, 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),. 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.





**D.
      Bradly Olah,** ** **42,** Mr.
      Olah
      has served as the Company’s CEO since September 2006 and a director since August
      2005. In addition Mr. Olah served as President from August 2005 until December
      2006. Previous to his appointment as President, Mr. Olah 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.





**David
      Norris** ,
      46, has
      served as the Company’s President and Chief Operating Officer since December
      2006. From June 2006 until his appointment as the Company’s President and Chief
      Operating Officer, Mr. Norris served as the President and a Director of Cybrix
      Corporation, a provider of specialized IT and network security services. From
      November 2004 until May 2006, Mr. Norris was a General Manager for Secured
      Services, Inc., a corporation engaged in the business of identity management
      and
      secure network access software and related services. Prior to that, Mr. Norris
      was the President and a Director of Cybrix Corporation beginning in 2002. Mr.
      Norris also has earlier experience, including service for several years as
      the
      President and Chief Executive Officer and a Director of NEII, a Minnesota-based
      developer of enterprise-wide client/server administration software, experience
      as the founder, President and Chief Executive Officer and a Director of Norris
      Solutions, Inc., an Oracle applications dealer, ten years of service as the
      President and a Director of DDI Business Systems, Inc., a provider of enterprise
      resource planning software and services, and nearly four years as a software
      developer at Honeywell, Inc.




53





**Kevin
      M. Greer** ,
      50, 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.





**Russell
      Mix** ,
      50, has
      served as Director of the Company since November 2003. From November 2003 until
      September 2006, Mr. Mix served as the Company’s CEO and f rom  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.




**Robert
      Bonev** ,
      49, has
      served as a director of the Company since October 2004.  Currently, Mr.
      Bonev is Vice President of Sales and Marketing for Prolific Publishing, a
      California-based Software Publishing firm that specializes in WEB-based Business
      Applications, Project Management, Compliance and Communications. Previous to
      his
      association with Prolific, Mr. Bonev was 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 1998 to
      2000, Mr. Bonev worked with The George Soros Private Equity Group as the group
      head of Marketing for Outdoor Marine Corporation.  Prior to that, Mr. Bonev
      has served in several Sales and Marketing roles with major corporations which
      included Teledyne Technologies, and Mercury Marine, a division of The Brunswick Corporation.




**N.D.
      “Butch” Witcher** ,
      68, 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.





**Charley
      Price** ,
      75, has
      served as a director of the Company since February 2007. Col. Price had a
      28-year career in the military, including service in both the US Army and US
      Air
      Force. In multiple combat tours during the Korean Conflict and the Vietnam
      War,
      he received numerous awards and decorations, including the Silver Star, Air
      Medal, MSM, ACOM w/2 OLC, Presidential Unit Citation, and Cross of Gallantry
      w/Palm. Over the past three decades, Col. Price has been involved as an officer
      or volunteer for multiple national veterans service organizations, as a *pro
      bono* Legislative Director or legal advisor, as an advisor to the Governor of the
      State of Florida as Director of External Affairs for the Florida Department
      of
      Veteran Affairs, and as a member of many other statewide commissions, boards
      and
      panels. Since July 2006, Col. Price has been a political consultant and advisor
      representing veterans’ service organizations at the state and national level on
      issues concerning benefits, entitlements, legal access and status, and
      legislative matters. Also since July 2006, Col. Price has served as President
      of
      Veterans Mediation Services, a public service corporation. From September 2002
      until June 2006, Col. Price served as the Director of External Affairs for
      the
      Florida Department of Veterans Affairs. Prior to that, from October 1998 until
      September 2002, Col. Price served as a mediator with Veterans Mediation
      Services, and a legal consultant to various veterans organizations concerning
      claims and benefits matters. Col. Price holds BAs from the University of
      Maryland and Park College, a MBA from Chadwick University and a JD from
      Monticello School of Law. He is a member of the American Bar Association and
      is
      a State Supreme Court certified Mediator/Arbitrator.




54




**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 solely 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 2006, except for Mr. Brad
      Olah,
      who had the following transactions: (i) conversion of Series B Variable Rate
      Convertible Preferred Stock on February 1, 2006, which was reported on February
      6, 2006; (ii) issuance of a convertible promissory note and warrant in
      connection with a loan Mr. Olah made to the Company on May 9, 2006, which was
      reported on May 12, 2006; and (iii) issuance of a warrant in connection with
      the
      guaranty of a loan for the Company on September 16, 2006, which was reported
      on
      a Form 5 filed on February 13, 2007.





**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.





**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.




55





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





The
      following table sets forth the total compensation paid by the Company during
      its
      last fiscal year to the persons who served as President or Chief Executive
      Officer of the Company and each other executive officer of the Company and
      the
      most highly compensated executive officers with decision making abilities.





SUMMARY
      COMPENSATION TABLE





Name
                and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards
              ($)
            
            Other
                Annual Compensation
              ($)
            
            Total
              ($)Russell
                C. Mix, President and Chief Executive Officer(1)
            
            
            2006
            
            
            162,521
            
            
            -
            
            
            22,000
            (2)
            
            21,484
            (3)
            
            -
            
            
            206,005D.
                Bradly Olah, President and Chief Executive Officer(4)
            
            
            2006
            
            
            183,383
            
            
            100,000
            (5)
            
            22,000
            (6)
            
            8,921
            (7)
            
            -
            
            
            314,304David
                Norris,President
                and COO(8)
            
            
            2006
            
            
            7,292
            
            
            -
            
            
            -
            
            
            407,347
            (9)
            
            -
            
            
            414,639Kevin
                M. Greer, Chief Financial Officer
            
            
            2006
            
            
            125,000
            
            
            20,000
            (10)
            
            -
            
            
            216,005
            (11)
            
            -
            
            
            355,600




(1)
            Mr.
                Mix was appointed President and Chief Executive Officer on April
                16, 2004.
                Mr. Mix served as President until August 2, 2005and continued to serve as our Chief Executive Officer until September
                12,
                2006.




(2)
            On
                September 12, 2006 Mr. Mix was awarded 25,000 restricted common shares
                as
                a member of the board of directors.




(3)
            On
                September 12, 2006 an option for 600,000 common shares held by Mr.
                Mix was
                cancelled and replaced by an option for 450,000 common shares. The
                reported value of the award is the difference between the value of
                the
                cancelled options and the newly issued
                option.




(4)
            Mr.
                Olah was appointed President on August 2, 2005 and Chief Executive
                Officer
                on September 12, 2006. Mr. Olah served as President until December
                19,
                2006.




(5)
            Represents
                a discretionary bonus approved by the board of
                directors.




(6)
            On
                September 12, 2006 Mr. Olah was awarded 25,000 restricted common
                shares as
                a member of the board of directors.




(7)
            On
                September 12, 2006 an option for 600,000 common shares held by Mr.
                Olah
                was cancelled and replaced by a new option for 600,000 common shares.
                The
                reported value of the award is the difference between the value of
                the
                cancelled option and the newly issued
                option.




(8)
            Mr.
                Norris was appointed President and Chief Operating Officer on December
                19,
                2006.




(9)
            Value
                of options for 500,000 common shares granted to Mr. Norris upon his
                appointment as President and Chief Operating Officer on December
                19,
                2006.




(10)
            Represents
                a discretionary bonus approved by the board of
                directors.




(11)
            Value
                of an option for 250,000 common shares granted to Mr. Greer on September
                12, 2006 and the difference in value of an additional option for
                250,000
                common shares which was granted, less the value of an option for
                250,000
                common shares which was cancelled.





**Employment
      Agreements and Related Compensation**





*Compensation
      of D. Bradly Olah* .
      During
      the fiscal year ended December 31, 2006, Mr. Olah served as President of the
      Company until December 19, 2006 at which time he resigned that position with
      the
      hiring of David Norris. On September 12, 2006, upon the separation from the
      Company by Russell Mix, Mr. Olah was appointed Chief Executive Officer. The
      Company does not have a written employment agreement with Mr. Olah, but agreed
      to compensate Mr. Olah with an annual base salary of $150,000.





The
      Company’s practice is to periodically evaluate compensation and related job
      performance and adjusts salary, awards bonuses and/or award stock options based
      upon such evaluation. On September 12, 2006, the Company increased Mr. Olah’s
      annual base salary to $250,000 (effective as of September 1, 2006) and agreed
      to
      provide Mr. Olah with a $100,000 cash bonus. In addition, the Company cancelled
      options held by Mr. Olah to purchase 100,000 common shares at $2.15 per share,
      and 500,000 common shares at $2.55 per share. In exchange, the Company granted
      Mr. Olah new options to purchase up to 600,000 common shares at $0.88 per share
      (the fair value of the common stock on the date of grant). Of the new options
      for 600,000 common shares, options for 100,000 shares vest and will expire
      on
      June 30, 2014; and options for 500,000 common shares expire on December 31,
      2015
      and vesting 166,666 shares on date of grant and 166,666 shares on August 1,
      2007
      and 166,668 shares on August 1, 2008 and will expire on December 31, 2015.
      All
      of the new options were granted under the Company’s 2004 Stock Option Plan.




56





On
      September 12, 2006, Mr. Olah received a restricted stock grant for 25,000 common
      shares in his capacity a member of the Company’s Board of Directors. The
      restricted stock vests over a thee year period with 8,333 shares vesting on
      September 12, 2007, 8,333 shares on September 12, 2008 and 8,334 shares on
      September 12, 2009.





*Compensation
      of Russell C. Mix* .
      On
      April 14, 2004, the Company entered into a written Employment Agreement with
      Russell C. Mix. 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. The Employment Agreement
      also provided that Mr. Mix was eligible to receive a performance-based annual
      bonus, and would receive salary payments for a one-year period after a
      termination by the Company without cause and in certain other limited
      circumstances, including the Company’s breach of the agreement, a material and
      adverse change in Mr. Mix’s duties, responsibilities and authority, or a change
      in control of the Company.





On
      September 12, 2006, Mr. Mix resigned from his position as the Company’s Chief
      Executive Officer (he had earlier resigned his position as President on August
      2, 2005 in connection with the Company’s appointment of Mr. Olah in that
      capacity). In connection with the resignation, the Company entered into a
      Separation and Release Agreement with Mr. Mix effective September 12, 2006.
      Under that agreement, the parties agreed to the following: (i) the termination
      of the April 14, 2004 Employment Agreement; (ii) the Company’s payment of
      $15,000 to Mr. Mix; (iii) the cancellation of options to purchase up to 600,000
      shares of common stock under the March 22, 2004 Option Agreement; and (iv)
      the
      execution and delivery of a 12-month Consulting Agreement between the parties,
      pursuant to which Mr. Mix will provide certain consulting services relating
      primarily to regulatory and training matters in consideration aggregating
      approximately $100,000. Prior to entering into the Separation and Release
      Agreement, the Company entered into a new Option Agreement with Mr. Mix pursuant
      to which the Company granted Mr. Mix the right to purchase up to 450,000 shares
      of common stock at $1.00 per share until September 12, 2008.





On
      September 12, 2006, Mr. Mix received a restricted stock grant for 25,000 common
      shares in his capacity a member of the Company’s Board of Directors. The
      restricted stock vests over a thee year period with 8,333 shares vesting on
      September 12, 2007, 8,333 shares on September 12, 2008 and 8,334 shares on
      September 12, 2009.




*Compensation
      of David Norris* . On
      December 19, 2006, the Company hired David Norris as its President and Chief
      Operating Officer. The Company does not have a written employment agreement
      with
      Mr. Norris, but agreed to compensate Mr. Norris with an annual base salary
      of
      $175,000. In connection with Mr. Norris’s appointment as the Company’s
      President, the Company granted Mr. Norris a five-year option to purchase up
      to
      500,000 shares of the Company’s common stock at an exercise price of $0.85 per
      share (the fair value of the common stock on December 19, 2006, the date of
      grant). This option vests ratably over three years in substantially equal
      installments and was granted under the Company’s 2006 Stock Incentive
      Plan.





*Compensation
      of Kevin M. Greer* .
      During
      the fiscal year ended December 31, 2006, Mr. Greer served as the Company’s Chief
      Financial Offer. The
      Company does not have a written employment agreement with Mr. Greer, but
      compensated Mr. Greer with an annual base salary of $120,000. On September
      12,
      2006, the Company increased Mr. Greer’s annual base salary to $135,000
      (effective as of September 1, 2006) and agreed to provide Mr. Greer with a
      $20,000 cash bonus. In addition, the Company cancelled options held by Mr.
      Greer
      to purchase 250,000 common shares at $1.60 per share. In exchange, the Company
      granted Mr. Greer two new options to purchase up to 250,000 common shares each
      at $0.88 per share (the fair value of the common stock on the date of grant).
      The first new options vested with respect to 83,333 shares on October 1, 2006,
      and will vest with respect to 83,333 shares each on October 1, 2007 and
      October12, 2008 and will expire on December 31, 2010. This new option was
      granted under the Company’s 2004 Stock Option Plan. The second new option vests
      83,333 shares on September 12, 2007 and 83,334 shares each on September 12,
      2008
      and September 12, 2009 and will expire on September 12, 2011. This option was
      granted under the Company’s 2006 Stock Incentive Plan.




57





**Outstanding
      Equity Awards at Fiscal Year-End**





The
      following table sets forth information concerning stock options held by named
      executives at December 31, 2006.





**Option
                Awards**
            
            **Stock
                Awards**Name
            
            Number
                of Securities Underlying Unexercised Options
              (#)
              Exercisable
            
            Number
                of Securities Underlying Unexercised Options
              (#)
                Unexercisable
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration Date
            
            Number
                of Shares Unvested
            
            Market
                Value of Shares UnvestedD.
                Bradly Olah
            
            
            100,000
            
            
            -
            
            $
            0.88
            
            
            6/30/2014
            
            
            25,000
            (1)
            
            16,250166,666
            
            
            333,334
            (2)
            $
            0.88
            
            
            12/31/2015
            
            
            -
            
            
            -David
                Norris
            
            
            -
            
            
            500,000
            (3)
            $
            0.88
            
            
            12/19/2011
            
            
            -
            
            
            -Kevin
                M. Greer
            
            
            83,333
            
            
            166,667
            (4)
            $
            0.88
            
            
            12/31/2010
            
            
            -
            
            
            --
            
            
            250,000
            (5)
            $
            0.88
            
            
            9/12/2011
            
            
            -
            
            
            -




(1)
            Restricted
                common stockvests over a three year period with 8,333 shares vesting on September
                12,
                2007, 8,333 shares on September 12, 2008 and 8,334 shares on September
                12,
                2009.




(2)
            Vests
                with respect to 166,667 shares on August 1, 2007 and 166,667 shares
                on
                August 1, 2008.




(3)
            Vests
                with respect to 166,666 shares on December 19, 2007, 166,667 shares
                on
                December 19, 2008 and 166,667 shares on December 19,
                2009.




(4)
            Vests
                with respect to 83,333 shares on October 1, 2007 and 83,334 shares
                on
                October 1, 2008.




(5)
            Vests
                with respect to 83,333 shares on September 12, 2007, 83,333 shares
                on
                September 12, 2008 and 83,334 shares on September 12,
                2009.




**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. On September 12,
      2006, the Company adopted a policy of providing directors with annual grants
      (to
      be made on June 30 of each year) of 25,000 shares of restricted and unregistered
      common stock, which shares are to vest ratably over three years in substantially
      equal installments. Coincident with the policy’s adoption, the Company made
      initial grants of 25,000 shares of restricted and unregistered stock on the
      same
      terms to all directors serving on September 12, 2006. Prior to September 12,
      2006, the Company had no official plan or policy for compensating directors
      with
      stock options or stock awards.





On
      September 12, 2006, the Company cancelled options held by Kenneth Brimmer,
      Robert Bonev and N. D. Witcher in the amounts of 250,000, 150,000 and 150,000
      respectively. The Company issued new options to the same three directors, for
      250,000, 150,000 and 150,000 respectively, exercisable at $0.88 per share.
      The
      option granted to Mr. Brimmer vests 100,000 shares on September 12, 2007, 75,000
      shares on March 1, 2007 and March 1, 2008. The option granted to Mr. Bonev
      vests
      30,000 shares on September 12, 2006, 30,000 shares on October 1, 2006, 30,000
      shares on October 1, 2007, 30,000 shares on October 1, 2008 and 30,000 shares
      on
      October 1, 2009. The option granted to Mr. Witcher vests 30,000 shares on
      September 12, 2006, 30,000 shares on January 1, 2007, 30,000 shares on January
      1, 2008, 30,000 shares on January 1, 2009 and 30,000 shares on January 1,
      2010.




58





On
      February 26, 2007, upon his appointment to the board of directors, the Company
      granted 25,000 share of restricted and unregistered stock to Charley
      Price.





The
      table
      below summarizes the compensation paid by the Company to its non-employee
      directors for the fiscal year ended December 31, 2006.





Name(1)
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Option
                Awards
              ($)
            
            Stock
                Awards
              ($)
            
            Other
                Annual Compensation
              ($)
            
            Total
              ($)Kenneth
                Brimmer
            
            
            -
            
            
            3,305
            (2)
            
            22,000
            (3)
            
            -
            
            
            25,305Robert
                Bonev
            
            
            -
            
            
            10,069
            (4)
            
            22,000
            (5)
            
            -
            
            
            32,069N.
                D. “Butch” Witcher
            
            
            -
            
            
            6,681
            (6)
            
            22,000
            (7)
            
            -
            
            
            28,681







(1)
            Excludes
                Russell Mix who was a non-employee director at year-end, but was
                included
                in the Summary Compensation Table for officers
                above.




(2)
            On
                September 12, 2006 an option for common shares held by Mr. Brimmer
                was
                cancelled and replaced by an option for 450,000 common shares. The
                reported value of the award is the difference between the value of
                the
                cancelled options and the newly issued
                option.




(3)
            On
                September 12, 2006 Mr. Brimmer was awarded 25,000 restricted shares
                as a
                member of the board of directors.




(4)
            On
                September 12, 2006 an option for 150,000 common shares held by Mr.
                Bonev
                was cancelled and replaced by an option for 150,000 common shares.
                The
                reported value of the award is the difference between the value of
                the
                cancelled option and the newly issued
                option.




(5)
            On
                September 12, 2006 Mr. Bonev was awarded 25,000 restricted shares
                as a
                member of the board of directors.




(6)
            On
                September 12, 2006 an option for 150,000 common shares held by Mr.
                Witcher
                was cancelled and replaced by an option for 150,000 common shares.
                The
                reported value of the award is the difference between the value of
                the
                cancelled option and the newly issued
                option.




(7)
            On
                September 12, 2006, Mr. Witcher was awarded 25,000 restricted shares
                as a
                member of the board of directors.




59




**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 April 12, 2007 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)
            
            
            175,000
            
            
            1.1
            %Robert
                Bonev (3)
              5602
                Cypress Point Dr.
              Grand
                Forks, ND 58201
            
            
            126,666
            
            
            *Russell
                Mix (4)
              1400
                West Burbank Blvd.
              Burbank,
                CA 91506
            
            
            804,919
            
            
            4.7
            %D.
                Bradley Olah (5)
            
            
            2,410,460
            
            
            13.0
            %Namon
                D. Witcher (6)
              825
                Jefferson St.
              Monterey,
                CA 93940
            
            
            60,000
            
            
            *Kevin
                M. Greer (7)
              26505
                Noble Road
              Shorewood,
                MN 55331
            
            
            83,333
            
            
            *David
                Norris
            
            
            -
            
            
            *Charley
                Price
            
            
            -
            
            
            *All
                current executive officers and
              directors
                as a group (eight persons) (8)
            
            
            3,660,378
            
            
            18.6
            %Perkins
                Capital Management, Inc. (9)
              730
                East Lake Street
              Wayzata,
                MN 55391
            
            
            4,048,473
            
            
            19.8
            %Wayne
                W. Mills (10)
              5020
                Blake Rd. S.
              Edina,
                MN 55436
            
            
            2,089,044
            
            
            11.3
            %White
                Pine Capital, LLC (11)
              60
                S. Sixth Street, Suite 2530
              Minneapolis,
                MN 55402
            
            
            1,235,951
            
            
            7.3
            %







*
      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.




(2)  Includes
      175,000 common shares which Mr. Brimmer may purchase under currently exercisable
      options for Spectre’s common stock.




(3)  Includes
      60,000 common 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
      533,333 common shares which Mr. Mix may purchase under currently exercisable
      options for Spectre’s common stock, 55,000 common shares issuable upon
      conversion of other convertible securities, 193,250 common shares issuable
      upon
      exercise of warrants (with respect to which, warrants for an aggregate of
      173,250 common shares are held by Prolific Publishing, Inc., a California
      corporation of which Mr. Mix is an affiliate).




60




(5)  Includes
      20,000 common shares held in trust for Mr. Olah’s children (with respect to
      which shares Mr. Olah disclaims beneficial ownership), 266,666 common shares
      issuable upon exercise of options, and 1,866,700 common shares issuable upon
      exercise of warrants.




(6)  Includes
      60,000 common shares which Mr. Witcher may purchase under currently exercisable
      options for Spectre’s common stock.




(7)  Includes
      83,333 common shares which Mr. Greer may purchase under currently exercisable
      options for Spectre’s common stock.




(8)  Includes
      Messrs. Brimmer, Bonev, Mix, Olah, Greer, Norris, Price and
      Witcher.




(9)  Includes
      1,388,250 common shares issuable upon exercise of warrants and 2,660,223 common
      shares issuable upon conversion of other convertible securities. Perkins Capital
      Management holds investment and dispositive power over all of the shares
      included in the table. In this regard, Richard W. Perkins, Richard C. Perkins,
      Daniel S. Perkins and Harry A. L. Lindberg, Jr., each are the natural person
      beneficial holders of investment and dispositive power over such shares. Perkins
      Capital Management (together with the four aforementioned individuals) has
      voting power over 1,204,875 common shares included in the table. Marla C.
      Kennedy, Gary B. Davis, Elizabeth J. Hyduke Kelm, Stephen P. Hyduke, Ann L.
      Harris, Richard W. Perkins, James G. Peters, David H. Potter, Michael S. Wallace
      and James H. Lehr are the natural person beneficial holders of voting power
      over
      the remaining 2,843,598 shares included in the table.




(10)   Includes
      1,987,000 common shares issuable upon exercise of warrants (with respect to
      which, warrants for an aggregate of 315,000 common shares are held by Hunter
      Ridge Partners, LLC, a Minnesota limited liability company of which Mr. Mills
      is
      an affiliate, warrants for an aggregate of 184,000 shares are held by Blake
      Capital, Inc., a Minnesota corporation of which Mr. Mills is an affiliate,
      and
      warrants for an aggregate of 660,000 common shares are held by Blake Advisors,
      LLC, a Minnesota limited liability company of which Mr. Mills is an affiliate).
      Also includes 100,000 common shares issuable upon exercise of other convertible
      securities held by Hunter Ridge Partners, and 2,044 outstanding common shares
      held by Hunter Ridge Partners.




(11)  As
      disclosed in a Schedule 13D/A filed on February 9, 2007 .




**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
              
              
              3,046,666
              
              $
              0.99
              
              
              1,123,334Equity
                  compensation plans not approved by security holders
              
              
              7,358,418
              
              $
              1.25
              
              
              noneTotal
              
              
              10,405,084
              
              $
              1.18
              
              
              1,123,334
  61
 
  **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.





**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 December 31, 2006, 1,915,000 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.





**2006
      Stock Incentive Plan**





In
      September 2006, the Company’s board of directors adopted the Company’s 2006
      Stock Incentive Plan (the “2006 Plan”), and reserved 2,000,000 shares of common
      stock for issuance under the 2006 Plan. The 2006 Plan permits the grant of
      both
      incentive and non-statutory stock options; however, our shareholders must
      approve the 2006 Plan on or prior to September 12, 2007 for the Company to
      issue
      incentive stock options in conformity with IRS regulations. As of April 11,
      2007, options for 1,145,000 shares of common stock and 150,000 shares of
      restricted common stock have been granted under the 2006 Plan. The board of
      directors adopted the 2006 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 Ronald Eibensteiner,
      a
      former director of the Company and employing Brian Niebur, another former
      director and officer of the Company, for rent and consulting services of $11,000
      and $149,000 during the years ended December 31, 2006 and 2005 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 to from a corporation, partially owned by Russell
      Mix,
      the former CEO and a director of the Company, for consulting services and
      expense reimbursements of approximately $4,000 and $214,000 during the year
      ended December 31, 2006 and 2005 respectively. Mr. Mix 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.




62





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.




Effective
      as of August 2, 2005, the Company’s board of directors appointed D.
      Bradly Olah as its President. A
      prior
      consulting agreement with Mr.
      Olah was terminated as a result of this
      appointment. Mr. Olah continued serving as the Company’s President until
      December 19, 2006, when Mr. David Norris was appointed to that position. On
      September 12, 2006, the Company appointed Mr. Olah as its Chief Executive
      Officer and he continues to serve the Company in that capacity. 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.





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, 2005, the Company recorded expense of $132,660
      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
      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.




63





Effective
      August 2, 2006, the Company entered into an Equipment Revenue Share Agreement
      with Florida Arcade Corporation, an entity which is owned in part by Ronald
      E.
      Eibensteiner (the Company’s former Chairman and Chief Executive Officer). The
      Company derived revenue of $55,961 in 2006 under this agreement.




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





**Number**
            
            **Description**3.1
            
            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 to Exhibits 3.1, 3.2 and 3.3 to
                the
                Company’s current report on Form 8-K filed on October 28,
                2005).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
            
            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).10.3
            
            Registration
                Rights Agreement with Pandora Select Partners, L.P. and Whitebox
                Intermarket Partners, L.P., dated September 10, 2004 (incorporated
                by
                reference to Exhibit 10.2 to the Company’s current report on Form 8-K
                filed on September 16, 2004).10.4
            
            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).10.5
            
            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).




64




10.6
            
            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).10.7
            
            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).10.8
            
            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).10.9
            
            Development
                and License Agreement with Global Gaming Group, Inc., dated May 15,
                2006**(incorporated
                by reference to Exhibit 10.10 to the registrant’s registration statement
                on Form SB-2 filed on October 2, 2006 (File No. 333-137751))*.*10.10
            
            Master
                Loan Agreement with PDS Gaming Corporation (incorporated by reference
                to
                Exhibit 10.18 to the registrant's registration statement on Form
                SB-2
                filed on June 7, 2006 (File No. 333-130254)).10.11
            
            Security
                Agreement with PDS Gaming Corporation (incorporated by reference
                to
                Exhibit 10.19 to the registrant's registration statement on Form
                SB-2
                filed on June 7, 2006 (File No. 333-130254)).10.12
            
            Termination
                and Settlement Agreement with Bally Gaming, Inc., dated June 30,
                2006
                (incorporated by reference to Exhibit 10.1 to the registrant’s current
                report on Form 8-K filed on July 6, 2006).10.13
            
            Technology
                Agreement with Bally Gaming, Inc., dated June 30, 2006 (incorporated
                by
                reference to Exhibit 10.2 to the registrant’s current report on Form 8-K
                filed on July 6, 2006).10.14
            
            Form
                of Securities Purchase Agreement by and between the registrant and
                each
                purchaser Variable Rate Convertible Debentures, dated as of August
                17,
                2006 (incorporated by reference to Exhibit 10.1 to the registrant’s
                current report on Form 8-K filed on August 21, 2006).10.15
            
            Form
                of Debenture issued to purchasers of Variable Rate Convertible Debentures,
                dated as of August 18, 2006 (incorporated by reference to Exhibit
                10.2 to
                the registrant’s current report on Form 8-K filed on August 21,
                2006).10.16
            
            Form
                of Common Stock Purchase Warrant issued to purchasers of Variable
                Rate
                Convertible Debentures, dated August 18, 2006 (incorporated by reference
                to Exhibit 10.3 to the registrant’s current report on Form 8-K filed on
                August 21, 2006).10.17
            
            Form
                of Registration Rights Agreement by and between the registrant and
                each
                purchaser of Variable Rate Convertible Debentures, dated August 17,
                2006
                (incorporated by reference to Exhibit 10.4 to the registrant’s current
                report on Form 8-K filed on August 21, 2006).10.18
            
            Separation
                and Release Agreement with Russell C. Mix, dated September 13, 2006
                (incorporated by reference to Exhibit 10.2 to the registrant’s current
                report on Form 8-K filed on September 18,
                2006).




65




10.19
            
            Consulting
                Agreement with Russell C. Mix, dated September 13, 2006 (incorporated
                by
                reference to Exhibit 10.3 to the registrant’s current report on Form 8-K
                filed on September 18, 2006).10.20
            
            2004
                Stock Option Plan (incorporated
                by reference to Exhibit 10.20 to the registrant’s registration statement
                on Form SB-2 filed on October 2, 2006 (File No. 333-137751)).10.21
            
            2006
                Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to
                the
                registrant’s current report on Form 8-K filed on September 18,
                2006).10.22
            
            Royalty
                Agreement with PDS Gaming Corporation, dated June 29, 2006 (*filed
                herewith*).10.23
            
            Form
                of Unsecured Term Promissory Note issued to purchasers of certain
                bridge
                notes from December 2006 through March 2007, and to PDS Gaming Corporation
                on March 16, 2007 (*filed
                herewith*).





23
            
            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*).





**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, 2006 and
      2005. The following table details the fees paid to Virchow Krause for the years
      ended December 31, 2006 and 2005.





**2006**
            
            **2005**Audit
                Fees
            
            $
            117,010
            
            $
            76,965Audit-Related
                Fees
            
            
            29,425(2
            )
            
            13,040(1
            )Tax
                Return Preparation Fees
            
            
            4,400
            
            
            3,632All
                Other Fees
            
            
            0
            
            
            0Total
            
            $
            150,835
            
            $
            93,637





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


(2)
            Fees
                relate to review of various SB-2 filings, SEC comment letter, amended
                10-KSB and 10-QSB





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.By:
            /s/ Kevin
              M.
              GreerKevin
              M. GreerChief
              Financial OfficerDate:
                April 17, 2007




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
              
              Chairman
              
              April
                  17, 2007Kenneth
                  Brimmer/s/
                  D. Bradly Olah
              
              Chief
                  Executive Officer and Director
              
              April
                  17, 2007D.
                  Bradly Olah
              
              (Principal
                  Executive Officer)/s/
                  Kevin M. Greer
              
              Chief
                  Financial Officer
              
              April
                  17, 2007Kevin
                  M. Greer
              
              (Principal
                  Financial and Accounting Officer)Director
              
              April
                  17, 2007Russell
                  MixDirector
              
              April
                  17, 2007Robert
                  Bonev/s/
                  N.D. Witcher
              
              Director
              
              April
                  17, 2007N.D.
                  Witcher/s/
                  Charley Price
              
              Director
              
              April
                  17, 2007Charley
                  Price
  67