**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-KSB/A**


(Amendment
      No. 1)





(Mark
      One)





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


FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2005





 ̈ TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


FOR
      THE
      TRANSITION PERIOD FROM __________ TO __________


COMMISSION
      FILE NUMBER ________________________________





**PHANTOM
      FIBER CORPORATION**


(Name
      of
      small business issuer in its charter)





**DELAWARE**
              (State
                or other jurisdiction of incorporation or organization)
            **04-2451506**
              (I.R.S.
                Employer Identification No.)




**144
      Front Street, Suite 580, Toronto, Ontario, Canada M5J
      2L7**


(Address
      of principal executive offices) (Zip Code)





Issuer’s
      telephone Number: **(416)
      703-4007**





Securities
      registered under Section 12(b) of the Exchange Act: None.





Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par
      value





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes **T** No  ̈





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained 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 this Form 10-KSB or any
      amendment to this Form 10-KSB.  ̈





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No **T**





State
      issuer’s revenues for its most recent fiscal year. $224,956





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the average bid and asked price of
      such
      common equity as of March 31, 2006, was $8,222,559.





As
      of
      March 31, 2006, the issuer had 14,950,108 outstanding shares of Common
      Stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**





Transitional
      Small Business Disclosure Format (check one): Yes  ̈ No **T**









**EXPLANATORY
          NOTE:** This Amendment to Phantom Fiber Corporation’s annual report on
          Form 10-KSB for the fiscal year ended December 31, 2005 is filed to correct
          certain errors in the financial statements filed with such report. Specifically,
          the following errors are corrected: (1) in the Statements of Cash Flows
          for
          2004, the “Repayment of obligation under capital leases” amount was revised from
          12,871 to (12,831); (2) in the Statements of Cash Flows for 2005 and 2004,
          the
          amounts previously reported as interest paid under Non cash transactions
          was
          separated from Non cash transactions; and (3) corrections were made to
          the
          amounts previously reported as future minimum payments due under capital
          leases
          in Note 4. Property, Plant and Equipment.





**TABLE
      OF CONTENTS**





**Page****PART
                I**Item
                1. Description of Business
            1Item
                2. Description of Property
            4Item
                3. Legal Proceedings
            4Item
                4. Submission of Matters to a Vote of Security Holders
            4**PART
                II**Item
                5. Market for Common Equity and Related Stockholder
                Matters
            5Item
                6. Management’s Discussion and Analysis or Plan of
                Operation
            7Item
                7. Financial Statements
            16Item
                8. Changes In and Disagreements with Accountants on Accounting and
                Financial Disclosure
            16Item
                8A. Controls and Procedures
            16Item
                8B. Other Information
            16**PART
                III**Item
                9. Directors, Executive Officers, Promoters and Control
                Persons;Compliance
                With Section 16(a) of the Exchange Act
            17Item
                10. Executive Compensation
            19Item
                11. Security Ownership of Certain Beneficial Owners and Management
and
                Related Stockholder Matters
            22Item
                12. Certain Relationship and Related Transactions
            24Item
                13. Exhibits
            26Item
                14. Principal Accountant Fees and Services
            27**SIGNATURES**
            28











**PART
      I**





**Item
      1. Description of Business.**





**Organizational
      History**





On
      July
      7, 2004, pursuant to a Share Exchange Agreement entered into as of April 21,
      2004, the Company acquired Phantom Fiber Corporation, a Canadian corporation
      ( ***“Phantom
      Fiber Canada”*** ),
      and
      its wholly owned subsidiary, Phantom Fiber Inc., also a Canadian corporation.
      Pursuant to the Share Exchange Agreement, the Company issued 137,410,735 shares
      of common stock (before giving effect to a one-for 20 reverse stock split)
      to
      the shareholders of Phantom Fiber Canada and 30,000,000 shares of common stock
      and warrants to purchase 15,000,000 shares of common stock (before giving effect
      to a one-for 20 reverse stock split) to debenture holders of Phantom Fiber
      Canada in exchange for all of the issued and outstanding shares of capital
      stock
      of Phantom Fiber Canada and subordinated convertible debentures of Phantom
      Fiber
      Canada.





The
      Company conducts its business through its wholly owned subsidiaries in Canada,
      being Phantom Fiber Corporation and Phantom Fiber, Inc. Throughout this report,
      references to “Phantom Fiber,” the “Company,” “we,” “us,” and “our” refer to
      Phantom Fiber Corporation together with its wholly owned
      subsidiaries.





**Overview**





Phantom
      Fiber is a developer of wireless software applications and mobile solutions
      that
      empower enterprises with high-performance functionality on today’s mobile
      devices and global communication networks. The Company has developed a wireless
      platform and supporting software developer kit that extends the rich multimedia
      content and user experience of existing Internet web sites securely and
      instantly to PDA’s and mobile phones. While applications based on this platform
      can be applied to any enterprise requiring a mobile solution we have been most
      successful with clients that require speed and a rich user experience in their
      mobile solutions. Potential applications include remote monitoring of
      facilities, stock research, real time quoting and transacting, logistics and
      distribution, health care (including real time distribution of secure patient
      information), gaming and entertainment, and live streaming video.





Phantom
      Fiber derives revenue through the sale of its proprietary software and custom
      integration services. The Company’s business model generates initial revenue
      from integration and customization services and recurring revenue from
      usage-based licensing. The Company combines a low implementation cost with
      a
      rapid deployment strategy using reusable software objects to reduce initial
      purchase barriers. Once deployed, the platform utilizes Phantom Fiber’s
      proprietary Smart StreamingTM data transmission technique to deliver high-speed
      client side performance that intuitively adapts to device and network
      properties. Information is securely encased and delivered with complete
      end-to-end encryption on a variety of handset operating systems including Java,
      Palm, Research In Motion, i-Mode, Symbian and Windows CE platforms.





With
      the
      ability to offer rich graphics and high transaction speed, the Company’s initial
      market strategy was to enter into the e-gaming market. This industry was
      attractive since it is a rapid adopter of new enabling technologies and
      currently has no single significant provider of wireless solutions. The Company
      plans to extend its marketing strategy into the enterprise software markets.
      Potential future markets include the banking and brokerage segments, health
      care
      and insurance. Phantom Fiber also intends to explore a channel strategy with
      enterprise software providers, such as SAP and Oracle, to extend their installed
      base to the mobile Internet.





The
      Company charges a one-time integration fee to implement and customize the
      product to match the functionality of the client’s Internet offerings. For
      clients with a potential client base or reach in excess of 10,000 users in
      which
      a service charge or transaction fee exists, Phantom Fiber also participates
      in
      that revenue stream via a revenue sharing arrangement.




1


**Our
      Wireless Platform**





The
      Company’s wireless platform is built using a building block or object approach.
      The technical architecture was chosen to protect performance and ensure
      scalability on the device. Mobile devices commercially available at this time
      do
      not yet have the storage, memory, and computing power of a personal computer.
      Phantom Fiber created this object oriented programming structure and framework
      to ensure functional autonomy of its platform. Some of the primary features
      of
      the platform are listed below:





***Enhanced
      user experience:*** The
      wireless framework offers a rich graphic experience without compromising on
      performance. This is the primary reason the gaming sector has embraced the
      technology. The visual presentation is available today and can be deployed
      on
      existing wireless data networks.





***Cross-platform
      & Network compatibility:*** **** The
      client-side software supports Windows/CE, Palm, Symbian, i-Mode, Blackberry,
      Smart-Phone and Java-enabled phones (J2ME). This cross-platform compatibility
      eliminates the need to recompile the application for devices running different
      operating systems, using different devices and running on different network
      protocols. The solution is network carrier independent. Therefore solutions
      can
      be deployed and run globally with various network providers without any change
      to the software. Being device and network agnostic is a key marketing feature
      for wireless carriers, device manufacturers, and content providers.





***Performance:*** Current
      browser based solutions format the presentation prior to transmission and then
      send the entire screen layout across the wireless network to the wireless
      device. The result is long delays between responses and inquiries. With Phantom
      Fiber’s data communication technology and client-side software, the client can
      deliver Internet type speed across networks. This approach puts less demand
      on
      the server and network and allows the Company to provide the user with improved
      performance and better graphic presentation.





Some
      of
      the other features inherent to the framework include a number of unique and
      proprietary functions such as:





 ̈
            *Secure
                State Management*-
                Maintains a checkpoint connection in “no signal” areas. Should a user lose
                signal for a period of time, their mobile device will auto refresh
                once a
                connection is re-established. This function takes place without any
                action
                required by the user.


 ̈
            *Security*-
                The communication component of the Company’s software uniquely delivers an
                end-to-end encrypted secure solution. By eliminating reliance on
                the
                browser and the network gateway, there is an increase in both security
                and
                performance while simplifying the technical
                implementation.


 ̈
            *SmartStreamTM*-
                Communications are handled using compression to provide landline
                Internet
                speed on today’s wireless devices. SmartStream also queues and prioritizes
                transmissions to assure the quality of user experience and application
                responsiveness.


 ̈
            *Client
                Libraries*-
                Presentation graphics and animation are stored in local device libraries
                eliminating redundant delivery and creating a vivid user experience
                without compromising performance.


 ̈
            *Store
                & Forward*-
                Users without wireless connectivity can use Phantom Fiber’s software
                through PC connections and their device cradle. The software incorporates
                an encrypted database on the device. Users can experience the same
                functionality whether or not they have a current internet connection.
                This
                also allows clients to use the device in shielded or poorly serviced
                cellular zones.





**Market
      Strategy**





In
      implementing its initial strategy, Phantom Fiber established the following
      criteria:





·
            Users
                were likely to be “early adopters” of wireless technologies;


·
            There
                was no dominant competition apparent to Phantom Fiber; and


·
            The
                Company could implement a stable recurring revenue model.





Based
      on
      these factors, the Company initially targeted the e-gaming market. As the
      platform becomes more established the Company plans to enter the financial
      services and the large enterprise application markets with emphasis on
      transaction support and processing.




2





**Competition**





The
      wireless applications market is highly competitive and characterized by frequent
      product introductions, evolving wireless platforms and new technologies. As
      demand for applications continues to increase, Phantom Fiber expects new
      competitors to enter the market and existing competitors to allocate more
      resources to develop and market applications. As a result, competition in the
      wireless applications market will intensify.





The
      Company divides the current and potential competition in the wireless
      applications market into three groups: focused providers, gaming specific
      providers and systems integrators. Each of these groups is described
      below.





***Focused
      Providers:*** These
      are companies that have built a wireless set of tools to address the needs
      of a
      specific vertical market. Currently most of the competition in this sector
      consists of micro-browser based products with the majority of their revenue
      derived from infrastructure and ongoing professional services. For these
      companies to adapt their offering to next generation devices would require
      re-architecting the way they conduct business risking a loss of the
      infrastructure and professional services components of their business. They
      have, to date, focused on financial institutions or carriers for market
      penetration. These competitors include Aligo, Infowave, Aether, 724, and Sybase,
      among others.





***Gaming
      Specific Providers:*** There
      are a number of SMS and WML game providers in today’s market, including Summus,
      Jamdat, and Airborne Entertainment. The Company believes these gaming specific
      providers have low penetration into the real time gaming environment due to
      risk
      of security breaches and latency issues inherent to SMS and WML as well as
      technical restrictions that exist on the handheld devices. Further, these
      companies often sell their own games and content thereby competing with the
      existing casino software providers who prefer to offer their own games. Phantom
      Fiber does not produce content including games preferring to facilitate the
      casino’s existing ones. In this aspect Phantom Fiber has no competitors.





***Systems
      Integrators:*** Custom
      solutions will still consume some of the wireless applications market share
      as
      large organizations continually try to build ground-up solutions for each
      client, under the assumption that wireless is easy and can be built without
      the
      aid of tools and wireless platforms. These companies include IBM, EDS,
      Accenture, CGI and BEA Systems. Phantom Fiber plans for some systems integrator
      companies to become future clients and value added resellers of its suite of
      products.





With
      any
      growing and expanding market new competitors will emerge. The Company believes
      this is particularly true in the wireless market due to the prevalence of open
      standards and trend towards the consolidation of computing power with telephone
      handsets.





**Government
      Regulation**





Together
      with our licensees, the Company is subject to various domestic and foreign
      laws
      applicable in the jurisdictions in which each company operates. At the present
      time, the Company’s gaming related software clients sell directly to licensees
      that hold government licenses to operate Internet gaming sites. Gaming
      regulations are based on policies that are concerned with: (i) the prevention
      of
      unsavory or unsuitable persons from having a direct or indirect involvement
      with
      gaming; (ii) the establishment and maintenance of responsible accounting
      practices and procedures; (iii) the maintenance of effective controls over
      the
      financial practices of licensees, including the establishment of minimum
      procedures for internal fiscal affairs and the safeguarding of assets and
      revenues, providing reliable record keeping and requiring the filing of periodic
      reports with the governing jurisdictions; (iv) the prevention of cheating and
      fraudulent practices; and (v) the provision of a source of government revenue
      through taxation and licensing fees.





Some
      jurisdictions have introduced regulations attempting to restrict or prohibit
      Internet gaming, while other jurisdictions have taken the position that Internet
      gaming is legal and/or have adopted or are in the process of considering
      legislation to regulate Internet gaming. For example, the United Kingdom intends
      to establish a regulated market for online gaming. The Isle of Man and Alderney
      - both part of the British Isles - already have fully regulated environments
      for
      Internet gaming, based on high standards consistent with land-based gaming.
      Opposing views are developing in Europe. Some European countries, including
      Italy, Germany and Holland where there are state-owned monopolies, are taking
      action aimed at banning foreign online gaming operators. Such actions by these
      European Union member states are in contrast with a favorably viewed ruling
      from
      the European Court of Justice and have prompted the European Commission to
      look
      at creating new legislation that could harmonize online gaming within the
      European Union, in line with the European Commission’s goal to encourage a free
      and open cross-border market.




3





Since
      companies and consumers involved in Internet gaming are located around the
      globe, including Phantom Fiber’s clients’ licensees and their players, there is
      uncertainty regarding which government has authority to regulate or legislate
      the industry. However, legislation and legal action designed to restrict or
      prohibit Internet gaming may be adopted in the future in the United States
      or
      other jurisdictions. Future decisions may have a material impact on Phantom
      Fiber’s operations and financial results. Existing legislation, including United
      States federal and state statutes, have been and could continue to be construed
      to prohibit or restrict gaming through the use of the Internet and therefore
      the
      wireless extension to such Internet sites. Therefore, there is a risk that
      legal
      proceedings could be initiated against the Company’s licensees, Internet service
      providers, credit card processors, advertisers and others involved in the
      Internet gaming industry, penalties, fines, injunctions or other remedies or
      restrictions being imposed. Such proceedings could have a material adverse
      effect on the Company’s business, revenues, operating results and financial
      condition. New laws and regulations that address issues such as user privacy,
      pricing, online content regulation, taxation, advertising, intellectual
      property, information security, and the characteristics and quality of online
      products and services may be enacted. The adoption of new laws or regulations
      relating to mobile, or particular mobile applications or interpretations of
      existing laws, could decrease the present growth in use of mobile applications,
      decrease the demand for the Company’s products and services, increase its cost
      of doing business or could otherwise have a material adverse affect on its
      business, revenues, operating results and financial condition.





**Employees**





As
      of
      March 31, 2006 the Company had 27 full time employees and no part time
      employees. The Company has made it a priority to build and maintain a good
      working environment for employees. Turnover rates have been low and employees
      are active in referring their colleagues to the Company. The Company considers
      relations with its employees to be good. The overall number of resources
      employed by Phantom Fiber increased by 11 in 2005.





**Item
      2. Description of Property.**





The
      Company maintains its corporate executive office at 144 Front Street, Suite
      580,
      Toronto, Ontario, Canada M5J 2L7. The offices are leased and are comprised
      of
      6,200 square feet, with a monthly rental of $8,000, expiring in April 2009.





**Item
      3. Legal Proceedings.**





The
      Company is not a party to any pending legal proceeding, nor is its property
      the
      subject of a pending legal proceeding, that is not in the ordinary course of
      business or otherwise material to the financial condition of its business.
      None
      of the Company’s directors, officers or affiliates is involved in a proceeding
      adverse to its business or has a material interest adverse to its
      business.





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





On
      December 12, 2005, the following actions were approved pursuant to the written
      consent of a majority of the shareholders in lieu of a special meeting of the
      stockholders:





1.  To
      approve and authorize the Company to effect a one-for-20 reverse split of its
      issued and outstanding shares of common stock, which was given effect by the
      OTC
      Bulletin Board and the Company’s common stock transfer agent during May 2005;





2.  To
      ratify
      any and all actions we have taken to date with respect to the approved
      one-for-20 reverse split of the issued and outstanding shares of common stock;




4





3.  To
      increase the number of shares of common stock subject to the 2000 Stock Option
      Plan after the one-for-20 reverse stock split from 1,000,000 shares to 2,000,000
      shares; and





4.  To
      authorize the issuance of 10,000,000 shares of preferred stock.





The
      above
      actions approved by the holders of 143,400,000 shares (approximately 7,170,000
      shares post 1:20 reverse split) of the Company’s common stock, representing
      approximately 52% the total outstanding shares. Notwithstanding the foregoing,
      the Company will be submitting each of the above items to a vote at the
      Company’s upcoming 2006 annual shareholders meeting and the Company will not
      deem the above actions to have been approved unless and until they are approved
      at the 2006 annual shareholders meeting.





**PART
      II**





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





**Market
      Information**





The
      Company’s common stock is currently quoted on the OTC Bulletin Board under the
      symbol “PHFB.” For the periods indicated, the following table sets forth the
      high and low bid prices per share of common stock. These prices represent
      inter-dealer quotations without retail markup, markdown, or commission and
      may
      not necessarily represent actual transactions.





Fiscal
                2006
            Fiscal
                2005
            Fiscal
                2004Quarter
                Ended
            High
            Low
            High
            Low
            High
            LowMarch
                31
            $0.70
            $0.45
            $2.00*
            $0.80*
            $2.60*
            $0.60*June
                30
            —
            —
            $1.45
            $0.60*
            $3.60*
            $1.40*September
                30
            —
            —
            $1.25
            $0.59
            $2.20*
            $0.60*December
                31
            —
            —
            $0.73
            $0.45
            $2.00*
            $0.60*





*Prices
      adjusted to reflect a one-for-20 reverse stock split given effect by the OTC
      Bulletin Board on May 5, 2005.





**Holders**





As
      of
      March 31, 2006, shares of common stock were held by approximately 434
      stockholders of record. The number of record holders was determined from the
      records of the Company’s transfer agent and does not include beneficial owners’
common stocks whose shares are held in the names of various securities brokers,
      dealers and registered clearing agencies. The Company’s transfer agent is
      PacWest Transfer, LLC.





**Dividends**





Phantom
      Fiber has not declared any dividends to date. The Company has no present
      intention of paying any cash dividends on its common stock in the foreseeable
      future, as any earnings will be used to generate growth. The decision on the
      payment of dividends, in the future, rests within the discretion of the Board
      of
      Directors and will depend, among other things, upon earnings, capital
      requirements and financial condition, as well as other relevant factors. There
      are no restrictions in the Company’s certificate of incorporation or bylaws that
      restrict it from declaring dividends.




5





**Recent
      Sales of Unregistered Securities**





During
      the fiscal year ended December 31, 2005 and the quarter ended March 31, 2006
      Phantom Fiber issued the below securities without registration under the
      Securities Act of 1933, as amended (the “Securities Act”). ***All
      below transactions prior to May 5, 2005 are described on a pre-1:20 reverse
      stock split which the OTC Bulletin Board and the Company’s transfer agent gave
      effect to on May 5, 2005.***





All
      of
      the below unregistered issuances of securities were made pursuant to the
      exemptions from registration requirements provided by Section 4(2) of the
      Securities Act and/or Regulation D, promulgated thereunder. Except as expressly
      set forth below the individuals and entities to which the Company issued
      securities are unaffiliated with it. For each of such sales, no advertising
      or
      general solicitation was employed in offering the securities. The offerings
      and
      sales were made to a limited number of persons, all of whom were accredited
      investors, business associates of the Company or its executive officers, and
      transfer was restricted by it in accordance with the requirements of the
      Securities Act. For each transaction exempt pursuant to Regulation D, each
      of
      the below security holders who were not Phantom Fiber executive officers
      represented that they are accredited and sophisticated investors, that they
      are
      capable of analyzing the merits and risks of their investment, and that they
      understand the speculative nature of their investment. Furthermore, all of
      the
      below-referenced persons had access to the Company’s Securities and Exchange
      Commission filings.





On
      February 18, 2005, the Company issued 500,000 restricted shares of common stock
      to Neil Greenburg as consideration for partial repayment of a loan. This
      transaction was exempt from registration requirement pursuant to Section 4(2)
      of
      the Securities Act.





On
      March
      6, 2005, the Company issued 372,685 restricted shares of common stock to various
      holders of senior subordinated convertible debentures which matured and were
      automatically converted in accordance with their terms. This transaction was
      exempt from registration requirement pursuant to Section 4(2) of the Securities
      Act.





On
      April
      26, 2005, the Company sold 5,000,000 units at a price of $0.05 per unit. Each
      unit is comprised of one share of common stock and one common stock purchase
      warrant. Each common stock purchase warrant entitles the holder to purchase
      one
      additional common share at a price of $0.10 if exercised within 30 months from
      the closing of the private placement. This transaction was exempt from
      registration requirement pursuant to Section 4(2) of the Securities
      Act.





On
      April
      26, 2005, the Company sold 50,000 units at a price of $1.00 per unit. Each
      unit
      is comprised of one share of common stock and one common stock purchase warrant.
      Each common stock purchase warrant entitles the holder to purchase one
      additional common share at a price of $2.00 if exercised within 30 months from
      the closing of the private placement. This transaction was exempt from
      registration requirement pursuant to Section 4(2) of the Securities
      Act.





On
      December 8, 2005, the Company sold 1,560,000 shares of common stock and warrants
      to purchase 1,560,000 shares of common stock to 15 accredited investors
      resulting in aggregate gross proceeds of $858,000. The common stock and warrants
      were sold as units, with each unit consisting of one share of common stock
      and a
      warrant to purchase one share of common stock, for a per unit purchase price
      of
      $0.55. Each warrant entitles the holder to purchase one share of common stock
      at
      $1.10 per share, exercisable for a period of three years. Each of the investors
      had the right to exchange their units for any equity securities or other
      security which may be sold by the Company during the period ending 45 days
      after
      closing of the transaction. Each of the investors exercised their right to
      exchange their units for securities sold by the Company in a private placement
      which closed on January 9, 2006.





On
      January 9, 2006, the Company sold (a) $3,500,000 principal amount of senior
      convertible notes, and (b) warrants to purchase 7,000,000 shares of common
      stock, to 16 accredited investors. Participants in a private placement which
      closed on December 8, 2005 for gross proceeds of $858,000 exchanged the
      securities they previously purchased for an investment in the senior convertible
      notes and warrants based on the dollar amount of their prior investment,
      bringing the total gross proceeds from the transactions to $3,500,000. The
      senior convertible notes bear interest at 1% per annum payable semi-annually,
      they mature two years from the date of issuance and are convertible into shares
      of common stock at the investors’ option at $0.50 per share, subject to
      adjustment. The warrants are exercisable until three years from the date of
      issuance. Half of the warrants are exercisable at a purchase price of $1.50
      per
      share and the other half of the warrants are exercisable at a purchase price
      of
      $0.56 per share. The investors may exercise the warrants on a cashless basis
      if
      the shares of common stock underlying the warrants are not then registered
      pursuant to an effective registration statement. This transaction was exempt
      from registration requirement pursuant to Section 4(2) of the Securities Act
      and
      Rule 506 promulgated thereunder.




6





Oberon
      Securities, LLC acted as placement agent in connection with the sale of
      $2,642,000 principal amount of the senior convertible notes and related warrants
      on January 9, 2006 and was paid $241,730 cash compensation and issued 483,460
      non-assignable compensation warrants exercisable until three years after the
      date of issuance, with one-half of such compensation warrants entitling the
      holder to purchase shares of common stock at $1.50 per share and the other
      half
      of the compensation warrants entitling the holder to purchase shares of common
      stock at a purchase price of $0.56 per share. The Company also granted other
      placement agents in connection with the sale of $858,000 principal amount of
      the
      senior convertible notes and related warrants compensation in the form of 87,620
      restricted shares of common stock. These issuances were exempt from registration
      requirement pursuant to Section 4(2) of the Securities Act.





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





**Forward-Looking
      Statements**





The
      information in this annual report contains forward-looking statements. All
      statements other than statements of historical fact made in this report are
      forward looking. In particular, the statements herein regarding industry
      prospects and future results of operations or financial position are
      forward-looking statements. Forward-looking statements reflect management's
      current expectations and are inherently uncertain. Actual results may differ
      significantly from management's expectations.





The
      following discussion and analysis should be read in conjunction with the
      consolidated financial statements of Phantom Fiber included herewith. This
      discussion should not be construed to imply that the results discussed herein
      will necessarily continue into the future, or that any conclusion reached herein
      will necessarily be indicative of actual operating results in the future. Such
      discussion represents only the best present assessment of management.





**Current
      Business and Outlook**





Phantom
      Fiber provides wireless technology products and services that allow users to
      experience internet-like graphics and internet-like speed in an end-to-end
      highly secure solution for multiple mobile platforms. The Company’s customers
      include cellular network carriers such as Wind (Italy), Vodophone and Telus
      Mobility (Canada), and several online gaming, horse racing, fixed odd game
      providers and sports book service providers companies including Golden Palace,
      Real-Time Gaming, WagerWorks, Interactive Gaming and Wagering, Digital Gaming
      Solutions, Kiron Interactive, Bet Options, Tribeca Tables, Wager Works, Orbis
      ,
      IQ-Ludorum, CaribSports, and Parlay Entertainment. The Company also has clients
      in the financial and mobile payments vertical (such as FireOne, Citadel, and
      Navaho Networks), logistics and distribution software providers, and the
      security and remote-monitoring industries.





Phantom
      Fiber’s gaming and sports book customers typically enter into exclusive
      multi-year, revenue-sharing agreements, under which they use Phantom Fiber’s
      technology to offer games, content or other services to their subscribers and
      are charged a monthly user fee or percentage of the revenues or income generated
      from those games.





In
      2005,
      the Company continued to secure several multi-year contracts with software
      providers to the online gaming and wagering industry. The growing backlog of
      sites to integrate and deploy has forced the Company to shift its focus and
      resources to provide functionality to address the demands of this specific
      market. This service includes the following: affiliate tracking; multi-lingual
      and multi-currency support; enhanced bandwidth optimization; integrated
      refer-a-friend; online registration; a simplified single click install wizard;
      enhanced client tracking and interactive technical support. The Company has
      determined that by working closer with its client operators it can significantly
      influence adoption by end users. The Company’s marketing team has been enhanced
      to support the existing and growing client base to serve these needs.




7





In
      the
      past year, the number of mobile phones and Personal Digital Assistants (PDA’s)
      supported by Phantom Fiber’s software has increased from 20 devices at the end
      of 2004 to over 1,000 handheld mobile phones and PDA’s currently produced.
      Management believes that ongoing success will stem from three areas: (1)
      contract fulfillment through client deployments; (2) direct involvement in
      the
      marketing and user adoption strategies of the operator; and (3) ongoing product
      development to expand the Company’s product and service offerings and increase
      its competitive position. The Company intends to enhance its product offering
      by
      introducing new features and products as the market demands. As part of its
      product development process, the Company has worked closely with its customers
      and its distribution channels to ensure that such market needs are met.





Pursuant
      to the Share Exchange Agreement entered into as of April 21, 2004 (described
      under “Organizational History” on page 1 of this report), the Company assumed a
      number of obligations incurred by its predecessor business “Pivotal Self-Service
      Technologies.” totaling $493,400. By the end of fiscal 2005 the Company had
      settled or repaid approximately $301,400 of these obligations and had made
      arrangements on the remaining $192,000 Eliminating these matters is an important
      step towards freeing management to focus on sales and technology in 2006 and
      beyond. The recent financing closed on January 10, 2006 (described under
“Subsequent Events” below) was another major advancement enabling the Company to
      increase in staff and execute on its plans. These plans include expanding to
      London, England, the US and Costa Rica in the second quarter of 2006, enhancing
      product support and accelerating deployment of new products and client
      sites.





Three
      markets management believes will dominate the Company’s efforts in 2006 will
      be:





·
            the
                online gaming, horse racing and sports book sectors;




·
            the
                live video streaming and interactive mobile content sectors; and




·
            the
                payment processing sector allowing a seamless transition into a mobile
                wallet or mobile commerce market in subsequent years.







The
      Company’s product development program and establishment of new long-term
      relationships, globally, is expected to expand the distribution channels for
      its
      product and service offerings and generate meaningful revenue streams. This
      remains key to Phantom Fiber’s objective of increasing brand awareness and
      market share on a basis that enhances profitability and shareholder
      value.





**Results
      of operations**




In
      fiscal
      2005 the operating loss, before other income and expenses, increased by $352,070
      to $2,068,180 from $1,716,110 in fiscal 2004. After the net impact of other
      income and expenses the net loss for the fiscal year ended December 31, 2005
      was
      $2,725,200 ($0.20 per share) compared to a net loss of $1,524,049 ($0.15 per
      share) for the same period in the preceding year an increase of $1,201,151.
      The
      Company is continuing the transition from a product development enterprise
      into
      commercial rollout of its software **** that
      started in fiscal 2004. At the same time the Company is continuing to conduct
      extensive research and development to ensure its software keeps pace with
      changes in technology and market needs.





**Revenue**





Total
      revenue increased by $133,445 from $91,511 for the year ended December 31,
      2004
      to $224,956 for the year ended December 31, 2005, an increase of 146%.
      Professional services revenue increased by $49,065 from $56,636 in fiscal 2004
      to $105,701 in fiscal 2005. The Company implemented 15 sites for customers
      in
      2005 compared to eight in 2004. There were three projects initiated during
      2005
      that will be completed in fiscal 2006.





User
      fees
      and royalties are based on number of users and are recognized monthly. User
      fees
      and royalties increased by $84,380 from $34,875 in 2004 to $119,255 in 2005.
      There were 23 client sites live in 2005 compared to eight in 2004. The number
      of
      potential users will increase as further client sites are
      implemented.




8





**Operating
      expenses**





Total
      operating expenses increased $485,515 from $1,807,621 for the year ended
      December 31, 2004 to $2,293,136 for the year ended December 31, 2005, an
      increase of 27%. Operating expenses are grouped into Research and development,
      Sales and marketing and General and administrative. The change in each of these
      groupings is described below:





**Research
      and development**





**2005**
            
            **2004**
            
            **Change**
            
            **%**Salaries
                and benefits
            
            $
            1,051,486
            
            $
            796,458
            
            $
            255,028
            
            
            32Other
                expenses
            
            
            11,585
            
            
            12,999
            
            
            (1,414
            )
            
            (11
            )Less:
                Investment tax credits
            
            
            (129,572
            )
            
            (237,199
            )
            
            107,627
            
            
            (45
            )Total
            
            $
            933,499
            
            $
            572,258
            
            $
            361,241
            
            
            63





The
      total
      research and development costs increased by $361,241 to $933,499 in 2005 from
      $572,258 in the prior year. R&D salaries and benefits paid to develop the
      product and assist in implementation increased from $796,458 in 2004 to
      $1,051,486 in 2005 an increase of $255,028 (32%). The Company added 11 people
      in
      2005. This increase reflects the need for resources to continue to extend the
      capability of the product and to support the increased in product development
      activities and customer deployments. Other R&D expenses include software
      licenses, phone usage and other miscellaneous items. These costs decreased
      from
      $12,999 in fiscal 2004 to $11,585 in fiscal 2005. The Company is eligible for
      tax credits offered by federal and provincial governments in Canada for spending
      on research and development. In fiscal 2004 to the Company filed and received
      $237,199 in cash refundable investment tax credits. After the reverse
      acquisition the operating company ceased to be a Canadian Controlled Private
      Company (i.e. a designation in Canadian tax law for private companies that
      are
      owned at least 50% by residents of Canada). As a result of this change of status
      of the Company, cash refundable investment tax credits are no longer available
      from the federal government and, in aggregate, declined $107,627 to $129,572
      in
      fiscal 2005 from $237,199 in fiscal 2004.





**Sales
      and marketing**





**2005**
            
            **2004**
            
            **Change**
            
            **%**Salaries
                and benefits
            
            $
            154,360
            
            $
            270,934
            
            
            ($
                116,574
            )
            
            (43
            )Advertising
                and promotion
            
            
            50,827
            
            
            21,417
            
            
            29,410
            
            
            137Public
                relations
            
            
            100,139
            
            
            4,274
            
            
            95,865
            
            
            2243Market
                research
            
            
            —
            
            
            9,789
            
            
            (9,789
            )
            
            —Travel
                and entertainment
            
            
            47,290
            
            
            18,687
            
            
            28,603
            
            
            153Total
            
            $
            352,616
            
            $
            325,101
            
            $
            27,515
            
            
            8





Total
      sales and marketing expenses increased by $27,515 to $352,616 in fiscal 2005
      from $325,101 in the previous year. Sales and marketing salaries and benefits
      declined by 43% from $270,934 in 2004 to $154,360 in 2005. The Company had
      four
      people in the sales and marketing department in 2004 including a Vice President
      of Sales and two account representatives that had high base salaries. The staff
      reduced to one person for part of 2005 with a second person added later in
      2005.
      Management made a decision to focus the marketing staff on assisting clients
      with user adoption rather than field sales staff. The Company will rebuild
      a
      sales team in the current year. The Company increased its advertising and
      promotion spending in 2005 by $29,410 from $21,417 in fiscal 2004 to $50,827
      in
      fiscal 2005. These expenditures were on advertising in trade publications,
      some
      trade show spending and miscellaneous promotion. The company increased its
      spending on public relations from $4,274 in 2004 to $100,139 in 2005. The
      Company worked with two firms during the year to increase exposure of Phantom
      Fiber in the market. This account also included expenditures on the preparation
      and issuance of press releases. The Company spent $9,789 on a research study
      in
      fiscal 2004. There were no research studies or other market research activities
      undertaken in 2005. Travel and entertainment expenses increased from $18,687
      in
      2004 to $47,290 in 2005 an increase of $28,603. The Company incurred these
      costs
      to travel to prospective customer sites, attend trade shows and entertain
      prospective clients. These costs had been curtailed in prior years due to keep
      costs down and preserve cash.




9





**General
      and administrative expenses**





**2005**
            
            **2004**
            
            **Change**
            
            **%**Salaries
                and benefits
            
            $
            493,246
            
            $
            186,105
            
            
            307,141
            
            
            165Director’s
                compensation
            
            
            71,801
            
            
            —
            
            
            71,801
            
            
            —Professional
                and consulting fees
            
            
            193,632
            
            
            281,654
            
            
            (88,022
            )
            
            (31
            )Investor
                relations and filing fees
            
            
            40,356
            
            
            302,500
            
            
            (262,144
            )
            
            (87
            )Occupancy
                costs
            
            
            90,752
            
            
            67,909
            
            
            22,843
            
            
            34Telephone
            
            
            13,004
            
            
            12,514
            
            
            490
            
            
            4Equipment
                leasing
            
            
            —
            
            
            905
            
            
            (905
            )
            
            (100
            )Insurance
            
            
            3,231
            
            
            2,714
            
            
            517
            
            
            19Office
                and general
            
            
            26,785
            
            
            43,950
            
            
            (17,165
            )
            
            (39
            )Bad
                debt expense
            
            
            19,807
            
            
            —
            
            
            19,807
            
            
            100Stock-based
                compensation expense
            
            
            39,000
            
            
            —
            
            
            39,000
            
            
            —Amortization
            
            
            15,407
            
            
            12,011
            
            
            3,396
            
            
            28Total
            
            $
            1,007,021
            
            $
            910,262
            
            $
            96,795
            
            
            10





The
      Company’s general and administrative expenses increased to $1,007,021 for the
      year ended December 31, 2005 from $910,262 for the prior year an increase of
      $96,795. Administrative salaries and benefits increased by $307,141, primarily
      due to a stock bonus paid to the CEO of $270,000 and an allocation of
      approximately $105,000 of the CEO’s salary that had previously been recorded in
      R&D offset by the reduction in the number of administrative staff. The
      Company paid fees of $71,801 to its directors which had not been paid in the
      prior year. The occupancy costs increased by $22,843 from $67,909 in 2004 to
      $90,752 in 2005. In 2004 the Company only occupied the current premises for
      eight months and had space with lower cost for the first four months. In 2005
      the Company occupied the premises for the entire year. Investor relations and
      filing fees declined by $262,144 from $302,500 in 2004 to $40,356 in 2005.
      The
      Company had arranged a contract with an investor relations firm in 2004 that
      was
      not renewed in 2005. The Company also found less expensive services for the
      regulatory filings than the services used in 2004. The professional and
      consulting fees declined by $88,022 to $193,632 in 2005 from $281,654 in 2004.
      The Company incurred higher legal fees in 2004 to complete the reverse takeover
      transaction. The audit fees were higher due to the need to audit prior year
      balances to comply with the filing requirements. The Company also incurred
      a
      consulting fee to file its investment tax credit claim. No consulting firm
      will
      be used for the 2005 filing. The office and general expenses decreased in 2005
      to $26,785 from $43,950 in the prior year. The Company incurred higher costs
      in
      2004 with the move to larger premises. The Company needed to stock the office
      with supplies, stationery and other miscellaneous items. The bad debt expense
      of
      $19,807 in 2005 was the result of one account where collection is in doubt.
      The
      Company did not have any such accounts in 2004. Amortization expense increased
      by $3,396 from $12,011 in 2004 to $15,407 in 2005. The Company made purchases
      of
      capital assets in 2005 that resulted in an increase in amortization expense.
      There were small increases in telephone equipment and insurance due to increased
      business activity. The Company recorded stock based compensation expense of
      $39,000 in fiscal 2005. This expense reflects the change in accounting policy
      whereby the cost of stock options and warrants granted to non employees are
      expensed.





**Other
      income and expenses**





**2005**
            
            **2004**
            
            **Change**
            
            **%**Loss
                on disposal of marketable securities
            
            $
            (588,573
            )
            $
            (109,534
            )
            $
            (479,039
            )
            
            437Loss
                on settlement of payables and debt
            
            
            (27,902
            )
            
            —
            
            
            (27,902
            )
            
            —Loss
                on settlement of loan obligation
            
            
            —
            
            
            (83,250
            )
            
            (83,250
            )
            
            —Gain
                on sale of Battery Business
            
            
            —
            
            
            391,874
            
            
            (391,874
            )
            
            —


Earnout
                on Battery Business
            
            
            82,500
            
            
            35,500
            
            
            47,000
            
            
            132Interest
                expense
            
            
            (121,032
            )
            
            (111,495
            )
            
            (9,537
            )
            
            9Interest
                revenue
            
            
            6,464
            
            
            6,906
            
            
            (442
            )
            
            (6
            )Gain
                (loss) on foreign exchange
            
            
            (8,477
            )
            
            62,060
            
            
            (70,537
            )
            
            (114
            )Total
            
            $
            (657,020
            )
            $
            192,061
            
            
            ($888,081
            )
            
            (462
            )







10


During
      the year ended December 31, 2005, the Company recorded a loss on disposal of
      marketable securities that were sold to fund operations of $588,573. This loss
      compares to the loss of $109,534 recorded in fiscal 2004. In fiscal 2005 the
      Company issued shares to pay for accounts payable, debt and services resulting
      in a loss on settlement of $27,902. In fiscal 2004 there were no accounts
      payable balances settled for shares. The Company did settle a number of notes
      payable in early 2004 with shareholders resulting in a loss on debt settlement
      of $83,250. The Company recorded a gain on the divestment of the Battery
      Division of $391,874 in fiscal 2004 and a further earnout of $35,500 for a
      total
      of $427,374. In 2005 the Company recognized the remaining earnout of $82,500
      from this transaction. The Company recorded a loss on foreign exchange in the
      current year of $8,477 compared to a gain of $62,060 in 2004 as accounts
      receivable and cash balances denominated in US dollars were impacted by the
      strengthening of the Canadian dollar in fiscal 2005. Interest expense increased
      by $9,537 to $121,032 in fiscal 2005 from $111,495 in the prior year. The
      Company repaid a number of interest bearing obligations during 2005 with
      interest on these obligations of approximately $40,000 in 2005 compared to
      approximately $66,500 in 2004. This reduction was offset by interest and
      penalties on overdue payroll remittances of $58,596 paid in 2005. The Company
      received interest revenue of $6,464 in fiscal 2005 from the Government of Canada
      on its investment tax credits receivable. In 2004 the Company received interest
      of $6,906 on these investment tax credits.





**Financial
      Condition**





Total
      assets decreased $724,265 from $1,444,124 as at December 31, 2004 to $719,859
      as
      at December 31, 2005. The decrease is due primarily to the decline in marketable
      securities of $922,099 from $962,599 at the end of fiscal 2005 to $40,500 at
      the
      end of the prior year. Marketable securities with a book value of $954,599
      were
      sold while shares valued at $32,500 were received for consulting services
      rendered.  At
      December 31, 2004, the Company held 1,145,000 common
      shares of Wireless Age Communications, Inc., and 3,000,000 shares of Trackpower
      Inc. valued at $812,950 and $149,649 respectively. All of the Trackpower shares
      and 1,120,000 of the Wireless Age shares were sold during fiscal 2005. The
      proceeds from these sales of $967,890 were used to fund operations of the
      Company.





Investment
      tax credits receivable declined by $218,681 from $353,340 at the end of 2004
      to
      $134,659 at the end of fiscal 2005. The outstanding balance at the end of 2004
      was received in 2005 while the claim for the fiscal year 2005 was lower than
      the
      outstanding balance at the end of 2004. Accounts receivable increased by $26,819
      from $41,244 at the end of fiscal 2004 to $68,063 at the end of fiscal 2005
      due
      to increased revenue in 2005. The prepaid expenses and other receivables
      increased by $55,222 to $69,636 at the end of fiscal 2005 compared to $14,414
      at
      end of fiscal 2004. The increase was due to a receivable of $54,575 for the
      balance of proceeds due from the sale of shares of marketable securities during
      fiscal 2005. Property plant and equipment declined by $7,976 from $53,127 at
      the
      end of fiscal 2004 to $45,151 at the end of fiscal 2005 as amortization expense
      exceeded the property, plant and equipment added during fiscal 2005. The Company
      recorded deferred development costs of $92,440 reflecting the cost of warrants
      provided to parties assisting with raising funds. There were no such costs
      in
      2004.





Total
      liabilities increased $479,457 from $1,645,247 at December 31, 2004 to
      $2,124,704 as at December 31, 2005. At December 31, 2005 accounts payable and
      accrued liabilities increased by $62,312 to $1,139,491 at the end of fiscal
      2005
      from $1,077,179 at the end of the previous year. The factors impacting this
      change include:





·
            a
                reduction in trade accounts payable of $225,908 compared to the prior
                year,


·
            the
                accrual of a common stock bonus to the CEO of $270,000 in
                2005,


·
            the
                allocation of a note payable of $57,500 to accrued liabilities in
                2005,




11




·
            recording
                of deferred financing costs of $68,640 related to fees paid in connection
                with subscriptions for securities in December,
                2005,


·
            an
                accrual for director’s compensation of $72,000 in fiscal
                2005,


·
            an
                increase in wage and vacation pay accruals of $38,005 at the end
                of fiscal
                2005 compared to the prior period,


·
            a
                decrease in the professional fee accrual of $127,245 at the end of
                fiscal
                2005 compared to fiscal 2004,


·
            a
                decrease in respect of accruals at December 31, 2004 for a fee to
                a
                director of the predecessor company of $18,300 that was repaid in
                2005 and
                for accrued interest on debentures of $25,722 that was converted
                to common
                stock in 2005.


·
            a
                decrease in statutory liabilities for employee tax deductions and
                sales
                tax of $22,598 from the prior year,
                and


·
            a
                reduction of $24,060 in other miscellaneous accruals at the end of
                fiscal
                2005 compared to the prior year.





There
      is
      a balance of $51,963 in unearned revenue at the end of fiscal 2005 for funds
      received on professional services projects not completed at year end. There
      were
      no such uncompleted projects at December 31, 2004. Short term borrowings
      decreased by $295,749 from $340,920 at the end of fiscal 2004 to $45,171 at
      the
      end of fiscal 2005. The Company repaid some high interest rate financing as
      funds became available. The notes payable of $109,725 outstanding at the end
      of
      December 31, 2004 was reduced to nil. A note of $52,225 was applied against
      a
      receivable due from the sale of marketable securities to the party holding
      the
      note. Another note payable of $57,500 was reclassified to accounts payable
      and
      accrued liabilities pending confirmation of a negotiated settlement. The
      obligation under capital leases decreased by $20,844 to $30,079 at the end
      of
      fiscal 2005 from $50,923 at the end of fiscal 2004 as repayments exceeded the
      cost of new leases. Convertible debentures in the principal amount of $66,500
      as
      at December 31, 2004 were converted to common stock in 2005. Lastly, the Company
      raised $858,000 during December, 2005 in connection with subscriptions received
      for its securities.





Stockholders’
      deficiency increased from $201,123 at December 31, 2004 to $1,404,845 at
      December 31, 2005. The increase is the result of:





1. The
      net
      loss of $2,725,200 recorded in fiscal 2005; and


2. Cumulative
      foreign exchange translation loss of $30,059;




o ffset
      by:





1. A
          reversal of the unrealized loss on available for sale marketable securities
          of
          $519,364;


2.  Issuance
      of shares totaling $969,373; and


3.  Stock
      based compensation amounts of $62,800.





The
      consolidated financial statements of the Company are prepared in conformity
      with
      United States generally accepted accounting principles, which require management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Some of the significant estimates required to
      be
      made by management include the realizable value of intangible assets and the
      fair value of common stock and common stock equivalents issued for services
      or
      in settlement of obligations. Actual results could differ from those
      estimates.





**Liquidity
      and Capital Resources**





The
      Company reported a negative working capital of $669,152 at December 31, 2005
      compared with a negative working capital of $229,601 at December 31, 2004
      representing a decrease of $439,551. The decline in current liabilities was
      offset by the decrease in marketable securities and investment tax credits
      receivable as described above. As of December 31, 2005, the Company had cash
      and
      cash equivalents of $269,410 compared with cash and cash equivalents of $19,400
      at the end of the prior year.




12




For
      the
      year ended December 31, 2005, cash used in operating activities totaled
      $1,513,922, primarily as a result of operating losses. This amount compares
      to
      $984,455 used in operations in fiscal 2004. These losses were funded by an
      increase in financing activities of $903,867 and cash from investing activities
      of $860,065. The Company raised funds in a private placement stock issue of
      $300,000 and a debt subscription of $858,000. These funds raised were partially
      offset by repayments of short term borrowings of $223,136 and lease payments
      of
      $30,997 during the year. In fiscal 2004 the Company generated $778,583 from
      financing activities from the sale of $625,630 of convertible debentures and
      from increases in short term borrowings of $203,784 offset by repayments on
      notes payable of $38,000 and obligation under capital lease of $12,831.  In
      fiscal 2005, the Company generated $860,065 from investing activities through
      the sale of marketable securities. In fiscal 2004 the Company generated $205,530
      from investing activities, comprised of $199,989 from the sale of marketable
      securities and $5,541 of cash assumed in the reverse acquisition.





During
      the first fiscal quarter of 2006 the company completed a private placement
      of
      senior convertible notes and warrants for gross proceeds received during 2006
      of
      $2,642,000. The material terms of this transaction are described below under
      “Subsequent Events.” Based
      on
      current cash resources and other current assets, management believes the Company
      has sufficient liquidity to fund operations for the next twelve months.





**Subsequent
      Events**





On
      January 5, 2006, the Company entered into a Securities Purchase Agreement with
      accredited investors for the sale of (i) $3,500,000 principal amount of senior
      convertible notes and (ii) warrants to purchase up to 7,000,000 shares of common
      stock. The sale of the senior convertible notes and warrants closed on January
      9, 2006. Participants in a private placement which closed on December 8, 2005
      for gross proceeds of $858,000 exchanged the securities they previously
      purchased for an investment in the senior convertible notes and warrants based
      on the dollar amount of their prior investment, bringing the total gross
      proceeds from the transactions to $3,500,000.





The
      senior convertible notes bear interest at 1% per annum payable semi-annually,
      mature two years from the date of issuance and are convertible into shares
      of
      common stock at the investors’ option at $0.50 per share, subject to adjustment.
      Under prescribed conditions relating mainly to share price and average daily
      trading volumes, the Company have the right to require the holders to convert
      the principal amount then remaining under the senior convertible notes. Should
      the Company fail to deploy its wireless software platform on or prior to
      December 31, 2006 to a specified number of gaming related sites with a specified
      aggregate number of end users then the conversion price could be adjusted to
      75%
      of the conversion price then in effect. Further, the conversion price of the
      senior convertible notes could be adjusted if the company should (i) issue
      shares of common stock below the then applicable conversion price, or (ii)
      pay a
      stock dividend, subdivides or combine outstanding shares of common stock into
      a
      greater or lesser number of shares, or take such other actions as would
      otherwise result in dilution of the holders’ position. Interest may be paid with
      shares of common stock at the option of the Company based on 90% of the dollar
      volume weighted average price of the common stock on each of the 30 consecutive
      trading days immediately preceding the applicable interest payment due
      date.





The
      warrants are exercisable until three years from the date of issuance. Half
      of
      the warrants are exercisable at a purchase price of $1.50 per share and the
      other half of the warrants are exercisable at a purchase price of $0.56 per
      share. The investors may exercise the warrants on a cashless basis if the shares
      of common stock underlying the warrants are not then registered pursuant to
      an
      effective registration statement.





Further,
      the conversion price of the senior convertible notes could be adjusted if the
      company should (i) issue shares of common stock below the then applicable
      conversion price, or (ii) pay a stock dividend, subdivides or combine
      outstanding shares of common stock into a greater or lesser number of shares,
      or
      take such other actions as would otherwise result in dilution of the holders’
position.





On
      February 13, 2006, the Company filed a registration statement with the
      Securities and Exchange Commission to register the sale of the common stock
      issuable upon conversion of the senior convertible notes and exercise of the
      warrants. If the registration statement is not declared effective within 110
      days from the date of closing, the Company will be required to pay liquidated
      damages to the investors equal to 2% of their purchase price for each 30 day
      period until the event is cured.




13





The
      Company paid $241,730 cash compensation to the placement agent in connection
      with the sale of $2,642,000 principal amount of the senior convertible notes
      and
      related warrants and issued 483,460 non-assignable compensation warrants
      exercisable until three years after the date of issuance, with one-half of
      such
      compensation warrants entitling the holder to purchase shares of common stock
      at
      $1.50 per share and the other half of the compensation warrants entitling the
      holder to purchase shares of common stock at a purchase price of $0.56 per
      share. The Company also granted other placement agents in connection with the
      sale of $858,000 principal amount of the senior convertible notes and related
      warrants compensation in the form of 87,620 restricted shares of common
      stock.





**Off-Balance
      Sheet Arrangements**





The
      Company does not have any off balance sheet arrangements that are reasonably
      likely to have a current or future effect on our financial condition, revenues,
      results of operations, liquidity or capital expenditures.





**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of results of operations and financial condition are
      based upon the consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America (GAAP). The preparation of these consolidated financial statements
      requires management to make estimates and judgments that affect the reported
      amounts of assets, liabilities, revenues and expenses, and related disclosure
      of
      contingent assets and liabilities. Management evaluates the estimates on an
      on-going basis, including those related to bad debts, inventories, investments,
      customer accounts, intangible assets, income taxes, and contingencies and
      litigation. Management bases its estimates on historical experience and on
      various other assumptions that they believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. Note 2 of the "Notes to Consolidated Financial
      Statements" of the Company’s annual audited Consolidated Financial Statements
      includes a summary of the significant accounting policies and methods used
      in
      the preparation of the consolidated financial statements. The following is
      a
      brief description of the more significant accounting policies and methods the
      Company uses.





**Investments**





The
      Company’s investment in marketable securities is classified as available for
      sale securities. Unrealized holding gains and losses are reported as a net
      amount in a separate component of shareholders’ equity until
      realized.





**Revenue
      recognition**





The
      Company recognizes software licensing revenues in accordance with all applicable
      accounting regulations, including the American Institute of Certified Public
      Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition”,
      SOP 98-9, "Modification of SOP 97-2 with respect to Certain Transactions" and
      Staff Accounting Bulletin (“SAB”) 104.





Following
      the requirements of these accounting pronouncements, the Company recognizes
      license revenues when all of the following conditions are met:





·
            there
                is a signed license agreement with the
                customer;


·
            the
                software product has been delivered to the
                customer;


·
            the
                amount of the fees to be paid by the customer is fixed or determinable;
                and


·
            collection
                of these fees is probable.





The
      Company generally negotiates formal license agreements with its customers.
      Each
      of the license agreements includes provisions for receipt of an up-front license
      fee and royalties. Generally, service providers pay these royalty fees either
      in
      the form of a one-time payment or as an on-going monthly fee. On-going royalties
      are recognized monthly based on the number of subscribers at month end. One-time
      royalties are recognized based on the number of new subscribers at the end
      of
      each period.




14





The
      Company may also negotiate license agreements that allow for the payment of
      the
      initial license fee to be made in future installments over a period of less
      than
      a year. Revenues recognized in advance of the installments being due are
      recorded as unbilled revenues in the balance sheet.





Maintenance
      and technical support revenues are recognized rateably over the applicable
      service period, which is usually one year. Revenues derived from professional
      services are recognized upon performance of the related services. Revenues
      derived from license agreements containing multiple deliverables, such as
      product licenses, maintenance and technical support and other services, are
      allocated among the various deliverables based on the fair value of each
      deliverable. Payments received from customers prior to the completion of
      services are recorded as unearned revenue.





**Allowance
      for Doubtful Accounts**




The
      Company records an allowance for doubtful accounts based on specifically
      identified amounts that management believes to be uncollectible. The criteria
      for allowance provision are determined based on historical experience and the
      Company’s assessment of the general financial conditions affecting its customer
      base. If the Company’s actual collections experience changes, revisions to the
      allowance may be required.





**Intangible
      Assets**





Long-lived
      assets, including intangible assets, are reviewed when facts and circumstances
      indicate that the carrying value of the asset may not be recoverable. When
      necessary, impaired assets are written down to estimated fair value based on
      the
      best information available. Fair value is determined by estimated future cash
      flows and appraised value of the assets.





**Recent
      Accounting Pronouncements**




In
      September 2005, the Financial Accounting Standards Board (“FASB”) ratified the
      following consensus reached in EITF Issue 05-8 ( *“Income
      Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion
      Feature”* ):





The
      issuance of convertible debt with a beneficial conversion feature results in
      a
      basis difference in applying FASB Statement of Financial Accounting Standards
      SFAS No. 109, Accounting for Income Taxes. Recognition of such a feature
      effectively creates a debt instrument and a separate equity instrument for
      book
      purposes, whereas the convertible debt is treated entirely as a debt instrument
      for income tax purposes.





The
      resulting basis difference should be deemed a temporary difference because
      it
      will result in a taxable amount when the recorded amount of the liability is
      recovered or settled.࿠





Recognition
      of deferred taxes for the temporary difference should be reported as an
      adjustment to additional paid-in capital.





The
      foregoing consensus is effective in the first interim or annual reporting period
      commencing after December 15, 2005, with early application permitted. The effect
      of applying the consensus should be accounted for retroactively to all debt
      instruments containing a beneficial conversion feature that are subject to
      EITF
      Issue 00-27, “ *Application
      of Issue No. 98-5 to Certain Convertible Debt Instruments”* (and
      thus is applicable to debt instruments converted or extinguished in prior
      periods but which are still presented in the financial statements). The Company
      has not completed an evaluation of the impact of this
      pronouncement.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”) which supersedes APB Opinion No. 20, “Accounting Changes” and
      SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements”. The
      statement requires the retroactive application to prior periods’ financial
      statements of changes in accounting principles, unless it is impractical to
      determine either the period of specific effects or the cumulative effect of
      the
      change.




15





SFAS
      154
      does not change the guidance for reporting the correction of an error in
      previously issued financial statements or the change in accounting estimate.
      SFAS No. 154 is effective for accounting changes and corrections of errors
      made
      in fiscal years beginning after December 15, 2005. The Company does not believe
      SFAS No. 154 will have a significant impact on its consolidated financial
      position or results of operations.





In
      December 2004, the FASB issued Statement No. 123(R), *Share-Based
      Payments* ,
      which
      will require compensation costs related to share-based payment transactions
      to
      be recognized in the financial statements. As permitted by the predecessor
      Statement No.123, the Company does not recognize compensation expense with
      respect to stock options issued because the option price was no greater than
      the
      market price at the time the option was issued. Statement 123(R) will be
      effective in the fiscal quarter beginning January 1, 2006. The Company has
      not
      completed an evaluation of the impact of adopting Statement 123(R).





In
      December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
      Assets-amendment of APB Opinion No. 29". Statement 153 eliminates the
      exception to fair value for exchanges of similar productive assets and replaces
      it with a general exception for exchange transactions that do not have
      commercial substance, defined as transactions that are not expected to result
      in
      significant changes in the cash flows of the reporting entity. This statement
      is
      effective for exchanges of nonmonetary assets occurring after June 15,
      2005. The Company will adopt this Statement in fiscal 2005 and adoption is
      not
      expected to have a material impact on the Company’s financial
      statements.




**Item
      7. Financial Statements.**





All
      financial information required by this Item is attached hereto at the end of
      this report beginning on page F-1 and is hereby incorporated by reference.





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





None.





**Item
      8A.** **Controls
      and Procedures.**





As
      of the
      end of the period covered by this report, the Company conducted an evaluation,
      under the supervision and with the participation of the Company’s chief
      executive officer and principal financial officer of its disclosure controls
      and
      procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
      Act). Based upon this evaluation, the Company’s chief executive officer and
      principal financial officer concluded that the disclosure controls and
      procedures are effective as of the end of the period covered by this report
      to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the Exchange Act is: (1) accumulated and
      communicated to management, including the Company’s chief executive officer and
      principal financial officer, as appropriate to allow timely decisions regarding
      required disclosure; and (2) recorded, processed, summarized and reported,
      within the time periods specified in the Commission's rules and forms. There
      was
      no change to the Company’s internal controls or in other factors that could
      affect these controls during the Company’s last fiscal quarter that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.





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





None.




16





**PART
      III**





**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(A)
      OF THE EXCHANGE ACT.**





The
      members of the Company’s board of directors and executive officers, together
      with their respective ages and certain biographical information are set forth
      below. There are no family relationships among any of the directors or executive
      officers.





**Name**
            **Age**
            **Position**Jeffrey
                T. Halloran
            44
            Chief
                Executive Officer, President, Principal Financial Officer, Principal
                Accounting Officer and ChairmanHerbert
                C. Sears
            37
            Chief
                Technology OfficerGordon
                S. Fowler
            58
            DirectorJ.
                Graham Simmonds
            31
            DirectorKonstantine
                (Gus) Lucas
            58
            DirectorStephen
                Gesner
            50
            Director





Mr.
      Halloran became Chief Executive Officer, President and Director on January
      7,
      2002. Mr. Halloran assumed the positions of Principal Financial Officer and
      Principal Accounting Officer effective on January 1, 2005. From March 2001
      to
      November 2001, he was the Chief Executive Officer of Sona Innovations Inc.,
      a
      wireless software company. From March 1989 to February 2001, Mr. Halloran was
      the Chief Executive Officer and President of Relational Solutions Inc., a
      computer systems consulting firm. From August 1987 to March 1989, he was a
      Consulting Manager for Oracle Corporation providing database consulting
      services. Mr. Halloran graduated from St. Clair College in 1982 with a degree
      in
      business administration.





Mr.
      Sears
      has been Chief Technology Officer since January 2002. From November 2000 to
      December 2001, he was Vice President-Technology of Sona Innovations Inc.,
      engaged in software development. From May 1996 to October 2000, Mr. Sears was
      the Director of Technology of ANGOSS Software Corp. and was engaged in software
      development. From June 1992 to May 1996, he was a Senior Developer and
      programmer employed by CS Computing Services Inc. Mr. Sears graduated from
      DeVry
      Institute of Technology in 1989 with a degree in computer science.





Mr.
      Fowler became a director in March 2002. From February 2003 to March 2005, he
      was
      interim Chief Executive Officer and President of Nano-C, Inc. in Westwood,
      MA,
      engaged in nano technology. From 1999 to the present, Mr. Fowler has been the
      principal of SynCom Associates in Boston, MA. From 1998 to 1999, he was the
      Chief Executive Officer and President of NetConvergence, Inc. From 1995 to
      1998,
      he was the Chief Executive Officer and President of MUSE Networks, Inc. an
      Internet e-commerce company. From 1993 to 1995, Mr. Fowler was the Director
      of
      Operations of Cray Communications, Ltd. Mr. Fowler graduated from the University
      of Saskatchewan in 1970 with a Bachelor of Science degree in mechanical
      engineering.





Mr.
      Simmonds became a director on July 7, 2004. From May 2004 to the present, he
      has
      been the Chief Executive Officer and President of Diversified Racing Investments
      Inc. From January 2004 to May 2004, he was a Vice President of Simmonds
      Mercantile Products Inc. From February 2003 to December 2003, he was employed
      by
      Prime Battery Products Limited engaged in business development. From April
      2001
      to February 2003, Mr. Simmonds was self employed as a horse breeder and horse
      industry consultant. From January 2001 to April 2001, he was a Vice President
      of
      IRMG, Inc. From May 1999 to January 2001, he was the General Manager of
      TrackPower Inc. Mr. Simmonds attended McGill University.





Konstantine
      (Gus) Lucas became a director on February 13, 2006. Mr. Lucas currently serves
      as Executive Vice President, Warner Bros. Domestic Cable Distribution. Prior
      to
      his Warner Bros. employment, from September 1998 until April 2000, Mr. Lucas
      was
      a consultant to the media industry including cable networks and MGM Studios.
      Prior to that, from May 1995 to August 1998, Mr. Lucas was President of
      Programming for the Family Channel. Before joining the Family Channel, from
      August 1986 to September 1993, Mr. Lucas was Executive Vice-President, Viacom
      Entertainment Group, and President, West Coast Operations and Viacom
      Productions. Prior to that, from March 1970 until July 1986, Mr. Lucas held
      several positions at ABC Entertainment, culminating in his position as
      Vice-President and assistant to the President of ABC Entertainment.




17





Stephen
      Gesner became a director on February 13, 2006. Mr. Gesner currently serves
      as
      the Chief Information Officer of Meridian Credit Union. Prior to such service,
      from May 2004 to March 2005, Mr. Gesner was the Vice President of Financial
      Services Marketing for TELUS Communications and from May 2003 to December 2003
      served as the CTO for Cap Gemini Ernst and Young Canada. Before that Mr. Gesner
      worked for 14 years with TD Bank Financial Group, beginning in January 1989
      as a
      consultant in the Cash Management Group and moving through various senior roles
      culminating in his position as Senior Vice President and Chief Technology
      Officer from March 2000 through November 2002. Mr. Gesner began his career
      with
      Ford Motor Company of Canada in September 1979 and held several positions in
      Finance, Treasury, Production Planning, and Industrial Relations through
      December 1988. Mr. Gesner holds an Honours BSc from York University (1977)
      and
      an M.B.A from the Schulich School of Business (1979). He is a member of the
      Technical Advisory Board of Kinitos Software (April 2003) as well as a member
      of
      the J.L. Albright III Venture Fund Advisory Board (August 2002). He is also
      on
      the Board of Directors for Smart Systems for Health Agency.





**Board
      of Directors**





At
      each
      annual meeting of stockholders, all of the Company’s directors are elected to
      serve from the time of election and qualification until the next annual meeting
      of stockholders following election. The exact number of directors is to be
      determined from time to time by resolution of the Board of Directors.





Each
      officer is elected by, and serves at the discretion of the Board of Directors.
      Each of the Company’s officers devotes his full time to our affairs.





**Audit
      Committee**





On
      March
      24, 2006 the Board of Directors established an Audit Committee to oversee and
      monitor the Company’s accounting and reporting processes and the audits of the
      Company’s financial statements. The Audit Committee is presently composed of two
      persons, including Mr. Stephen Gesner and Mr. Gordon Fowler. Mr. Gesner serves
      as Chairman of the Audit Committee. As of the date this report was filed with
      the SEC, the Board of Directors has not yet adopted an Audit Committee Charter
      and the Audit Committee has not held any meetings or taken any action. The
      Company does have an audit committee financial expert as that term is defined
      in
      Item 401 of Regulation S-B. The Company has not yet been able to identify a
      suitable nominee to serve as an audit committee financial expert.





**Compensation
      Committee**





On
      March
      24, 2006 the Board of Directors established a Compensation Committee to
      determine and recommend to the Board the compensation to be paid the Company’s
      executive officers, to review the amount of salary and bonus for each of the
      Company’s other officers and employees and to determine and recommend to the
      Board the amount of stock option grants to be issued to the Company’s officers
      and directors under the Company’s 2000 Stock Option Plan. The Compensation
      Committee is presently composed of 2 persons, including Konstantine (Gus) Lucas
      and J. Graham Simmonds. Konstantine (Gus) Lucas serves as Chairman of the
      Compensation Committee. As of the date this report was filed with the SEC,
      the
      Board of Directors has not yet adopted a Compensation Committee Charter and
      the
      Compensation Committee has not held any meetings or taken any
      action.





**Code
      of Ethics**





The
      Company has adopted a Code of Ethics and Business Conduct that applies to
      executive officers, directors and employees, and is filed as Exhibit 14.1 to
      this Form 10-KSB. Upon request, the Company will provide to any person, without
      charge, a copy of its Code of Ethics. Any such request should be made to Attn:
      Secretary, Phantom Fiber Corporation, 144 Front Street, Suite 580, Toronto,
      Ontario, Canada M5J 2L7. A copy of the Code of Ethics is available to investors
      and can be found on the Corporate Website at: www.phantomfiber.com.




18





**Section
      16(a) Beneficial Ownership Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires directors and executive
      officers and persons who beneficially own more than ten percent of a registered
      class of the Company’s equity securities to file with the SEC initial reports of
      ownership and reports of change in ownership of common stock and other equity
      securities. Officers, directors and greater than ten percent stockholders are
      required by SEC regulations to furnish the Company with copies of all Section
      16(a) forms they file. Based solely upon a review of Forms 3 and 4 and
      amendments thereto furnished to the Company under Rule 16a-3(e) during the
      fiscal year ended December 31, 2005, and Forms 5 and amendments thereto
      furnished to the Company with respect to the fiscal year ended December 31,
      2005, the Company believes that during the year ended December 31, 2005, its
      executive officers, directors and all persons who own more than ten percent
      of a
      registered class of the Company’s equity securities complied with all Section
      16(a) filing requirements, except as follows: Jeffrey Halloran reported two
      transactions late and filed one Form 4 late.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION.**





The
      following table sets forth information concerning the annual and long-term
      compensation earned by or paid to the Chief Executive Officer and to the other
      named executive officers who served as executive officers as at and/or during
      the fiscal year ended December 31, 2005, for services as executive officers
      for
      the last three fiscal years.




**SUMMARY
      COMPENSATION TABLE**




**Annual
                Compensation**
            
            **Long-Term
                Compensation****Awards**
            
            **Payouts****Name
                and**
              **Principal
                Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Other**
              **Annual**
              **Compen-**
              **sation
                ($)**
            
            **Restricted
                Stock Award(s) ($)**
            
            **Securities
                Underlying Options/ SARs (#)**
            
            **LTIP**
              **Payouts
                ($)**
            
            **All**
              **Other**
              **Compen-**
              **sation
                ($)**Jeffrey
                T. Halloran,
            
            2005
            
            $
            250,000
            
            
            -0-
            
            $
            6,000
            (1)
            $
            270,000
            (2)
            
            250,000
            (3)
            
            -0-
            
            
            -0-Chief
                Executive
            
            2004
            
            $
            179,300
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Officer,
                President,
            
            2003
            
            $
            85,600
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-and
                PrincipalFinancial
                OfficerHerb
                Sears,
            
            2005
            
            $
            132,195
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Chief
                Technology
            
            2004
            
            $
            84,715
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Officer
            
            2003
            
            $
            78,792
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Gordon
                Fowler
            
            2005
            
            
            -0-
            
            
            -0-
            
            $
            40,000
            (4)
            $
            20,000
            (5)
            
            75,000
            (6)
            
            -0-
            
            
            -0-Former
                Executive
            
            2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Chairman
            
            2003
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Vince
                Bulbrook,
            
            2005
            
            
            -0-
            
            
            -0-
            
            $
            15,462
            (7)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Former
                Chief
            
            2004
            
            
            -0-
            
            
            -0-
            
            $
            29,050
            (7)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Financial
                Officer
            
            2003
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-John
                G. Simmonds,
            
            2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Former
                Chief
            
            2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Executive
                Officer
            
            2003
            
            $
            55,573
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-




(1)
            Pertains
                to a car allowance of $500 per month payable to Mr. Halloran.




(2)
            Pertains
                to 500,000 restricted shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) issued to Mr. Halloran as a bonus
                earned
                pursuant to the terms of an employment agreement dated February 4,
                2004 at
                an estimated value of $0.54 per share (after giving effect to a one-for-20
                reverse stock split).




19


(3)
            Reflects
                warrants granted to Mr. Halloran as a bonus pursuant to the terms
                of an
                employment agreement dated February 4, 2004 and included as a de-facto
                options grant, entitling Mr. Halloran to purchase 250,000 restricted
                shares of common stock (after giving effect to a one-for-20 reverse
                stock
                split) at a price of $4.00 per share (after giving effect to a one-for-20
                reverse stock split).




(4)
            Pertains
                to cash amounts payable to Mr. Fowler for consulting services rendered
                during the period January 1, 2005 to April 30, 2005.




(5)
            Pertains
                to 25,000 restricted shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) to be issued to Mr. Fowler for consulting
                services rendered during the period November 1, 2004 to December
                31, 2004
                at an estimated value of $0.80 per share (after giving effect to
                a
                one-for-20 reverse stock split).




(6)
            Represents
                stock options granted to Mr. Fowler for consulting services during
                the
                fiscal year entitling Mr. Fowler to purchase: (a) 37,500 shares of
                common
                stock (after giving effect to a one-for-20 reverse stock split) at
                a price
                of $0.99 per share (after giving effect to a one-for-20 reverse stock
                split); and (b) 37,500 shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) at a price of $1.08 per share (after
                giving effect to a one-for-20 reverse stock
                split).




(7)
            Pertains
                to cash amounts paid and/or payable to Mr. Bulbrook for consulting
                services rendered.







**OPTIONS
      GRANT TABLE**





The
      following table sets forth information with respect to the named executive
      officers concerning the grant of stock options during the fiscal year ended
      December 31, 2005. The Company did not have during such fiscal year any plans
      providing for the grant of stock appreciation rights (“SARs”).





**Option/SAR
                Grants in Last Fiscal Year**




**Individual
              Grants**
            **Potential
                Realizable Value**
              **at
                Assumed Annual Rates**
              **of
                Stock Price**
              **Appreciation
                for**
              **Option
                Term**
            **Alternative
                to (f)**
              **and
                (g): Grant**
              **Date
                Value****(a)**
            **(b)**
            **(c)**
            **(d)**
            **(e)**
            **(f)**
            **(g)**
            **(h)****Name**
            **Number
                of Securities**
              **Underlying
                Options/**
              **SARs
                Granted (#)**
            **%
                of Total Options/**
              **SARs
                Granted to**
              **Employees
                in**
              **Fiscal
                Year**
            **Exercise
                or**
              **Base****Price**
              **($/Sh)**
            **Expiration**
              **Date**
            **5%
                ($)**
            **10%
                ($)**
            **Grant
                Date**
              **Present**
              **Value
                ($) (1)**Jeffrey
                T. Halloran
            250,000
                (2)
            43.5%
            $4.00
            December
                15, 2010
            —
            —
            $862,500Gordon
                Fowler
            37,500
                (3)
            6.5%
            $0.99
            December
                15, 2006
            —
            —
            $36,038Gordon
                Fowler
            37,500
                (3)
            6.5%
            $1.08
            December
                15, 2006
            —
            —
            $39,300Konstantine
                (Gus) Lucas
            250,000
                (4)
            43.5%
            $2.00
            July
                20, 2008
            —
            —
            $463,000




(1)
            The
                value shown was calculated utilizing the Black-Scholes option pricing
                model and is presented solely for the purpose of comparative disclosure
                in
                accordance with certain regulations of the Securities and Exchange
                Commission. This model is a mathematical formula used to value traded
                stock price volatility. The actual value that an executive officer
                may
                realize, if any, is dependent on the amount by which the stock price
                at
                the time of exercise exceeds the exercise price. There is no assurance
                that the value realized by an executive officer will be at or near
                the
                value estimated by the Black-Scholes model. In calculating the grant
                date
                present values, the Company used the following assumptions: (a) expected
                volatility of approximately 60%; (b) risk-free rate of return of
                approximately 3%; (c) no dividends payable during the relevant period;
                and
                (d) an expected term to exercise in accordance with the expiration
                date of
                stock options grants. These values should not be used to predict
                stock
                value.




20


(2)
            Represents
                warrants granted to Mr. Halloran and included as a de-facto options
                grant,
                entitling the holder to purchase 250,000 restricted shares of common
                stock
                (after giving effect to a one-for-20 reverse stock split) at a price
                of
                $4.00 per share (after giving effect to a one-for-20 reverse stock
                split).




(3)
            Represents
                stock options (after giving effect to a one-for-20 reverse stock
                split)
                granted to Mr. Fowler for consulting services during the fiscal
                year.




(4)
            Represents
                warrants granted to Mr. Lucas and included as a de-facto options
                grant,
                entitling the holder to purchase 250,000 restricted shares of common
                stock
                (after giving effect to a one-for-20 reverse stock split) at a price
                of
                $2.00 per share (after giving effect to a one-for-20 reverse stock
                split).





**Aggregate
      Option Exercises and Fiscal Year-End Option Values**





The
      following table sets forth information with respect to the named executive
      officers concerning the year-end value of “in the money” options and the value
      of unexercised options as of December 31, 2005. No options were exercised by
      the
      named executive officers during the fiscal year ended December 31,
      2005.





**Number of Securities**
              **Underlying Unexercised**
              **Options at**
              **December
                31, 2005 (#)(1)**
            
            **Value of Unexercised**
              **In-the-Money Options**
              **at December
                31, 2005 ($)(2)****(Exercisable/Unexercisable)**
            
            **(Exercisable/Unexercisable)**Jeffrey
                T. Halloran
            
            206,250/0
            
            
            $
            64,350/$0Herb
                Sears
            
            118,250/0
            
            
            $
            36,894/$0Gordon
                Fowler
            
            19,250/0
            
            
            $
            6,006/$0







(1)
            Share
                numbers give effect to a one-for-20 reverse stock split and exclude
                (a) warrants granted to Mr. Halloran and expiring December 15, 2010
                which entitle him to purchase 250,000 restricted shares of common
                stock at
                $4.00 per share, and (b) options granted to Mr. Fowler and expiring
                December 15, 2006 entitling him to purchase 37,500 restricted shares
                of
                common stock at $0.99 per share and 37,500 restricted shares of common
                stock at $1.08 per share.




(2)
            Using
                a stock price of $0.54 (after giving effect to a one-for-20 reverse
                stock
                split) at December 31, 2005. This number is calculated by: (a) subtracting
                the option exercise price from the December 30, 2005 closing market
                price
                ($0.54 per share, as reported on the OTC Bulletin Board) to calculate
                the
                “average value per option”; and (b) multiplying the average value per
                option by the number of exercisable and unexercisable “in the money”
                options. The amounts in this column may not represent amounts that
                will
                actually be realized by the named executive
                officer.







**Compensation
      of Directors**





On
      March
      24, 2006, the Company’s Board of Directors approved a plan to compensate each
      director with cash and stock options valued at $25,000 annually. The cash
      component will equal $1,000 per meeting with the balance being the value of
      stock options valued using the Black Scholes pricing model. On March 24, 2006
      the Board of Directors granted the following stock options to non-management
      directors as compensation, as applicable, for 2005 and 2006: (1) the Board
      granted Gordon S. Fowler options to purchase 154,250 shares of common stock
      with
      an exercise price of $0.58 per share; (2) the Board granted J. Graham Simmonds
      options to purchase 154,250 shares of common stock with an exercise price of
      $0.58 per share; (3) the Board granted Konstantine (Gus) Lucas options to
      purchase 58,250 shares of common stock with an exercise price of $0.58 per
      share; and (4) the Board granted Stephen Gesner options to purchase 58,250
      shares of common stock with an exercise price of $0.58 per share.




21




**Employment
      Agreements**





Under
      an
      employment agreement dated February 4, 2004, Jeff Halloran was engaged as
      President and Chief Executive Officer at an annual base salary of $250,000
      per
      annum, plus other benefits including a monthly car allowance of $500. Upon
      achievement of specified milestones, Mr. Halloran became entitled to receive
      up
      to 500,000 restricted shares of common stock (after giving effect to a
      one-for-20 reverse stock split) and 250,000 warrants (after giving effect to
      a
      one-for-20 reverse stock split) with a five year maturity and entitling him
      to
      purchase 250,000 restricted shares of common stock at a price of $4.00 per
      share
      (after giving effect to a one-for-20 reverse stock split). Should the company
      choose to terminate the employment agreement, Mr. Halloran is entitled to
      receive two times his base salary. All outstanding options are to immediately
      vest and all extended health care premiums will remain in full effect for a
      one-year period. Mr. Halloran is required to enter into a non-compete agreement
      with the Company.





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





**Security
      Ownership of Certain Beneficial Owners and Management**





The
      following table sets forth information regarding the beneficial ownership of
      the
      Company’s Common Stock as of March 31, 2006. The information in this table
      provides the ownership information for: each person known to be the beneficial
      owner of more than 5% of the Company’s Common Stock; each of the Company’s
      directors; each of the Company’s executive officers; and the Company’s executive
      officers and directors as a group.


Number
                  of Shares
              
              
              Percentage
                  ofName
                  and Address
              of
                    CommonStock
              
              
              Outstanding
                  Shares ofof
                  Beneficial Owner
              Beneficially
                  Owned  (1)
              
              
              Common
                  Stock  (1)Jeffrey
                  T. Halloran
              5,612,050
              (2
              )
              36.0
              %6
                  Bunhill CourtAjax,
                  Ontario, Canada L15 4S7Lorraine
                  Halloran
              825,000
              
              
              5.6
              %1465
                  Villa Maria SouthWindsor,
                  Ontario, Canada N9G 1W6Herbert
                  C. Sears
              118,250
              (3
              )
              *45
                  Roberson DriveAjax,
                  Ontario, Canada L1T 4K1Gordon
                  S. Fowler
              273,500
              (4
              )
              1.8
              %95
                  Lake Road TerraceWayland,
                  MA 01778J.
                  Graham Simmonds
              154,250
              (5
              )
              1.0
              %330
                  University AvenueToronto,
                  Ontario, Canada M5G 1R7Konstantine
                  (Gus) Lucas
              2,384,250
              (6
              )
              14.8
              %17428
                  Oak Creek CourtEncino,
                  CA 91316Stephen
                  Gesner
              264,500
              (7
              )
              1.8
              %395
                  March CrescentOakville,
                  Ontario, Canada L6H 5X7All
                  Directors and Executive Officers as
              8,806,809
              
              
              50.0
              %a
                  Group (6 persons)




22




*
      Less
      than 1%




(1)
            Applicable
                percentage ownership is based on 14,647,421 shares of Common Stock
                (after
                giving effect to a one-for-20 reverse stock split) outstanding as
                of March
                31, 2006, together with securities exercisable or convertible into
                shares
                of Common Stock within 60 days of March 31, 2006 for each stockholder.
                Beneficial ownership is determined in accordance with the rules of
                the
                Securities and Exchange Commission and generally includes voting
                or
                investment power with respect to securities. Shares of Common Stock
                that
                are currently exercisable or exercisable within 60 days of March
                31, 2006
                are deemed to be beneficially owned by the person holding such securities
                for the purpose of computing the percentage of ownership of such
                person,
                but are not treated as outstanding for the purpose of computing the
                percentage ownership of any other
                person.




(2)
            Includes:
                4,155,800 shares held by the Halloran Family Trust; 500,000 restricted
                shares of Common Stock issued by the Company as bonus shares on March
                24,
                2006 at an estimated value of $0.515 per share; 500,000 restricted
                shares
                of Common Stock issued by the Company as bonus shares on December
                15, 2005
                at an estimated value of $0.54 per share; warrants to purchase 250,000
                shares of Common Stock at $4.00 per share issued by the Company on
                December 15, 2005; and stock options to purchase 206,250 shares of
                Common
                Stock, comprised of 165,000 options owned by Mr. Halloran and 41,250
                options owned by Bernadette Halloran, with an exercise price of $0.228
                per
                share. Quantities and prices in this footnote are adjusted to give
                effect
                to a one-for-20 reverse stock split.




(3)
            Represents
                a stock option to purchase 118,250 shares of Common Stock of the
                Company
                with an exercise price of $0.228 per share. Quantities and prices
                in this
                footnote are adjusted to give effect to a one-for-20 reverse stock
                split.




(4)
            Represents
                25,000 restricted shares to be issued by the Company at a price of
                $0.80
                per share and 248,500 stock options to purchase: (i) 19,250 shares
                of
                Common Stock with an exercise price of $0.228 per share; (ii) 37,500
                shares of Common Stock with an exercise price of $0.99 per share;
                (iii)
                37,500 shares of Common Stock with an exercise price of $1.08 per
                share;
                and (iv) 154,250 shares of Common Stock with an exercise price of
                $0.58
                per share. Quantities and prices in this footnote are adjusted to
                give
                effect to a one-for-20 reverse stock
                split.




(5)
            Represents
                stock options to purchase 154,250 shares of Common Stock of the Company
                with an exercise price of $0.58 per share. Quantities and prices
                in this
                footnote are adjusted to give effect to a one-for-20 reverse stock
                split.




(6)
            Represents
                stock options to purchase 58,250 shares of Common Stock of the Company
                with an exercise price of $0.58 per share and 2,326,000 shares held
                or to
                be held by Konstantine J. Lucas and/or Konstantine J. Lucas and Beth
                Anne
                Lucas Trust and/or immediate family of which 250,000 shares of Common
                Stock is issuable upon exercise of warrants obtained April 26, 2005
                with
                an exercise price of $2.00 per share, 550,000 shares of Common Stock
                is
                issuable to Mr. Lucas upon conversion of outstanding senior convertible
                notes issued in a financing which closed on January 9, 2006, and
                550,000
                shares are issuable upon exercise of warrants issued in connection
                with
                such financing (275,000 with an exercise price of $1.50 per share
                and
                275,000 with an exercise price of $0.56 per share). Quantities and
                prices
                in this footnote are adjusted to give effect to a one-for-20 reverse
                stock
                split.




(7)
            Represents
                206,250 shares of Common Stock held by Mr. Gesner and stock options
                to
                purchase 58,250 shares of Common Stock of the Company with an exercise
                price of $0.58 per share. Quantities and prices in this footnote
                are
                adjusted to give effect to a one-for-20 reverse stock
                split.





**Securities
      Authorized for Issuance Under Equity Compensation Plans**





The
      following table shows information with respect to each equity compensation
      plan
      under which common stock is authorized for issuance as of the fiscal year ended
      December 31, 2005. All common stock share amounts and exercise prices in this
      section have been adjusted to reflect a one-for-20 reverse split given effect
      by
      the OTC Bulletin Board on May 5, 2005.




23





**EQUITY
      COMPENSATION PLAN INFORMATION**


**Plan
                category**
            **Number
                of securities**
              **to
                be issued upon**
              **exercise
                of**
              **outstanding
                options,**
              **warrants
                and rights**
            **Weighted
                average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
            **Number
                of securities**
              **remaining
                available for future issuance under equity compensation plans (excluding
                securities reflected in column (a)****(a)**
            **(b)**
            **(c)****Equity
                compensation plans approved**
              **by
                security holders**
            817,500
            $1.51
            1,432,500**Equity
                compensation plans not approved**
              **by****security
                holders**
            -0-
            -0-
            -0-**Total**
            817,500
            $1.51
            1,432,500





On
      January 5, 2000, our Board of Directors adopted the Company’s 2000 Stock Option
      Plan which terminates on January 5, 2010. At a Special Meeting of Stockholders
      on February 29, 2000, the Plan was approved by the stockholders. On November
      30,
      2005, the Board of Directors approved an amendment to the 2000 Stock Option
      Plan
      to increase the number of shares of common stock subject to the plan after
      effectiveness of a one-for-20 reverse stock split from 1,000,000 shares to
      2,000,000 shares. On December 12, 2005, the Company’s shareholders approved the
      increase by unanimous written consent. The Company also will be presenting
      the
      increase to shareholders to vote on at its upcoming 2006 annual shareholders
      meeting. As of December 31, 2005, after giving effect to the one-for-20 reverse
      stock split, there were 567,500 options outstanding under the 2000 Stock Option
      Plan and 250,000 warrants issuable to Jeff Halloran as a bonus under an
      employment agreement dated February 4, 2004 and entitling him to acquire 250,000
      restricted shares of common stock at a price of $4.00 per share. The 2000 Stock
      Option Plan is intended to help the Company and its subsidiaries attract and
      retain employees (including officers), directors, consultants and independent
      contractors and to furnish additional incentives to such persons to enhance
      the
      value of its business over the long term by encouraging them to acquire a
      proprietary interest in the Company. After March 24, 2006, the 2000 Stock Option
      Plan is administered by the Company’s Compensation Committee. The 2000 Stock
      Option Plan was previously administered by the Board of Directors.





**Item
      12.**  **Certain
      Relationships and Related Transactions.**





The
      Company’s management believes the terms of each of the below transactions are at
      least as favorable as could be obtained from unrelated third
      parties.





**Loans
      From Related Parties**





On
      November 12, 2002, Mr. Brian Usher-Jones, one of our stockholders and then
      one
      of our directors, provided a $77,131 (CAD$100,000) loan by way of a note
      payable. Under the terms of the loan agreement Mr. Usher-Jones would receive:





(a)
            a
                fee of 5% of the amount borrowed;


(b)
            2%
                of the outstanding balance paid as interest on a monthly basis;


(c)
            warrants
                to purchase 1,000,000 shares of the Company's common stock for each
                30 day
                period or part thereof that the borrowed funds are outstanding; and


(d)
            a
                further 5% fee if the loan is not repaid in 90 days.





Also
      on
      November 12, 2002, Mr. Neil Greenberg, the sole shareholder of 1500450 Ontario
      Limited which was deemed beneficially to own approximately 20.5% of our
      outstanding shares of common stock at the time, provided a $77,131 (CAD$100,000)
      loan to us on the same terms as Mr. Usher-Jones.




24





On
      December 29, 2003, we entered into a settlement agreement with Mr. Brian
      Usher-Jones pursuant to which we agreed to pay $101,041 (CAD$131,000) in cash
      on
      January 2, 2004 as full and complete repayment of the loan. As part of the
      settlement Mr. Usher-Jones agreed to forgive all fees and warrants issuable
      under the terms of the loan. On January 23, 2004, we entered into a Settlement
      Agreement with Mr. Neil Greenberg. Under the terms of the settlement, we
      transferred 50,000 shares of Wireless Age Communications, Inc. common stock
      to
      Mr. Greenberg as payment of the loan. As part of the settlement, Mr. Greenberg
      agreed to forgive all interest and warrants issuable under the original loan
      agreement and we agreed to adjust the number of Wireless Age Communications,
      Inc. common shares as follows: In the event that the closing price is less
      than
      $3.00 per share of Wireless Age common stock on the earlier of (i) the date
      such
      stock becomes freely tradable under Rule 144, or (ii) the date such stock
      becomes freely tradable under an effective registration statement filed by
      Wireless Age, then the we would issue to Mr. Greenberg an additional number
      of
      shares of Wireless Age common stock equal to the excess of (x) US$150,000
      divided by the average per share closing price of Wireless Age common stock
      for
      the 5 trading days immediately prior to such date, over (y) 50,000.





On
      January 23, 2004, we transferred 50,000 Wireless Age Communications, Common
      Shares (marketable securities) to Neil Greenberg and 1500450 Ontario Inc.,
      a
      related party (by virtue of their ownership of our common stock at the time),
      as
      repayment of promissory notes totaling $162,000. We also agreed to adjust the
      number of shares in the event that the closing share prices is less than $3.00
      on the earlier of: (1) the date which the shares become freely trading under
      securities legislation, or (2) the date the shares are freely tradable under
      a
      registration statement. On February 18, 2005, we negotiated a final settlement
      of this matter under which we agreed to issue 25,000 shares of our capital
      stock
      (after adjustment for a one-for-20 reverse stock split) at a deemed value of
      $30,000 and transferred 75,000 shares of common stock of Wireless Age
      Communications Inc. at a deemed value of $53,250. This aggregate amount of
      $83,250 has been accrued as a settlement of loan obligation in the statement
      of
      operations at December 31, 2004.





One
      of
      our officers, Jeff Halloran, loaned us $45,171 as at December 31, 2005 to fund
      our operations. This loan is included in short term borrowings. It is unsecured,
      non-interest bearing and has no formal repayment terms.





**Phantom
      Fiber Acquisition**





Pursuant
      to the terms of the share exchange agreement with Phantom Fiber Corp., our
      wholly owned subsidiary formed in Ontario, Canada, on July 7, 2004, the holders
      of an aggregate of CAD$1,200,000 (approximately US$919,750) principal amount
      of
      our convertible debentures received an aggregate of 1,500,000 shares of our
      common stock and warrants (after adjustment for a one-for-20 reverse stock
      split) exercisable until the second anniversary of the closing to purchase
      750,000 shares of common stock (after adjustment for a one-for-20 reverse stock
      split) at an exercise price of $1.68 per share (after adjustment for a
      one-for-20 reverse stock split). Our former directors, Brian Usher-Jones and
      John G. Simmonds, each held CAD$100,000, and our former Secretary, Carrie
      Weiler, held CAD$25,000 principal amount of such debentures. Accordingly, upon
      the closing, Mr. Usher-Jones, Mr. Simmonds and Ms. Weiler received 125,000,
      125,000 and 31,250 shares of common stock (after adjustment for a one-for-20
      reverse stock split) and 62,500, 62,500 and 15,625 warrants (after adjustment
      for a one-for-20 reverse stock split), respectively **.** These
      warrants remain outstanding as at December 31, 2005.





**Private
      Securities Transactions**





On
      January 13, 2005, we entered into a private sales transaction with a former
      director and officer, Mr. John G. Simmonds, pursuant to which we agreed to
      deliver 800,000 shares of common stock of Wireless Age Communications Inc.
      for
      cash consideration of $600,000 and 3,000,000 shares of common stock of
      Trackpower Inc. for cash consideration of $150,000. The transaction, as amended,
      provides for payment of consideration through a combination of cash and
      cancellation of a note payable of $52,225 to a company controlled by Mr.
      Simmonds, as well as for periodic delivery of these shares upon satisfaction
      of
      various conditions and in quantities proportionate to cash payments received
      as
      a percentage of the total proceeds of the transaction.





Konstantine
      (Gus) Lucas, one of our directors, currently beneficially owns approximately
      14.8% of our outstanding common stock as described under “Security Ownership of
      Certain Beneficial Owners and Management” beginning on page 22 of this
      report. On April 26, 2005 Mr. Lucas purchased 250,000 shares of Common Stock
      in
      a private placement transaction at $1.00 (post one-for-20 stock split adjusted)
      per share. In connection with the April 26, 2005 private placement, Mr. Lucas
      received a warrant to purchase 250,000 shares of Common Stock with an exercise
      price of $2.00 (post one-for-20 stock split adjusted) per share and a term
      of 30
      months. On December 8, 2005 Mr. Lucas purchased 500,000 shares of Common Stock
      and warrants to purchase 500,000 shares of Common Stock from the Company in
      a
      private placement financing transaction for an aggregate purchase price of
      $275,000. Mr. Lucas subsequently exchanged the securities he purchased on
      December 8, 2005 for $275,000 principal amount of senior convertible notes
      and
      warrants to purchase 550,000 shares of Common Stock in a private placement
      financing which closed on January 9, 2006.




25





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





The
      following exhibits are included as part of this 10-k. References to the
“Company” in this Exhibit List mean Phantom Fiber Corporation, a Delaware
      corporation.





**Exhibit**
              **Number**
            
            **Description**3.1
            
            Certificate
                of Incorporation of the Company (Incorporated by reference to Amendment
                No. 1 to the Company’s Registration Statement on Form 10-SB/A (File No.
                001-15627), filed with the Securities and Exchange Commission on
                February
                17, 2000)3.2
            
            Certificate
                of Merger of Hycomp, Inc. Into Eieihome.com Inc. filed with the Delaware
                Secretary of State on March 3, 2000 (Incorporated by reference to
                the
                Company’s Registration Statement on Form SB-2 (File No. 333-131808), filed
                with the Securities and Exchange Commission on February 13,
                2006)3.3
            
            Certificate
                of Amendment to the Company’s Certificate of Incorporation filed with the
                Delaware Secretary of State on September 26, 2000 (Incorporated by
                reference to the Company’s Registration Statement on Form SB-2 (File No.
                333-131808), filed with the Securities and Exchange Commission on
                February
                13, 2006)3.4
            
            Amended
                and Restated Certificate of Incorporation of the Company filed with
                the
                Delaware Secretary of State on October 2, 2001 (Incorporated by reference
                to the Company’s Registration Statement on Form SB-2 (File No.
                333-131808), filed with the Securities and Exchange Commission on
                February
                13, 2006)3.5
            
            Certificate
                of Amendment to the Company’s Amended and Restated Certificate of
                Incorporation filed with the Delaware Secretary of State on July
                2, 2004
                (Incorporated by reference to the Company’s Registration Statement on Form
                SB-2 (File No. 333-131808), filed with the Securities and Exchange
                Commission on February 13, 2006)3.6
            
            By-laws
                of the Company (Incorporated by reference to Amendment No. 1 to the
                Company’s Registration Statement on Form 10-SB/A (File No. 001-15627),
                filed with the Securities and Exchange Commission on February 17,
                2000)4.1
            
            Form
                of Senior Convertible Note (Incorporated by reference to the Company’s
                Form 8-K filed with the Securities and Exchange Commission on January
                10,
                2006)4.2
            
            Form
                of $1.50/$0.56 Warrants(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on January 10, 2006)10.1
            
            Amended
                and Restated 2000 Stock Option Plan (Incorporated by reference to
                Appendix
                A to the Company’s Preliminary Schedule 14C filed with the Securities and
                Exchange Commission on December 19, 2005)10.2
            
            2005
                Stock Option, SAR and Stock Bonus Consultant Plan (Incorporated by
                reference to the Company’s Registration Statement on Form S-8 (File No.
                333-122730) filed with the Securities and Exchange Commission on
                February
                11, 2005)10.3
            
            Subscription
                Agreement effective December 8, 2005 between Phantom Fiber Corporation
                and
                the subscribers thereto (Incorporated by reference to the Company’s 8-K
                filed with the Securities and Exchange Commission on December 14,
                2005)10.4
            
            Securities
                Purchase Agreement dated January 5, 2006 by and among Phantom Fiber
                Corporation and the investors listed on the Schedule of Buyers attached
                thereto (Incorporated by reference to the Company’s Form 8-K filed with
                the Securities and Exchange Commission on January 10,
                2006)10.5
            
            Agreements
                of December 8, 2005 investors to exchange securities (Incorporated
                by
                reference to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on January 10, 2006)





10.6
            
            Registration
                Rights Agreement dated January 5, 2006 by and among Phantom Fiber
                Corporation and the Buyers signatory thereto (Incorporated by reference
                to
                the Company’s Form 8-K filed with the Securities and Exchange Commission
                on January 10, 2006)10.7
            
            Transfer
                Agent Instructions dated January 4, 2006 (Incorporated by reference
                to the
                Company’s Form 8-K filed with the Securities and Exchange Commission on
                January 10, 2006)21.1
            
            Subsidiaries
                of the Company (Incorporated by reference to the Company’s Registration
                Statement on Form SB-2 (File No. 333-131808), filed with the Securities
                and Exchange Commission on February 13, 2006)14.1
            
            Code
                of Ethics (Incorporated by reference to the Company’s annual report on
                Form 10-KSB for the fiscal year ended December 31, 2005, filed with
                the
                Securities and Exchange Commission on April 17, 2006)21.1
            
            List
                of Subsidiaries (Incorporated by reference to the Company’s Registration
                Statement on Form SB-2 (File No. 333-131808), filed with the Securities
                and Exchange Commission on February 13, 2006)31.1*
            
            Certification
                by Chief Executive Officer and Principal Financial Officer, required
                by
                Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act32.1*
            
            Certification
                by Chief Executive Officer and Principal Financial Officer, required
                by
                Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
                1350 of
                Chapter 63 of Title 18 of the United States
                Code






*
        Filed herewith.




26





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





**Audit
      Fees**





The
      aggregate fees billed for professional services rendered by the Company’s
      principal accountants for the audit of our financial statements, for the reviews
      of the Company’s financial statements included in the annual report on Form
      10-KSB, and for other services normally provided in connection with statutory
      filings were $ 80,800 and $56,500 for the years ended December 31, 2005 and
      December 31, 2004, respectively.





**Audit-Related
      Fees**





The
      Company incurred fees of $ 12,000 and $ 5,700 for the years ended December
      31,
      2005 and December 31, 2004, respectively, for professional services rendered
      by
      its principal accountants that are reasonably related to the performance of
      the
      audit or review of the Company’s financial statements and not included in “Audit
      Fees.”





**Tax
      Fees**





The
      aggregate fees billed for professional services rendered by the Company’s
      principal accountants for tax compliance, tax advice, and tax planning were
      $
      nil and $ nil, for the years ended December 31, 2005 and December 31, 2004,
      respectively.





**All
      Other Fees**





The
      Company did not incur any fees for other professional services rendered by
      its
      principal accountants during the years ended December 31, 2005 and December
      31,
      2004.





**Audit
      Committee Pre-Approval Policies and Procedures**





The
      Company’s Audit Committee was formed on March 24, 2006, and in the future will
      consult with respect to audit policy, choice of auditors, and approval of any
      financial transactions that are not in the ordinary course of business. As
      of
      the date this report was filed with the SEC and previously the entire Board
      of
      Directors was responsible for such functions.




27


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**Dated:**April
                19, 2006
            
            
            **PHANTOM
                FIBER CORPORATION**By:
            /s/
                Jeffrey T. HalloranJeffrey
                T. HalloranChief
                Executive Officer, President,Principal
                Financial Officer, PrincipalAccounting
                Officer and Director





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





**Signature**
            **Title**
            **Date**/s/
                Jeffrey T.
                Halloran
              Jeffrey
                T. Halloran
            Chief
                Executive Officer, President, Principal Financial Officer, Principal
                Accounting Officer and Director
            April
                19, 2006/s/
                  Konstantine
                  Lucas
              Konstantine
                  (Gus) Lucas
            Director
            April
                19, 2006/s/
                Stephen
                Gesner
              Stephen
                Gesner
            Director
            April
                18, 2006







28




Mintz & Partners L.L.P.
  **REPORT
        OF INDEPENDENT REGISTERED AUDITORS**
 
 To
        the
        Board of Directors and Stockholders of
 Phantom
        Fiber Corporation
 
 We
        have
        audited the accompanying consolidated balance sheets of Phantom Fiber
        Corporation, as
        at
        December 31, 2005 and 2004, and the related consolidated statements of
        operations and comprehensive
        loss, changes
        in stockholders' deficiency and cash flows for each of the years ended
        December 31, 2005 and 2004. These consolidated financial
        statements are the responsibility
        of the Company's management. Our responsibility is to express an opinion
        on
        these consolidated 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 statements presentation.
        We believe that our audits provide a reasonable basis
        for
        our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material
        respects, the financial position of Phantom Fiber Corporation as at December
        31, 2005
        and
        2004, and the results of its operations and its cash flows for each of the
        years
        in the two-year period
        ended December
        31, 2005 in conformity with accounting principles generally accepted in the
        United States of America.
 
 As
        described in the Note 1(d), the
        accompanying consolidated financial statements have been prepared
        assuming the Company will continue as a going concern, As
        at
        December 31, 2005 the Company
        had an accumulated deficit of $5,221,874. The recurring losses raise substantial doubt
        about the Company's ability to continue as a going concern. The
        consolidated financial statements
        do not include any adjustments that might result from the going concern
        assumption not
        being
        applicable.
 
  /s/
                    Mintz & Partners L.L.P.Toronto, CanadaApril 14, 2006
                CHARTERED
                  ACCOUNTANTS




F-1


**Phantom
                  Fiber Corporation**Consolidated
                  Balance SheetsAs
                  at December 31
 2005
              
              2004**ASSETS****Current
                  Assets:**Cash
              
              $
              269,410
              
              $
              19,400Accounts
                  receivable
              
              
              68,063
              
              
              41,244Marketable
                  securities (note 3)
              
              
              40,500
              
              
              962,599Investment
                  tax credit receivable
              
              
              134,659
              
              
              353,340Prepaid
                  expenses and other receivable
              
              
              69,636
              
              
              14,414**Total
                  current assets**
              
              
              582,268
              
              
              1,390,997**Deferred
                  financing costs**(note
                  2(m))
              
              
              92,440
              
              
              —**Property,
                  plant and equipment**(note
                  4)
              
              
              45,151
              
              
              53,127**TOTAL
                  ASSETS**
              
              $
              719,859
              
              $
              1,444,124**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIENCY****Current
                  Liabilities:**Accounts
                  payable and accrued liabilities
              
              $
              1,139,491
              
              $
              1,077,179Unearned
                  revenue
              
              
              51,963
              
              
              —Short
                  term borrowings (note 5)
              
              
              45,171
              
              
              340,920Current
                  portion of obligation under capital leases (note 4)
              
              
              14,795
              
              
              26,274Notes
                  payable (note 6)
              
              
              —
              
              
              109,725Senior
                  subordinated convertible debentures (note 7)
              
              
              —
              
              
              66,500**Total
                  current liabilities**
              
              
              1,251,420
              
              
              1,620,598Obligation
                  under capital leases (note 4)
              
              
              15,284
              
              
              24,649Securities
                  subscriptions received (note 12)
              
              
              858,000
              
              
              —2,124,704
              
              
              1,645,247**Stockholders’
                  Deficiency****Common
                  stock**,
                  $.001 par value, 400,000,000 shares authorized,13,890,464
                  shares, issued and outstanding (note 8);(13,034,454
                  shares, December 31, 2004).
              
              
              13,890
              
              
              13,034**Additional
                  paid-in capital**
              
              
              3,811,881
              
              
              2,780,5643,825,771
              
              
              2,793,598**Accumulated
                  deficit**
              
              
              (5,221,874
              )
              
              (2,496,674
              )**Accumulated
                  other comprehensive loss**
              
              
              (8,742
              )
              
              (498,047
              )**Total
                  stockholders’ deficiency**
              
              
              (1,404,845
              )
              
              (201,123
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIENCY**
              
              $
              719,859
              
              $
              1,444,124




See
      accompanying notes






F-2




**Phantom
                  Fiber Corporation**Consolidated
                  Statements of Operations and Comprehensive LossYears
                  Ended December 31
 2005
              
              2004**Revenue**Professional
                  services
              
              $
              105,701
              
              $
              56,636User
                  fees and royalties
              
              
              119,255
              
              
              34,875224,956
              
              
              91,511**Operating
                  expenses:**Research
                  and development
              
              
              933,499
              
              
              572,258Sales
                  and marketing
              
              
              352,616
              
              
              325,101General
                  and administrative
              
              
              1,007,021
              
              
              910,262Total
                  operating expenses
              
              
              2,293,136
              
              
              1,807,621**Operating
                  loss before other income (expenses)**
              
              
              (2,068,180
              )
              
              (1,716,110
              )**Other
                  income (expenses)**Loss
                  on disposal of marketable securities
              
              
              (588,573
              )
              
              (109,534
              )Loss
                  on settlement and write off of accounts payable
              
              
              (27,902
              )
              
              —Gain
                  on disposal of Battery Business
              
              
              —
              
              
              391,874Interest
                  expense
              
              
              (121,032
              )
              
              (111,495
              )Interest
                  revenue
              
              
              6,464
              
              
              6,906Earnout
                  on sale of Battery Business (Note 1(c))
              
              
              82,500
              
              
              35,500Settlement
                  of loan obligation
              
              
              —
              
              
              (83,250
              )Gain
                  (loss) on foreign exchange
              
              
              (8,477
              )
              
              62,060**Net
                  loss**
              
              $
              (2,725,200
              )
              $
              (1,524,049
              )Other
                  comprehensive income (loss):Unrealized
                  gain (loss) on marketable securities
              
              
              519,364
              
              
              (535,378
              )Foreign
                  exchange translation loss
              
              
              (30,059
              )
              
              (17,849
              )Comprehensive
                  loss
              
              $
              (2,235,895
              )
              $
              (2,077,276
              )**Loss
                  per share:**Weighted
                  average number of common shares outstanding(note
                  2 (i))
              
              
              13,568,016
              
              
              9,868,289Loss
                  per share (note 2(i))
              
              $
              (0.20
              )
              $
              (0.15
              )




See
      accompanying notes




F-3


**Phantom
        Fiber Corporation**


Consolidated
      Statements of Changes in Stockholders’ Deficiency


December
      31, 2005 and December 31, 2004




Common
                stock
              Number
                reflecting a 1:20 share consolidation
            
            Common
                stock
              Par
                Value
            
            Additional
                paid in capital
            
            Other
              Shareholders’
              Equity
            
            Accumulated
              Deficit
            
            Accumulated
                other comprehensive
              income
                (loss)
            
            Total
              Stockholders
              Equity
                /(Deficiency)(#)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)**Balance,
                December 31, 2003**
            
            
            **7,350,211**
            
            
            **7,350**
            
            
            **—**
            
            
            **1,077,517**
            
            
            **(972,625**
            **)**
            
            **55,180**
            
            
            **167,422**Issuance
                of convertible debentures
            
            
            1,020,326
            
            
            1,020
            
            
            624,610
            
            
            
            
            
            
            
            
            
            
            
            625,630Adjustment
                arising from reorganization due to reverse acquisition
            
            
            4,663,917
            
            
            4,664
            
            
            2,155,954
            
            
            (1,077,517
            )
            
            
            
            
            
            
            
            1,083,101Net
                loss for the year ended December 31, 2004
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,524,049
            )
            
            
            
            
            (1,524,049
            )Adjustment
                arising from unrealized loss on marketable securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (535,378
            )
            
            (535,378
            )Adjustment
                arising from foreign exchange translation loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (17,849
            )
            
            (17,849
            )**Balance,
                December 31, 2004**
            
            
            **13,034,454**
            
            
            **13,034**
            
            
            **2,780,564**
            
            
            **—**
            
            
            **(2,496,674**
            **)**
            
            **(498,047**
            **)**
            
            **(201,123**
            **)**Shares
                issued for settlement on
              accounts
                payable, debt and services
            
            
            537,376
            
            
            537
            
            
            575,666
            
            
            
            
            
            
            
            
            
            
            
            576,203Shares
                issued for conversion of senior subordinated convertible
                debentures
            
            
            18,634
            
            
            19
            
            
            93,151
            
            
            
            
            
            
            
            
            
            
            
            93,170Net
                loss for the year ended December 31, 2005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,725,200
            )
            
            
            
            
            (2,725,200
            )Adjustment
                arising from reduction in unrealized loss on marketable
                securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            519,364
            
            
            519,364Adjustment
                arising from foreign exchange translation loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (30,059
            )
            
            (30,059
            )Stock
                based compensation -expensed
            
            
            
            
            
            
            
            
            39,000
            
            
            
            
            
            
            
            
            
            
            
            39,000Stock
                based compensation - deferred
            
            
            
            
            
            
            
            
            23,800
            
            
            
            
            
            
            
            
            
            
            
            23,800Common
                stock issued in connection with private placement
            
            
            300,000
            
            
            300
            
            
            299,700
            
            
            
            
            
            
            
            
            
            
            
            300,000**Balance,
                December 31, 2005**
            
            
            **13,890,464**
            
            
            **13,890**
            
            
            **3,811,881**
            
            
            **—**
            
            
            **(5,221,874**
            **)**
            
            **(8,742**
            **)**
            
            **(1,404,845**
            **)**






See
      accompanying notes




F-4




**Phantom
                  Fiber Corporation**Consolidated
                  Statements of Cash FlowsYears
                  Ended December 31
 2005
              
              2004**Cash
                  Flows From Operating Activities**Loss
                  for the year
              
              $
              (2,725,200
              )
              $
              (1,524,049
              )Add
                  back items not requiring (providing) cashDepreciation
                  and amortization
              
              
              15,407
              
              
              14,386Loss
                  on sale of securities
              
              
              588,573
              
              
              109,534Foreign
                  exchange gain
              
              
              (30,059
              )
              
              (17,958
              )Marketable
                  securities received for services rendered
              
              
              (32,500
              )
              
              —Gain
                  on disposition of Battery Business
              
              
              —
              
              
              (391,874
              )Stock-based
                  compensation
              
              
              39,000
              
              
              —Expenses
                  paid in marketable securities
              
              
              53,250
              
              
              324,100Expenses
                  paid with common stock
              
              
              250,079
              
              
              —Gain
                  on settlement and write off of debt
              
              
              —
              
              
              83,250Earnout
                  on sale of Battery Business
              
              
              (82,500
              )
              
              (35,500
              )Changes
                  in non cash operating assets and liabilitiesAccounts
                  receivable
              
              
              (26,819
              )
              
              (155,876
              )Investment
                  tax credit receivable
              
              
              218,681
              
              
              99,737Prepaid
                  expenses and other receivables
              
              
              12,127
              
              
              (10,728
              )Accounts
                  payable and accrued liabilities
              
              
              154,076
              
              
              520,523Unearned
                  revenue
              
              
              51,963
              
              
              —(1,513,922
              )
              
              (984,455
              )**Cash
                  Flows From Financing Activities**Issuance
                  of common stock
              
              
              300,000
              
              
              —Issuance
                  of convertible debentures
              
              
              —
              
              
              625,630Securities
                  subscriptions received
              
              
              858,000
              
              
              —Repayments
                  of notes payable
              
              
              —
              
              
              (38,000
              )Repayment
                  of obligation under capital leases
              
              
              (30,997
              )
              
              (12,831
              )Increase
                  (decrease) in short term borrowings
              
              
              (223,136
              )
              
              203,784903,867
              
              
              778,583**Cash
                  Flows From Investing Activities**Cash
                  acquired in reverse acquisition transaction
              
              
              —
              
              
              5,541Proceeds
                  from the sale of marketable securities
              
              
              860,065
              
              
              199,989860,065
              
              
              205,530**Increase
                  / (decrease) in cash**
              
              
              250,010
              
              
              (342
              )**Cash,
                  beginning of year**
              
              
              19,400
              
              
              19,742**Cash,
                  end of year**
              
              $
              269,410
              
              $
              19,400**Interest
                  paid**
              
              $
              101,557
              
              $
              97,167





See
      accompanying notes




F-5




**Phantom
                  Fiber Corporation**Consolidated
                  Statements of Cash Flows (continued)Years
                  Ended December 31
 2005
              
              2004**Non
                  cash transactions:**Marketable
                  securities disposed of in settlement ofdebt
              
              $
              53,250
              
              $
              —Common
                  shares issued on conversion of debenture (includesaccrued
                  interest of $26,670)
              
              
              93,170
              
              
              —Common
                  shares issued in settlement of accounts payable
              
              
              197,706
              
              
              —Common
                  shares issued in settlement of short term borrowings
              
              
              118,072
              
              
              —Common
                  shares issued in settlement for services
              
              
              260,424
              
              
              —Stock-based
                  compensation
              
              
              39,000
              
              
              —Stock-based
                  compensation recorded as deferred finance expense
              
              
              23,800Marketable
                  securities received for services rendered
              
              
              32,500
              
              
              —Note
                  payable applied to other receivable (includes interestof
                  $14,000
              
              
              66,225
              
              
              —Property,
                  plant and equipment obtained via capital leases
              
              
              7,370
              
              
              45,785Assets
                  and liabilities acquired pursuant to reverseacquisition:Marketable
                  securities
              
              
              —
              
              
              930,000Battery
                  business
              
              
              —
              
              
              315,126Prepaid
                  expenses
              
              
              —
              
              
              324,100Accounts
                  payable and accrued liabilities
              
              
              —
              
              
              (277,441
              )Notes
                  payable
              
              
              —
              
              
              (147,725
              )Senior
                  subordinated convertible debentures
              
              
              —
              
              
              (66,500
              )Marketable
                  securities received for settlement ofNote
                  receivable
              
              
              —
              
              
              135,000Earnout
                  on sale of Battery Business (note 1(c), 3)
              
              
              82,500
              
              
              35,500








See
      accompanying notes




F-6


**Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements


December
      31, 2005 and 2004




**Note
      1.**  **Description
      of Business and Basis of Presentation**





a)
            Description
                of Business





The
      business of Phantom Fiber Corporation (the “Company”) (formerly known as Pivotal
      Self Service Technologies Inc, Wireless Ventures Inc. and Hycomp, Inc.) is
      conducted through its wholly-owned Canadian subsidiary Phantom Fiber Inc.
      headquartered in Toronto, Canada.





It
      is
      engaged in the business of the sale and licensing of its proprietary wireless
      software platform and integration services. Phantom Fiber uses its software
      platform to extend the rich multimedia content and user experience of its
      customers’ existing Internet web sites securely and instantly to the Personal
      Digital Assistants (“PDA’s) and cell phones of mobile users.





Phantom
      Fiber derives its revenue from direct sales of various licensing and revenue
      sharing plans that allow its revenues to grow based upon the adoption rate
      of
      its customer’s end users.





b)
            Reverse
                Acquisition Transaction





On
      July
      7, 2004, the Company (formerly known as "Pivotal Self-Service Technologies
      Inc.") completed a reverse acquisition of privately held Phantom Fiber
      Corporation, an Ontario corporation. The merger was effected pursuant to a
      Share
      Exchange Agreement dated April 22, 2004 (the " Agreement") by and among the
      Company and Phantom Fiber Corporation. In accordance with the terms of the
      Agreement, the Company merged with and into Phantom Fiber Corporation, with
      Phantom Fiber Corporation remaining as the surviving corporation and a wholly
      owned subsidiary of the Company.





Pursuant
      to the Agreement, the outstanding shares of common stock of Phantom Fiber
      Corporation, converted into an aggregate of 8,370,537 (167,410,735 pre-
      consolidation of shares) shares of the Company's common stock, which represented
      64 percent of the Company's outstanding voting stock after giving effect to
      the
      merger. An aggregate of 1,374,107 (after consolidation of shares) shares had
      been placed in escrow for a period of one year following the date of closing
      of
      the transaction in support of indemnifications by the pre-merger stockholders
      of
      Phantom Fiber Corporation to Pivotal Self-Service Technologies Inc. The
      transaction is recorded as a reverse acquisition since the Phantom Fiber
      Corporation stockholders became the controlling stockholders of the Company.
      Accordingly, the transaction is accounted for as the issuance of stock by
      Phantom Fiber Corporation for the net monetary assets of the Company accompanied
      by a recapitalization of Phantom Fiber Corporation and no goodwill or any
      intangible assets are recorded. Prior period results and comparatives are those
      of Phantom Fiber Corporation and its subsidiary. Based on the price of the
      Company's common stock on July 7, 2004 of $1.60 per share (being $0.08 per
      share
      restated for a 1 for 20 reverse stock split which became effective May 5, 2005)
      , the purchase price approximated $13,393,000. In connection with the merger,
      the Company changed its name from "Pivotal Self-Service Technologies Inc."
      to
      "Phantom Fiber Corporation".





Pursuant
      to the terms of the share exchange agreement between the Company and Phantom
      Fiber, upon Closing on July 7, 2004, the holders of an aggregate of CAD
      $1,200,000 (approximately $919,750) principal amount of convertible debentures
      of Phantom Fiber Corporation received warrants exercisable until the second
      anniversary of the Closing to purchase 750,000 (after consolidation of shares)
      shares of the Company's common stock at an exercise price of $1.68 per share
      (being $0.084 per share restated for a 1 for 20 reverse stock split (see Note
      8(a)).




F-7


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
        31, 2005 and 2004


**Note
      1.**  **Description
      of Business and Basis of Presentation** (continued)





The
      Company also issued stock options to replace 2,000,000 Phantom Fiber Corporation
      stock options existing prior to the merger. Each stock option will allow the
      holder to .275 post-merger common shares (550,000 common shares in aggregate
      )
      for an exercise price equal to the exercise price of the Phantom Fiber
      Corporation stock options previously held divided by .275, and with an expiry
      date and vesting provisions similar to those of the previously outstanding
      stock
      options.





c)
            Disposition
                of Prime Battery





The
      Company disposed of the all of the shares of its Prime Battery Products Limited
      (“Prime Battery”) subsidiary plus additional assets and liabilities (together,
      the “Battery Business”) in a transaction completed on September 15,
      2004.





The
      Battery Business was sold to Wireless Age Communications Inc. (“Wireless Age”)
      for the following consideration: (i) 700,000 restricted common shares of
      Wireless Age; and (ii) 200,000 additional restricted common shares (“Earnout
      Shares”) of Wireless Age as an earnout over a one year period. The Earnout
      Shares were issuable on November 30, 2004 , February 28, 2005, May 31, 2005
      and
      August 31, 2005 if Prime Battery continues to earn royalties under existing
      agreements with certain customers.





d)
            Going
                Concern and Basis of Presentation





These
      financial statements have been prepared on the going concern basis, which
      assumes the realization of assets and liquidation of liabilities in the normal
      course of business, notwithstanding the continuing operating losses and the
      deficit as at December 31, 2005. The ability of the Company to continue as
      a
      going concern is dependent on the Company's ability to generate future
      profitable operations and receive continued support from its lenders,
      shareholders and raise external financing for which there can be no assurance
      regarding the success thereof.





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





a)
            Use
                of estimates





The
      preparation of consolidated financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosures of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the year.
      Actual results may differ from these estimates.





b)
            Allowance
                for doubtful accounts





The
      Company records an allowance for doubtful accounts based on specifically
      identified amounts that management believes to be uncollectible. The criteria
      for allowance provision are determined based on historical experience and the
      Company’s assessment of the general financial conditions affecting its customer
      base. If the Company’s actual collections experience changes, revisions to the
      allowance may be required.




F-8


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
        31, 2005 and 2004


**Note
      2.**  **Summary
      of Significant Accounting Policies** (continued)





c)
            Acquisitions
                and business combinations





The
      Company accounts for acquisitions and business combinations under the purchase
      method of accounting. The Company includes the results of operations of the
      acquired business from the acquisition date. Net assets of the companies
      acquired are recorded at their fair value at the acquisition date. The excess
      of
      the purchase price over the fair value of net assets acquired are included
      in
      intangible assets in the accompanying consolidated balance sheets.





d)
            Revenue
                recognition





The
      Company recognizes software licensing revenues in accordance with all applicable
      accounting regulations, including the American Institute of Certified Public
      Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition”,
      SOP 98-9, "Modification of SOP 97-2 with respect to Certain Transactions" and
      Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 104.
      Following the requirements of these accounting pronouncements, the Company
      recognizes license revenues when all of the following conditions are
      met:





·  there
      is
      a signed license agreement with the customer;





·  the
      software product has been delivered to the customer;





·  the
      amount of the fees to be paid by the customer is fixed or determinable;
      and





·  collection
      of these fees is probable.





The
      Company generally negotiates formal license agreements with its customers.
      Each
      of the license agreements includes provisions for receipt of an up-front license
      fee and royalties. Generally, service providers pay these royalty fees either
      in
      the form of a one-time payment or as an on-going monthly fee. On-going royalties
      are recognized monthly based on the number of subscribers at month end. One-time
      royalties are recognized based on the number of new subscribers at the end
      of
      each period.





The
      Company may also negotiate license agreements that allow for the payment of
      the
      initial license fee to be made in future installments over a period of less
      than
      a year. Revenues recognized in advance of the installments being due are
      recorded as unbilled revenues in the balance sheet.





Maintenance
      and technical support revenues are recognized rateably over the applicable
      service period, which is usually one year. Revenues derived from professional
      services are recognized upon performance of the related services. Revenues
      derived from license agreements containing multiple deliverables, such as
      product licenses, maintenance and technical support and other services, are
      allocated among the various deliverables based on the fair value of each
      deliverable. Payments received from customers prior to the completion of
      services are recorded as unearned revenue.




F-9


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
        31, 2005 and 2004


**Note
      2.**  **Summary
      of Significant Accounting Policies** (continued)





e)
            Intangibles
                and goodwill





The
      Company regularly reviews all of its long-lived assets, including goodwill
      and
      other intangible assets, for impairment whenever events or changes in
      circumstances indicate that the carrying value may not be recoverable. Factors
      the Company considers important that could trigger an impairment review include,
      but are not limited to, significant underperformance relative to historical
      or
      projected future operating results, significant changes in the manner of use
      of
      the acquired assets or the strategy for the Company’s overall business, and
      significant negative industry or economic trends. When management determines
      that an impairment review is necessary based upon the existence of one or more
      of the above indicators of impairment, the Company measures any impairment
      based
      on a projected discounted cash flow method using a discount rate commensurate
      with the risk inherent in our current business model.





Significant
      judgment is required in the development of projected cash flows for these
      purposes including assumptions regarding the appropriate level of aggregation
      of
      cash flows, their term and discount rate as well as the underlying forecasts
      of
      expected future revenue and expense. To the extent that events or circumstances
      cause assumptions to change, charges may be required which could be
      material.




f)
            Investments





The
      Company’s investment in marketable securities is classified as available for
      sale securities and is recorded at their fair value. Unrealized holding gains
      and losses are reported as a net amount in a separate component of shareholders’
equity until realized.





g)
            Income
                taxes





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. Under SFAS
      No. 109, deferred tax assets and liabilities are determined based on temporary
      differences between the financial statement and tax bases of assets and
      liabilities and net operating loss and credit carryforwards using enacted tax
      rates in effect for the year in which the differences are expected to reverse.
      Valuation allowances are established when necessary to reduce deferred tax
      assets to the amounts expected to be realized. A provision for income tax
      expense is recognized for income taxes payable for the current period, plus
      the
      net changes in deferred tax amounts.





h)
            Financial
                instruments




Fair
      value




The
      carrying values of cash, trade accounts receivable, prepaid expenses and other
      receivables, accounts payable and accrued liabilities and short term loans
      approximate their fair values due to the relatively short periods to maturity
      of
      the instruments.




F-10


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
        31, 2005 and 2004


**Note
      2.**  **Summary
      of Significant Accounting Policies** (continued)






The
      fair
      value of the convertible debentures is based on current rates for debt with
      similar terms and maturities and is estimated not to be materially different
      from its carrying value.




Credit
      risk




Credit
      risk arises from the potential that a counter party will fail to perform its
      obligations. The Company is exposed to credit risk from its customers. However,
      the Company has a significant number of customers which minimizes concentration
      of credit risk.




Interest
      rate risk




Interest
      rates, maturities and security affecting the interest risk of the Company’s
      financial assets and liabilities have been disclosed in notes 5, 6 and
      7.





i)
            Net
                loss per share





For
      fiscal years 2005 and 2004, net loss per share has been computed using the
      net
      loss for the year divided by the weighted average number of shares outstanding
      as adjusted for a 1 for 20 reverse stock split effective May 5, 2005 . Dilutive
      earnings per share considers the dilutive impact of the exercise of outstanding
      stock options and warrants as if the events had occurred at the beginning of
      the
      year, or at a time of issuance, if later. When the effect of computing diluted
      loss per share is anti-dilutive this information is not provided.





j)
            Foreign
                currency





The
      functional currency of the company is the U.S. dollar and the functional
      currency of the wholly owned subsidiary located in Canada is the Canadian
      dollar. Assets and liabilities of this subsidiary are translated to U.S. dollars
      at year-end exchange rates and income statement items are translated at the
      exchange rates present at the time such transactions arise. Resulting
      translation adjustments, if material, are recorded as a separate component
      of
      accumulated other comprehensive income, a component of stockholders’
equity/(deficiency).





k)
            Investment
                tax credits




The
      Company’s subsidiary is entitled to Canadian (Ontario) tax credits which are
      earned as a percentage of eligible research and development expenditures
      incurred in each taxation year. Investment tax credits earned relating to
      research and development expenses and property, plant and equipment purchases
      are accounted for as a reduction of the respective expenses and the cost of
      such
      assets.





l)
            Comprehensive
                income (loss)





Comprehensive
      income (loss) includes the net exchange differences arising from the translation
      of Canadian dollar denominated subsidiaries into US dollars and accumulated
      unrealized holding gains and losses on the Company’s available for sale
      securities.




F-11


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
        31, 2005 and 2004


**Note
      2.**  **Summary
      of Significant Accounting Policies** (continued)





m)
            Deferred
                financing costs





Costs
      directly identifiable with the raising of debt will be recorded as deferred
      financing costs. These deferred costs will be amortized over the term of the
      debt financing to which the costs relate. Deferred financing costs consist
      primarily of corporate finance fees and legal fees.





n)
            Recent
                accounting pronouncements







In
      September 2005, the Financial Accounting Standards Board (“FASB”) ratified the
      following consensus reached in EITF Issue 05-8 ( *“Income
      Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion
      Feature”* ):






·  The
      issuance of convertible debt with a beneficial conversion feature results in
      a
      basis difference in applying FASB Statement of Financial Accounting Standards
      SFAS No. 109, Accounting for Income Taxes. Recognition of such a feature
      effectively creates a debt instrument and a separate equity instrument for
      book
      purposes, whereas the convertible debt is treated entirely as a debt instrument
      for income tax purposes.




·  The
      resulting basis difference should be deemed a temporary difference because
      it
      will result in a taxable amount when the recorded amount of the liability is
      recovered or settled.




·   Recognition
      of deferred taxes for the temporary difference should be reported as an
      adjustment to additional paid-in capital.







The
      foregoing consensus is effective in the first interim or annual reporting period
      commencing after December 15, 2005, with early application permitted. The effect
      of applying the consensus should be accounted for retroactively to all debt
      instruments containing a beneficial conversion feature that are subject to
      EITF
      Issue 00-27, *“Application
      of Issue No. 98-5 to Certain Convertible Debt Instruments”* (and
      thus is applicable to debt instruments converted or extinguished in prior
      periods but which are still presented in the financial statements). The Company
      has not completed an evaluation of the impact of this
      pronouncement.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”) which supersedes APB Opinion No. 20, “Accounting Changes” and
      SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements”. The
      statement requires the retroactive application to prior periods’ financial
      statements of changes in accounting principles, unless it is impractical to
      determine either the period of specific effects or the cumulative effect of
      the
      change.





SFAS
      154
      does not change the guidance for reporting the correction of an error in
      previously issued financial statements or the change in accounting estimate.
      SFAS No. 154 is effective for accounting changes and corrections of errors
      made
      in fiscal years beginning after December 15, 2005. The Company does not believe
      SFAS No. 154 will have a significant impact on its consolidated financial
      position or results of operations.




F-12


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
        31, 2005 and 2004




**Note
      2. Summary of Significant Accounting Policies** (continued)





In
      December 2004, the FASB issued Statement No. 123(R), *Share-Based
      Payments* ,
      which
      will require compensation costs related to share-based payment transactions
      to
      be recognized in the financial statements. As permitted by the predecessor
      Statement No.123, the Company does not recognize compensation expense with
      respect to stock options issued because the option price was no greater than
      the
      market price at the time the option was issued. Statement 123(R) will be
      effective in the fiscal quarter beginning January 1, 2006. The Company has
      not
      completed an evaluation of the impact of adopting Statement 123(R).





In
      December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
      Assets-amendment of APB Opinion No. 29". Statement 153 eliminates the
      exception to fair value for exchanges of similar productive assets and replaces
      it with a general exception for exchange transactions that do not have
      commercial substance, defined as transactions that are not expected to result
      in
      significant changes in the cash flows of the reporting entity. This statement
      is
      effective for exchanges of nonmonetary assets occurring after June 15,
      2005. The Company will adopt this Statement in fiscal 2005 and adoption is
      not
      expected to have a material impact on the Company’s financial
      statements.


o)
              Stock
                  options


The
      Company applies the disclosure provisions of SFAS No.123, "Accounting for
      Stock-Based Compensation "for granting of stock options and warrants to
      employees. These stock option awards continue to be accounted for in accordance
      with APB Opinion No.25. The Company applies the accounting and disclosure
      provisions of SFAS No.123, "Accounting for Stock-Based Compensation "for
      granting of stock options and warrants to non-employees. As the number of shares
      to be issued and the per share strike price are not subject to uncertainty,
      stock option grants are accorded fixed accounting treatment. The Company has
      recorded compensation expense in connection with the granting of stock options
      and warrants to non-employees.





Had
      compensation cost for the employee and non-employee director stock options
      been
      determined based on the fair value at the grant date for awards for the years
      December 31, 2004 and 2005 consistent with the provisions of SFAS No.123, the
      net loss as reported would have been increased to the pro forma amounts
      indicated below (amounts in thousands):





2005
              
              2004Net
                  loss as reported
              
              $
              (2,725
              )
              $
              (1,524
              )Pro
                  forma compensation expense (employees)
              
              
              57
              
              
              21Pro
                  forma net loss
              
              $
              (2,782
              )
              $
              (1,545
              )There
                  is no effect on loss per share.




F-13


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004


**Note
      2. Summary of Significant Accounting Policies** (continued)





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model. The following weighted average assumptions
      were used in the model:





2005
              
              2004Dividend
                  yield
              
              
              nil
              
              
              nilExpected
                  volatility
              
              
              86
              %
              
              90
              %Risk
                  free interest rates
              
              
              4.0
              %
              
              3.5
              %Expected
                  lives (years)
              
              
              5.0
              
              
              3.0
 p)
                  Property,
                      plant and equipment


Property,
      plant and equipment are carried at cost less accumulated amortization.
      Amortization is calculated using the declining-balance method as follows.





Computer
                    equipment
                
                
                30
                %Office
                    furniture
                
                
                20
                %


Additions
      during the period are amortized at one-half the usual rate.


q)
                Capital
                    leases


Leases
      that transfer the substantial obligations and benefits of ownership are recorded
      as capital assets and a related obligation under capital
      leases.




**Note
      3.**  **Marketable
      Securities**





The
      Company’s available for sale marketable securities consist of the
      following:


**Original**
              
              **Carrying**
              
              **Unrealized****Number**
              
              
              **Cost**
              
              **Value**
              
              **Gain/
                  (Loss)**December
                  31, 2005:Midland
                  International Corporation
              
              
              650,000
              (d)
              
              $
              32,500
              
              $
              32,500
              
              $
              nilWireless
                  Age Communications Inc.
              
              
              25,000
              (b)
              
              
              24,014
              
              $
              8,000
              
              $
              (16,014
              )$
              56,514
              
              $
              40,500
              
              $
              (16,014
              )December
                  31, 2004:Trackpower
                  Inc.
              
              
              3,000,000
              (c)
              
              $
              136,950
              
              $
              149,649
              
              $
              12,699Wireless
                  Age Communications Inc.
              
              
              1,145,000
              (a)
              
              
              1,361,027
              
              
              812,950
              
              
              (548,077
              )$
              1,497,977
              
              $
              962,599
              
              $
              (535,378
              )


(a)
                In
                    September, 2004 the Company received 700,000 restricted shares
                    of Wireless
                    Age Communications Inc. (“Wireless Age”) at a market price of $1.01
                    through the disposition of its Battery Business as described
                    in Note 1(c).
                    Pursuant to an earnout arrangement arising from the disposition
                    of its
                    Battery Business as described in Note 1 (c), the Company received
                    50,000
                    restricted shares of Wireless Age at a market price of $0.71.
                    The
                    remaining 395,000 shares of Wireless Age were acquired in conjunction
                    with
                    the reverse acquisition transaction described in note 1
                    (b).




F-14


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
        31, 2005 and 2004




**Note
      3.**  **Marketable
      Securities** (continued)


(b)
                During
                      fiscal 2005, the Company received a further 150,000 restricted
                      shares of
                      Wireless Age at a market prices from $0.52 to $0.61 pursuant
                      to the
                      earnout arrangement previously noted and described in Note
                      1 (c).


O n
      January
      13, 2005, the Company entered into a transaction with a former officer, director
      and shareholder of Pivotal Self-Service Technologies Inc. under which the
      Company agreed to sell 800,000 shares of common stock of Wireless Age for
      consideration of $600,000. The Company realized a loss of $350,936 on this
      transaction. The transaction provides for payment of consideration through
      a
      combination of cash and cancellation of a note payable of $52,225 to a company
      controlled by the purchaser (note 6(b)), as well as for periodic delivery of
      these shares upon satisfaction of various conditions and in quantities
      proportionate to cash payments received as a percentage of the total proceeds
      of
      the transaction.




On
      January 23, 2004, the Company transferred 50,000 of the Wireless Age shares
      to
      an affiliate of the Company who, per note 6(b), had provided a loan of $162,000
      to the Company in November 2002. The transfer of these shares was in payment
      of
      the loan. The sale agreement provided for an issuance of additional shares
      of
      Wireless Age if the value of the original 50,000 shares fell below a specified
      level at the time they became free trading. On February 18, 2005, the Company
      issued 25,000 (after consolidation of shares) shares of its own capital stock
      and transferred an additional 75,000 shares of common stock of Wireless Age
      to
      make up for the drop in value under this sale agreement. The Company realized
      a
      loss on disposition of marketable securities of $35,900 on the transfer of
      the
      Wireless Age shares.




During
      fiscal 2005, the Company sold 395,000 shares of Wireless Age for cash proceeds
      of $164,640. The Company realized losses on disposition of marketable securities
      of $214,787 on these transactions.


(c)
                During
                    July, 2004 the Company received 3,000,000 restricted shares of
                    Trackpower
                    Inc. as partial payment for an amount due from a third party.
                    On January
                    13, 2005, the Company entered into a sales transaction with a
                    former
                    officer, director and shareholder of Pivotal
                    Self-Service Technologies Inc. under which the Company agreed
                    to deliver
                    3,000,000 shares of common stock of Trackpower Inc. for consideration
                    of
                    $150,000. The Company realized a gain on disposition of marketable
                    securities of $13,050 on this
                    transaction.




(d)
                  During
                      fiscal 2005 the Company received 650,000 restricted shares
                      of Midland
                      International Corporation (formerly Azonic Corporation) pursuant
                      to an
                      agreement to provide consulting services. Midland is an early
                      stage
                      company with stock that subject to restrictions and is thinly
                      traded. In
                      management’s opinion attempts to sell the shares will result in a decline
                      in share price. Further the restrictions on trading create
                      a risk that the
                      share price will fall before the Company is able to realize
                      on the stock.
                      Due to these factors management has estimated realization on
                      these shares
                      of $0.05 per share (a discount from the price of $0.41 at the
                      time of the
                      contract). The stock traded at $0.10 at December 31,
                      2005.
 
 F-15


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004





**Note
      4.**  **Property,
      Plant and Equipment**





Property,
      plant and equipment comprises the following:


2005
              
              2004Computer
                  equipment - cost
              
              $
              50,997
              
              $
              43,513Office
                  furniture - cost
              
              
              28,044
              
              
              28,15879,041
              
              
              71,671Less:
                  accumulated amortization
              
              
              (33,891
              )
              
              (18,544
              )$
              45,151
              
              $
              53,127





Included
      in the above property, plant and equipment are computer equipment and office
      furniture under capital lease with a cost of $70,638 (December 31, 2004:
      $61,353) and accumulated amortization of $27,083 (December 31, 2004: $11,898).
      These leases bear interest at varying rates from 9%-21%. The specific assets
      covered by the capital leases have been pledged as security to the leasing
      company until the complete lease has been repaid.





The
      future minimum payments due under these capital leases are as
      follows:


2006
              
              $
              21,4152007
              
              
              15,1472008
              
              
              3,137$
              39,699Less:
                    Interest portion
              
              
              9,62030,079Less:Current
                    portion
              
              
              14,795$
              15,284


**Note
      5.**  **Short
      Term Borrowings**


2005
              
              2004Advance
                  from a shareholder, repayable on demand,unsecured
                  and non-interest bearing
              
              $
              45,171
              
              $
              27,595Advance
                  from a party related to the principal shareholder,on
                  demand, unsecured with monthly interest of 3%
              
              
              —
              
              
              62,250Advances
                  from an unrelated party, on demand,unsecured
                  with monthly interest of 3%.
              
              
              —
              
              
              100,422Bridge
                  loan, on demand, unsecured with monthlyinterest
                  payments of 3%
              
              
              —
              
              
              150,653Total
              
              $
              45,171
              
              $
              340,920





**Note
      6. Notes Payable**


2005
              
              2004Non-interest
                  bearing note payable(a)
              
              $
              —
              
              $
              57,5005
                  year non-interest bearing note payable(b)
              
              
              —
              
              
              52,225$
              —
              
              $
              109,725


(a)
              In
                  2001, the Company restructured a $416,821 payable with a creditor,
                  whereby
                  $76,821 was forgiven, $180,000 was satisfied through the issuance
                  of 1.8
                  million shares of the Company’s common stock, and a note payable of
                  $160,000 was issued that by the end of fiscal 2004 had been paid
                  down to
                  $57,500. During fiscal 2005 the Company has negotiated a settlement
                  with
                  this party whereby this note and an accounts payable balance of
                  $111,481
                  would be satisfied through a payment of $59,200. The Company is
                  awaiting
                  confirmation of this settlement and has transferred this balance
                  to a
                  general reserve account as part of accounts payable and accrued
                  liabilities. This amount is due on demand and has therefore not
                  been
                  discounted.




F-16


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004





(b)
            In
                2002, the Company issued a non-interest bearing note payable to an
                affiliate for $120,000 payable over 5 years at $2,000 per month commencing
                July 1, 2002 (this note was discounted to $106,000 representing its
                present value using a 5% discount rate and has been paid down to
                $52,225).
                The Company issued this note as part of the acquisition of Prime
                Wireless
                that was later disposed of on March 13, 2003. During fiscal 2005
                this note
                was cancelled pursuant to the terms of a transaction described in
                note 3
                (b).





**Note
      7.**  **Senior
      Subordinated Convertible Debentures**





The
      senior subordinated convertible debentures bear interest at 8% payable in
      arrears annually commencing were issued March 6, 2001. The remaining debentures
      at December 31, 2004 totaled $66,500.





Each
      $5.00 of principal was convertible into one share of common stock and one three
      year warrant to purchase an additional share of common stock at an exercise
      price of $10.00 per share. Management had determined that the value attached
      to
      the conversion feature and the related warrants was insignificant and, therefore
      has not made an adjustment to the debentures’ carrying amount for these
      features. No payments
      of interest were made by the Company on these debentures. The notes were
      technically in default at December 31, 2004 and therefore had been classified
      as
      current liabilities. On March 6, 2005, these debentures matured and amounts
      outstanding were automatically converted into 18,634 (after consolidation of
      shares) shares of restricted common stock of the Company. Also see note
      8(b).





**Note
      8.**  **Capital
      Structure**




(a)
            Authorized:


400,000,000
      voting common shares, $0.001 par value


2,000
      preference shares, $100 par value


Issued
                and outstanding common shares (Number of shares pursuant to a 1 for
                20
                reverse stock split effective May 5, 2005) at December 31, 2005:
                13,890,464(2004:
                13,034,454)




(b)
            Warrants:




The
      Company has granted 1,731,538 (after consolidation of shares) warrants to
      purchase an aggregate of 1,731,538 (after consolidation of shares) common
      shares. All warrants have vested.




F-17


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004




(b)
            Warrants
                (continued):




The
      composition and exercise prices of the warrants outstanding at December 31,
      2005
      are as follows:


WeightedNumber
              
              
              averageof
                  warrants
              
              
              exercise
                  price
              
              Expiry
                  dateJanuary
                  1, 2004
              436,780
              
              $
              7.58
              
              —Warrants
                  granted
              750,000
              
              
              1.68
              
              —Warrants
                  expired
              (311,376
              )
              
              (10.00
              )
              —December
                  31, 2004
              875,404
              
              $
              3.85
              
              —Warrants
                  granted
              968,634
              
              
              2.58
              
              —Warrants
                  expired
              (112,500
              )
              
              (0.62
              )
              —December
                  31, 2005
              1,731,538
              
              $
              2.25
              
              —Comprised
                  of:100,000
              
              
              3.00
              
              February
                  25, 2006750,000
              
              
              1.68
              
              July
                  7, 2006(a)5,108
              
              
              10.00
              
              August
                  13, 20063,898
              
              
              10.00
              
              October
                  8, 20063,898
              
              
              10.00
              
              November
                  20, 2006200,000
              
              
              1.51
              
              November
                  30, 200718,634
              
              
              10.00
              
              March
                  6, 2008(b)100,000
              
              
              1.10
              
              May
                  25, 2008300,000
              
              
              2.00
              
              July
                  20, 2008250,000
              
              
              4.00
              
              December
                  15, 2010(c)1,731,538
              
              $
              2.25
              
              —




(a)   Warrants
      issued on July 7, 2004 in connection with the Reverse Acquisition described
      in
      note 1(b) to purchase 750,000 common shares at $1.68.




(b)  Warrants
      issued on March 6, 2005 per note 7 in connection with maturity and conversion
      of
      8% Senior Subordinated Convertible Debentures, to purchase 18,634 common shares
      at $10.00 per share.




(c)  Warrants
      issued on December 15, 2005 to the President and Chief Executive Officer in
      connection with satisfaction of terms specified in an employment agreement
      dated
      February 4, 2004.




F-18


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004





**Note
      8. Capital Structure (continued)**




(c)
            Stock
                options:




In
      connection with the Reverse Acquisition described in note 1(b), the Company’s
      stock option plan was amended to increase the number of options to be issued
      under the plan from a maximum of 150,000 (after consolidation of shares) options
      to a maximum of 1,000,000 (after consolidation of shares) options.




Options
      granted under the amended plan are being accounted for under Accounting
      Principles Board Opinion No. 25 (APB Opinion No. 25), “Accounting for Stock
      Issued to Employees”. All options have been granted at a price equal to or
      greater than the fair value of the Company’s common stock at the date of the
      grant.




A
      summary
      of the changes in the Company’s stock option plan for the year ended December
      31, 2005 and year ended December 31, 2004 is as follows:


2005
              
              
              
              
              2004Weighted
              
              
              
              
              Weightedaverage
              
              
              
              
              averageNumber
              
              
              exercise
              
              Number
              
              
              exerciseof
                  shares
              
              
              price
              
              of
                  shares
              
              
              priceBalance
                  at beginning of year
              
              580,000
              
              $
              0.35
              
              50,000
              
              $
              2.30Options
                  granted
              
              75,000
              (b)
              
              1.03
              
              550,000
              (a)
              
              0.23Options
                  cancelled
              
              (87,500
              )
              
              (0.50
              )
              (20,000
              )
              
              (2.00
              )**Balance,
                  end of year**
              
              **567,500**
              
              
              **0.41**
              
              **580,000**
              
              
              **0.35****Exercisable,
                  end of year**
              
              **567,500**
              
              **$**
              **0.41**
              
              **549,444**
              
              **$**
              **0.35**Weighted
              
              Weighted
              
              
              WeightedNumber
              
              Average
              
              
              average
              
              Number
              
              
              averageExercise
              of
                  options
              
              remaining
                  life
              
              
              exercise
              
              of
                  options
              
              
              exercisePrice
              outstanding
              
              (years)
              
              
              price
              
              exercisable
              
              
              price$0.23
              467,500
              
              1.13
              
              $
              0.23
              
              467,500
              
              $
              0.230.99
              37,500
              (b)
              0.96
              
              
              0.99
              
              37,500
              
              
              0.991.08
              37,500
              (b)
              0.96
              
              
              1.08
              
              37,500
              
              
              1.082.00
              25,000
              
              5.66
              
              
              2.00
              
              25,000
              
              
              2.00$0.23
                  - $2.00
              567,500
              
              1.31
              
              $
              0.41
              
              567,500
              
              $
              0.41




(a) Options issued
      on July 7, 2004 in connection with the Reverse Acquisition described in note
      1(b) to purchase 550,000 common shares at $0.228 per common share




(b) Options issued
      on December 15, 2005 to a director for consulting services rendered for the
      period November 1, 2004 to April 30, 2005.




F-19


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004





**Note
      9. Related Party Transactions**




An
      officer of the Company provided $45,171 (note 5) to fund operations of the
      Company (2004 - $27,595). This loan is unsecured, non-interest bearing, has
      no
      formal repayment terms and is therefore disclosed as a current liability under
      short term borrowings. The Company paid $28,886 to a company controlled by
      the
      spouse of the Chief Executive Officer for accounting services in the normal
      course of business (2004 - nil). Included in accounts payable at December 31,
      2005 is an amount of $4,589 owing to this company.





On
      January 23, 2004, the Company transferred 50,000 Wireless Age Communications,
      common shares (marketable securities) to a related party (related by virtue
      of
      their ownership position in the Company), in repayment of a promissory note
      of
      $162,000. The Company also agreed to adjust the number of shares in event that
      the closing share price is less than $3.00 on the earlier of; i) the date which
      the shares become freely trading under securities legislation, or ii) the date
      the shares are freely tradable under a registration statement. On February
      18,
      2005, the Company issued 25,000 (after consolidation of shares) shares of its
      own capital stock and transferred an additional 75,000 shares of common stock
      of
      Wireless Age to make up for the drop in value under the initial transaction.







**Note
      10. Income Taxes**





The
      company files US Federal income tax returns for its US operations. Separate
      income tax returns are filed, as locally required, for each of its foreign
      subsidiaries.





There
      was
      no provision for income taxes for the years ended December 31, 2005 and
      2004.





The
      total
      provision for income taxes differs from that amount which would be computed
      by
      applying the income tax rate to income (loss) before provision for income taxes.
      The reasons for these differences are as follows:




2005
            
            2004Amount
            
            %
            
            Amount
            
            %Statutory
                income tax rate (recovery)
            
            $
            (984,300
            )
            
            (36
            )
            $
            (512,600
            )
            
            (36
            )Non-deductible
                items and temporary differences
            
            
            496,300
            
            
            18
            
            
            1,600
            
            
            —Other,
                including valuation
              Allowance
                adjustment
            
            
            488,000
            
            
            18
            
            
            511,000
            
            
            36Net
                taxes (recovery) and effective rate
            
            $
            —
            
            
            0
            
            $
            —
            
            
            0








F-20


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004


The
      Company recognizes deferred tax liabilities and assets for the expected future
      tax consequences of temporary differences between the carrying amounts and
      the
      tax basis of assets and liabilities and net operating loss carry-forwards.
      Temporary differences and carry-forwards, which give rise to deferred tax assets
      and liabilities are as follows:





2005
            
            2004Component
            
            Tax
                Effect
            
            Component
            
            Tax
                EffectNet
                operating losses - domestic
            
            $
            2,682,000
            
            $
            912,000
            
            $
            2,100,000
            
            $
            714,000Less
                valuation allowance
            
            
            (2,682,000
            )
            
            (912,000
            )
            
            (2,100,000
            )
            
            (714,000
            )Net
                deferred tax asset
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                operating losses - foreign
            
            $
            4,335,000
            
            $
            1,566,000
            
            $
            1,750,000
            
            $
            630,000Less
                valuation allowance
            
            
            (4,335,000
            )
            
            (1,566,000
            )
            
            (1,750,000
            )
            
            (630,000
            )Net
                deferred tax asset
            
            
            —
            
            
            —
            
            
            —
            
            
            —








As
      December 31, 2005, the Company had cumulative net operating loss carry-forwards
      of approximately $2,682,000 and $4,335,000 in the United States and Canada
      respectively. These amounts will expire in various years through 2015. The
      related deferred tax assets have been completely offset by a valuation
      allowance. The Company has no significant deferred tax liabilities.







**Note
      11. Commitments**




The
      Company is committed to the following annual amounts in respect to its lease
      of
      office space:


2006
              
              
              40,0002007
              
              
              44,0002008
              
              
              48,0002009
              
              
              12,000




**Note
      12. Securities Subscription Received**





On
      December 8, 2005, the Company received subscriptions of $858,000 for the sale
      of
      1,560,000 shares of common stock and warrants from accredited investors. The
      common stock and warrants were sold as units, with each unit consisting of
      one
      share of common stock and a warrant to purchase one share of common stock,
      for a
      per unit purchase price of $0.55. Each warrant entitles the holder to purchase
      one share of common stock at $1.10 per share, exercisable for a period of three
      years. Each of the investors had the right to exchange their units for any
      equity securities or other security which may be sold by the Company during
      the
      period ending 45 days after closing of the transaction. Each of the investors
      exercised their right to exchange their units for securities sold by the Company
      in a private placement which closed on January 9, 2006 (note 13). The rights
      to
      the warrants described in this notes were also exchanged in favor of warrants
      attached to the January 9, 2006 financing. The funds received for this
      transaction have been recorded as securities subscriptions pending completion
      of
      the January 5, 2006 transaction.




F-21


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
          31, 2005 and 2004




**Note
      13. Subsequent Events**




Private
      Placement





On
      January 5, 2006, the Company entered into a Securities Purchase Agreement with
      accredited investors for the sale of (i) $3,500,000 principal amount of senior
      convertible notes and (ii) warrants to purchase up to 7,000,000 shares of common
      stock. The sale of the senior convertible notes and warrants closed on January
      9, 2006. Participants in a private placement which closed on December 8, 2005
      for gross proceeds of $858,000 (note 12) exchanged the securities they
      previously purchased for an investment in the senior convertible notes and
      warrants based on the dollar amount of their prior investment, bringing the
      total gross proceeds from the transactions to $3,500,000.




The
      Company paid $241,730 cash compensation to the placement agent in connection
      with the sale of $2,642,000 principal amount of the senior convertible notes
      and
      related warrants and issued 483,460 non-assignable compensation warrants
      exercisable until three years after the date of issuance, with one-half of
      such
      compensation warrants entitling the holder to purchase shares of common stock
      at
      $1.50 per share and the other half of the compensation warrants entitling the
      holder to purchase shares of common stock at a purchase price of $0.56 per
      share. The Company also granted other placement agents in connection with the
      sale of $858,000 (note 12) principal amount of the senior convertible notes
      and
      related warrants compensation in the form of 87,620 restricted shares of
      Company.







**Note
      14. Comparative Figures**




Certain
      comparative figures have been reclassified to conform to the financial statement
      presentation adopted in the current year.




F-22