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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, 2004 Commission file number 0-25764 Spectre Gaming, Inc.  Minnesota
    
    41-1675041State of Incorporation
    
    I.R.S. Employer Identification No.
 1466 Pioneer Way,
Suite 10
El Cajon, CA 92020
(Address of principal executive offices) (612) 279-2030
(Issuers telephone number) Securities registered under Section 12(g) of the Exchange Act: common stock, par value $.01 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 þ 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 The Companys revenues from operations for the fiscal year ended December 31, 2004 totaled
$82,689. The aggregate market value of the common stock held by nonaffiliates of the registrant as of
March 15, 2005 was approximately $16,945,134 based on the average of the closing bid and asked
price of the registrants common stock on such date. The number of shares outstanding of
the registrants common stock, as of March 15, 2005 was 12,980,927. Transitional Small Business Issuer Format (Check One): Yes o No þ




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SPECTRE GAMING, INC.
TABLE OF CONTENTS PagePART I
    
    
    2Item 1. Description of Business
    
    
    2Item 2. Description of Property
    
    
    13Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART II
    
    
    13Item 5. Market for Common Equity and Related Stockholder Matters
    
    
    13Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    15Item 7. Financial Statements
    
    
    21Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    40Item 8A. Controls and Procedures
    
    
    40Item 8B. Other Information
    
    
    40PART III
    
    
    41Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act
    
    
    41Item 10. Executive Compensation
    
    
    42Item 11. Security Ownership of Certain Beneficial Owners and Management
    
    
    45Item 12. Certain Relationships and Related Transactions
    
    
    48Item 13. Exhibits
    
    
    49Item 14. Principal Accountant Fees and Services
    
    
    50Warrant For 200,000 Shares of Common StockAmendment to Promissory Note-Pandora Select Partners, L.P.Amendment to Promissory Note-Whitebox Intermarket Partners, L.P.Code of EthicsConsent of Virchow, Krause & Company, LLPCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification




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This annual report on Form 10-KSB contains certain statements that are forward-looking
statements under Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and includes, among other things, discussions of the Companys business
strategies, future operations and capital resources. Words such as, but not limited to, may,
likely, anticipate, expect and believes indicate forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking statements are generally
reasonable, it can give no assurance that such expectations will ultimately prove to be correct.
Generally, these statements relate to business plans and strategies, projected or anticipated
benefits or other consequences of market conditions and opportunities, business plans or
strategies, projections involving anticipated sales and revenues, expenses, projected future
earnings and other aspects of operational results. All phases of the Companys operations are
subject to a number of uncertainties, risks and other influences, most of which are outside the
Companys control, and any one or combination of which could materially and adversely affect the
results of the Companys operations, and also, could affect whether any such forward-looking
statements contained in this annual report ultimately prove to be accurate. Important factors that
could cause actual results to differ materially from the Companys expectations are summarized
above, as well as in the section of this annual report captioned Risk Factors. The
forward-looking statements contained in this annual report are made as of the date of this report,
and the Company assumes no obligation to update the forward-looking statements or to update the
reasons why actual results could differ from those contained in such forward-looking statements.
Therefore, readers are cautioned not to put undue reliance on forward-looking statements. 
 PART I 
 Item 1. Description of Business General Spectre Gaming, Inc. (the Company or Spectre, we, us or ours) (formerly OneLink,
Inc.) was incorporated in Minnesota in June 1990 under the name MarketLink, Inc. At that time, the
Company provided telecommunications-based business-intelligence services to client end users. In
January 1997, the Company changed its name to OneLink Communications, Inc., and later in June 2000,
changed its name to OneLink, Inc. In July 2002, the Company ceased operating its
telecommunications-based business, and in December 2002 sold substantially all of its assets. In
September 2003, the Company adopted a new business plan focused on providing interactive electronic
games to the Native American and charitable gaming markets, and in January 2004 changed its name to
Spectre Gaming, Inc. The Company designs and develops networks, software and content that provide
its customers with a comprehensive gaming system. The Company has begun placing its gaming
machines on casino floors. Markets Class II: Class II gaming includes bingo, and over 60 million people play bingo on a
regular basis in the United States. Presently, there are two distinctly different market segments
that exist in Class II gaming: Native American and charitable, which are discussed in greater
detail below. Worldwide in 2003, these segments cumulatively generated approximately $10 billion.
Today, 46 states and the District of Columbia legally permit the game of bingo to be conducted by
Native American tribes or in connection with charitable causes. With the advent of innovative
ideas for the presentation and playing of bingo, coupled with new server-based technology, bingo
has been placed into a device that looks and feels similar to a slot machine, but the outcome of
the game is determined by a central server (such games are commonly referred to as Central
Determination Games). These Central Determination Games feature many technological and
user-interactive advancements, including video bingo games, that have the excitement and play of
Class III style games (discussed below), and game odds and paytables which are more flexible than
traditional slot machines. Native American In the United States there are over 560 federally recognized Native American
tribes with approximately 354 gaming operations. From published reports, industry experts
currently estimate there are approximately 22,000 Class II gaming devices on the floors of tribal
casinos, with growth potential of 100% by the end of 2007. The Class II Native American market began in states that had no tribal-state
compacts, such as Oklahoma and Florida. Two major events have recently transpired regarding Class
II Native American gaming.




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First, in June 2002, the National Indian Gaming Commission (the NIGC)
established a definition of a Class II device which narrowly construes a prohibition on electronic
and electromechanical facsimiles under the Indian Gaming Regulatory Act of 1988 (IGRA). In
March 2004, the United States Supreme Court denied a writ of certiorari to review a lower court
ruling upholding the legality of devices which meet the NIGCs definition of Class II games (see
United States of America v. Santee Sioux Tribe of Nebraska (3/20/03, No. 02-1503); and
Seneca-Cayuga Tribe of Oklahoma et al. v. Natl Indian Gaming Commn et al., 4/17/03, No. 01-5066).
We believe these legal developments have dispelled some uncertainty in the market, are positive,
and will help fuel growth in the Class II Native American market over the next several years. The Company believes that opportunities also exist for Class II gaming in states that do not
allow mechanical versions of Class III games (such as Minnesota), and states that have placed
limits on the number of Class III machines in tribal gaming facilities (such as California and
South Dakota). For example, we believe that in jurisdictions where less casino floor space can be
allocated to traditional mechanical slot machines, more floor space will be available for Class II
machines in general. Similarly, where states have placed absolute limits on Class III machine
numbers, Class II devices become a solution to place more games on casino floors without violating
applicable restrictions. Charitable It is estimated there are over 600 million people that play some form of bingo
worldwide. In the United States, an estimated 37,000 charitable organizations are legally
permitted to conduct bingo games. In addition, the Class II charitable gaming market may grow if
horse and dog race tracks are allowed to install such games in connection with charitable purposes. Our Class II Products The Company is currently developing software for a proprietary
Linux-based Class II gaming system pursuant to a software development agreement with MET Games.
MET Games had begun testing and developing the software on the Companys behalf. As part of the
testing process, the Company had placed test systems and games in the Oklahoma marketplace and
anticipates placing test systems and games in the Oklahoma market in the future. The Company
anticipates that its Class II gaming products will operate under bingo rules of play (i.e., player
vs. player as opposed to player vs. machine), but its gaming terminals will appear and play like
traditional slot machines, combining video and mechanical elements and including such features as
ticket-in/ticket-out technology and touch screens. The Company anticipates that each gaming
terminal will be electronically connected to a local on-site server. Each local server will in
turn be connected to one or more regional servers coordinating the local servers into one single
bingo game by allocating bingo cards to each playing terminal, generating numbers randomly in the
manner of a traditional bingo blower, tracking or scoring, and communicating each terminals
results in addition to maintaining reports. Class III: Class III gaming encompasses all games that are neither tribal nor Class
II games. Plainly stated, Class III gaming involves games that people typically associate with
casinos, such as traditional slot machines and table games. According to Deutsche Bank, there were
an estimated 725,000 Class III slot machines in the North American marketplace at the end of 2003.
The major Class III markets in the United States for Class III gaming machines are as follows:  
    Nevada is the largest and most established domestic gaming market with
approximately 100 casinos and various smaller gaming venues accounting for an estimated
total of 205,000 Class III gaming machines.
    Atlantic City has 13 large casinos concentrated in a mature boardwalk area
and marina district. This market contains approximately 44,000 Class III gaming
machines.
    Class III gaming conducted by Native American tribes is allowed in 25
states, including California which alone has over 51,000 Class III gaming machines in
tribal gaming locations. Class III Native American gaming differs from the non-Native
American casino market in that it
is regulated under IGRA. Pursuant to IGRA regulations, permissible Class III gaming
devices require, as a condition to installation on a tribal casino floor, that a
Native American tribe and the state government in which the Native American lands
are located enter into a compact governing the 3




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terms of the proposed gaming.
Without any such compact between the state and a tribe, the tribe cannot conduct
Class III gaming in that state. Our Class III Products The Company has acquired mechanical 9-Reel games manufactured in
Japan in connection with a strategic relationship with a California corporation. These games
feature back-lit spinning reels that combine rocking motion and flashing lights upon a winning
combination, and include dual-speaker stereo sound with high-power amplifiers. Optional features
include ticket-in/ticket-out technology, bill acceptors/validators and mechanical bells or
electronic melodies for jackpots. These machines are carefully manufactured to provide comfort and
ease of play, and to minimize costly maintenance. Spectres Strategy The Companys initial plans include delivering its Class II games to Native American customers
in Oklahoma and delivering its Class III games to Native American customers in California. The
Company has designed and developed and continues to design and develop content, hardware, software,
and networks able to provide its customers with comprehensive gaming systems. As opportunities
arise, the Company intends to expand into other states and into the charitable gaming market. Research and Development Our research and development activities primarily focus on the development of new gaming
systems, gaming engines, gaming platforms and content, and enhancements to our existing product
lines. 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 was $1,045,000 and $0 during the years ended December 31, 2004 and 2003,
respectively. Sales and Distribution Our products and services are sold to gaming operators that conduct gaming operations. We
market our products and systems through our internal sales staff and agents. In this regard, we
employ two sales personnel in the United States, and have hired consultants to assist with the
placement of additional gaming machines. 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 Class III gaming machines, manufacturers and distributors that compete with
Spectre include International Game Technology, Inc. (IGT), Aristocrat Leisure Limited
(Aristocrat); Bally and its parent company Alliance Gaming Corp.; Atronic Casino Technology, Ltd.
(Atronic); Konami Co. Ltd.; Shuffle Master, Inc.; Sigma Game, Inc.; and WMS Industries. All have
developed casino products and are either authorized to sell products or are in the licensing
process in many United States gaming jurisdictions. Spectres major competitors in the market for
Class II gaming machines are currently Multimedia Games, Inc., Sierra Design Group, VGT (Video Game
Technologies), IGT, Aruze, Aristocrat, Atronic, and Rocket Bingo. Intellectual Property Our proprietary intellectual property currently consists of certain licensed trademark, image
and likeness, and other moral rights, assets acquired pursuant to an asset purchase agreement with
Streamline Development Company, Inc., and a right to acquire copyright and other
intellectual-property rights relating to software that may be developed by MET Games pursuant to
our software development agreement with them, as amended in January 2005. We 4




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currently rely and
intend to rely in the future on a combination of patent, copyright, trademark, trade secret laws,
and nondisclosure agreements to protect our proprietary technology. Most of our products are or will be sold under trademarks and copyrights that provide product
recognition and promote widespread acceptance of our products in the marketplace. Our products may
also contain content licensed from third parties, such as trademarks, fictional characters, names
and/or storylines. We design, manufacture, produce, operate, use, and/or otherwise have permission
to exploit certain gaming machines utilizing materials under license from third-party licensors. Our ability to enforce our patents, copyrights, trademarks and other intellectual property is
subject to general litigation risks. Typically, when a party seeks to enforce its
intellectual-property rights, it is often subject to claims that the intellectual-property right is
invalid, or is licensed to the party against whom the claim is being asserted. We cannot ensure
that our intellectual-property rights will not be infringed upon or that others will not develop
products in violation of our intellectual-property rights. Although we have entered into
confidentiality, non-compete and invention-assignment agreements with our employees and consultants
and otherwise limit access to, and distribution of, our proprietary technology, there can be no
assurance that such agreements will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become independently developed or discovered
by competitors. Government Regulation The gaming industry in the United States is highly regulated, and frequently requires
operators of gaming facilities and manufacturers and distributors of gaming machines and related
equipment to acquire various authorizations, licenses, permits or other forms of approval from
governmental, tribal and/or quasi-governmental agencies or bodies, as well as the individual
suitability of officers, directors, major shareholders and key employees and/or consultants. Spectre and our key personnel have not yet obtained or applied for all government licenses,
permits, registrations, findings of suitability and approvals necessary to maintain compliance with
all regulatory agency requirements. Many of the regulations at each level are similar or
overlapping; however, we are required to satisfy all conditions individually for each jurisdiction
in which we operate. Laws of the various gaming regulatory agencies serve to protect the public
and ensure that gaming related activity is conducted honestly, competitively, and free of
corruption. In the jurisdictions where we operate, the oversight additionally ensures that the
local authorities receive the appropriate amount of tax revenues. As such, our operations
financial systems and reporting functions must demonstrate high levels of detail and integrity. The nature of the industry makes the regulatory compliance process very time-consuming and
requires extensive resources. The process helps assure both regulators and investors that all of
our operations maintain the highest levels of integrity and avoid any appearances of improprieties.
We have never been denied a gaming related license, nor have our licenses ever been suspended or
revoked. The Federal Gambling Devices Act of 1962 (the Johnson Act) makes it unlawful for a person to
manufacture, transport or receive gaming machines, gaming devices or components across interstate
lines unless that person has first registered with the Attorney General of the United States
Department of Justice. In addition, the Johnson Act imposes identification and recordkeeping
requirements on gaming machine distributors such as Spectre. Violation of the Johnson Act may
result in seizure and forfeiture of our equipment, as well as other penalties. We are required to
register annually under the Johnson Act, and to date have complied with the registration
requirements of such act. Federal law, tribal-state compacts, and tribal gaming regulations govern gaming on Native
American lands. IGRA provides the framework for federal and state control over all gaming on
Native American lands and is administered by the NIGC and the Secretary of the United States
Department of the Interior. The NIGC has authority to issue regulations governing tribal gaming
activities, approve tribal ordinances for regulating gaming, and approve management agreements for
gaming facilities, conduct investigations and monitor tribal gaming generally. IGRA is subject to
interpretation by the NIGC and may be subject to judicial and legislative clarification or
amendment. IGRA requires that the tribe and the state enter into a written agreement (i.e., a
tribal-state compact) 5




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governing the terms of the tribes gaming activities in that state.
Tribal-state compacts vary from state-to-state and in many cases require equipment manufacturers
and/or distributors to meet ongoing registration and licensing requirements. In addition, tribal
gaming commissions have been established by many Native American tribes to regulate gaming related
activity on Indian lands. Indian tribes are sovereign and maintain their own governmental systems,
which have primary regulatory authority over gaming conducted on land within the tribes
jurisdiction. At this time, we have registered with the U.S. Department of Justice under the Johnson Act, we
possess a manufacturer and distributor registration from the State of California Gambling Control
Commission, twelve tribal licenses from tribes located in the State of California, and one tribal
licenses in the State of Oklahoma. Accordingly, we expect to require further approvals from
regulatory authorities in the State of California in order to carry out our current business plans
and opportunities in that jurisdiction. In particular, we will require tribal permits upon each
placement of machines in Native American casinos and facilities, and will likely also require a
suitability finding by the California State Gaming Agency. In addition, we expect to be required
to obtain similar permits, licenses and approvals in the State of Oklahoma. We cannot be certain
that we will be able to successfully obtain any of the foregoing permits, licenses or obtain a
suitability finding. Any failure on our part to obtain required authorizations, licenses, permits
or other form of approval may thwart our business plans significantly or entirely. In addition, in the course of pursuing authorizations, licenses, permits and other forms of
approval for us to manufacture, manage and service our gaming products in California and Oklahoma,
the Company has routinely encountered slower application processes than anticipated, especially
when seeking authorizations, licenses and permits from tribal authorities. Reverse Stock Split On November 10, 2003, the Companys Board of Directors approved a reverse stock split of
the Companys capital stock at a ratio of one-for-three shares. The reverse split became effective
with respect to shareholders of record at the close of business on December 2, 2003. In lieu of
fractional shares, shareholders of common stock received a cash payment. Stockholders equity has
been restated to give retroactive recognition of the reverse split for all periods presented by
reclassifying to additional paid-in capital the amount in excess of the par value of the
outstanding shares. All references to share and per share amounts for all periods presented have
been retroactively restated to reflect this reverse split. Employees As of December 31, 2004, the Company had 14 full-time employees and 4 part-time employees. Risk Factors We have no operating history and our business plan is currently being tested. We anticipate
incurring future losses. We are in the early stages of providing interactive electronic games to
the Native American and charitable gaming industry. We are therefore subject to all of the risks
and uncertainties inherent in establishing a new business. We have no prior operating history for
these products from which to evaluate our success, or our likelihood of success in operating our
business, generating any revenues or achieving profitability. In sum, we have very limited assets,
very little operating revenue and uncertain prospects of future profitable operations. We cannot
assure you that our operations will be successful and the likelihood of our success must be
considered in light of the problems, expenses, difficulties, complications and delays frequently encountered
in connection with the formation of a new business, development of technology and the competitive
environment in which we operate. We anticipate that we will incur losses in the near future. We will need additional financing in the future and any such financing will likely be dilutive
to our existing shareholders. We will likely require additional sources of financing before we can
generate revenues needed to sustain operations. In particular, management believes that the
Companys current cash is sufficient to continue operations only through July 2005. Our
operations, as currently conducted or anticipated to be conducted, generate costs related to the
exploration of additional business opportunities, as well as ongoing personnel, legal and
accounting expenses. If we are unable to capitalize on existing opportunities or locate and act on
other business 6




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opportunities, or if expenditures exceed our current expectations, we will be
required to find additional sources of financing. Even if we successfully avail ourselves of
current or future opportunities, additional financing may be required to expand or continue being
involved in such opportunities. Additional financing could be sought from a number of sources, including but not limited to
additional sales of equity or debt securities (including equity-linked or convertible debt
securities), loans from banks, loans from affiliates of the Company or other financial
institutions. No assurance, however, can be given that we will be able to sell any securities or
obtain any such additional financing when needed, or do so on terms and conditions acceptable or
favorable to the Company, if at all. If financing is not available, we may be forced to abandon
our business plans or our entire business, discontinue our preparation and filing of public
disclosure reports with the United States Securities and Exchange Commission, 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. Our independent auditors have substantial doubt about our ability to continue as a going
concern.We have had net losses for each of the years ended December 31, 2004 and 2003, and we had
an accumulated deficit as of December 31, 2004. Since the financial statements for each of these
periods were prepared assuming that we would continue as a going concern, in the view of our
independent auditors, these conditions raise substantial doubt about our ability to continue as a
going concern. Furthermore, since we are pursuing a new line of business, this diminishes our
ability to accurately forecast our revenues and expenses. Our ability to continue as a going
concern depends, in large part, on our ability to raise sufficient capital through equity or debt
financing transactions. If we are unable to raise additional capital, we may be forced to
discontinue our business. The proprietary operating system and related gaming products critical to our future success
have not been, and may never be, fully developed.Pursuant to our software development agreement
with MET Games, Inc., we are developing a Linux-based operating system for use with our proposed
Class II Central Determination Games. The development process has not yet been completed and we
cannot be certain that the operating system will work as anticipated and required for use in a
highly regulated marketplace. The completion of the development of our proposed Linux-based
operating system remains subject to all the risks associated with the development and manufacture
of new products based on innovative technologies, including unanticipated technical or other
problems, failures to meet regulatory requirements or performance objectives, and the possible
insufficiency of the funds allocated for the completion of such development, which could result in
a change in the design, delay in the development, or abandonment of such system and its products.
Consequently, there can be no assurance that our proprietary Linux-based operating system will be
fully developed or successfully manufactured. The Company believes that its greatest opportunity
for financial success lies in its ability to capitalize on the Class II gaming market. Of course,
our failure to complete the Linux-based operating system for our proposed Class II games will
likely have a materially adverse effect on our business and prospects for future profitability. Even if successfully developed, our Class II operating system and gaming products may not be
accepted by the marketplace.Our Class II gaming system and the gaming products associated with
it, even if successfully tested, developed and manufactured, will be competing against existing
competing games and products in the gaming marketplace. There can be no assurance that the market
will accept our system and products. Evolving law may adversely affect the Companys entry into the gaming industry.On November
25, 2003, the United States Department of Justice, at the request of the Bush administration, filed
two formal requests asking the United States Supreme Court to review two cases decided in the
Eighth and Tenth U.S. Circuits Courts of Appeal, respectively (see United States of America v.
Santee Sioux Tribe of Nebraska(3/20/03, No. 02-1503); and Seneca-Cayuga Tribe of Oklahoma et al.
v. Natl Indian Gaming Commn et al., 4/17/03, No. 01-5066). The Eight and Tenth Circuits cover
the west and northern plains states, where dozens of Native American tribes are located. The two
circuit court decisions examined whether certain electronic gaming devices were Class II or Class
III gaming machines under IGRA. Under IGRA, bingo generally qualifies as a Class II game. Class
II games, including bingo, do not lose their designation as such if electronic, computer or
technological aids are used in connection with the games; but an electronic facsimile of any game
of chance (including bingo) does not qualify as a Class II game. Class III games (e.g., slot
machines, video poker, other table games, etc.) encompass all other games not Class I (social games
played for prizes of minimal value) or Class II games. 7




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In both the Eighth and Tenth Circuit cases, the courts determined that electronic machines
that dispensed paper pull-tabs (another game of chance) were Class II machines under the IGRA
because they merely dispensed paper pull-tabs and displayed results. The courts found, in essence,
that the games in question were not electronic facsimiles of the game of pull-tabs, but instead
merely facilitated the playing of pull-tabs. Regulations promulgated under the IGRA indicate that
the use of electronic and electromechanical formats which broaden player participation by allowing
multiple players to play with or against each (other than with or against a machine) will not
constitute electronic facsimiles (see 25 C.F.R. § 502.8). The classification of electronically linked bingo-style games is important to the Company and
its business plan. For one, state-tribal compacts typically limit the number of Class III
slot-machine games able to be installed in any one gaming location. Second, our involvement in the
gaming industry is directly related to these kinds of bingo/slot-machine games. Therefore, if
games that we anticipate will qualify as Class II games were to be classified by regulatory
authorities as Class III games, the size of our available market would significantly shrink. On March 2, 2004, the Supreme Court denied the Justice Departments petition for writ of
certiorari for the Eighth and Tenth Circuit decisions, which means the Court declined to review the
Eighth and Tenth Circuit Court decisions. Because of this action, the Eighth and Tenth Circuit
decisions stand. While this result is positive for the gaming industry in general and for us in
particular, there can be no assurance that there will not be other legal actions that will result
in a classification of our Class II games as Class III games, or that current IGRA regulations will
not be repealed. Furthermore, the cases discussed above did not involve bingo-style gaming
machines or Central Determination Games (and their corresponding gaming systems) such as those
distributed by the Company. The result of any such further attempts to overturn precedent or to
reclassify bingo-style gaming machines, such as ours, is beyond our control, and its outcome must
be considered a material and significant risk factor. In May 2004, the Oklahoma Legislature passed legislation authorizing certain forms of gaming
at racetracks, and additional types of games at tribal gaming facilities, pursuant to a
tribal-state compact. This legislation was subject to approval in a statewide referendum, which
was subsequently obtained in the November 2004 elections. The Oklahoma gaming legislation allows
the tribes to sign a compact with the State of Oklahoma to operate an unlimited number of
electronic instant bingo games, electronic bonanza-style bingo games, electronic skill games and
non house-banked blackjack games. In addition, certain horse tracks in Oklahoma will be allowed to
operate a limited number of instant and bonanzastyle bingo games and electronic skill games.
Four tribes and the state must sign the compact and the Bureau of Indian Affairs must approve it
before it becomes effective. The compact was effective and the tribes began operating the
compacted games in the first quarter of 2005. All vendors placing games at any of the racetracks
under the compact will ultimately be required to be licensed by the State of Oklahoma. Pursuant to
the compacts, vendors placing games at tribal facilities will have to be licensed by each tribe.
All electronic games placed under the compact will have to be certified by independent testing
laboratories to meet technical specifications. These were published by the Oklahoma Horse Racing
Commission and the individual tribal gaming authorities in February 2005. We believe the recently adopted Oklahoma legislation significantly clarifies and expands
the types of gaming permitted by Native America tribes in that state. We currently expect
continued intensified competition from vendors currently operating in Oklahoma as well as new
market entrants. As a result, we anticipate further pressure on our ability to penetrate the market
in Oklahoma. In addition, in the immediate future, we expect continued regulatory uncertainty in
Oklahoma. In particular, although we and other vendors may not begin to offer games enabled by the
new legislation until state and tribal regulations, rules and specifications adopted pursuant to
that legislation become final, certain other vendors and tribes may begin to offer new games prior
to that time. It is unclear what, if any, regulatory enforcement action could or would be taken
against tribes and vendors offering games not authorized by existing law but permitted under the
newly adopted, but not yet effective, legislation. The new legislation requires Oklahoma tribes to develop their own licensing procedures
for their vendors. Our Oklahoma tribal customers are in the early stages of developing these
procedures, and we currently have limited, if any, information regarding the ultimate process or
expenses involved with securing licensure by the tribes. Moreover, tribal policies and procedures,
as well as tribal selection of gaming vendors, are subject to the political and governance
environment within the tribe. Changes in tribal leadership or tribal political pressure can affect
our 8




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relationships with our customers. As a result of these and other considerations, it remains
difficult to forecast the short-term impact on our business from the recent Oklahoma gaming
legislation. The Company currently has few required licenses and permits for its gaming business, and has
encountered delays in the permitting and licensing process with tribal authorities.The gaming
industry in the United States is highly regulated, and frequently requires operators of gaming
facilities and manufacturers and distributors of gaming machines and related equipment to acquire
various authorizations, licenses, permits or other forms of approval from governmental, tribal
and/or quasi-governmental agencies or bodies. At this time, we have registered with the U.S.
Department of Justice under the Johnson Act, we possess a manufacturer and distributor registration
from the State of California Gambling Control Commission, twelve tribal licenses from tribes in
located in the State of California, and one tribal licenses in the State of Oklahoma. We possess
no other authorizations, licenses, permits or other forms of approval that may be required for us
to manufacture, manage and service our anticipated gaming products. We will likely require further approvals from regulatory authorities in the State of
California in order to carry out our current business plans and opportunities in such jurisdiction.
In particular, we will require tribal permits upon each placement of machines in Native American
casinos and facilities, and will likely also require a suitability finding by the California State
Gaming Agency. In addition, we expect to be required to obtain similar permits, licenses and
approvals in the State of Oklahoma. We cannot be certain that we will be able to successfully
obtain any of the foregoing permits, licenses or obtain a suitability finding. Any failure on our
part to obtain required authorizations, licenses, permits or other form of approval may thwart our
business plans significantly or entirely. In addition, in the course of pursuing authorizations, licenses, permits and other forms of
approval for us to manufacture, manage and service our gaming products in California and Oklahoma,
the Company has routinely encountered slower application processes than anticipated, especially
when seeking authorizations, licenses and permits from tribal authorities. We may have a difficult time enforcing our contracts against Native American tribes and the
casinos they own and operate.Native American Tribes generally enjoy sovereign immunity from suit
similar to that of the states and the United States. In order to sue a Native American tribe (or
an agency or instrumentality of a Native American tribe), the Native American tribe must have
effectively waived its sovereign immunity with respect to the matter in dispute. In our contracts with Native American customers, we attempt to provide that any dispute
regarding interpretation, performance or enforcement shall be submitted to, and resolved by,
arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration
Association and that any award, determination, order or relief resulting from such arbitration is
binding and may be entered in any federal court having jurisdiction. Even if we are able to effectively bargain or negotiate for such a provision,
we could be precluded from judicially enforcing any rights or remedies against a tribe without a
waiver, limited or otherwise, of the tribes sovereign immunity. These rights and remedies
include, but are not limited to, our right to enter Native American lands to retrieve our property
in the event of a breach of contract by the tribe party to that contract, and our right to enforce
any arbitration decision in our favor. We will depend upon others for the manufacture of our gaming products, which will subject our
business to the risk that we will be unable to fully control the supply of our products to the
market.Our ability to develop, manufacture and successfully commercialize our proposed products
depends upon our ability to enter into and maintain contractual and collaborative arrangements with
others, such as Bally. We do not intend to manufacture any of our proposed products; but instead
intend to retain contract manufacturers. There can be no assurance that Bally or any other
manufacturers will be able to supply our products in the required quantities, at appropriate
quality levels or at acceptable costs. We may be adversely affected by any difficulties
encountered by such third-party manufacturers that result in product defects, production delays or
the inability to fulfill orders on a timely basis. If a manufacturer cannot meet our quality
standards and delivery requirements in a cost-efficient manner, we would likely suffer
interruptions of delivery while we arrange for alternative manufacturing sources. Any extended
disruption in the delivery of products could result in our inability to satisfy customer demand for
our products. Consequently, our inability to obtain alternative sources on a timely basis may have
a material adverse effect on our 9




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business and results of operations. A number of our products are
manufactured outside of the United States. Our purchase contracts are typically settled in Yen and
we therefore may be subject to currency risk. Our reliance on third-party manufacturers and other third parties in other aspects of our
business will reduce any profits we may earn from our products, and may negatively affect future
product development.As noted above, we currently intend to market and commercialize products
manufactured by others, and in connection therewith we will likely be required to enter into
manufacturing, licensing and distribution arrangements with third parties similar to the licensing
agreement we entered into with Bally. These arrangements will likely reduce our product profit
margins. In addition, the identification of new product candidates for development may require us
to enter into licensing or other collaborative agreements with others. These collaborative
agreements may require us to pay license fees, make milestone payments, pay royalties and/or grant
rights, including marketing rights, to one or more parties. Any such arrangement will likely
reduce our profits. Moreover, these arrangements may contain covenants restricting our product
development or business efforts in the future. We may not be able to enter into manufacturing agreements or other collaborative agreements on
terms acceptable to us, if at all, which failure would materially and adversely affect our
business.We cannot be sure that we will be able to enter into manufacturing or other
collaborative arrangements with third parties on terms acceptable to us, if at all, when and as
required. If we fail to establish such arrangements when and as necessary, we could be required to
undertake these activities at our own expense, which would significantly increase our capital
requirements and may delay the development, manufacture and installation of our gaming machines on
casino floors. If we could not find ways of addressing these capital requirements, we would likely
be forced to sell or abandon our business. We operate in an extremely competitive environment.The market for gaming machines is a
difficult one in which to compete as there are a number of established, well-financed and
well-known companies that compete with our current and planned products. In particular,
International Game Technology (IGT) enjoys a significant domestic and international market
position in the gaming-machine market. Similarly, Multimedia Games, Inc. enjoys a significant
market position in the Class II gaming machine market. Other major gaming-machine companies
include Sigma Gaming, Inc. and Bally Gaming Inc., a subsidiary of Alliance Gaming Corp. All of
these companies have substantially more resources than we do. The development of a successful new
product by a competitor could adversely affect the market demand for our products and impair our
ability to generate sales. Similarly, if well-established companies such as IGT were to focus
their resources on the developing Class II gaming machine market, our ability to capitalize on the
perceived opportunities in that market could be significantly impaired. Our inability to protect our intellectual property could impair our ability to compete.Our
success and ability to compete depend in part upon proprietary intellectual property. Our
proprietary intellectual property currently consists of certain licensed trademark, image and
likeness, and other moral rights, assets acquired pursuant to an asset purchase agreement with
Streamline Development Company, Inc., and a right to acquire copyright and other
intellectual-property rights relating to software that may be developed by MET Games pursuant to
our software development agreement with them. We currently rely and intend to rely in the future
on a combination of copyright, trademark, patents, trade secret laws, and nondisclosure agreements
to protect our proprietary technology. Although we have entered into confidentiality, non-compete
and invention assignment agreements with our employees and otherwise limit access to, and
distribution of, our proprietary technology, there can be no assurance that such agreements will
not be breached, that we would have adequate remedies for any breach, or that our trade secrets
will not otherwise become independently developed or discovered by competitors. We are highly dependent on the services provided by certain executives and key personnel.Our
success in the Native American and charitable gaming markets depends in significant part upon the
continued service of certain senior management and other key personnel. In particular, we are
materially dependent upon the services of Russell C. Mix, a director of the Company and our
President and Chief Executive Officer. We have an employment agreement with both Mr. Mix, but if
Mr. Mix should no longer serve the Company it would likely have a materially adverse impact on our
business, financial condition and operations. The Company has not secured any key person life
insurance covering the life of Mr. Mix. 10




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Our success also depends on our ability to identify, hire, train, retain and motivate highly
skilled technical, managerial, sales and marketing personnel. We intend to hire a full-time Chief
Financial Officer and a number of sales, business development, marketing, technical and
administrative personnel in the future. Competition for such personnel is intense and there can be
no assurance that we will successfully attract, assimilate or retain a sufficient number of
qualified personnel. The failure to retain and attract the necessary technical, managerial, sales
and marketing and administrative personnel could have a material adverse impact on our business,
financial condition and operations. Our officers and directors, together with certain affiliates, possess substantial voting power
with respect to our common stock, which could adversely affect the market price of our common
stock.As of February 28, 2005, our officers and directors collectively possess beneficial
ownership of 520,553 shares of our common stock, which represents approximately 3.9% of our common
stock. Certain other significant shareholders, including Perkins Capital Management, Inc., Ronald
E. Eibensteiner, Wayne W. Mills, and D. Bradly Olah, collectively possess beneficial ownership of a
total of 6,218,788 shares of common stock, which represents approximately 47.6% of our common
stock. When taken together, our directors, officers and significant shareholders have beneficial
ownership of approximately 51.5% of our common stock. This represents a significant and
controlling portion of the voting power of the Companys shareholders. As a result, our directors
and officers, together with significant shareholders, have the ability to substantially (but not
wholly) control our management and affairs through the election and removal of our entire board of
directors, and all other matters requiring shareholder approval, including the future merger,
consolidation or sale of all or substantially all of our assets. This concentrated control could
discourage others from initiating any potential merger, takeover or other change-of-control
transaction that may otherwise be beneficial to our shareholders. Our stock price is, and we expect it to remain, volatile.The volatile price of our common
stock makes it difficult for investors to predict the value of their investment, to sell shares at
a profit at any given time, or to plan purchases and sales in advance. A variety of factors may
affect the market price of our common stock, including but are not limited to:  
    achievement or rejection of regulatory approvals by us or by the tribes or other
purchasers of our products;
    announcements of technological innovations or new commercial products by our competitors or us;
    developments concerning proprietary rights, including patents;
    regulatory developments in the United States relating to the gaming industry;
    period-to-period fluctuations in our revenues and other results of operations;
    changes in financial estimates by securities analysts; and
    sales of our common stock. We will not be able to control many of these factors, and we believe that period-to-period
comparisons of our financial results will not necessarily be indicative of our future performance. Our articles of incorporation grant the Companys board of directors with the power to
designate and issue additional shares of common and/or preferred stock.Our authorized capital
consists of 100,000,000 shares of capital stock. Pursuant to authority granted by the Companys
articles of incorporation, our board of directors, without any action by the shareholders, may
designate and issue shares in such classes or series (including classes or series of common stock
and/or preferred stock) as it deems appropriate and establish the rights, preferences, and
privileges of such shares, including dividends, liquidation and voting rights. The rights of
holders of classes or series of common stock or preferred stock that may be issued could be
superior to the rights of the common stock offered hereby. Our board of directors ability to
designate and issue shares could impede or deter an unsolicited tender offer or takeover proposal.
Further, the issuance of additional shares having preferential rights could adversely affect other
rights appurtenant to the shares of common stock offered hereby. Any such issuances will dilute
the percentage of ownership interest of our shareholders and may dilute the book value of the
Company. As of December 31, 2004, we had 12,888,213 shares of common stock outstanding and a further
6,835,719 shares of our common stock had been reserved as follows: 11




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
    2,300,000 shares for issuance under our existing stock option plans, of which
options relating to 529,166 shares were outstanding;
    1,837,773 shares for issuance pursuant to stock option agreements entered into
outside of stock option plans; and
    2,697,946 shares issuable upon the exercise of outstanding warrants. In addition to the shares noted above, our board of directors has designated 466,666 of our
shares for issuance as Series A Convertible Preferred Stock. During the fiscal year ended
December 31, 2001, the Company issued 440,000 shares of Series A Convertible Preferred Stock. As
of December 31, 2004, shareholders holding 233,333 shares of Series A Convertible Preferred Stock
had converted their preferred shares into shares of our common stock. As a result, there remain
206,667 shares of Series A Convertible Preferred Stock outstanding as
December 31, 2004,
which shares are currently convertible into an additional 466,452 shares of our common stock. Our common stock trades only in an illiquid trading market.Trading of our common stock is
conducted on the over-the-counter bulletin board. This has an adverse effect on the liquidity of
our common stock, not only in terms of the number of shares that can be bought and sold at a given
price, but also through delays in the timing of transactions and reduction in security analysts
and the medias coverage of our Company and its common stock. This may result in lower prices for
our common stock than might otherwise be obtained and could also result in a larger spread between
the bid and asked prices for our common stock. There is currently little trading volume in our common stock, which may make it difficult to
sell shares of our common stock.In general, there has been very little trading activity in our
common stock. Over the past three months, the average daily trading volume (as reported by
BigCharts.com and Yahoo Finance) has been approximately 20,000 shares. The relatively small
trading volume will likely make it difficult for our shareholders to sell their shares as and when
they choose. Furthermore, small trading volumes generally depress market prices. As a result, you
may not always be able to resell shares of our common stock publicly at the time and prices that
you feel are fair or appropriate. Because it is a penny stock, you may have difficulty selling shares of our common stock.
Our common stock is a penny stock and is therefore subject to the requirements of Rule 15g-9
under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Under this rule,
broker-dealers who sell penny stocks
must provide purchasers of these stocks with a standardized risk-disclosure document prepared
by the Securities and Exchange Commission. 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 severely limit the liquidity of securities in the secondary market, and
many brokers choose not to participate in penny-stock transactions. As a result, there is
generally less trading in penny stocks. If you become a holder of our common stock, you may not
always be able to resell shares of our common stock publicly at the time and prices that you feel
are fair or appropriate. We have no intention of paying dividends on our common stock.To date, we have not paid any
cash dividends and do not anticipate the payment of cash dividends in the foreseeable future.
Accordingly, the only return on an investment in shares of our common stock, if any, may occur upon
a subsequent sale of such shares. 12




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##### Table of Contents



Item 2. Description of Property The Company currently leases 6,114 square feet of commercial office and warehouse space at
1466 Pioneer Way No. 10, El Cajon, California. The Company pays $4,586 per month for such lease
through May 31, 2005; and thereafter will pay $4,747 per month through May 31, 2006, which is the
date such lease terminates. Under the terms of the El Cajon lease, the Company also pays $165 per
month for water, sewer and HVAC. This location is the main manufacturing and distribution facility
for the Companys Class III games in California. The Company also leases a house located at 288
Bearing Lane, El Cajon, California 92020. The Company also leases office space at 800 Nicollet Mall, Suite 2690, Minneapolis, Minnesota,
which it uses as its administrative headquarters, on a month-to-month basis from Corporate Services
Group, a company wholly owned by Ronald E. Eibensteiner, the Companys Chairman of the Board from
May 1996 until February 2004. During 2003 and 2004, the Company paid a total of $30,363 and
$102,166, respectively, for rent and overhead for this office lease. Finally, for its Class II
Oklahoma operations the Company leases a small office space at 7242 East 38th Street, in Tulsa,
Oklahoma, on a month-to-month basis. The Company believes that these spaces will be adequate for its operations at least for the
next year. 
 Item 3. Legal Proceedings The Company is not a party to any material legal proceedings. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters The Companys common stock traded on the pink sheets under the symbol ONEL.PK through
December 19, 2003. 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 2004 and 2003. These
quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may
not represent actual transactions. These quotations are also adjusted to reflect the one-for-three
reverse stock split of the Companys common stock effected on December 2, 2003. Trading in the
Companys capital stock during the period represented was sporadic, exemplified by low trading
volume and many days during which no trades occurred. Year Ended December 31, 2004High
    
    
    
    LowFirst Qtr.
    
    
    $
    2.25
    
    
    
    $
    .70Second Qtr.
    
    
    
    3.40
    
    
    
    
    1.70Third Qtr.
    
    
    
    4.50
    
    
    
    
    2.11Fourth Qtr.
    
    
    
    3.90
    
    
    
    
    2.45
 13




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##### Table of Contents



Year Ended December 31, 2003High
    
    
    
    LowFirst Qtr.
    
    
    $
    .03
    
    
    
    $
    .03Second Qtr.
    
    
    
    .09
    
    
    
    
    .03Third Qtr.
    
    
    
    .15
    
    
    
    
    .03Fourth Qtr.
    
    
    
    .936
    
    
    
    
    .059
 The approximate number of shareholders of record of the Companys common stock as of March 9,
2005 was 266. The Company has never declared or paid a cash dividend on our common stock and does not
anticipate paying any cash dividends in the foreseeable future. The following table sets forth certain information regarding sales of equity securities by the
Company during the calendar year 2004 in transactions which were not registered under the
Securities Act of 1933. Exemption fromDate of Sale
    
    Number of Shares Sold
    
    Persons to Whom Sold
    
    Consideration Paid
    
    Registration Relied UponVarious dates (1)
    
    1,531,989(1)
common shares
    
    24 entities
    
    $
    1,148,991.75
    
    
    Regulation 5063/4/2004
    
    800,000 common shares
    
    Met Games, Inc.
    
    Software
    
    Section 4 (2) of
Securities ActVarious dates (2)
    
    Options to purchase
1,222,500 shares of
common stock
    
    9 employees and
directors of the
Company
    
    Services
    
    Section 4 (2) of
Securities Act3/18/2004
    
    Warrants to purchase
83,400 shares of
common stock
    
    Feltl and Company
    
    Services related to
equity financing
    
    Section 4 (2) of
Securities Act and
Regulation 506Various dates (3)
    
    Options to purchase
595,000 shares of
common stock
    
    6 consultants
    
    Services
    
    Section 4 (2) of
Securities Act and
Regulation 5065/20/2004
    
    Warrants to purchase
200,000 shares of
common stock
    
    Pandora Select
Partners, L.P.
    
    Convertible note
payable proceeds
    
    Section 4 (2) of
Securities Act and
Regulation 5065/20/2004
    
    Note payable
convertible into
440,000 shares of
common stock
    
    Pandora Select
Partners, L.P.
    
    Convertible note
payable proceeds
    
    Section 4 (2) of
Securities Act and
Regulation 5065/20/2004
    
    Warrants to purchase
100,000 shares of
common stock
    
    Blake Capital
Partners
    
    Services related to
debt financing
    
    Section 4 (2) of
Securities Act6/16/2004
    
    50,000 common shares
and options to
purchase 500,000
shares of common
stock
    
    Games of Chance,
Inc.
    
    Distribution rights
of certain gaming
equipment
    
    Section 4 (2) of
Securities Act9/1/2004
    
    5,000 common shares
    
    RaceTown, Inc.
    
    Supplier agreement
    
    Section 4 (2) of
Securities Act9/10/2004
    
    Warrants to purchase
50,000 shares of
common tock
    
    Pandora Select
Partners, L.P.
    
    Short-term debt
financing
    
    Section 4 (2) of
Securities Act and
Regulation 5069/10/2004
    
    Warrants to purchase
50,000 shares of
common stock
    
    Whitebox
Intermarket
Partners, L.P.
    
    Short-term debt
financing
    
    Section 4 (2) of
Securities Act and
Regulation 506
 14




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##### Table of Contents



Exemption fromDate of Sale
    
    Number of Shares Sold
    
    Persons to Whom Sold
    
    Consideration Paid
    
    Registration Relied Upon11/12/2004
    
    1,636,429 common
shares and warrants
to purchase an
additional 1,636,429
shares of common
stock
    
    117 Entities
    
    $
    4,091,072.50
    
    
    Regulation 50611/12/2004 and 11/24/04
    
    Warrants to purchase
362,286 shares of
common stock
    
    Feltl and Company
and The Seidler
Companies
    
    Services related to
equity financing
    
    Section 4 (2) of
Securities Act and
Regulation 50611/24/2004
    
    175,000 common
shares and warrants
to purchase an
additional 175,000
shares of common
stock
    
    8 Entities
    
    $
    437,500
    
    
    Regulation 50612/15/2004
    
    70,000 common shares
    
    Streamline
Development Company
    
    Certain assets and
intellectual
property of
Streamline
Development Company
    
    Section 4 (2) of
Securities Act
   (1)
    
    From January 16, 2004 through March 22, 2004.(2)
    
    From March 4, 2004 through December 15, 2004.(3)
    
    From April 1, 2004 through December 15, 2004. 
 Item 6. Managements Discussion and Analysis or Plan of Operation Overview: Spectre Gaming, Inc. (the Company or Spectre, we, us or ours) (formerly OneLink,
Inc.) was incorporated in Minnesota in June 1990 under the name MarketLink, Inc. At that time, the
Company provided telecommunications-based business-intelligence services to client end users. In
January 1997, the Company changed its name to OneLink Communications, Inc., and later in June 2000,
changed its name to OneLink, Inc. In July 2002, the Company ceased operating its
telecommunications-based business, and in December 2002 sold substantially all of its assets. In
September 2003, the Company adopted a new business plan focused on providing interactive electronic
games to the Native American and charitable gaming markets, and in January 2004 changed its name to
Spectre Gaming, Inc. The Company designs and develops networks, software and content that provide
its customers with a comprehensive gaming system. During the fourth quarter of 2004, the Company began generating revenues for the first time
since developing and implementing its new gaming machine and gaming system business. These
revenues resulted in gross profits of $18,943 before expenses. During 2004, the Company invested
heavily in research and development primarily through a software development transaction with MET
Games, Inc. of Oklahoma. The Company increased its selling, general and administrative expenses
significantly in 2004 as it built it infrastructure to capitalize on the opportunities in the
Native American class II and class III gaming markets. During 2004, the Company raised substantial
capital by selling equity in the Company through two private placements and also by issuing notes
payable and common stock warrants. 15




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##### Table of Contents



Results of Operations: Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenues.The Companys revenues for the year ended December 31, 2004 were $82,689 compared
to $0 for the year ended December 31, 2003, an increase of 100%. The increase in revenues is the
result of the Company starting operations in the Native American and charitable gaming markets on
January 1, 2004. Cost of Revenues and Gross Profit. The Companys cost of revenues for the year ended December
31, 2004 was $63,746, compared to $0 for the year ended December 31, 2003, an increase of 100%. Gross profit for the year ended December 31, 2004 was $18,943, compared to $0 for the year
ended December 31, 2003, an increase of 100% attributable to the initial revenue transactions. Research and Product Development Expenses. Research and product development expenses for the
year ended December 31, 2004 were $1,045,000, compared to $0 for the year ended December 31, 2003.
On March 4, 2004, the Company signed a Software Development Agreement with MET Games, Inc. (MET)
to purchase certain Linux-based software and technology being developed by MET for the operation of
certain gaming computers and systems. Pursuant to the Software Development Agreement, the Company
made a $250,000 cash payment to MET and issued 800,000 unregistered and restricted shares of the
Companys common stock. Restrictions on the 800,000 restricted shares were to lapse commensurate
with certain milestone achievements. The Company intends to utilize the software as it develops
its business opportunities in the Native American Class II and charitable gaming markets. MET is
wholly-owned by an individual who became an employee of the Company on March 4, 2004. The Company had the right to terminate the Software Development agreement and recover the
$250,000 payment and the 800,000 unregistered and restricted shares of the Companys common stock
if MET failed to deliver software meeting the specifications detailed in the agreement or in the
event that MET failed to provide the software in accordance with the development schedule detailed
in the agreement. Despite this fact, due to the softwares development not having reached
technological feasibility on the date of the agreement and the $250,000 cash payment being a
significant performance commitment, the Company expensed the cash payment and the value of the
common stock ($600,000) as research and development expense. For this purpose, the common stock
was valued at $0.75 per share, based upon the price of the Companys then recently completed
private placement. The Company and MET executed an amendment to the Software Development Agreement to be
effective as of January 24, 2005. The amendment provides for the Companys acceptance of METs
non-conforming delivery of the developed 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 Companys
completion of the software and the Companys access to METs office and warehouse space to
facilitate such completion. Accordingly, the Company intends to complete the softwares
development internally. In connection with the amendment, the Company released the forfeiture
restrictions on 100,000 shares of common stock immediately and agreed to release the restrictions
on the remaining 700,000 shares commensurate with revised milestone achievements. The amendment
did not change the Companys ownership rights to the completed software. As a result there were no
accounting adjustments or revisions attributable to this amendment. 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 asset purchase agreement the Company made a $20,000 cash
payment and issued 70,000 unregistered shares of the Companys common stock to Streamline. The
shares were valued at the trading price of the Companys common stock on the day the agreement was
executed, $2.50 per share, and charged to research and development expense since the technological
feasibility of the assets purchased had not yet been achieved. An additional 280,000 shares of the
Companys common stock are issuable to Streamline upon the achievement of certain milestones. The
shares will be expensed over the period the development services are
provided, and valued at the trading price of the Companys common stock, on the day the
milestone is completed. Streamline is majority owned by two individuals who became employees of
the Company in 2004. 16




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##### Table of Contents



Other than the expenses related to the MET and Streamline transactions, the Company incurred
no research and development expenses in 2004. We expect our research and development expenses to
grow over the upcoming periods as we continue focusing on product development and adding
development staff. Selling, General and Administrative Expenses. Selling, general and administrative expenses
for the year ended December 31, 2004 were $2,586,156, compared to $218,402 for the year ended
December 31, 2003, an increase of 1,230%. The increases in expense primarily resulted from the
Company commencing operations in the Native American and charitable gaming markets. In this
regard, the Company hired employees and engaged consultants which significantly increased these
expenses for fiscal 2004. Selling, general and administrative expense for the year ended December
31, 2004 includes $431,451 of expense related to options and warrants granted to consultants. The
Company anticipates that selling, general and administrative expenses will increase in 2005 as
compared to 2004 as it continues to execute on its business strategy. Other Expense.Other expense was $781,978 for the year ended December 31, 2004, compared to
no expense for the year ended December 31, 2003. The increase in other expense is primarily due to
interest on notes payable to Pandora Select Partners, L.P. and Whitebox Intermarket Partners L.P.
along with the amortization of the associated debt issuance costs and the amortization of the
original issue discount. Net Loss. The Company incurred a net loss of $4,394,191 for the year ended December 31, 2004,
compared to a net loss of $218,402 for the prior year. These increased net losses for 2004 as
compared to 2003 are primarily the result of the Company commencing operations in the Native
American and charitable gaming markets which involve significant increases in employee and
consulting expense and the expensed consideration given in the MET and Streamline transactions.
The net loss also includes net interest expense of $781,978 for the year ended December 31, 2004. Liquidity and Capital Resources. The Company had positive working capital of $2,660,953 and
$259,749 at December 31, 2004 and 2003, respectively. During 2004, cash used in operations was
$4,386,270, and the primary uses of cash were to fund the Companys net loss, acquire inventory and
to prepay license fees. These uses were partially offset by an increase in accounts payable,
payroll and related taxes and accrued expenses and non-cash charges related to common stock, stock
options and warrants issued for services. For the year ended December 31, 2003, the primary use of
cash was to fund the Companys net loss partially offset by a decrease in prepaid expenses and
increases in accounts payable, payroll and related taxes and accrued expenses. Cash used in investing activities was $845,475 and $0 for the years ended December 31, 2004
and 2003, respectively. For the year ended December 31, 2004 the Company used cash for capital
expenditures, primarily at its El Cajon, California location. Cash provided by financing activities was $7,339,350 and $468,703 for the years ended December
31, 2004 and 2003, respectively. In November 2003, the Company began a private placement which
ended in March 2004. A majority of the sales of the Companys common stock in this private
placement occurred after December 31, 2003. In the private placement, the Company sold a total of
1,796,829 shares of its common stock (of which 1,531,989 were sold in 2004) for a per-share price
of $0.75 (i.e., raising a gross total of $1,347,626, $1,148,996 of which was raised in 2004). The
Company used an agent for a portion of these sales. As a fee, the Company paid the agent $62,550
in cash and issued the agent fully-vested five-year warrants to purchase up to 83,400 shares of the
Companys common stock for an exercise price of $0.75 per share. In addition, the Company incurred
legal fees and other expenses of $19,407 related to this private placement. In November, 2004, the Company closed on a private placement of 1,811,429 units, each unit
consisting of one share of common stock and a five-year warrant to purchase one additional share of
common stock at a purchase price of $3.75 per share. The per-unit price was $2.50 (i.e., raising a
gross total of $4,528,573). The Company used two agents in completing the sale of the units in the
November 2004 private placement. As a fee,
the Company paid the agents an aggregate of $362,286 in cash, and issued the agents
fully-vested five-year warrants to purchase up to 181,143 units for an exercise price of $2.50 per
unit. In addition, the Company incurred legal fees and other expenses of $70,898 related to this
private placement. 17




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##### Table of Contents



On September 30, 2003, the Company completed the private placement of 3,841,333 shares of the
Companys common stock. Total proceeds from the private placement totaled $272,480, of which
$130,480 was received in cash, $42,000 was a conversion of loans payable to related parties and
$100,000 was received as stock subscriptions receivable. On May 20, 2004, the Company received $1,100,000 in a convertible debt investment from Pandora
Select Partners, L.P. (Pandora). The note was payable in interest only, at 10% per annum, through
August 20, 2004, and thereafter is payable in equal monthly installments over the next 15 months.
The note is convertible by Pandora into common stock of Spectre at $2.50 per share, and allows
Spectre, subject to certain conditions and limitations, to make monthly installment payments with
its common stock at a price per share equal to 90% of the average closing bid price of the common
stock over the 30 trading days immediately preceding the payment date. In connection with the
financing, Spectre paid a 3% origination fee, issued a fully-vested five-year warrant for the
purchase of 200,000 shares of Spectres common stock at $2.50 per share, and granted Pandora a
security interest in the Companys assets. In addition, Spectre agreed to file a registration
statement by November 3, 2004 with the U.S. Securities and Exchange Commission, covering the
issuance or resale of the shares of Spectres common stock which may be issued in connection with
the note and warrant issued to Pandora, and cause the same to be declared effective by February 1,
2005. The registration statement was declared effective on January 24, 2005. In connection with
the financing, the Company also paid a finders fee to Blake Capital Advisors, LLC (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. Net cash received by the Company
after paying the finders fee, origination fee and legal cost of the lender of $10,000 was
$1,007,000. On September 10, 2004, the Company issued two $750,000 promissory notes accruing interest at
10% per annum. One note was issued to Pandora and the other note was issued to Whitebox
Intermarket Partners L.P. (Whitebox). The notes are payable interest only through March 10,
2005, at which time the principal is due. In connection with the financing, Spectre paid a 3%
origination fee, issued fully-vested five-year warrants for the purchase of 50,000 shares of
Spectres common stock at $3.00 per share to both Pandora and Whitebox, and granted Pandora and
Whitebox security interests in the Companys assets. In addition, Spectre agreed to file a
registration statement by November 3, 2004 with the U.S. Securities and Exchange Commission,
covering the issuance or resale of the shares of Spectres common stock which may be issued in
connection with the warrants issued to Pandora and Whitebox, and cause the same to be declared
effective by February 1, 2005. The registration statement was declared effective on January 24,
2005. Net cash received by the Company after paying the origination fee and legal costs of the
lenders of $5,000 was $1,450,000. On March 10, 2005, the Company signed amendments to the two $750,000 secured promissory notes
with Pandora and Whitebox. The amendments extend the due date of the notes to June 10, 2005, which
date can be further extended by the Company to September 10, 2005. As part of the amendment the
Company agreed to maintain assets whose value equals or exceeds the principal interest amounts then
owned under the notes. For purposes of valuing the assets for compliance under this provision, the
Companys cash shall be valued at 100%, the Companys accounts receivable shall be valued at 80% and
the Companys inventory and fixed assets shall be valued at 50% of their book value. As
consideration for the amendments, the Company paid Pandora and Whitebox each $18,750. If the
Company elects to extend the notes to September 10, 2005, Pandora and Whitebox will each be
entitled to a 2.5% origination fee on the then outstanding principal amount of their respective
note. On June 30, 2004, the Company signed a three-year non-exclusive license agreement (License
Agreement) with Bally Gaming Inc. (Bally). The License Agreement calls for the Company to
purchase up to 3,000 game cabinets from Bally over the term of the Agreement. Nevertheless, if the
Company has purchased at least 70% of its Class II cabinet purchases from Bally during the term,
Bally shall waive the 3,000 game cabinet purchase
minimum. In addition, the Company was obligated to purchase at least 100 game cabinets from
Bally, and incur certain minimum license-fee charges of $187,500, by June 30, 2004. As of December
31, 2004, the Company had not taken delivery of any of the products that include the license fee
charges and therefore the minimum license fee charge is included in prepaid expenses at December
31, 2004. 18




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##### Table of Contents



The Company expects to spend a significant amount on capital equipment purchases over the next
twelve months, primarily as it places its gaming machines in Native American and charitable gaming
facilities. The Company expects that it will use debt and/or equity financing to purchase this
equipment. The following summarizes the Companys contractual obligations at December 31, 2004. (See
Notes 10, 11, 15). 1 Year orTotal
    
    
    Less
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    Over 5 YearsConvertible note
payable
    
    $
    819,922
    
    
    $
    819,922
    
    
    $
    
    
    
    $
    
    
    
    $
    Short-term debt
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    105,397
    
    
    
    73,812
    
    
    
    30,180
    
    
    
    1,405
    
    
    
    Total
    
    $
    2,425,319
    
    
    $
    2,393,734
    
    
    $
    30,180
    
    
    $
    1,405
    
    
    $
    
 During 2004, and 2003, we did not pay or declare any cash dividends and do not intend to pay
any cash dividends in the near future. The Company anticipates that it will expend significant resources in 2005 acquiring machines
to be placed in casinos on a participation basis. Once placed in a casino these machines are
transferred to fixed assets. Management believes that its cash should be sufficient to satisfy its cash requirements
through May 2005. The Company will need to obtain additional cash to meet its needs, including
repaying the notes described above, beyond that period and has been actively pursuing additional
debt and equity financing. Off-Balance-Sheet Arrangements The Company has no off-balance-sheet arrangements. New Accounting Pronouncements In December 2003, FASB issued FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities (FIN 46R). FIN 46R states that companies that have exposure to the economic risks and
potential rewards from another entitys assets and activities have a controlling financial interest
in a variable interest entity and should consolidate the entity, despite the absence of clear
control through a voting equity interest. The consolidation requirements apply to all
special-purpose entities by the end of the first reporting period ending after December 15, 2003.
FIN 46R shall be applied to all variable interest entities by the end of the first reporting period
ending after March 15, 2004, for enterprises that are not small business issuers or December 15,
2004 for enterprises that are small business issuers. The Company does not expect the adoption of
FIN 46R to have a material effect on its financial statements. In November 2004, FASB issued SFAS No. 151 Inventory Costs amends the guidance in ARB No.
43, Chapter 4 Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 pf ARB 43, Chapter 4,
previously stated that under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as
current period charges. SFAS No. 151 requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal. In addition, SFAS No, 151
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS No. 151 shall be effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted
for inventory costs incurred during fiscal years beginning after the date SFAS No. 151 was issued.
SFAS No. 151 shall be applied prospectively. The Company does not expect the adoption of SFAS No.
151 to have a material effect on its financial statements. 19




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##### Table of Contents



In December 2004, FASB issued SFAS No. 153 Exchanges of Nonmonetary Assets amends APB
Opinion No. 29, Accounting for Nonmonetary Transactions. APB No. 29 is based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included certain exceptions to that principle.
SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the exchange. SFAS
No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after the date SFAS No. 153 was issued. SFAS No. 153 shall be applied
prospectively. The Company does not expect the adoption of SFAS No. 153 to have a material effect
on its financial statements. In December 2004, FASB issued SFAS No. 123R which requires companies to recognize in the
income statement the grant-date fair value of stock options and other equity-based compensation
issued to employees, but expressed no preference for the type of valuation model. FASB No. 123R is
effective for small business issuers as of the beginning of interim or annual reporting periods
that begin after December 15, 2005. The Company will adopt SFAS No. 123R in its first fiscal 2006
quarter. The impact of SFAS No. 123R has not been determined by the Company. Critical Accounting Estimates Our critical accounting policies are those both having the most impact to the reporting of our
financial condition and results, and requiring significant judgments and estimates. Our critical
accounting policies include those related to (a) revenue recognition, (b) property, plant and
equipment, (c) inventory and (d) the valuation of stock-based compensation awarded. The Company
derives its gaming revenues primarily two ways, outright sales of machines to customers, and
participation arrangements with its Native American customers. Revenue for machine sales is
recorded upon shipment. Under the participation arrangements, the Company retains ownership of the
equipment installed at a customer site and receives revenue based on a percentage of the hold per
day generated by each gaming system, which is generally considered both realizable and earned at
the end of each gaming day. The Company accounts for the participation agreements as operating
leases. Property, equipment and leasehold improvements and leased gaming equipment were stated at
cost. Depreciation of an asset was recognized on the straight-line basis over the assets
estimated useful life ranging from three to five years. Leasehold improvements were amortized
using the straight-line method over the shorter of the lease term or the estimated useful life.
Maintenance, repairs and minor renewals are expensed when incurred. Inventory, which consist
principally of gaming products and related materials, are stated at the lower of cost (determined
on the first-in, first-out method) or market. The Company uses the intrinsic value-based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for employee stock options and stock based
compensation. The Company uses Emerging Issues Task Force 96-18 (EITF 96-18), Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, to value options and warrants issued to non-employees. Managements
estimates of the fair value of each option and warrant granted is calculated using the
Black-Scholes pricing model with weighted-average assumptions including risk free interest rate,
expected life of options granted, expected volatility range, and expected dividend yield. 20




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##### Table of Contents



Item 7. Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders, Audit Committee and Board of Directors of
Spectre Gaming, Inc. (Formerly OneLink, Inc.)
Minneapolis, Minnesota We have audited the accompanying balance sheets of Spectre Gaming, Inc. (formerly OneLink, Inc.) as
of December 31, 2004 and 2003, and the related statements of operations, shareholders equity and
cash flows for the years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Spectre Gaming, Inc. (formerly OneLink, Inc.) as of December
31, 2004 and 2003, 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, 2004 and 2003, had an accumulated deficit at December 31, 2004 and
does not have adequate liquidity to fund its operations through out fiscal 2005. These conditions
raise substantial doubt about its ability to continue as a going concern. Managements plans
regarding those matters also are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this condition. /s/ VIRCHOW, KRAUSE & COMPANY, LLP
 Minneapolis, Minnesota
February 3, 2005 (except as to Note 17, as to which the date is March 10, 2005) 21




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##### Table of Contents



Spectre Gaming, Inc.Balance Sheets As of December 31,2004
    
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,431,280
    
    
    $
    323,675Accounts receivable
    
    
    7,347
    
    
    
    Inventory
    
    
    2,530,683
    
    
    
    Prepaid license fees
    
    
    187,500
    
    
    
    Deposits
    
    
    51,258
    
    
    
    Prepaid expenses
    
    
    36,939
    
    
    
    40,461Total current assets:
    
    
    5,245,007
    
    
    
    364,136Property, equipment and leasehold improvements, net
    
    
    77,677
    
    
    
    Leased gaming equipment, net
    
    
    734,720
    
    
    
    Other assets
    
    
    213,587
    
    
    
    Total Assets:
    
    $
    6,270,991
    
    
    $
    364,136LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Convertible note payable, net
    
    $
    354,134
    
    
    $
    Short-term debt, net
    
    
    1,373,611
    
    
    
    Accounts payable
    
    
    687,518
    
    
    
    42,907Accrued payroll and related taxes
    
    
    
    
    
    
    3,942Accrued expenses
    
    
    168,791
    
    
    
    57,538Total current liabilities:
    
    
    2,584,054
    
    
    
    104,387SHAREHOLDERS EQUITY:Capital stock, par value $.01 per share, 100,000,000 shares
authorized:Series A Convertible Preferred Stock, par value $.01 per share:Authorized shares466,666Issued and outstanding shares:206,667
and 440,000 shares at December 31, 2004 and 2003,
respectively
($310,000 and $660,000 liquidation preference at
December 31, 2004 and 2003, respectively)
    
    
    2,067
    
    
    
    4,400Common stock, par value $.01 per share:Authorized shares13,333,333Issued and outstanding shares:12,888,213
and 8,093,198 at December 31, 2004 and 2003,
respectively
    
    
    128,882
    
    
    
    80,932Additional paid-in capital
    
    
    25,087,624
    
    
    
    16,388,237Accumulated deficit
    
    
    (20,608,011
    )
    
    
    (16,213,820
    )Deferred equity compensation
    
    
    (923,625
    )
    
    
    Total shareholders equity:
    
    
    3,686,937
    
    
    
    259,749Total liabilities and shareholders equity:
    
    $
    6,270,991
    
    
    $
    364,136
 See accompanying notes to financial statements. 22




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##### Table of Contents



Spectre Gaming, Inc.Statements of Operations For the Years ended December 31,2004
    
    
    2003REVENUE:Gaming
revenue - sales
    
    $
    71,670
    
    
    $
    Gaming
revenue - participation and lease
    
    
    11,019
    
    
    
    Total revenue
    
    
    82,689
    
    
    
    Cost of revenues
    
    
    63,746
    
    
    
    Gross profit
    
    
    18,943
    
    
    
    OPERATING EXPENSES:Research and development
    
    
    1,045,000
    
    
    
    Selling, general and administrative
    
    
    2,586,156
    
    
    
    218,402Total Operating Expenses:
    
    
    3,631,156
    
    
    
    218,402Operating loss
    
    
    (3,612,213
    )
    
    
    (218,402
    )OTHER INCOME (EXPENSE):Interest income
    
    
    11,331
    
    
    
    Interest expense
    
    
    (793,309
    )
    
    
    Net Loss:
    
    $
    (4,394,191
    )
    
    $
    (218,402
    )NET LOSS PER COMMON SHARE:Basic and diluted
    
    $
    (0.42
    )
    
    $
    (0.05
    )WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:Basic and diluted
    
    
    10,578,101
    
    
    
    4,072,188
 See accompanying notes to financial statements. 23




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##### Table of Contents



Spectre Gaming, Inc.Statements of Shareholders Equity Series A Convertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Deferred
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Equity
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    EquityBalance at December 31, 2002
    
    
    440,000
    
    
    $
    4,400
    
    
    
    3,287,084
    
    
    $
    32,871
    
    
    $
    16,191,517
    
    
    $
    
    
    
    $
    (15,995,418
    )
    
    $
    9,448Cash payments related to
reverse stock split
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    (1
    )
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Sale of common stock, net
of issuance costs
    
    
    
    
    
    
    
    
    
    
    4,106,173
    
    
    
    41,062
    
    
    
    385,676
    
    
    
    
    
    
    
    
    
    
    
    426,738Conversion of related
party debt to common
stock
    
    
    
    
    
    
    
    
    
    
    700,000
    
    
    
    7,000
    
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    42,000Cancellation of stock-
subscription receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (223,922
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (218,402
    )
    
    
    (218,402
    )Balance at December 31, 2003
    
    
    440,000
    
    
    
    4,400
    
    
    
    8,093,198
    
    
    
    80,932
    
    
    
    16,388,237
    
    
    
    
    
    
    
    (16,213,820
    )
    
    
    259,749Sale of common stock, net
of issuance costs
    
    
    
    
    
    
    
    
    
    
    3,343,418
    
    
    
    33,434
    
    
    
    5,128,994
    
    
    
    
    
    
    
    
    
    
    
    5,162,428Conversion of preferred
stock to common stock
    
    
    (233,333
    )
    
    
    (2,333
    )
    
    
    526,597
    
    
    
    5,266
    
    
    
    (2,933
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
for purchased research
and development
    
    
    
    
    
    
    
    
    
    
    870,000
    
    
    
    8,700
    
    
    
    766,300
    
    
    
    
    
    
    
    
    
    
    
    775,000Issuance of common stock
for distribution
agreements
    
    
    
    
    
    
    
    
    
    
    55,000
    
    
    
    550
    
    
    
    111,950
    
    
    
    
    
    
    
    
    
    
    
    112,500Issuance of options and
warrants for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,355,076
    
    
    
    (1,355,076
    )
    
    
    
    
    
    
    Amortization of deferred
equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    431,451
    
    
    
    
    
    
    
    431,451Issuance of stock
warrants related to notes
payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Beneficial conversion of
note payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    340,000
    
    
    
    
    
    
    
    
    
    
    
    340,000Net and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,394,191
    )
    
    
    (4,394,191
    )Balance at December 31, 2004
    
    
    206,667
    
    
    $
    2,067
    
    
    
    12,888,213
    
    
    $
    128,882
    
    
    $
    25,087,624
    
    
    $
    (923,625
    )
    
    $
    (20,608,011
    )
    
    $
    3,686,937
 See accompanying notes to financial statements. 24




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##### Table of Contents



Spectre Gaming, Inc.Statements of Cash Flows For the Years ended December 31,2004
    
    
    2003Operating activitiesNet loss
    
    $
    (4,394,191
    )
    
    $
    (218,402
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    33,078
    
    
    
    Common stock issued for purchased research and development
    
    
    775,000
    
    
    
    Common Stock issued for distribution agreements
    
    
    112,500
    
    
    
    Stock options and warrants issued for services
    
    
    431,451
    
    
    
    Amortization of original issue discount
    
    
    522,823
    
    
    
    Amortization of debt issuance costs
    
    
    161,063
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,347
    )
    
    
    Inventory
    
    
    (2,530,683
    )
    
    
    Deposits
    
    
    (51,258
    )
    
    
    Prepaid license fees
    
    
    (187,500
    )
    
    
    Prepaid expenses
    
    
    3,522
    
    
    
    20,066Other Assets
    
    
    (6,650
    )
    
    
    Accounts payable, payroll and related taxes and
accrued expenses
    
    
    751,922
    
    
    
    49,962Net cash used in operating activities:
    
    
    (4,386,270
    )
    
    
    (148,374
    )Investing activitiesPurchases of property, equipment and leasehold improvements
    
    
    (94,742
    )
    
    
    Purchases of leased gaming equipment
    
    
    (750,733
    )
    
    
    Net cash used in investing activities:
    
    
    (845,475
    )
    
    
    Financing activitiesDebt financing costs
    
    
    (143,000
    )
    
    
    Proceeds from sale of common stock, net of issuance costs
    
    
    5,162,428
    
    
    
    426,738Proceeds from notes payable and common stock warrants issued
    
    
    2,600,000
    
    
    
    Proceeds from loans payable  related parties
    
    
    
    
    
    
    47,000Payments on notes payable
    
    
    (280,078
    )
    
    
    Cash payments for reverse stock split
    
    
    
    
    
    
    (35
    )Payments on loans payable  related parties
    
    
    
    
    
    
    (5,000
    )Net cash provided by financing activities:
    
    
    7,339,350
    
    
    
    468,703Increase in cash and cash equivalents
    
    
    2,107,605
    
    
    
    320,329Cash and cash equivalents at beginning of year
    
    
    323,675
    
    
    
    3,346Cash at end of year:
    
    $
    2,431,280
    
    
    $
    323,675Supplemental cash flow informationCash paid for interest
    
    $
    98,190
    
    
    $
    Warrants issued for service relating to debt issuance
    
    
    225,000
    
    
    
    Conversion of loans payable  related parties to common stock
    
    
    
    
    
    
    42,000Cancellation of stock-subscription receivable and contingent
note payable
    
    
    
    
    
    
    223,922
 See accompanying notes to financial statements. 25




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##### Table of Contents



Spectre Gaming, Inc.
Notes to Financial Statements
For the years ended December 31, 2004 and 2003 1. Description of Business Spectre Gaming, Inc. (the Company or Spectre, we, us or ours) (formerly OneLink,
Inc.) was incorporated in Minnesota in June 1990 under the name MarketLink, Inc. At that time, the
Company provided telecommunications-based business-intelligence services to client end users. In
January 1997, the Company changed its name to OneLink Communications, Inc., and later in June 2000,
changed its name to OneLink, Inc. In July 2002, the Company ceased operating its
telecommunications-based business, and in December 2002 sold substantially all of its assets. In
September 2003, the Company adopted a new business plan focused on providing interactive electronic
games to the Native American and charitable gaming markets, and in January 2004 changed its name to
Spectre Gaming, Inc. The Company designs and develops networks, software and content that provide
its customers with a comprehensive gaming system. The Company has begun placing its gaming
machines on casino floors. 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, 2004 and
2003, had an accumulated deficit at December 31, 2004 and does not have adequate liquidity to fund
its operations through out fiscal 2005. The financial statements do not include any adjustments
that might result from the outcome of this condition. The Company, as noted above, is now pursuing business opportunities in the Native American and
charitable gaming markets. To fund these business opportunities, the Company has engaged in debt
and equity financing (see Notes 6, 10, 11, and 12). The Company anticipates engaging in additional
debt and equity financing in the future. Nevertheless, there can be no assurance the Company will
raise the necessary capital to fund its business. 2. Summary of Accounting Policies Revenue Recognition .The Company derives its gaming revenues primarily two ways,
outright sales of machines to customers, and participation arrangements with its Native American
customers. Revenue for machine sales is recorded upon shipment and upon the expiration of any
applicable trial periods granted to the customer. Under the participation arrangements, the
Company retains ownership of the equipment installed at a customer site and receives revenue based
on a percentage of the hold per day generated by each gaming system, which is generally considered
both realizable and earned at the end of each gaming day. The Company accounts for the
participation agreements as operating leases. The Company records amounts being charged to customers for shipping and handling as sales in
accordance with Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and
Handling Fees and Costs. Shipping and handling costs incurred by the Company are included in cost
of goods sold. In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition. SAB No. 104 sets forth the SEC staffs position regarding the point at which it is
appropriate for a registrant to recognize revenue. The staff believes that revenue is realizable
and earned when all of the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the sellers price to the buyer is
fixed or determinable, and collectibility is reasonably assured. The Company used the above
criteria to determine whether revenue could be recognized, and is recognizing revenue in accordance
with SAB 104. 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 26




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##### Table of Contents



customers and other information. Accounts receivable over 30 days are
considered past due. The Company does not accrue interest on past due accounts receivable.
Receivables are written off only after all collection attempts have failed and are based on
individual credit evaluation and specific circumstances of the customer. No allowance was
considered necessary at December 31, 2004 and 2003, respectively. The Company extended unsecured credit to customers in the normal course of business. Use of Estimates.The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions affecting the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Inventory.Inventory, which consists principally of gaming products and related materials, is
stated at the lower of cost (determined on the first-in, first-out method) or market. At December
31, 2004 the Company had $652,114 of finished goods inventory and $1,878,569 of spare parts and
gaming cabinets. Prepaid License Fees.Prepaid license fees relate to licenses associated with the themes of
certain gaming machines which are licensed from unrelated parties. Under participation agreements
and upon the placement of the machines into service, the Company will begin amortizing the licenses
over the estimated useful life of the pertinent machines of 3 years. Deposits.Deposits primarily relate to the prepayment of machines ordered which have not been
received as of December 31, 2004 and deposits placed on corporate credit cards. Upon receipt of
the machines, deposits of $28,394 will be reclassified into inventory. Leased Gaming Equipment and Property, Equipment and Leasehold Improvements. Leased gaming
equipment and property, equipment and leasehold improvements were stated at cost. Gaming machines
placed with customers under participation arrangements are included in leased gaming equipment.
Depreciation of an asset 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. Sales and retirements of depreciable
property were recorded by removing the related cost and accumulated depreciation from the accounts.
Gains or losses on sales and retirements of property are reflected in the Companys results of
operations. Depreciation and amortization expense on leased gaming equipment and property,
equipment and leasehold improvements was $33,078 and $0 for the years ended December 31, 2004 and
2003, 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. Debt Issuance Costs.The Company capitalizes debt issuance costs and amortizes the costs over
the life of the loan using the straight-line method, which approximates the interest method. The
capitalized costs related to the convertible debt investment from Pandora Select Partners LP
(Pandora) in May 2004 include the origination fee paid to Pandora of $33,000, the $50,000 cash
paid to Blake Capital Advisors, LLC (Blake), the value of the warrants issued to Blake and
$10,000 of legal fees, and are included in other assets in the financial statements.
The warrants issued to Blake were valued at $225,000 using the Black-Scholes pricing model.
The capitalized costs related to the loans from Pandora and Whitebox Intermarket Partners LP in
September 2004 include the origination fee paid of $45,000 and $5,000 of legal fees. At December
31, 2004 , the Company had debt issuance costs of $206,937 classified as other assets on the
balance sheet. Amortization expense of the debt issuance costs for the years ended December 31,
2004 and 2003 was $161,063 and $0, respectively. Estimated amortization for debt issuance costs is
$206,937 for the year ending December 31, 2005. 27




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##### Table of Contents



Fair Value of Financial Instruments. The carrying amounts for all financial instruments
approximate fair value. The carrying amounts for cash, accounts receivable, accounts payable,
accrued expenses and short-term debt approximate fair value because of the short maturity of these
instruments. Research and Development Costs.Costs related to research, design and development of products
are charged to research and development expense as incurred. Software development costs are
capitalized beginning when a products technological feasibility has been established and ending
when a product is available for general release to customers. The Company uses the working model
approach to determine technological feasibility. Generally, the Companys products are released
soon after technological feasibility has been established. As a result, the Company has not
capitalized any internal software development costs, since such costs have not been significant and
the products are released shortly after technological feasibility. Research and development
expense was $1,045,000 and $0 for the years ended December 31, 2004 and 2003, respectively, for
research and development purchased during the year. Net Loss Per Common Share. Basic and diluted loss per common share is computed by dividing
net loss by the weighted-average number of common shares outstanding for the reporting period.
Dilutive common-equivalent shares have not been included in the computation of diluted net loss per
share because their inclusion would be antidilutive. Antidilutive common-equivalent shares
issuable based on future exercise of stock options or warrants could potentially dilute basic loss
per common share in subsequent years. All options and warrants outstanding were antidilutive for
the years ended December 31, 2004 and 2003. (See Note 7) Advertising Expense.Advertising costs are charged to operations when incurred. Advertising
expense was $99,655 and $0 for the years ended December 31, 2004 and 2003, respectively. Employees Stock-Based Compensation. In accordance with Accounting Principles Board (APB) Opinion No.
25 and related interpretations, the Company uses the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if any, of the quoted
market price of the Companys common stock at the grant date over the amount the employee must pay
for the stock. The Companys general policy is to grant stock options and warrants at fair value
at the date of grant. Options and warrants issued to non-employees are recorded at fair value, as
required by Statement of Financial Accounting Standards (SFAS) No. 123 Accounting for Stock
Based Compensation, using the Black-Scholes pricing model. The Company has adopted the disclosure
only provision of SFAS No. 148, Accounting for Stock Based Compensation. The Company applies APB No. 25 and related interpretations in accounting for its stock options
and warrants issued to employees. Had compensation costs for the Companys stock options and
warrants been determined based on the fair value at the grant dates consistent with the method of
SFAS No. 123, the Companys net loss and loss per share would have been changed to the approximate
pro forma amounts indicated below: 28




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##### Table of Contents



Year Ended December 31,2004
    
    
    2003Net loss:As reported
    
    $
    (4,394,191
    )
    
    $
    (218,402
    )Pro forma
    
    
    (4,925,051
    )
    
    
    (251,596
    )Basic and diluted net loss per
common shareAs reported
    
    $
    (0.42
    )
    
    $
    (0.05
    )Pro forma
    
    
    (0.47
    )
    
    
    (0.06
    )Stock-based compensationAs reported
    
    $
    
    
    
    $
    Pro forma
    
    
    530,860
    
    
    
    33,194
 The following significant assumptions were utilized to calculate the fair value information
presented utilizing the Black-Scholes pricing model: Year Ended December 31,2004
    
    
    2003Risk Free interest rate
    
    
    3.04
    %
    
    
    3.12
    %Expected life
    
    5.09 years
    
    4.7 yearsExpected volatility
    
    
    640
    %
    
    
    469
    %Expected dividends
    
    
    0
    %
    
    
    0
    %
 Non-employees During the years ended December 31, 2004 and 2003, the Company has issued options and warrants
to purchase 1,095,000 shares and 16,666 shares, respectively of the Companys common stock to
non-employees, mostly consultants, with exercise prices ranging from $0.75 per share to $3.30 per
share and expiring at various times through June 2014. Pursuant to Emerging Issues Task Force
96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, the Company will value and record an
expense related to the options on the earlier of the date a performance commitment is met or the
date the performance is complete. Of the options issued to non-employees, 500,000 are earned and
vest as specific milestones are achieved as described in the agreement. At December 31, 2004 and
2003, $4,500 and $0, respectively, had been recorded for expense of these options. The Company
valued other non-vested options and warrants subject to performance and issued to non-employees at
$1,550,000 and $0, using the Black-Scholes pricing model, and cancelled options with a value of
$194,924 and $0, for the years ended December 31, 2004 and 2003, respectively. The Company
recorded expense of $431,451 and $0 for the years ended December 31, 2004 and 2003, respectively,
in accordance with EITF 96-18. Income Taxes. The Company accounts for income taxes using the liability method. Deferred tax
assets and liabilities are recognized for the expected future tax consequences attributable to the
temporary differences between the financial and income tax reporting bases of assets and
liabilities. Reclassifications.Certain accounts in the prior years financial statements have been
reclassified for comparative purposes to conform with the presentation in the current year
financial statement. These reclassifications had no effect on the net loss or shareholders
equity. Recent Accounting Pronouncements. In December 2003, FASB issued FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities (FIN 46R). FIN 46R states that companies that have
exposure to the economic risks and potential rewards from another entitys assets and activities
have a controlling financial interest in a variable interest entity and should consolidate the
entity, despite the absence of clear control through a voting equity interest. The consolidation
requirements apply to all special-purpose entities by the end of the first reporting period ending
after December 15, 2003. FIN 46R shall be applied to all variable interest entities by the end of
the first reporting period ending after March 15, 2004, for enterprises that are not small business
issuers or December 29




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##### Table of Contents



15, 2004 for enterprises that are small business issuers. The Company does not
expect the adoption of FIN 46R to have a material effect on its financial statements. In November 2004, FASB issued SFAS No. 151 Inventory Costs amends the guidance in ARB No.
43, Chapter 4 Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 pf ARB 43, Chapter 4,
previously stated that under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as
current period charges. SFAS No. 151 requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal. In addition, SFAS No, 151
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS No. 151 shall be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after the date SFAS No. 151 was issued. SFAS
No. 151 shall be applied prospectively. The Company does not expect the adoption of SFAS No. 151
to have a material effect on its financial statements. In December 2004, FASB issued SFAS No. 153 Exchanges of Nonmonetary Assets amends APB
Opinion No. 29, Accounting for Nonmonetary Transactions. APB No. 29 is based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included certain exceptions to that principle.
SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the exchange. SFAS
No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after the date SFAS No. 153 was issued. SFAS No. 153 shall be applied
prospectively. The Company does not expect the adoption of SFAS No. 153 to have a material effect
on its financial statements. In December 2004, FASB issued SFAS No. 123R which requires companies to recognize in the
income statement the grant-date fair value of stock options and other equity-based compensation
issued to employees, but expressed no preference for the type of valuation model. SFAS No. 123R is
effective for small business issuers as of the beginning of interim or annual reporting periods
that begin after December 15, 2005. The Company will adopt SFAS No. 123R in its first fiscal 2006
quarter. The impact of SFAS No. 123R has not been determined by the Company. 3. Asset Acquisition In December 2004, the Company signed an asset purchase agreement with Streamline Development
Company, Inc. (Streamline) whereby the Company acquired all of the assets and intellectual
property of Streamline. Pursuant to the agreement the Company made a $20,000 cash payment and
issued 70,000 unregistered shares of the Companys common stock to Streamline. The shares were
valued at the trading price of the Companys common stock on the day the agreement was executed,
$2.50 per share, and charged to research and development expense since the technological
feasibility of the assets purchased had not yet been achieved. An additional 280,000 shares of the
Companys common stock will be issued to Streamline upon the achievement of
certain development milestones. The shares will be expensed as development occurs, and valued
at the trading price of the Companys common stock, on the day the milestone is completed.
Streamline is majority owned by two individuals who became employees of the Company in 2004. 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 have not yet
reached technological feasibility. 30




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##### Table of Contents



Streamline is majority owned by two individuals who became employees of the Company in 2004. 4. Property, Equipment and Leasehold Improvements and Leased Gaming Equipment At December 31, 2004 and 2003, the Companys leased gaming equipment and property, equipment
and leasehold improvements consisted of the following: Estimated2004
    
    
    2003
    
    
    Useful LivesFurniture and equipment
    
    $
    34,440
    
    
    $
    
    
    
    3-5 yearsLeasehold improvements
    
    
    60,302
    
    
    
    
    
    
    12-24 monthsTotal property, equipment
and leasehold improvements
    
    
    94,742
    
    
    
    Less accumulated depreciation
    
    
    (17,065
    )
    
    
    Total property, equipment
and leasehold improvements,
net
    
    $
    77,677
    
    
    $
    Leased gaming equipment
    
    $
    750,733
    
    
    $
    
    
    
    3 yearsLess accumulated depreciation
    
    
    (16,013
    )
    
    
    Total leased gaming equipment
    
    $
    734,720
    
    
    $
    
 Leased gaming equipment includes machines leased under participation arrangements that are at
customer facilities. 5. Contingent Shareholder Notes Payable In January 1994, the Company acquired 73,121 shares of common stock from two shareholders for
$6.54 per share by issuing promissory notes totaling $478,212 which bear interest at 6%. These
shares have been canceled and retired. Under the terms of the notes, payments shall be made when,
and only if, the Company receives payments for the exercise of options under its 1994 Stock Option
Plan until the notes are paid in full. The Company is required to use 100% of any cash proceeds
resulting from the exercise of options under the 1994 Stock Option Plan to pay down these
obligations until the notes are satisfied. As of December 31, 2004 and 2003, there were no options
outstanding under the 1994 Stock Option Plan and as of December 31, 2004 the 1994 Stock Option Plan
has expired. Consequently, no liability has been recorded in the financial statements. No
principal or interest payments were made on these promissory notes in 2004 and 2003. During December 1999, the Company sold 37,808 shares of common stock and received a
stock-subscription receivable for $226,852 from one of the note holders. The receivable was
payable when payments on the contingent shareholder notes payable are made by the Company. The
outstanding balance on the stock  subscription receivable earns interest at 6%. There were no payments made in 2004 or 2003.
In December 2003, when the principal balance of the subscription receivable was $223,922, the
Company and one of the note holders, with an original principal amount of $232,707, agreed to
offset the remaining balance of the note against the subscription receivable from the note holder.
The agreement released the Company from its obligations under the note, released the note holder
from their obligations under the subscription agreement and related stock pledge agreement, and
mutually released both parties from any and all claims by the other party. The principal balance of the contingent promissory notes was $0 and $238,939 at December 31,
2004 and 2003, respectively. 31




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##### Table of Contents



6. 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 December 1999, the Company sold 37,808 shares of common stock and received a
stock-subscription receivable for $226,852. The receivable was payable when payments on the
contingent shareholder notes payable were made by the Company (see Note 5). The outstanding
balance on the stock-subscription receivable earned interest at 6%. There were no payments made in
2003 or 2002. In December 2003, the Company agreed to offset the remaining balance of the
subscription receivable against the contingent shareholder notes payable (see Note 5). The
agreement released the Company from its obligations under the note, released the note holder from
their obligations under the subscription agreement and related stock pledge agreement, and mutually
released both parties from any and all claims by the other party. In September 2003, the Company sold 3,841,333 shares of common stock for gross proceeds of
$230,480, and issued 700,000 shares in satisfaction of $42,000 of debt to related parties. In November 2003, the Company began a private placement which ended in March 2004 (the
Offering). A majority of the sales of the Companys common stock occurred after December 31,
2003. In the Offering, the Company sold a total of 1,796,829 shares of its common stock (of which
1,531,989 were sold in 2004) for a per share price of $0.75 (i.e., raising a gross total of
$1,347,626, $1,148,996 of which was raised in 2004). The Offering was a private placement made
under Rule 506 promulgated under the Securities Act of 1933, as amended. The Company raised funds
in this private placement in anticipation of entering into the business of developing,
manufacturing, distributing and servicing gaming machines, primarily for the Native American and
charitable gaming markets. The Company used an agent for a portion of these sales. As a fee, the
Company paid the agent $62,550 in cash which was accounted for as a reduction of gross proceeds,
and issued the agent fully-vested five-year warrants to purchase up to 83,400 shares of the
Companys common stock for an exercise price of $0.75 per share. In addition, the Company incurred
legal fees and other expenses of $19,407 related to the Offering. In November, 2004, the Company closed on a private placement (the Second Offering) of
1,811,429 Units (Units), each consisting of one share of common stock, par value $.01 per share,
and five-year warrants to purchase one additional share of common stock at a purchase price of
$3.75 per share. The per-Unit price was $2.50 (i.e., raising a gross total of $4,528,573). The
Company used two agents in completing the sale of the Units in the Second Offering. As a fee, the
Company paid the agents $362,286 in cash, and issued the agents fully-vested five-year warrants to
purchase up to 181,143 Units for an exercise price of $2.50 per Unit. In addition, the Company
incurred legal fees and other expenses of $70,898 related to the Second Offering. Preferred Stock During the year ended December 31, 2001, the Company sold 440,000 shares of Series A
Convertible Preferred Stock and received net proceeds of $615,133. The preferred stock has voting
rights identical to common stock. In the event of liquidation, the Series A Preferred Shareholders
receive a liquidation preference. Although no dividends are required with respect to the Series A
Preferred Stock, no dividend shall be paid on any shares of common stock unless comparable
dividends are paid on the Series A Preferred Stock. The holders of Series A Convertible Preferred Stock may elect to convert all or a portion of
such shares into shares of the Companys common stock in the manner set forth in the Series A
Convertible Preferred Stock Certificate of Designation on file with the Minnesota Secretary of
State. After adjustment pursuant to the terms of the Certificate of Designation, each share of
Series A Convertible Preferred Stock currently converts into 2.257 shares of the Companys common
stock. 32




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##### Table of Contents



In June 2004, holders of 200,000 shares of the Companys Series A Convertible Preferred Stock
converted their preferred shares into 451,369 shares of the Companys $.01 par value common stock.
In July 2004, holders of an additional 33,333 shares of the Companys Series A Convertible
Preferred Stock converted their preferred shares into 75,228 shares of the Companys $.01 par value
common stock. At December 31, 2004 there were outstanding 206,667 shares of Series A Convertible
Preferred Stock which were convertible into an aggregate of 466,452 shares of the Companys common
stock with a liquidation preference of $310,000. 7. Warrants and Stock Options During 2003, 16,666 five-year warrants were issued to a consultant and none were exercised.
The warrants issued to the consultant are earned and vest as the consultant achieves milestones as
described in the consulting agreement. Pursuant to Emerging Issues Task Force 96-18 (EITF 96-18),
Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, the Company will value and record an expense related
to the warrants as the milestones are achieved. At December 31, 2004 and 2003, no expense has been
recorded related to these warrants as no milestones were achieved. At December 31, 2004, the Company had 2,697,946 warrants outstanding with exercise prices
ranging from $0.75 to $8.82. The warrants expire serially through November 2009. 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. During 2003, the Company issued options for 16,667 shares of common stock to a director that
were subject to the shareholders of the Company approving an increase in the number of shares
reserved for issuance under the 1999 Stock Option Plan and were not considered outstanding at
December 31, 2003. In August 2004, the shareholders approved an increase in the number of shares
reserved for issuance under the 1999 Stock Option Plan to 300,000 shares. The Company established a stock option plan in 2004 (2004 Stock Option Plan) to provide
incentives to employees, directors, officers and consultants and under which 2,000,000 shares of
common stock have been reserved for issuance. The options can be either incentive stock options or
non-statutory stock options and are valued at the fair market value of the stock on the date of
grant. The exercise price of incentive stock options may not be less than 100% of the fair market
value of the stock subject to the option on the date of the grant and, in some cases, may not be
less than 110% of such fair market value. The exercise price of non-statutory options may not be
less than 100% of the fair market value of the stock on the date of grant. During 2004, the Company issued options for 2,005,000 shares of the Companys common stock
outside of the Companys stock option plans. At December 31, 2004, the Company had 327,772 exercisable options outstanding with a
weighted-average exercise price of $1.00, and a weighted-average remaining contractual life of 8.9
years. At December 31, 2003, the Company had 172,774 exercisable options outstanding with a
weighted-average exercise price of $0.65, and a weighted-average remaining contractual life of 9.2
years. The weighted-average grant date fair market value of options granted during the year ended
December 31, 2004 and 2003 was $2.18 and $0.24, respectively. 33




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##### Table of Contents



The following table summarizes options and warrants to purchase shares of the Companys common
stock: Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Range of
    
    
    
    
    
    
    Average ExerciseExercise Price
    
    
    Option
    
    
    
    
    
    
    PriceOptions
    
    
    Per Share of
    
    
    Exercise
    
    
    Warrants
    
    
    Per Share ofOutstanding
    
    
    Options
    
    
    Price
    
    
    Outstanding
    
    
    WarrantsBalance at December 31, 2002
    
    
    269,606
    
    
    $
    4.62
    
    
    $
    3.00 to $10.50
    
    
    
    61,659
    
    
    $
    4.50Granted
    
    
    199,999
    
    
    
    .35
    
    
    $
    0.15 to $0.75
    
    
    
    16,666
    
    
    
    .75Canceled/expired
    
    
    (250,998
    )
    
    
    4.67
    
    
    $
    3.00 to $10.50
    
    
    
    (4,000
    )
    
    
    3.74Balance at December 31, 2003
    
    
    218,607
    
    
    
    .67
    
    
    $
    0.15 to $6.00
    
    
    
    74,325
    
    
    
    3.71Granted
    
    
    2,334,167
    
    
    
    2.18
    
    
    $
    0.75 to $3.50
    
    
    
    2,657,115
    
    
    
    3.41Canceled/expired
    
    
    (185,835
    )
    
    
    2.25
    
    
    $
    2.00 to $3.09
    
    
    
    (33,494
    )
    
    
    4.47Balance at December 31, 2004
    
    
    2,366,939
    
    
    $
    2.04
    
    
    $
    0.15 to $6.00
    
    
    
    2,697,946
    
    
    $
    3.41
 The following table summarizes information about stock options outstanding at December 31,
2004: Options outstandingWeighted-
    
    
    
    
    
    
    Options exercisableAverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$0.15
    
    
    133,333
    
    
    
    8.75
    
    
    $
    0.15
    
    
    
    133,333
    
    
    $
    0.15$0.75
    
    
    83,333
    
    
    
    8.88
    
    
    
    0.75
    
    
    
    41,666
    
    
    
    0.75$1.50
    
    
    600,000
    
    
    
    9.23
    
    
    
    1.50
    
    
    
    120,000
    
    
    
    1.50$2.00
    
    
    220,831
    
    
    
    3.79
    
    
    
    2.00
    
    
    
    20,831
    
    
    
    2.00$2.15
    
    
    300,000
    
    
    
    9.42
    
    
    
    2.15
    
    
    
    
    
    
    
    N/A$2.40 - $2.50
    
    
    782,500
    
    
    
    8.13
    
    
    
    2.48
    
    
    
    
    
    
    
    N/A$2.70 - $3.00
    
    
    30,276
    
    
    
    4.13
    
    
    
    2.75
    
    
    
    5,276
    
    
    
    3.00$3.20 - $3.50
    
    
    210,000
    
    
    
    7.14
    
    
    
    3.28
    
    
    
    
    
    
    
    N/A$6.00
    
    
    6,666
    
    
    
    4.70
    
    
    
    6.00
    
    
    
    6,666
    
    
    
    6.00$0.15 to $6.00
    
    
    2,366,939
    
    
    
    8.08
    
    
    $
    2.04
    
    
    
    327,772
    
    
    $
    1.00
 8. Software On March 4, 2004, the Company signed an agreement with MET Games, Inc. (MET) to purchase
certain Linux-based software and technology being developed by and owned by MET for the operation
of certain gaming computers and systems. Pursuant to the agreement, the Company made a $250,000
cash payment to MET and issued 800,000 unregistered, restricted shares of the Companys common stock. The Company
will utilize the software as it develops its business opportunities in the Native American Class II
and charitable gaming markets. The Company has the right to terminate the agreement and recover the $250,000 payment and
800,000 unregistered, restricted shares of the Companys common stock if MET fails to deliver
software that meets the specifications detailed in the agreement or in the event that MET fails to
provide the software in accordance with the development schedule detailed in the agreement.
Despite this fact, due to the development of the software not having reached technological
feasibility on the date of the agreement and the $250,000 cash payment being a significant
performance commitment, the Company expensed the cash payment and the value of the common stock,
$600,000, as research and development expense. For his purpose, the common stock was valued at
$0.75 per share, based upon the price of the Companys then recently completed private placement. 34




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MET is wholly-owned by an individual who became an employee of the Company on March 4, 2004. On February 3, 2005, the Company and MET Games, Inc. executed an amendment to the Software
Development Agreement to be effective January 24, 2005. (See Note 17) 9. Distribution Agreement In June 2004, the Company signed a distribution agreement to become the exclusive distributor
of Games of Chance, Inc. (GOC). Under the terms of the five-year agreement the Company will
issue an aggregate of 200,000 shares of the Companys common stock, 50,000 shares of which were
issuable upon the signing of the agreement with the remaining 150,000 shares issuable in five
30,000-share installments on each of the five anniversaries of the agreement. The shares issued
upon the signing of the agreement were expensed at $100,000, their current value on the date of the
agreement. In addition, GOC received an option to purchase 500,000 shares of the Companys common
stock at an exercise price of $2.50 per share. The options vest in increments of 25,000 shares as
the Company places or sells 500 GOC machines. Pursuant to Emerging Issues Task Force 96-18 (EITF
96-18), Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or
in Conjunction with Selling, Goods or Services, the Company will value and record an expense
related to the options as the machines are sold. At December 31, 2004 and 2003, $4,500 and $0 had
been recorded for expense of these options. As of December 31, 2004, the Company had placed 36 GOC
machines. Upon signing the Company also paid GOC $15,000 related to prior expenses incurred by GOC
on behalf of the Company. In connection with the distribution agreement the Company signed a five-year consulting
agreement (Consulting Agreement) with Barry Quick, the spouse of the President of GOC. The
Consulting Agreement calls for monthly payments to Mr. Quick of $10,000 and is terminable, without
penalty, for cause or non-performance. 10. Convertible Note Payable On May 20, 2004, the Company received $1,100,000 in a convertible debt investment from Pandora
Select Partners, L.P. (Pandora). The note was payable in interest only, at 10% per annum,
through August 20, 2004, and thereafter is payable in equal monthly installments over the next 15
months. The note is convertible by Pandora into common stock of Spectre at $2.50 per share, and
allows Spectre, subject to certain conditions and limitations, to make monthly installment payments
with its common stock at a price per share equal to 90% of the average closing bid price of the
common stock over the 30 trading days immediately preceding the payment date. In connection with
the financing, Spectre paid a 3% origination fee, issued a fully-vested five-year warrant for the
purchase of 200,000 shares of Spectres common stock at $2.50 per share, and granted Pandora a
security interest in the Companys assets. The gross proceeds of $1,100,000 were allocated between
the convertible note and the common stock warrants based on the relative fair values of the
securities at the time of issuance. The common stock warrants were valued using the Black-Scholes
pricing model. The resulting original issue discount, the fair value of the warrants and the
beneficial conversion of the note into common stock as defined in EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments, will be amortized over the
life of the promissory note using the straight-line method, which approximates the interest method.
The note is convertible by the holder any time in whole or in part upon written notice to the
Company. Such conversion is limited to the extent the holders beneficial ownership interest would
exceed 4.99% of outstanding common stock at conversion. In addition, Spectre agreed to file a
registration statement by November 3, 2004, which date was extended to November 30, 2004, with the
U.S. Securities and Exchange Commission, covering the issuance or resale of the shares of Spectres
common stock which may be issued in connection with the note and warrant issued to Pandora, and
cause the same to be effective by February 1, 2005. The Company filed the registration statement
on November 30, 2004 and the registration statement was declared effective on January 24, 2005.
In connection with the financing, the Company also paid a finders fee to Blake Capital Advisors,
LLC (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 35




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##### Table of Contents



the value of the warrants were recorded as deferred
financing costs and will be amortized over the life of the convertible debt. The allocation of the gross proceeds of the convertible note payable is summarized below as of
December 31, 2004: Convertible note payable, total borrowed
    
    $
    1,100,000Value of 200,000 warrants allocated to additional paid
in capital
    
    
    (450,000
    )Value of beneficial conversion of note payable
allocated to additional paid in capital
    
    
    (340,000
    )Convertible note payable, net of original issue discount
    
    
    310,000Amortization of original issue discount
    
    
    324,212Principal payments on convertible note
    
    
    (280,078
    )Convertible note payable, net
    
    $
    354,134
 11. Short-term Debt On September 10, 2004, the Company issued two $750,000 10% promissory notes. One note was
issued to Pandora Select Partners, L.P. (Pandora) and the other note was issued to Whitebox
Intermarket Partners, L.P. (Whitebox). The notes are payable interest only through March 10,
2005, at which time the principal is due. In connection with the financing, Spectre paid a 3%
origination fee, issued five-year warrants for the purchase of 50,000 shares of Spectres common
stock at $3.00 per share to both Pandora and Whitebox, and granted Pandora and Whitebox security
interests in the Companys assets. The gross proceeds of $1,500,000 were allocated between the
notes and the common stock warrants based on the relative fair values of the securities at the time
of issuance. The common stock warrants were valued using the Black-Scholes pricing model. The
resulting original issue discount and the fair value of the warrants will be amortized over the
life of the promissory note using the straight-line method, which approximates the interest method.
In addition, Spectre agreed to file a registration statement by February 1, 2005 with the U.S.
Securities and Exchange Commission, covering the issuance or resale of the shares of Spectres
common stock which may be issued in connection with the warrants issued to Pandora and Whitebox.
The Company filed the registration statement on November 30, 2004 and the registration statement
was declared effective on January 24, 2005. The allocation of the gross proceeds of the short-term debt is summarized below as of December
31, 2004: Short-term debt, total borrowed
    
    $
    1,500,000Value of 100,000 warrants allocated to additional
paid in capital
    
    
    (325,000
    )Short-term debt, net of original issue discount
    
    
    1,175,000Amortization of original issue discount
    
    
    198,611Total short-term debt, net
    
    $
    1,373,611
 12. License Agreement On June 30, 2004, the Company signed a three-year non-exclusive license agreement (License
Agreement) with Bally Gaming Inc. (Bally). The License Agreement calls for the Company to
purchase up to 3,000 game cabinets from Bally over the term of the Agreement. Nevertheless, if the
Company has purchased at least 70% of its Class II cabinet purchases from Bally during the term,
Bally shall waive the 3,000 game cabinet purchase minimum. In addition, the Company was obligated
to purchase at least 100 game cabinets from Bally, and incur certain minimum license-fee charges of
$187,500, by June 30, 2004. As of December 31, 2004, 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, 2004. Upon receipt of the machines that
include the license fees and 36




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##### Table of Contents



the placement of the machines, through a participation agreement, into
service, the Company will begin amortizing the licenses over the estimated useful life of the
machines of 3 years. 13. Related Party Transactions The Company incurred expenses from a corporation, owned by a director of the Company and
employing another director and officer of the Company, for rent and consulting services of
approximately $102,000 and $61,000 during the years ended December 31, 2004 and 2003, respectively. The Company incurred expenses from a corporation, partially owned by the CEO and director of
the Company, for consulting services and expense reimbursements of approximately $81,000 and $0
during the years ended December 31, 2004 and 2003, respectively. The Companys CEO also serves as
a director of the corporation. In February 2004, the Company entered into a consulting agreement with D. Bradly Olah, 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 will be valued on the date performance is complete under variable plan accounting using
the Black-Scholes pricing model, the options had a value of $750,000 at December 31, 2004, of which
$218,750 had been charged to expense during the year ended December 31, 2004. In connection with the convertible debt financing from Pandora, the Company paid $50,000 and
issued two fully-vested three-year warrants to Blake Advisors, LLC, a Minnesota limited liability
company wholly owned by Wayne W. Mills, a greater-than-five-percent shareholder of the Company.
The warrants were issued in exchange for financial-advisory services rendered by Blake Advisors.
One warrant grants Blake Advisors the right to obtain up to 50,000 shares of the Companys common
stock at an exercise price of $2.50 per share, and the second warrant grants Blake Advisors the
right to obtain up to 50,000 shares of the Companys common stock at an exercise price of $3.00 per
share. The warrants were valued at $225,000 using the Black-Scholes pricing model and will be
expensed using the straight-line method over the term of the promissory note. For the year ended
December 31, 2004, the Company recorded expense of $92,340 related to these warrants. 14. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The temporary differences principally relate to net operating loss
carryforwards and depreciation. The Company has net operating loss carryforwards of approximately $19,584,000 at December 31,
2004 expiring at various times beginning 2008 that can be used to offset future taxable income, and
research and development credit carryforwards of approximately $101,000 which, if not used, will
begin to expire in 2007. The Company believes there has been a change in ownership and change in
the Companys business and that the carryforwards are subject to the limitations of the Internal
Revenue Code Section 382. These limitations would effectively eliminate the net operating loss
carryforwards prior to the date of the change in ownership. The Company has recorded a full valuation allowance against the net deferred tax asset due to
the uncertainty of realizing the related benefits and does not include any eliminations of net
operating loss carryforwards as disclosed above as follows at December 31: 37




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##### Table of Contents



2004
    
    
    2003Deferred income tax assets:Net operating loss carryforwards
    
    $
    7,926,000
    
    
    $
    5,966,000Research and development credit carryforwards
    
    
    101,000
    
    
    
    101,000Less: valuation allowance
    
    
    (8,027,000
    )
    
    
    (6,067,000
    )Net deferred income tax assets
    
    $
    
    
    
    $
    
 The change in the valuation allowance was $1,960,000 and $156,200 for the years ended December
31, 2004 and 2003, respectively. Income tax computed at the U.S. federal statutory rate reconciled to the effective tax rate is
as follows for the years ended December 31: 2004
    
    
    2003Federal 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
    %
 15. Commitments The Company leased office space on a month-to-month basis from a company owned by the
Companys former chairman at a rate of $3,000 per month and since September 2004 at a rate of
$1,500 per month. The Company leases its office facilities in El Cajon, CA pursuant to terms of a non-cancelable
operating lease, as amended, that expires in May 2006. Under the terms of the lease, the Company
is required to pay a portion of the lessors operating costs. The Company leases a house in El Cajon, CA pursuant to terms of a non-cancelable operating
lease that expires in June 2005. The Company leases equipment pursuant to terms of a non-cancelable operating lease that
expires in October 2009. Rent expense, excluding operating expenses, was $81,825 and $11,389 for the years ended
December 31, 2004 and 2003, respectively. Scheduled minimum lease payments for the next five years are approximately as follows: Year endingDecember 31,2005
    
    $
    73,8122006
    
    
    26,4342007
    
    
    1,8732008
    
    
    1,8732009
    
    
    1,405Totals
    
    $
    105,397
 38




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##### Table of Contents



The Company has entered into various employment agreements with certain executives of the
Company, which provide for severance payments subject to certain conditions and events. On June 30, 2004, the Company signed a three-year non-exclusive license agreement (License
Agreement) with Bally Gaming Inc. (Bally). The License Agreement calls for the Company to
purchase up to 3,000 game cabinets from Bally over the term of the Agreement. Nevertheless, if the
Company has purchased at least 70% of its Class II cabinet purchases from Bally during the term,
Bally shall waive the 3,000 game cabinet purchase minimum. (See Note 12) 16. Significant Customers Revenues to one customer was 86.7% of total revenues in 2004. 17. Subsequent Events On February 3, 2005, the Company and MET Games, Inc. (MET) executed an amendment to the
Software Development Agreement with MET to be effective January 24, 2005. (See Note 8) The amendment provides for the Companys acceptance of METs non-conforming delivery of the
bingo 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 bingo software and the
Companys access to METs office and warehouse space to facilitate the completion of the bingo
software. The Company intends to complete the development of the bingo software internally. 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 to the completed
software. As a result there were no accounting adjustments or revisions attributable to this
amendment. On March 10, 2005, the Company signed amendments to the two $750,000 secured promissory notes
with Pandora and Whitebox. The amendments extend the due date of the notes to June 10, 2005, which
date can be further extended by the Company to September 10, 2005. As part of the amendment the
Company agreed to maintain assets whose value equals or exceeds the principal interest amounts then
owned under the notes. For purposes of valuing the assets for compliance under this provision, the
Companys cash shall be valued at 100%, he Companys accounts receivable shall be valued at 80% and
the Companys inventory and fixed assets shall be valued at 50% of their book value. As
consideration for the amendments, the Company paid Pandora and
Whitebox each $18,750. If the Company elects to extend the notes to September 10, 2005,
Pandora and Whitebox will each be entitled to a 2.5% origination fee on the then outstanding
principal amount of their respective note. 39




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##### Table of Contents



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, 2004, of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934).
Based upon that evaluation, made at the end of the period, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information required to be disclosed in our periodic reports to
the Securities and Exchange Commission, and that there has been no significant change in such
internal controls, or other factors which could significantly affect such controls including any
corrective actions with regard to significant deficiencies or material weaknesses, since our
evaluation. However, due to the limited number of Company employees engaged in the authorization,
recording, processing and reporting of transactions, there is inherently a lack of segregation of
duties. During the course of their audit of our consolidated financial statements for Fiscal 2004,
our independent registered public accounting firm, Virchow, Krause & Company, LLP, advised
management and the audit committee of our Board of Directors that they had identified a deficiency
in internal control. The deficiency is considered to be a material weakness as defined under
standards established by the American Institute of Certified Public Accountants. The material
weakness relates to the lack of segregation of duties within the financial processes in the
Company. The Company periodically assesses the cost versus benefit of adding the resources that
would remedy or mitigate this situation, and currently does not consider the benefits to outweigh
the costs of adding additional staff in light of the limited number of transactions related to the
Companys operations. 
 Item 8B. Other Information None 40




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##### Table of Contents



PART III 
  Item 9.
    Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act Kenneth W. Brimmer,49 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, is in the business of selling, leasing
and servicing oxygen tanks provided to businesses for emergency medical use, and owns and operates
11 fast-food drive-through restaurants under the name Burger Time. At the request of Entrx
Corporations Board of Directors, Mr. Brimmer acted as the chief executive officer and chairman of
the board of directors of VioQuest Pharmaceuticals, Inc. (formerly Surg II, Inc. and Chiral Quest,
Inc.) (OTCBB: VQPH.OB), from May 2002 until February 2003. VioQuest Pharmaceuticals, Inc. was a
90%-owned Entrx subsidiary during that period, until October 2003. Mr. Brimmer was the chief
executive officer and chief financial officer of Active IQ Technologies, Inc. from March 2000 until
December 2001, and acted as chairman of its board of directors until June 2003. Active IQ
Technologies, Inc. was engaged in providing accounting software services in Minnetonka, Minnesota,
and is now in the precious metals exploration business under the name Wits Basin Precious Metals,
Inc. (OTCBB: WITN.OB). Until April 2000, Mr. Brimmer was an executive officer of Rainforest Cafe,
Inc., serving as its treasurer from 1995, and its president from April 1997. Mr. Brimmer is
currently a member and the chairman of the board of directors of Hypertension Diagnostics, Inc.
(OTCBB: HDII.OB). He currently also serves as a board member at VioQuest Pharmaceuticals, Inc.,
Landrys Restaurants, Inc. (NYSE: LNY) and Entrx Corporation (Nasdaq: ENTX). Mr. Brimmer has a
Bachelor of Arts degree in accounting. Russell Mix, 48, has served as a CEO and Director of the Company since November 2003. 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, 47, has served as a director of the Company since October 2004. Mr. Bonev has
been the Vice President Sales/Marketing with Arctic Cat Inc. (NASDAQ: ACAT), a worldwide
manufacturer and marketer of all-terrain vehicles (ATVs) and snowmobiles since June 2001. From
February 1999 to January 2000, Mr. Bonev served as Vice President of Marketing for Outdoor Marine
Corporation. From December 1998 to February 1999, Mr. Bonev was employed by Teledyne Continental
Motors, a business segment of Teledyne Technologies Incorporated, as Vice President of
Sales/Marketing. From June 1993 to December 1998, Mr. Bonev was Director of Marketing for Mercury
Marine, a division of The Brunswick Corporation. N.D. Butch Witcher, 66, 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. 41




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##### Table of Contents



Brian D. Niebur, 41, has served as Chief Financial Officer and a Director of the Company since
February 2003. Mr. Niebur has been employed part time by Entrx Corporation (NASDAQ: ENTX) as its
treasurer and chief financial officer since February 2002. Entrx Corporation is primarily engaged
in providing industrial insulation services through its California subsidiary, Metalclad Insulation
Corporation. In addition, since July 2000, and also on a part-time basis, Mr. Niebur has acted as
a vice president and controller for Wyncrest Capital, Inc. in Minneapolis, Minnesota, a privately
held venture capital firm. From August 1997 until July 2000, Mr. Niebur was the controller for
Vital Images, Inc., a developer and marketer of medical visualization and analysis software. Mr.
Niebur was the vice president and controller of IVI Publishing, Inc, from September 1993 until
August 1997. IVI Publishing, Inc. was an electronic publisher of health and medical information.
Mr. Niebur has passed the certified public accounting examination. Each member of our Board of Directors was elected to serve until the next annual meeting of
our shareholders. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys
officers, directors and persons considered to be beneficial owners of more than ten percent of a
registered class of the Companys equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and Nasdaq. Officers, directors and
greater-than-ten-percent shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based on a review of the copies of such forms
furnished to the Company, or written representations that no applicable filings were required, the
Company believes that all such filings were filed on a timely basis for the fiscal year 2004. Code of Ethics We have adopted a Code of Ethics which is intended to govern 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: Brian Niebur, 800 Nicollet Mall, Suite 2690, Minneapolis, Minnesota
55402. You may also request a copy by calling us at (612) 279-2030. 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.
Russell Mix, is an audit committee financial expert as that term is defined in Item 401(e)(2) of
Regulation S-B promulgated under the Securities and Exchange Act of 1934. Mr. Mixs relevant
experience includes his service as the Chief Executive Officer and Chief Financial Officer of
Prolific Publishing, Inc. and his past experience as a financial analyst. In addition, Mr. Mix
holds an undergraduate degree in finance. Mr. Mix is the Companys Chief Executive Officer and
does not qualify as an independent director, as such term is defined in Section 4200(a)(15) of
the National Association of Securities Dealers listing standards, or meets the criteria for
independence set forth in Rule 10A-3(b)(1) under the Securities and Exchange Act of 1934. 
 Item 10. Executive Compensation The following table sets forth the total compensation paid by the Company during its last
three fiscal years to the persons who served as President and Chief Executive Officer of the
Company and each other executive officer of the Company whose total annual base salary plus bonus
compensation for the most recent fiscal year exceeded $100,000 (all of whom are the Named
Executive Officers). 42




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##### Table of Contents



SUMMARY COMPENSATION TABLE Long-TermCompensationAnnual Compensation
    
    
    AwardsSecuritiesOther Annual
    
    
    
    UnderlyingSalary
    
    
    Bonus
    
    
    Compensation
    
    
    
    OptionsName and Principal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    
    (#)Russell C. Mix, President and
    
    
    2004
    
    
    $
    120,417
    
    
    
    
    
    
    
    7,083
    (2)
    
    
    
    616,667
    (3)CEO(1)
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,666
    (4)2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ronald E. Eibensteiner, President
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and CEO (5)
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2) Compensation represents consulting fees paid to Mr. Mix prior to him becoming an employee of
the Company. (3) Includes options for 16,667 shares of the Companys common stock that were granted to Mr. Mix
as a result of his appointment to the Companys Board of Directors in 2003, but that were subject
to shareholder approval of an increase in the number of shares reserved for issuance under the
Companys 1999 Stock Option Plan. The shareholders approved the increase in the shares reserved
for issuance under the 1999 Stock Option Plan in August 2004. (4) These options were granted to Mr. Mix as a result of his appointment to the Companys Board of
Directors. (5) Mr. Eibensteiner was appointed President and Chief Executive Officer on February 6, 2003 and
resigned his positions as President and Chief Executive Officer effective April 16, 2004. Mr.
Eibensteiner did not receive any salary while in these positions. Mr. Eibensteiner was Chairman of
the Company from May 1996 until February 2005. OPTION GRANTS DURING 2004 FISCAL YEAR The following table sets forth the options that were granted to the Named Executive Officers
during the Companys last fiscal year which ended December 31, 2004. Number of
    
    
    Percent ofSecurities
    
    
    Total Options/Underlying
    
    
    Granted to
    
    
    Exercise orOptions
    
    
    Employees in
    
    
    Base Price
    
    
    ExpirationName
    
    Granted (#)
    
    
    Fiscal Year
    
    
    ($/Share)
    
    
    DateRussell C. Mix
    
    
    600,000
    
    
    
    55.1
    %
    
    
    1.50
    
    
    
    3/22/201416,667
    
    
    
    1.5
    %
    
    
    0.75
    
    
    
    11/17/2013Ronald E. Eibensteiner
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    
 43




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OPTION EXERCISES DURING FISCAL 2004
AND FISCAL YEAR-END OPTION VALUES The following table provides certain information regarding the exercise of stock options to
purchase shares of the Companys common stock by the Named Executive Officers during the year ended
December 31, 2004, and the fiscal year-end value of unexercised stock options held by such Named
Executive Officers. Number
    
    
    
    
    
    
    Number ofof
    
    
    
    
    
    
    Unexercised
    
    
    Value of UnexercisedShares
    
    
    
    
    
    
    Options at
    
    
    In-the-Money OptionsAcquired
    
    
    Value
    
    
    Fiscal Year End
    
    
    at Fiscal Year End ($)On
    
    
    Realized
    
    
    (exercisable /
    
    
    (exercisable /Name
    
    Exercise
    
    
    ($)
    
    
    unexercisable)
    
    
    unexercisable)Russell C. Mix
    
    
    0
    
    
    
    0
    
    
    
    161,666/521,667
    
    
    
    192,915/552,918Ronald E. Eibensteiner
    
    
    0
    
    
    
    0
    
    
    
    - / -
    
    
    $
    0 / $0
   (1)
    
    Based on a fiscal year end of December 31, 2004 and a closing bid price on the
Over-the-Counter Bulletin Board of $2.50 per share on December 31, 2004. The value of
in-the-money options is calculated as the difference between the fair market value of the
common stock underlying the options at fiscal year end and the exercise price of the options.
Exercisable options refer to those options that are exercisable as of December 31, 2004, while
unexercisable options refer to those options that become exercisable at various times
thereafter. Employment Agreements Since the end of fiscal year 2003, the Company has hired a new President and Chief Executive
Officer, Russell C. Mix. On April 16, 2004, the Company signed an employment agreement with Mr.
Mix to serve as the Companys President and Chief Executive Officer for a term of three years. The
employment agreement provides for Mr. Mix to receive a salary of $170,000 per year and to be
eligible for an annual bonus based upon meeting certain agreed-upon Company goals and objectives.
Mr. Mix will receive salary payments for a one-year period if he is terminated without cause and in
certain other limited circumstances. Such circumstances include the Companys breach of the
employment agreement, a material and adverse change in Mr. Mixs duties, responsibilities and
authority, and a change in control of the Company. The employment agreement entitles Mr. Mix to
participate in the Companys employee-benefit plans on the same basis as benefits are made
available to the Companys other employees. Currently, the Company has no such benefit plans. A
copy of the Companys employment agreement with Mr. Mix is on file with the United States
Securities and Exchange Commission as an exhibit to the Company Quarterly Report on Form 10-QSB for
the quarter ended March 31, 2004, filed on May 10, 2004. In connection with Mr. Mixs appointment as the Companys President and Chief Executive
Officer, Mr. Mix also received options to purchase up to 600,000 shares of the Companys common
stock at an exercise price of $1.50 per share (the fair value of the Companys common stock on the
date of grant). 60,000 shares of the option vested immediately as of the date of grant (i.e., March
22, 2004); and 60,000 shares of the option shall vest on each anniversary date of the date of grant
beginning on March 22, 2005 and ending on March 22, 2008. The remaining 300,000 shares of the
option vest upon the earlier of (i) the ten-year anniversary date of the option grant or (ii) in
60,000-share increments upon the trading of the Companys common stock at certain threshold prices
ranging from $3.00 to $10.00 per share. Upon a change in control of the Company, all of the
options shall immediately vest. The option has a ten-year term during which all options must be
exercised or forfeited. On March 4, 2004, the Company entered into an employment agreement with Mr. Gary Watkins,
pursuant to which Mr. Watkins was retained as the Companys Vice President of Operations in
Oklahoma for a term of two years. The employment agreement provides for Mr. Watkins to receive a
salary of $100,000 per year. Mr. Watkins will receive salary payments for the term of the
employment agreement if he is terminated without cause. In connection with the employment
agreement, the Company issued Mr. Watkins options to purchase up to 200,000 shares of the Companys
common stock at an exercise price of $2.00 per share (the fair value of the stock on the date 44




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##### Table of Contents



of
grant). The option vests in two 100,000-share increments on January 1, 2005 and January 1, 2006,
and has a five-year term during which all options must be exercised or forfeited. Director Compensation Directors do not presently receive any compensation from the Company for attending board of
directors or committee meetings, although the Company does reimburse directors for expenses
incurred in attending such meetings. The Company has no official plan or policy for compensating
directors with stock options or stock awards. In September 2003, the Company granted a director an option for 133,333 shares of the
Companys common stock. The options vested immediately and had an exercise price of $.15 per
share. In November 2003, the Company granted a director an option for 83,333 shares of the
Companys common stock at an exercise price of $.75 per share, as an inducement for him to join the
Companys board of directors. 20,833 of these options vested immediately, and an additional 20,833
of such options vested on November 17, 2004. 20,833 options will vest on November 17, 2005 and the
remaining 20,834 options will vest on November 17, 2006. In October 2004, the Company granted a
director an option for 150,000 shares of the Companys common stock at an exercise price of $3.20
per share, as an inducement for him to join the Companys board of directors. This option vests in
30,000-share increments on each October 8 of the years 2005, 2006, 2007, 2008 and 2009. In January
2005, the Company granted a director an option for 150,000 shares of the Companys common stock at
an exercise price of $3.20 per share, as an inducement for him to join the Companys board of
directors. This option vests in 30,000-share increments on each January 24 of the years 2006, 2007,
2008, 2009 and 2010. In February 2005, the Company granted a
director an option for 250,000 shares of the Companys common
stock at an exercise price of $2.00 per share, as an inducement for
him to join the Companys Board of Directors. This option vests
as to 25,000 shares immediately and in 75,000-share increments on
February 9 of the years 2006, 2007 and 2008. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information with respect to beneficial ownership of the
Companys common stock as of the February 28, 2005 by: (i) each director of the Company, (ii) each
executive officer of the Company named in the Summary Compensation Table, (iii) all 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 800 Nicollet Mall, Suite 2690,
Minneapolis, Minnesota 55402, and each such person has sole voting and investment power with
respect to the shares of common stock set forth opposite their respective names. Number ofShares
    
    
    Percent ofBeneficially
    
    
    OutstandingName and Address of Shareholder
    
    Owned (1)
    
    
    Shares (1)Kenneth Brimmer (2)800 Nicollet Mall, Suite 2690
Minneapolis, MN 55402
    
    
    25,000
    
    
    
    *Robert Bonevc/o Artic Cat, Inc.
601 Brooks Ave. S.
Thief River Falls, MN 56701
    
    
    66,666
    
    
    
    *Russell Mix (3)1400 West Burbank Blvd.
Burbank, CA 91506
    
    
    262,221
    
    
    
    2.0
    %Brian Niebur (4)800 Nicollet Mall, Suite 2690
Minneapolis, MN 55402
        
    
    166,666
    
    
    
    1.3
    %Namon D. Witcher12 Beach Drive
Mystic, CT 06355
    
    
    
    
    
    
    *
 45




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##### Table of Contents



Number ofShares
    
    
    Percent ofBeneficially
    
    
    OutstandingName and Address of Shareholder
    
    Owned (1)
    
    
    Shares (1)All current executive officers anddirectors as a group (five persons) (5)
    
    
    520,553
    
    
    
    3.9
    %Perkins Capital Management, Inc. (6)730 East Lake Street
Wayzata, MN 55391-1769
    
    
    3,163,208
    
    
    
    23.9
    %Ronald E. Eibensteiner (7)U S Bancorp Building
800 Nicollet Mall, Suite 2690
Minneapolis, MN 55402
    
    
    1,763,246
    
    
    
    13.7
    %D. Bradley Olah (8)5950 County Road 101
Plymouth, MN 55446
    
    
    525,334
    
    
    
    4.1
    %Wayne W. Mills (9)5020 Blake Rd. S.
Edina, MN 55436
    
    
    767,000
    
    
    
    5.9
    %Morgan Street Partners, LLC (10)800 Nicollet Mall, Suite 2690
Minneapolis, MN 55402
    
    
    1,619,913
    
    
    
    12.6
    %Gary Watkins (11)1611 S. Yutica, No. 194
Tulsa, OK 79104
    
    
    900,000
    
    
    
    6.9
    %
   *
    
    less than 1 percent (1) Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission, 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 25,000 shares which Mr. Brimmer may purchase under currently exercisable options
for Spectres common stock. (3) Includes 221,666 shares which Mr. Mix may purchase under currently exercisable options for
Spectres common stock, 555 shares held in trust for the benefit of Mr. Mixs children, 20,000
shares of common stock owned by Prolific Publishing, Inc., a company of which Mr. Mix is an
affiliate (Prolific), and 20,000 shares of common stock issuable upon exercise of currently
exercisable warrants owned by Prolific. (4) Includes 133,333 shares which Mr. Niebur may purchase under currently exercisable options
for Spectres common stock. (5) Includes Messrs. Brimmer, Bonev, Mix, Niebur and Witcher. (6) As disclosed in a Schedule 13G/A filed on February 10, 2005, Includes 332,000 shares
which Perkins Capital Management, Inc. may purchase under currently exercisable warrants for
Spectres common stock. Perkins Capital Management, Inc. has sole power to vote or direct the vote
for 1,129,833 shares and sole power to dispose of or direct the disposition of all shares listed in
the table as beneficially owned by it. 46




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(7) As disclosed in a Schedule 13 G filed on February 7, 2005. Includes the following: (i)
143,333 shares held by Wyncrest Capital, Inc., a corporation that is wholly owned by Mr.
Eibensteiner; and (ii) 1,619,913 shares held by Morgan Street Partners, LLC, of which Mr.
Eibensteiner is the sole executive officer. Mrs. Eibensteiner also holds 92,666 shares in her IRA.
Mr. Eibensteiner disclaims beneficial ownership of the shares held in the IRA for the benefit of
his spouse and these shares are not included in the totals and are noted here for information only. (8) As disclosed in a Schedule 13G filed on February 11, 2005 and includes 100,000 shares
owned by Arcola Holdings, LLC, a limited liability company, of which Mr. Olah is the sole manager.
Does not include 166,666 shares which are owned by Mr. Olahs spouse and 21,000 shares held in
trust for Mr. Olahs children. Mr. Olah disclaims beneficial ownership of such shares. (9) As disclosed in a Schedule 13G/A filed on February 8, 2005, Includes 100,000 shares
issuable upon exercise of a warrant held by Blake Advisors, LLC, a limited liability company of
which Mr. Mills is the sole member and manager. (10) As disclosed in a Schedule 13D/A filed on February 7, 2005, Morgan Street Partners, LLC
has sole power to vote or direct the vote for and sole power to dispose of or direct the
disposition of all shares listed in the table as beneficially owned by it. Morgan Street Partners,
LLC, is a limited liability company, which is owned by Mr. Eibensteiners spouse and daughter,
beneficially owns 1,619,913 shares. (11) Includes 100,000 shares which Mr. Watkins may purchase under currently exercisable
options for Spectres common stock and 700,000 restricted shares of common stock subject to certain
forfeiture restrictions. Equity Compensation Plan Information Number of securitiesremaining available forfuture issuance underNumber of Securities to
    
    
    
    Weighted-average
    
    
    
    equity compensationbe issued upon exercise
    
    
    
    exercise price of
    
    
    
    plans (excludingof outstanding options,
    
    
    
    outstanding options,
    
    
    
    securities reflected inPlan Category
    
    
    warrants and rights
    
    
    
    warrants and rights
    
    
    
    column (a))(a)
    
    
    
    (b)
    
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    
    529,166
    
    
    
    $
    1.93
    
    
    
    
    1,770,834Equity compensation
plans not approved
by security holders
    
    
    
    4,535,719
    
    
    
    $
    2.83
    
    
    
    noneTotal
    
    
    
    5,064,885
    
    
    
    $
    2.74
    
    
    
    
    1,770,834
 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 47




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Plan at the Companys annual shareholder meeting held on August
26, 2004. Under the 1999 Plan, only Company officers and directors receive options. Furthermore,
only non-statutory options (i.e., options other than incentive stock options under the Internal
Revenue Code of 1986, as amended) to purchase shares of the Companys common stock 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 March 15, 2005, 662,500
options have been granted under the 2004 Plan. The 2004 Plan provides for the grant of both
incentive and non-statutory stock options. Incentive stock options granted under the 2004 Plan are
intended to qualify as incentive stock options under the Internal Revenue Code of 1986, as
amended. Non-statutory stock options granted under the 2004 Plan will not qualify as incentive
stock options. The board of directors adopted the 2004 Plan to provide a means by which Company
employees, directors, officers and consultants may be given an opportunity to purchase stock in the
Company, to assist in retaining the services of such persons, to secure and retain the services of
persons capable of filling such positions and to provide incentives for such persons to exert
maximum efforts for the success of the Company. 
 Item 12. Certain Relationships and Related Transactions The Company incurred expenses from a corporation, owned by a former director of the Company
and employing another director and officer of the Company, for rent and consulting services of
$102,166 and $60,942 during the years ended December 31, 2004 and 2003, respectively. Management
believes that all of the above-described transactions were conducted on terms no less favorable to
the Company than could be obtained from unrelated third parties. The Company incurred expenses from a corporation, partially owned by the CEO and director of
the Company, for consulting services and expense reimbursements of approximately $81,000 and $0
during the years ended December 31, 2004 and 2003, respectively. The Companys CEO also serves as
a director of the corporation. Management believes that all of the above-described transactions
were conducted on terms no less favorable to the Company than could be obtained from unrelated
third parties. In February 2004, the Company entered into a consulting agreement with D. Bradly Olah, a
greater-than-five-percent shareholder of the Company. Pursuant to the consulting agreement, Mr.
Olah received $12,500 per month for four months (ending as of May 31, 2004) in exchange for general
consulting services. On June 1, 2004, the Company entered into a new consulting agreement with Mr.
Olah 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 will be valued on the date performance is complete under
variable plan accounting using the Black-Scholes pricing model, the
options had a value of $750,000 at December 31, 2004, of which
$218,750 had been charged to expense during the year ended
December 31, 2004. On May 20, 2004, the Company closed on a $1.1 million loan from Pandora Select Partners, L.P.,
(Pandora) 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. The warrants were valued at
$225,000 using the Black- 48




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Scholes pricing model and will be expensed using the straight-line method
over the term of the promissory note. For the year ended December 31, 2004, the Company recorded
expense of $92,340 related to these warrants. On September 10, 2004, the Company closed on second loan from Pandora and Whitebox in the
aggregate amount of $1.5 million. At the time of this transaction, Pandora beneficially owned
greater than five percent of the Companys common stock. The September 10, 2004 promissory notes
are secured by the Companys assets, and are payable in interest only, at an annual rate of ten
percent commencing October 2004, with the principal balance due in March 2005. These promissory
notes are not convertible into our common stock. In connection with this financing, the Company
issued to each of Pandora and Whitebox five-year warrants to purchase 50,000 shares of common stock
at a price of $3.00 per share. In the investment agreements with Pandora and Whitebox, the Company
agreed to file a registration statement under the Securities Act covering the resale of the shares
issuable upon exercise of the warrants on or before November 3, 2004 and cause such registration
statement to be declared effective no later than February 1, 2005. Subsequently, Pandora, Whitebox
and the Company agreed in writing to delay the Companys obligation to file such registration
statement until November 30, 2004, and to commensurately delay the deadline for effectiveness until
February 28, 2005. The Company filed the required registration statement with the United States
Securities and Exchange Commission on November 30, 2004, and the registration statement was
declared effective on January 24, 2005. In connection with the financing, the Company paid a three
percent origination fee to an affiliate of the lenders. 
 Item 13. Exhibits (a) Exhibits Number
    
    Description3.1
    
    Articles of Incorporation (Incorporated by reference to the Registrants
Registration Statement on Form SB-2 (File No. 33-90084C) filed on March
7, 1995).3.2
    
    Bylaws (Incorporated by reference to the Registrants Registration
Statement on Form SB-2 (File No. 33-90084C) filed on March 7, 1995).3.3
    
    Amendment of Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.3 to the Registrants Annual
Report on Form 10-KSB filed on March 24, 2004).3.4
    
    Articles of Merger (incorporated by reference to Exhibit 3.4 to the
Registrants Annual Report on Form 10-KSB filed on March 24, 2004).3.5
    
    Amendment of Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to the Registrants Current
Report on Form 8-K filed on September 16, 2004).4.1
    
    Certificate of Designation for Series A Preferred Stock, filed with the
Minnesota Secretary of State on June 5, 2001 (incorporated by reference
to Exhibit 4.1 to the Registrants Annual Report on Form 10-KSB filed on
September 13, 2002).4.2
    
    Warrant for 200,000 shares of common stock, issued to Pandora Select
Partners, L.P. on May 20, 2004 (filed herewith).4.3
    
    Warrant for 50,000 shares of common stock, issued to Whitebox
Intermarket Partners, L.P. on September 10, 2004 (incorporated by
reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K
filed on September 16, 2004).4.4
    
    Warrant for 50,000 shares of common stock, issued to Pandora Select
Partners, L.P. on September 10, 2004 (incorporated by reference to
Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on
September 16, 2004).10.1
    
    Asset Purchase Agreement by and between Spectre Gaming, Inc. and
CallVision, Inc., dated June 28, 2002 (incorporated by reference to
Exhibit 10.1 to the Registrants Annual Report on Form 10-KSB filed on
September 13, 2002).10.2
    
    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 filed on May 10,
2004).10.3
    
    Employment Agreement by and between Spectre Gaming, Inc. and Russell
Mix, dated April
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Number
    
    Description16, 2004 (incorporated by reference to Exhibit 10.1 to
the Registrants Quarterly Report on Form 10-QSB filed on May 10, 2004).10.4
    
    Purchase Agreement by and between Spectre Gaming, Inc. and Pandora
Select Partners, L.P., dated May 20, 2004 (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on May
27, 2004).10.5
    
    Secured Convertible Promissory Note in favor of Pandora Select Partners,
L.P., dated May 20, 2004 (incorporated by reference to Exhibit 10.2 to
the Registrants Current Report on Form 8-K filed on May 27, 2004).10.6
    
    Purchase Agreement by and among Spectre Gaming, Inc., Pandora Select
Partners, L.P. and Whitebox Intermarket Partners, L.P., dated September
10, 2004 (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on September 16, 2004).10.7
    
    Secured Promissory Note in favor of Pandora Select Partners, L.P., dated
September 10, 2004 (incorporated by reference to Exhibit 10.6 to the
Registrants Current Report on Form 8-K filed on September 16, 2004).10.8
    
    Secured 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).10.9
    
    Amendment to Promissory Note by and between Spectre Gaming, Inc. and
Pandora Select Partners, L.P., dated May 10, 2005 (amending item 10.7
above) (filed herewith).10.10
    
    Amendment to Promissory Note by and between Spectre Gaming, Inc. and
Whitebox Intermarket Partners, L.P., dated May 10, 2005 (amending item
10.8 above) (filed herewith).10.11
    
    License Agreement with Bally Gaming, Inc., dated June 30, 2004
(incorporated by reference to Exhibit 10.1 to the Registrants Quarterly
Report on Form 10-QSB filed on August 13, 2004).14
    
    Code of Ethics (filed herewith).23.1
    
    Consent of Virchow, Krause & Company, LLP (filed herewith).31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer (filed herewith).31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer (filed herewith).32.
    
    Section 1350 Certification (filed herewith).
 
 Item 14. Principal Accountant Fees and Services The Board of Directors of the Company selected Virchow, Krause & Company, LLP (Virchow
Krause), certified public accountants with offices in Minneapolis, Minnesota, to audit the
Companys financial statements for the years ended December 31, 2004 and 2003. The following table
details the fees paid to Virchow Krause for the years ended December 31, 2004 and 2003. 2004
    
    
    2003Audit Fees
    
    $
    36,800
    
    
    $
    9,575Audit-Related Fees
    
    
    1,000
    (1)
    
    
    Tax Return Preparation
Fees
    
    
    1,500
    
    
    
    5,560All Other Fees
    
    
    12,450
    (2)
    
    
    11,754
    (2)Total
    
    $
    51,750
    
    
    $
    26,889
   (1)
    
    Fees related to review of Form SB-2 filing.(2)
    
    Fees related to audit of potential acquisition and general research projects. The policy of the Companys audit committee is to review and preapprove both audit and
non-audit services to be provided by the independent auditors (other than with de minimis
exceptions permitted by the Sarbanes-Oxley Act of 2002). This duty may be delegated to one or more
designated members of the audit committee with any such 50




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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. 51




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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/ Brian D. NieburBrian D. NieburChief Financial Officer
Date: March 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signatures
    
    Title
    
    Date/s/ Kenneth Brimmer

Kenneth Brimmer
    
    Chairman
(Principal Executive Officer)
    
    March 28, 2005/s/ Russell Mix

Russell Mix
    
    Chief Executive Officer and Director
    
    March 28, 2005/s/ Brian D. Niebur

Brian D. Niebur
    
    Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
    
    March 28, 2005/s/ Robert Bonev

Robert Bonev
    
    Director
    
    March 28, 2005/s/ N.D. Witcher

N.D. Witcher
    
    Director
    
    March 28, 2005
 52