SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

       |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For the Fiscal Year ended December 31, 2005


                                       OR

     |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              AND EXCHANGE OF 1934

                        For the Transition Period From to

                          Commission File No. 33-20432

                       MAGNITUDE INFORMATION SYSTEMS, INC.
              Exact Name of Registrant as Specified in its Charter

                  DELAWARE                          75-2228828
                 ---------------------------------------------
            State or Other Jurisdiction of           IRS Employer
          Incorporation or Organization        Identification Number

                  401 State Route 24, Chester, New Jersey 07930
                  ---------------------------------------------
                 Address of Principal Executive Offices Zip Code

                                 (908) 879-2722
                                 --------------
                Registrants Telephone Number, Including Area Code


           Securities Registered Pursuant to Section 12(b) of the Act:
           -----------------------------------------------------------
                                      NONE

      Title of Each Class     Name of Each Exchange on Which Registered
      -----------------------------------------------------------------
           NONE                               NONE

      Securities Registered pursuant to Section 12(g) of the Exchange Act:
      --------------------------------------------------------------------
                         Common Stock, par value $0.0001


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

                                 Yes |X| No |_|
<PAGE>

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not 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. |_|

        The Registrant's revenues for the fiscal year ended December 31,
                              2005, were $189,552.

Common stock, par value $.0001 per share ("Common Stock"), was the only class of
voting  stock of the  Registrant  outstanding  on March 17,  2006.  Based on the
closing  price of the  Common  Stock  on the OTC  Electronic  Bulletin  Board as
reported  on  March  17,  2006,  ($0.10),  the  aggregate  market  value  of the
130,536,672  shares of the Common  Stock held by  persons  other than  officers,
directors and persons known to the  Registrant to be the  beneficial  owners (as
the term is defined under the rules of the Securities  and Exchange  Commission)
of  more  than  five  percent  of the  Common  Stock  on  March  17,  2006,  was
approximately $13,053,667.  By the foregoing statements, the Registrant does not
intend to imply that any of the officers,  directors,  or beneficial  owners are
affiliates of the  registrant or that the  aggregate  market value,  as computed
pursuant  to rules of the  Securities  and  Exchange  Commission,  is in any way
indicative  of the amount  which  could be  obtained  for such  shares of Common
Stock.

      As of March 17, 2006, 140,606,672 shares of Common Stock, $.0001 par
                            value, were outstanding.

             DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX





                                                                               2
<PAGE>

                       MAGNITUDE INFORMATION SYSTEMS, INC.

                                    CONTENTS

<TABLE>
<CAPTION>

PART I.
                                                                                                    Page
                                                                                                    ----
<S>              <C>                                                                                <C>
      Item  1.    Business..........................................................................   4

      Item  2.    Properties........................................................................  11

      Item  3.    Legal Proceedings.................................................................  11

      Item  4.    Submission of Matters to a Vote of Security Holders...............................  11

PART II.

      Item  5.    Market for Registrant's Common Equity and Related Shareholder Matters.............  12

      Item  6.    Selected Financial Data...........................................................  14

      Item  7.    Management's' Discussion and Analysis of Financial Condition
                  and Results of Operations.........................................................  15

      Item  8.    Financial Statements and Supplementary Data ......................................  17

      Item 8a.    Controls and Procedures...........................................................  17

      Item  9.    Changes in and Disagreements with Accountants on Accounting and
                  Financial Disclosure..............................................................  17

PART III.

      Item 10.    Directors and Executive Officers of the Registrant................................  18

      Item 11.    Executive Compensation............................................................  20

      Item 12.    Security Ownership of Certain Beneficial Owners and Management....................  23

      Item 13.    Certain Relationships and Related Transactions....................................  24

      Item 14.    Principal Accountant Fees and Services............................................  24

PART IV

      Item 15.    Exhibits and Reports on Form 8-K..................................................  26



                  Signatures........................................................................  27

                  Exhibit Index.....................................................................  28
</TABLE>


                                                                               3
<PAGE>



                                     PART I
ITEM 1:  BUSINESS

The Company
-----------

      Magnitude  Information  Systems,  Inc. (the "Company" or "Magnitude")  was
incorporated  as a  Delaware  corporation  on  April  19,  1988  under  the name
Fortunistics  Inc. On March 4, 1993, the Company  changed its name to Whitestone
Industries,  Inc. On July 14,  1997,  the Company  changed its name to Proformix
Systems,  Inc.,  and on  November  18,  1998,  the  Company  changed its name to
Magnitude Information Systems, Inc.

      The  Company's  primary  product  is an  integrated  suite of  proprietary
software modules marketed under the name  ErgoEnterprise(TM)  which are designed
to help  individual  computer users and  businesses  increase  productivity  and
reduce the risk of potentially preventable repetitive stress injury (RSI). These
software  modules can be applied  individually  or  together in a  comprehensive
ergonomic and early intervention  program that seeks to modify a user's behavior
by  monitoring  computer  usage  patterns over time and warning the user when to
break a  dangerous  trend in  repetitive  usage of an  input  device,  such as a
keyboard  or mouse.  The  product  was  developed  to train  people  working  on
computers,  monitor  computer-use  related activities and evaluate a user's risk
exposure and propensity  towards injury or loss of  effectiveness  in connection
with his/her  day-to-day work.  Moreover,  the software enables a company to not
only  address  the issue of health  risks  involving  employees  and to minimize
resulting  potential  liabilities,  but  delivers  a powerful  tool to  increase
overall productivity.

Background
----------

      On June 24,  1997,  the  Company  entered  into an  acquisition  agreement
whereby it acquired  substantially  all of the  outstanding  stock of Proformix,
Inc., a Delaware corporation and manufacturer of ergonomic  keyboarding systems.
Proformix,  Inc. in November  1998  changed its name to  Magnitude,  Inc. and is
hereafter referred to as Magnitude,  Inc. The business combination took the form
of a reverse acquisition. The Company and Magnitude, Inc. remain as two separate
legal entities  whereby  Magnitude,  Inc.  operates as a subsidiary of Magnitude
Information  Systems,  Inc. On November  18, 1998,  the Company sold  Magnitude,
Inc.'s  hardware  product line  comprised  of the  ergonomic  keyboard  platform
products and  accessories,  all related  inventory  and  production  tooling and
warehousing assets, and all intellectual property rights including the Proformix
name, to a Canadian company.

      On February 2, 1998,  the Company  entered into an  Agreement  and Plan of
Merger with Rolina Corporation,  a privately held New Jersey software developing
firm, and acquired the rights to certain software  products,  with such software
products  subsequently  forming  the basis for the  further  development  of the
Company's  proprietary  ErgoEnterprise(TM)  software  system.  The operations of
Magnitude  Information  Systems,  Inc.  are  currently  comprised  solely of the
operations of Magnitude, Inc.

      The Company is currently subject to the reporting  requirements of Section
15(d) of the  Securities  Exchange Act of 1934. The Company has the authority to
issue an aggregate of Two Hundred Million (200,000,000) Common Shares, par value
$.0001,  and Three Million  (3,000,000)  Preferred  Shares,  par value $.001, of
which at December 31, 2005, Two Thousand Five Hundred (2,500) were designated as
Cumulative  Preferred Shares,  par value $.001; Three Hundred Thousand (300,000)
were  designated  as  Series A Senior  Convertible  Preferred  Stock,  par value
$0.001;  Three  Hundred Fifty  Thousand  (350,000)  were  designated as Series B
Senior  Convertible  Preferred  Stock,  par value  $0.001;  One  Hundred  Twenty
Thousand  (120,000)  were  designated as Series C Senior  Convertible  Preferred
Stock,  par value $0.001;  Five Hundred  Thousand  (500,000) were  designated as
Series D Senior Convertible  Preferred Stock, par value $0.001; and Five Hundred
Thousand  (500,000)  were  designated as Series E Senior  Convertible  Preferred
Stock, par value $0.001.

      As of December 31, 2005, there were outstanding 140,606,672 Common Shares,
1 Cumulative Preferred Share, and 322,333 Convertible Preferred Shares.


                                                                               4
<PAGE>



Narrative Description of Business
---------------------------------

      Magnitude  Information  Systems,  Inc.  is a  pioneer  and  leader  in the
ergonomic  productivity  software market. With its  Anti-Injury(TM)  software as
represented by ErgoEnterprise(TM),  an interactive suite of Windows(TM) software
products,  Magnitude has developed  and delivered the first  integrated  systems
approach to computer  ergonomics.  The Company's patented  proprietary  software
products  provide  business and government  employers with a complete system for
the evaluation and  management of ergonomic and  productivity  risk factors with
respect to the use of computers in the office environment. ErgoEnterprise(TM) is
designed to help  employers  minimize  preventable  Repetitive  Stress  Injuries
("RSI") and enhance productivity through:

      o     Real-time  monitoring  of  keyboarding  activities  to ensure proper
            posture and work pacing.
      o     Pro-active  dialogue with at-risk  employees,  including surveys and
            training in the best practices for wellness and productivity.
      o     Strategic profiling and the management of computer use throughout an
            organization to employ best practices and to measure health, safety,
            and performance results.
      o     Computer workstation assessment tools.

      We have  received  a patent  from the U.S.  Patent  and  Trademark  Office
relative to certain core inventions within the ErgoEnterprise(TM)  system and we
have applied for several more patents for our products.

      As the utilization of computers in the office has increased  significantly
in the last decade, so has the rate of health problems believed to be related to
the use of computers.  Computer  ergonomics  focus on  optimizing  the design of
technology  involved in the  utilization  of computers  in the office,  and also
attempts to affect the manner in which people interact with computers,  so as to
minimize the associated  health risks. A successful  technology  delivery system
positively  impacts  the  cost of  doing  business  by  improving  the  comfort,
productivity,  job  satisfaction and safety of the computer user, while reducing
the costs of absenteeism and work related disability.

      Repetitive  stress injury (RSI) is a classification  of diseases caused by
the excessive use of joints.  It is a  sub-classification  of Cumulative  Trauma
Disorders  (CTDs).  RSI accounts for a large portion of work-related  illnesses,
and the  incidence of RSI is expected to grow as the number of people  operating
keyboards  increases.  The  impact of RSI is  measured  not only in the pain and
suffering of its victims,  but also in time lost from work,  and medical  costs.
The  Company's  software  products  are  designed to help  businesses  deal with
potentially  preventable  repetitive stress injuries, by real-time monitoring of
keyboarding activities,  pro-active dialog with at-risk employees, and strategic
profiling and management of computer use throughout an organization.

      A study  released in January  2001 by the  National  Academy of  Sciences,
originally  commissioned  by  Congress  and  produced by the  National  Research
Council,  finds that  work-related  back, hand and wrist injuries affect about 1
million U.S.  workers every year.  The total cost of the resultant  disorders is
between  $45  billion  and $54  billion  in  compensation,  lost wages and lower
productivity.  Increased  awareness of the health risks and associated costs led
the State of  California  several  years ago  implement an ergonomic  regulation
which directs qualifying  employers to establish and maintain a program designed
to minimize RSI's. Such program shall include work-site  evaluation,  control of
the exposures that have caused RSI's, and training of employees.  State agencies
and  employers  in  California  face fines of up to  $25,000  per  incident  for
violating these regulations. The State of Washington adopted similar regulations
in 2000,  and other states have  indicated a  willingness  to follow  suit.  The
Company believes that the growing  recognition of these trends will give rise to
a rapidly expanding market for the Company's products.

The Industry
------------

      The  Company  operates  in only one  business  segment:  the  development,
marketing,  and licensing of risk aversion and productivity enhancement software
products for the computerized  workplace  environment.  More  specifically,  the
Company  licenses highly  sophisticated  and proprietary  software that provides
computer based training, work pacing and monitoring tools, as well as a computer
workstation assessment tool.

                                                                               5
<PAGE>

      Potential  customers  for the  Company's  products are  businesses  of all
sizes,  as well as  organizations  and government  departments and agencies that
employ  many staff in  computer-related  functions.  The  software  industry  in
general is comprised of a remarkable  variety of  providers,  ranging from small
boutique-type  designers to large  international  corporations.  The industry is
characterized by great dynamics, patterns of rapid growth and well-known success
stories, but also by a high degree of volatility and risk.

      The Company operates  primarily in the United States of America,  however,
has introduced French and Portuguese  language versions of its software products
for the  European  and  Brazilian  markets,  and will  shortly  introduce  other
language  versions.  The Company has not yet derived any material  revenues from
the licensing or sale of its software products in foreign markets.


Products, Trademarks
--------------------

      The  Company's  current  primary  product  is a suite of nine  proprietary
software modules marketed under the name  ErgoEnterprise(TM)  which are designed
to  help  individual   computer  users  and  businesses  deal  with  potentially
preventable  repetitive  stress injury (RSI).  The nine software  modules can be
applied  individually  or  together  in  a  comprehensive  ergonomic  and  early
intervention  program  that  seeks to  modify a user's  behavior  by  monitoring
computer usage patterns over time and warning the user when to break a dangerous
trend in repetitive  usage of an input device,  such as a keyboard or mouse. The
product was developed to train people working on computers, monitor computer-use
related  activities and evaluate a user's risk exposure and  propensity  towards
injury or loss of  effectiveness  in connection  with his/her  day-to-day  work.
Moreover,  the package enables a company to not only address the issue of health
risks involving employees and to minimize resulting potential  liabilities,  but
delivers a powerful tool to increase overall productivity.

      The system is highly customizable for management, staff and employees. All
components  operate  on any PC or  workstation  running  the  Microsoft  Windows
operating system.  ErgoEnterprise(TM)  is the first suite of software  solutions
that combines ergonomic remediation and productivity enhancement tools. Its nine
component modules are described as follows:

ERGOTUTOR(TM)  delivers a complete office ergonomics training course directly to
employees at their desktop,  and provides employees with clear initial awareness
training as well as follow-up  training for reinforcement of previously  learned
materials.

ERGOSURE(TM)  is a postural  assessment tool designed to allow the evaluation of
employee posture while working at computers.  It is an electronic version of the
internationally accepted RULA (Rapid Upper Limb Assessment) system. This system,
developed  at  the  University  of  Nottingham's   Institute  for   Occupational
Ergonomics in the U.K., allows users to survey a broad range of computer-related
work activities involving repetitive motions,  allowing the user to detect - and
remedy - hazardous situations and conditions.

ERGOSURVEYOR(TM) is used to gather usage information from employee  populations.
Customized,   professional   quality   surveys   are   designed   to   corporate
specifications  and  gather  important  information  that  may be  used  to plan
ergonomic  and  corporate  business  strategies.  Responses  to risk  assessment
surveys are  gathered and  compiled  into a database  that may be used to create
comprehensive, customized reports.

USERNOTES(TM)  is an early  reporting  and "Rapid  Response"  Intervention  tool
designed to give employees a way to communicate  discomfort to designated staff,
allowing  issues  to be  addressed  earlier  - at a  lower  cost  and  a  higher
likelihood of success.  UserNotes is  consistently  available to everyone in the
organization at the workstation or notebook with or without Internet access.

                                                                               6
<PAGE>

ERGOSENTRY(R)  measures  rest against work in real time,  tracking  keyboard and
mouse activity  independently.  ErgoSentry's  patented algorithms,  designed for
prevention and control of RSI risk factors, monitor computer usage patterns over
time and alert the user when to take micro-breaks,  avoiding high-risk trends in
keyboard  or mouse  usage  through a unique  and  patented  empowering  feedback
mechanism.  Users are alerted to take these micro-breaks only when risk exposure
exceeds configured limits.

EMSANALYZER(TM)  is  designed  to  measure,  analyze  and manage all  aspects of
day-to-day  computer  use. Raw actual data of normal,  everyday use are gathered
through  ErgoSentry(R) and accumulated for standard and customized  reports that
track, analyze and qualify how employees are using their computer stations.

GUARDIAN(TM) captures metrics on the frequency of keystroking and mousing during
each minute  throughout the day, and optionally  tracks which  applications  and
files users access.

ERGOQUIZ(TM) is an electronic testing system used to assess ergonomic  awareness
and educate employees.

ERGOMAP(TM) offers employees state of the art ergonomic training at the desktop.


      In addition to the trademarks  shown above which are owned by the Company,
Magnitude has applied for other  product  designators  to be afforded  trademark
protection,  and has filed US Patent  Application for certain design  principles
underlying  several of its  proprietary  software  products,  including a patent
application  for its  newest  product,  a new class of usage  tracking  and data
collection  software  that is directed  towards  e-commerce  and a wide range of
other Internet related  applications.  There can be no assurance,  however, that
such patents will be granted or, if granted,  that a third party will not design
products which perform the same or similar functions as the Company's  products,
using technology other than that covered by the Company's patents.

Patents and New Products
------------------------

ErgoSentry - Patent Granted:

      In May 2000 the U.S.  Patent and  Trademark  Office  awarded the Company a
patent which covers various  innovations  including a proven approach that helps
computer users manage their activity to improve productivity and reduce the risk
of repetitive motion injuries.

ErgoPal Introduced, Patent Pending:

      New patent-pending ErgoPal software is a work pacing tool that helps users
mitigate health risks and improve their  productivity by gently alerting them to
increases in stress and fatigue which are occurring before they realize it.


Studies Involving ErgoEnterprise(TM)

      Magnitude has conducted  productivity studies using  ErgoEnterprise(TM) at
various client and prospect sites.

      In July 1999,  Cornell  University  released a study entitled  "Effects of
Ergonomic  Management  Software on Employee  Performance," a field  experimental
test of the effects of ErgoEnterprise  on computer work  activity.(1)  Professor
Alan  Hedge  tested the  effects  of using  Magnitude's  ergonomic  work  pacing
software to monitor  keyboard and mouse activity,  and to provide computer users
with information on appropriate,  discretionary  rest breaks.  The software also
provided  information  on  stretching  exercises,   appropriate  postures,   and
appropriate  workstation  adjustments.  The Wall Street  office of a  nationwide
insurance brokerage firm was chosen as the test site for this study.

                                                                               7
<PAGE>

      Data  gathered  in the  study  covered  6,195  hours  of  computer  usage,
equivalent to 800  person/days of computer use.  Participants  used computers an
average of 5.9 hours per day,  and typed over  3,949,000  keystrokes  during the
course of the study.  Employees at the site used their computers for much of the
workday.  The  study  evaluated  the  performance  of 21  individuals  including
executives,  administrators,  customer service  specialists,  underwriters,  and
accountants.

      Alerting  users to take more short rest and break  periods  improved  work
accuracy,  and did not impair  overall  keystroke  and mouse usage.  These study
results agree with previous research. In addition, the study concluded that from
an economic  standpoint,  the  performance  benefits  that may accrue from using
ErgoEnterprise indicate a return on investment of approximately 3 months.

      One client, the California State Compensation  Insurance Fund, conducted a
survey using  ErgoEnterprise  in a pilot  program from January 2000 - June 2000.
The significant results of the study included:

      o     A 50% reduction rate in the total number of Musculoskeletal Disorder
            (MSD) Claims.
      o     A reduction by between 20% and 80% of OSHA reported injuries.
      o     The actual  workers'  compensation  savings in the pilot program was
            $120,000.
      o     State Fund's projected annual workers' compensation cost savings was
            approximately $780,000.
      o     There was a total participation of employees in Pilot Program
      o     Employees postponed micro-breaks a maximum of nine minutes.
      o     There was 100% employee satisfaction while using ErgoEnterprise.
      o     Some  employees  used program to "warm up" prior to their  beginning
            work

      In February  2001, a study by  Cornell/Lockheed  Martin  titled  Ergonomic
Management  Software and Work Performance  presented an ROI analysis to quantify
the potential economic impact of a 59% improvement in keystroke accuracy for the
test  group.  Based on a  combination  of  factors  including  estimated  hourly
employee costs which include some of the following:  wages,  benefits,  occupied
internal floor space,  pre-study hourly error costs,  hourly savings per person,
and the annual "per seat" cost of  ErgoEnterprise,  the study indicated that the
breakeven/payback  period is  achieved  in 25.1  hours of usage.  Several  large
industrial clients already have named ErgoEnterprise  "Best Practice".  The term
"Best Practice" is an  acknowledgement  that a concept,  process,  or product is
proven  to  produce  the  desired  results  and  is  applicable  throughout  the
enterprise across organizational lines.

Ergonomic Advisory Board
------------------------

      Magnitude  has formed an  Ergonomic  Advisory  Board  (EAB)  comprised  of
individuals  with noted expertise in the field of ergonomics and productivity to
ensure that  Magnitude's  ergonomic  products  remain at the  forefront of these
industries. These respected leaders advise Magnitude on product requirements and
put their "stamp of approval" on the Company's EPS products,  enhancing  product
value and standing in these industries relative to the competition.

The EAB focuses on strategic issues, such as:

>>    What product  functions,  components,  and interfaces  should  Magnitude's
      products possess?
>>    What markets should Magnitude target?
>>    What kinds of  ergonomics  measures  and  methods  should be  provided  or
      recommended?
>>    What kinds of ergonomics  analyses may  companies do with their  collected
      datasets?
>>    What kinds of research studies should Magnitude consider?
>>    How will  Magnitude's  products fit with  current and proposed  ergonomics
      regulations?
>>    What other ergonomics issues should Magnitude consider?
>>    EAB members serve two-year terms.

                                                                               8
<PAGE>

Members of the EAB do not endorse specific Magnitude  products,  but do agree to
have their names and brief  biographies on  Magnitude's  Website and included in
press releases about the role and activities of the EAB.


Business Strategy
-----------------

      The most important  prospective  customers for the Company's  products are
large and medium  companies,  organizations,  and  governmental  departments and
agencies  that  have  a  relatively  large  staff  working  in  computer-related
functions.  These  entities not only are more  cognizant of the health risks and
negative effect on productivity associated with many of the traditional tools of
the  computerized  workplace  and  therefore  tend to be more  receptive  to new
remedial solutions and alternatives based on the science of Ergonomics, but also
have a significant exposure in terms of legal liabilities if they fail to act by
addressing  these potential  risks. On an on-going basis, the increasing cost of
workers  compensation  insurance  creates a growing  incentive  to deal with the
underlying causes.

      With  its  new  proprietary   ergonomic  software  the  Company  offers  a
comprehensive  and  effective  tool for  corporate  clients to address the three
major  issues  involved:   (a)  employee  wellness,  (b)  cost  containment  and
productivity  enhancement,  and (c) potential legal  liabilities.  While certain
portions of the ErgoEnterprise(TM)  software suite have been previously marketed
as  individual  modules,  the release to the market,  in  November  1998,  of an
overall integrated solution in form of the ErgoEnterprise(TM) system constituted
a novel approach.

      Since that time,  the product has been  installed  by a growing  number of
corporate  and  institutional  clients.  Typically,  in view of the  new-ness of
product  and  market,  such  client  initially  purchases a license for a "pilot
version" of the software,  functionally complete but limited to a smaller number
of users.  After  undergoing a process of  familiarization  and  evaluation  the
client is expected to upgrade to the intended ultimate number of users which, by
definition, should encompass all personnel exposed to the above described risks.
Many tests and  evaluations  by third  parties have  confirmed to the  Company's
satisfaction  that its product is mature,  stable,  and effective.  It is with a
high  degree of  confidence,  therefore,  that the Company  expects  many of the
ongoing trial installations to lead to larger enterprise orders and, thereby, to
the targeted revenue stream. The key to economic success lies in a comprehensive
marketing  approach that carries the Company's  message to the largest  possible
number of prospective clients.

      The  Company   intends  to   continue   developing   strategic   marketing
relationships  with leading  business  consultants,  to broaden its distribution
channels to include tiered marketing arrangements,  and to strengthen its direct
sales force and support  organization,  thereby focusing on a marketing approach
which  emphasizes  the  advantages  that  accrue to a  business  from the unique
combination of risk management and  productivity  enhancement  tools provided by
ErgoEnterprise(TM).


Research and Development
------------------------

      The Company has invested considerable resources in the further development
of the overall  ErgoEnterprise(TM)  system and related product documentation and
marketing collateral materials.  In late summer 1997, the first official version
of ErgoEnterprise(TM),  Version 1.78, was released,  followed by yearly upgrades
since then. The Company is currently  shipping Version 5.5 which was released in
February 2004.

      The Company has expensed all  expenditures  related to the above  efforts.
Such expenses  totaled  approximately  $217,067 for the year ended  December 31,
2005, and $221,000 for the year ended December 31, 2004.

                                                                               9
<PAGE>


Competition
-----------

      The market  addressed  by the  Company's  software  products is  presently
served by a number of  smaller  software  companies,  none of which  occupies  a
dominant position. For the most, these competitors market software products that
address  only  one or a few of  the  task  complexes  covered  by the  Company's
products,  without  thereby  offering  a  comparable  breadth  of  function  and
integration in such areas as work-site  evaluation,  employee  training and work
pacing.

      The  Company  is not  aware of any  products  that  compete  - in terms of
breadth of  functionality - with the integrated  software  product suite that is
marketed  by the  Company  under the trade  name  ErgoEnterprise(TM).  While the
Company  believes  that it currently  has a strategic  competitive  advantage in
ergonomic software, especially with regard to its patented algorithms underlying
the product, there can be no assurance that competitors will not attempt to copy
the Company's products or develop and successfully license similar products,  to
the Company's detriment.


Seasonality and Dependency
--------------------------

      The industry  segment in which the Company does  business is not seasonal.
The  Company's  past  revenues  come  primarily  from  smaller  orders for pilot
projects and field tests, and a limited number of individual larger orders where
successfully  completed pilot projects led to  departmental  or  enterprise-wide
deployment.  The nature of the business does not usually  involve  repeat orders
and  therefore  does not create  dependency  on a specific  customer or group of
customers.  The  Company's  future  success  is  dependent  upon its  ability to
increase  the  frequency  where  initial  pilot  installations  result in larger
contracts, as corporate clients introduce the Company's software products across
the entire spectrum of computer workplaces  throughout their company or specific
divisions/departments.  The relative  major impact of individual  larger orders,
the receipt or timing of which cannot be predicted  with any degree of accuracy,
creates a significant measure of volatility that adds a degree of uncertainty to
all current planning and forecasting. There can be no assurance that the Company
will generate enough revenues during the coming periods,  in a timely manner and
sufficient in scope, to finance and support the Company's  planned future growth
as expected by management.



Employees
---------

      As of December 31,  2005,  the Company  employed 9 persons,  of whom three
were  primarily  engaged  in  research  and  development  and  software  support
activities,  two were  primarily  engaged  in sales and  marketing,  and four in
general  administrative and managerial functions.  The Company has no collective
bargaining agreements with its employees.




ITEM 2:  PROPERTIES

      On March 15, 2000, the Company entered a five year lease for approximately
6,000 square feet of office  space at 401 Route 24,  Chester,  New Jersey.  This
lease  agreement  calls for  monthly  rental  payments  of $6,500  with  nominal
increases  after years No. 2, 3, and 4. During  February  2005,  the term of the
lease was extended to March 31, 2007, at a monthly rental fee of $10,000.


                                                                              10
<PAGE>


ITEM 3:  LEGAL PROCEEDINGS

      On March 21, 2005, the Company filed a patent infringement  lawsuit in the
United States  District Court,  District of New Jersey,  against Niche Software,
Ltd. of New Zealand,  alleging that its software  product  called  Workplace(TM)
willfully  infringed on the Company's patent  underlying its  ErgoEnterprise(TM)
product  line.  The Company  intends to vigorously  prosecute  its  infringement
claims against this infringer. Except for this infringement lawsuit, the Company
is not a party in any legal proceedings.



ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were  submitted to a vote of the  security  holders  during the
fourth quarter of this fiscal period.



                                                                              11
<PAGE>


                                     PART II

ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                  SHAREHOLDER MATTERS

(a)  Market Information

      The Company's  common stock  currently  trades on the Electronic  Bulletin
Board of the OTC market,  under the symbol MAGY. The following table sets forth,
for the calendar  quarters  indicated,  and for the last two years, the high and
low  quotations  of  the  Company's   common  stock.   The  quotations   reflect
inter-dealer prices,  without retail mark-up,  mark-down,  or commission and may
not represent actual transactions.

                                                          OTC-BB
                                                          ------
                                              High/Ask               Low/Bid
                                              --------               -------
2004
----
         First Quarter .....................  $  0.20             $    0.09
         Second Quarter ....................     0.20                  0.10
         Third Quarter .....................     0.14                  0.09
         Fourth Quarter ....................     0.18                  0.10
2005
----
         First Quarter .....................  $  0.16             $    0.09
         Second Quarter ....................     0.11                  0.06
         Third Quarter .....................     0.08                  0.05
         Fourth Quarter ....................     0.08                  0.04

(b)  Shareholders

      As of March 17, 2006, there were  approximately 380 shareholders of record
for the Company's  Common Stock.  The number of record  holders does not include
shareholders whose securities are held in street names.

(c)  Dividends

      The Company has not declared or paid, nor has it any present  intention to
pay, cash dividends on its common stock.  The Company is obliged,  under certain
circumstances, to pay cash dividends on its outstanding cumulative preferred and
convertible preferred stock. At December 31, 2005, the Company was in arrears on
the payment of certain  dividends  on its Series A, C, and D Senior  Convertible
Preferred Stock. Such arrears totaled approximately $601,000.

Recent Issues of Unregistered Securities
----------------------------------------

      During the fourth  quarter of 2005 the  Company  had issued the  following
unregistered securities:

      (i)  2,583,333  shares  of  common  stock  and  16,667  shares of Series E
Convertible   Preferred  Stock   convertible   into  1,666,667   common  shares,
accompanied  by warrants for the purchase of 4,250,000  shares of common  stock,
exercisable  at  $0.08/share  during  three years,  to six  domestic  accredited
investors pursuant to private placement  subscriptions  under Section 4(2), Rule
506 of Regulation D and  Regulation S of the  Securities  Act, which resulted in
the receipt by the Company of $265,000 in cash;

      (ii)  Warrants  for the  purchase  of  200,000  shares  of  common  stock,
exercisable at  $0.10/share  during three years,  to two  consultants as part of
their remuneration for services rendered.


                                                                              12
<PAGE>


ITEM 6:  SELECTED FINANCIAL DATA


      Except for historical information, the Company's reports to the Securities
and  Exchange  Commission  on Form  10-KSB and Form  10-QSB and  periodic  press
releases,   as  well  as  other  public   documents  and   statements,   contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange  Act of 1934.  Forward-looking  statements  are  subject  to risks  and
uncertainties  that could cause actual results to differ  materially  from those
expressed or implied by the statements.  These risks and  uncertainties  include
general economic and business  conditions,  development and market acceptance of
the Company's  products,  current  dependence on the willingness of investors to
continue to fund  operations  of the  Company and other risks and  uncertainties
identified in the Company's  reports to the Securities and Exchange  Commission,
periodic press releases, or other public documents or statements.

      Readers  are  cautioned  not to place undue  reliance  on  forward-looking
statements.  The  Company  undertakes  no  obligation  to  republish  or  revise
forward-looking  statements to reflect  events or  circumstances  after the date
hereof or to reflect the occurrences of unanticipated events.

      The  selected  financial  information  presented  below under the captions
"Statement of Operations"  and "Balance  Sheet" for the years ended December 31,
2005 and 2004 is derived from the financial statements of the Company and should
be read in conjunction with the financial statements and notes thereto.

      The  financial  data are  those of  Magnitude  Information  Systems,  Inc.
including  the  operations  of Magnitude,  Inc. All  inter-company  accounts and
transactions have been eliminated in consolidation.

     SELECTED FINANCIAL DATA

     Balance Sheet                                            December 31, 2005,
                                                              ------------------
Total assets .......................................              $   515,629
Current liabilities ................................                1,180,010
Long-term debt .....................................                       --
Working capital ....................................               (1,016,230)
Shareholders' equity (deficit) .....................              $  (664,381)


     Statement of Operations                For the Year Ended December 31,
                                               2005                  2004
                                       -------------------     -----------------
Total revenues .......................     $     189,552      $     121,886
Operating income (loss) ..............        (2,410,670)        (2,687,402)
Net (loss) ...........................        (2,218,257)        (2,308,948)
Net (loss) after dividends
On Preferred Shares ..................        (2,341,492)        (4,509,167)

Net loss per common share ............     $       (0.02)     $       (0.05)
Number of shares used in computing
per share data .......................       138,097,577         96,968,697


                                                                              13
<PAGE>





ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

CAUTIONARY  STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934

      Except for historical information, the Company's reports to the Securities
and  Exchange  Commission  on Form  10-KSB and Form  10-QSB and  periodic  press
releases,   as  well  as  other  public   documents  and   statements,   contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange  Act of 1934.  Forward-looking  statements  are  subject  to risks  and
uncertainties  that could cause actual results to differ  materially  from those
expressed or implied by the statements.  These risks and  uncertainties  include
general economic and business  conditions,  development and market acceptance of
the  Company's  products,  and other risks and  uncertainties  identified in the
Company's  reports to the  Securities  and Exchange  Commission,  periodic press
releases, or other public documents or statements.

      Readers  are  cautioned  not to place undue  reliance  on  forward-looking
statements.  The  Company  undertakes  no  obligation  to  republish  or  revise
forward-looking  statements to reflect  events or  circumstances  after the date
hereof or to reflect the occurrences of unanticipated events.

Results of Operations for the Year Ended December 31, 2005
----------------------------------------------------------

      The year noted a relative  increase in ordering activity among which, most
importantly,  stands out a contract  from our major  strategic  partner Aon Risk
Services  Division for our software  products,  to be utilized in-house by Aon's
staff. We intend to build upon the relationship  with Aon Corporation  evidenced
by a marketing  agreement concluded in the forth quarter pursuant to which Aon's
Risk Services  division and  Magnitude  will jointly  market our  ErgoEnterprise
software  solution to clients of both firms.  We expect this  venture to produce
tangible results in terms of software licensing contracts, during 2006.

      For the year ended December 31, 2005, the Company had revenues of $189,552
compared to $121,886 in 2004.  Revenues consisted of $132,053 licensing fees for
the  Company's  software  products  and  $57,499  for  maintenance  and  support
services.

      Gross profits amounted to $37,839. Gross profits are burdened with a fixed
charge for amortization of certain  proprietary  software assets.  Such software
assets  underlie the  Company's  products and are being  amortized on a straight
line over 10 years,  resulting  in a level charge of  approximately  $13,000 per
month to cost-of-goods-sold.  Owing to the fact that variable cost-of-goods-sold
expenses are less than 5%, the gross margins will increase with larger revenues,
as the portion of fixed expenses decreases  relatively.  After deducting selling
-,  research -, and  general and  administrative  expenses of  $2,454,724  which
decreased by 7% from the $2,653,313  recorded in 2004,  the Company  realized an
operating  loss of  $2,410,670  compared to an operating  loss of  $2,687,402 in
2004.  Non-operating  income and expenses  included $21,703 interest expense and
income of $4,846 from dissolving certain prior year's accruals. The Company also
realized  a credit  of  $209,894  from the  sale of net loss  carry-forward  tax
credits  pursuant  to the  New  Jersey  Emerging  Technology  and  Biotechnology
Financial  Assistance  Act. The year  concluded  with a net loss of  $2,218,257.
After  accounting for dividends  accrued and discounts on outstanding  preferred
stock which totaled $123,235 the net loss applicable to common  shareholders was
$2,341,492  or $0.02 per share,  compared to a loss of  $4,509,167  or $0.05 per
share for the previous year.



                                                                              14
<PAGE>




Liquidity and Capital Resources
-------------------------------

      In the absence of cash flow from  operations,  required working capital to
finance ongoing operations was supplied almost entirely from new equity capital.
The Company attracted $1,593,000 in new equity funding in the form of cash.

      At  December  31,  2005,  the  deficit  in  working  capital  amounted  to
$1,016,230 as compared to $1,010,649 at December 31, 2004.  Stockholders' equity
showed  an  impairment  of  $664,381  at the  end of the  year,  compared  to an
impairment of $513,046 at the beginning of the year. The negative cash flow from
operations totaled approximately $1.5 million and was substantially  financed by
new  equity  which was  obtained  through  private  placements.  The new  equity
placements  were  consummated  by  issuance  of  common  stock  and  convertible
preferred  stock to  accredited  private  investors  in the  United  States  and
overseas. Details of such transactions can be found in the "Changes and Issuance
of Securities" sections in the Company's reports on Form 10-QSB during the year,
as well as in the pertinent section of this report. During 2005, the Company had
filed amendments to three previously filed registration statements on Form SB-2,
all of which  covered  common  shares  directly  issued as well as common shares
underlying the previously issued  convertible  preferred stock and warrants,  in
connection with these and prior financing transactions.  These filings were made
on behalf of certain  investors  in the  Company's  equities and proceeds of any
sales of such registered securities will accrue entirely to such investors.  The
filings  will  shortly be updated  with the  current  financial  statements  and
forwarded to the Securities and Exchange Commission for review.

      At the time of this submission,  the Company had no bank debt. At December
31, 2005 its  short-term  liabilities,  aside from trade  payables and accruals,
consisted of certain notes and loans aggregating approximately $233,419 of which
approximately  $100,000 was owed to the chairman and chief executive  officer of
the  Company  in form of a  demand  note  (see  "Related  Party  Transactions").
Accruals include $601,499 unpaid dividends on outstanding  preferred stock. Such
dividends  will be paid only if and when  capital  surplus  and  cash-flow  from
operations  are  sufficient to cover the  outstanding  amounts  without  thereby
unduly  impacting  the Company's  ability to continue  operating and growing its
business.

      Current cash reserves and net cash flow from  operations  expected  during
the near future are inadequate  when measured  against  present and  anticipated
future needs. In order to remedy the resulting liquidity constraints and address
any  "going-concern"  issues,  management is currently  negotiating with several
financing sources with the goal of obtaining commitments for further investments
in form of debt or equity  capital,  to be funded  during the upcoming  quarter.
There can be no assurance,  however,  that these  negotiations  will lead to the
desired outcome.




                                                                              15
<PAGE>



ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Company's Financial  Statements and Notes to Financial  Statements are
attached hereto as Exhibit A and incorporated herein by reference.


ITEM 8A: CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our Chief  Executive  Officer and Chief  Financial  Officer  participated  in an
evaluation by our management of the effectiveness of the design and operation of
our  disclosure  controls and  procedures of the end of our fiscal  quarter that
ended on December 31, 2005 as defined in Exchange Act Rule  13(a)-15(e),.  Based
on their  participation in that  evaluation,  our CEO and CFO concluded that our
disclosure  controls and  procedures  were  effective as of December 31, 2005 to
ensure that  required  information  is  disclosed  on a timely basis in our Form
10-KSB  filed  and  furnished  under the  Securities  Exchange  Act of 1934,  as
amended,  and ensured that all material  information required to be disclosed in
the subject Form 10-KSB was recorded, processed, summarized and reported, within
the time period specified by the Commission's rules and forms.

As of the end of the  period  covered by this Form  10-KSB  for the fiscal  year
ended December 31, 2005, an evaluation (the  "Evaluation") was undertaken by the
Company's   Chief  Executive   Officer  and  Chief  Financial   Officer  of  the
effectiveness of the design and operation of the Company's  disclosure  controls
and procedures, and; based upon that Evaluation,  Company management,  including
the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), has
concluded that the Company's  disclosure  controls and procedures were effective
as of the end of the  period  covered  by the  subject  Form  10-KSB  CHANGES IN
INTERNAL CONTROL OVER FINANCIAL  REPORTING Our CEO and CFO also  participated in
an  evaluation  by our  management  of any changes in our internal  control over
financial  reporting  that occurred  during the quarter ended December 31, 2005.
That evaluation did not identify any changes that have materially  affected,  or
are likely to materially affect, our internal control over financial reporting.


ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

      There  have been no  changes  in or  disagreements  with the  Registrant's
independent auditors during the last two years.



                                                                              16
<PAGE>


                                    PART III

ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS

The names of all directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>

      Name                        Position                         Term(s) of Office
-------------------        ----------------------------       ---------------------------


<S>                        <C>                                 <C>
Steven D. Rudnik           Chief Executive Officer,           Jan.8, 1999, until present
                           President, Director

Steven D. Rudnik           Chairman of the Board              Feb.11, 2000, until present

Mark Chroscielewski        Sr. Vice President                 Jan 2, 2003, until present
                           Business Development

Joerg H. Klaube            Sr. Vice President, Secretary,     Jul.31, 1997, until present
                           Chief Financial Officer

Joerg H. Klaube            Director                           Dec.2, 2005, until present

Steven W. Jagels           Sr. Vice President                 Feb 15, 1998, until present
                           Information Systems

Joseph J. Tomasek          Director                           Feb.11, 1999 until present

Ivano Angelastri           Director                           May 18, 2000 until Dec 2, 2005

Steven L. Gray             Director                           May 18, 2000 until present

</TABLE>

      There are no family relationships among the Company's Officers and
Directors.

      All Directors of the Company hold office until the next annual  meeting of
the shareholders and until successors have been elected and qualified. Executive
Officers of the Company are  appointed  by the Board of Directors at meetings of
the Company 's  Directors  and hold office until they resign or are removed from
office.

Resumes:
--------

      STEVEN  D.  RUDNIK,  Age  46  -  Chairman  and  Chief  Executive  Officer,
President.  Mr. Rudnik  personally  developed many of the  copyrighted  software
products offered by Magnitude  Information Systems. Mr. Rudnik co-founded Rolina
Corporation in 1996.  Prior to 1996, Mr. Rudnik had executive level positions in
software  product  development  and software  company  operations.  In 1983, Mr.
Rudnik  joined  Randall-Helms  International,  Inc.  Over the next 13 years,  he
conceived  and  developed  four  independent  families of stock market  modeling
software  products  aimed at the worldwide  "large cap"  institutional  investor
market.  These product families generated over US$ 25 million in sales from more
than 400 clients in 23 countries.  Mr. Rudnik was Executive  Vice  President and
Partner at Randall-Helms when it was sold in 1995.

                                                                              17
<PAGE>

      MARK CHROSCIELEWSKI,  Age 48 - Senior Vice President Business Development.
Since  joining  the  Company in January  2003 Mark  Chroscielewski  manages  our
strategic  alliances  and  develops  new  marketing  strategies  to present  our
products  to both the  productivity  and  ergonomic  segments  of the  corporate
marketplace.  Prior to joining our Company, Mr. Chroscielewski was the principal
of a consulting firm, specializing in the development of proprietary data mining
software, modeled for corporate customers seeking an enterprise-wide application
for their customer relations management programs.  This software was utilized by
Columbia/HCA,  the largest  healthcare  enterprise in the world,  to support its
healthcare claims protocol. Mark's experience includes the co-founding, in 1988,
of a multi-national  software marketing  enterprise,  CrossZ  International.  As
Chairman and Chief Executive Officer, Mr. Chroscielewski grew this company to 80
plus  employees,  established  international  operations,  sold  product to many
fortune 100 companies  including  American Express,  Philip Morris and MCI while
raising  approximately  $37 million in equity  capital to fund its  business and
growth.  After  participating  in its initial  public  offering in 1997,  CrossZ
Software was sold to an Italian  consortium,  Intelitec in 2002,  and is now now
called CrossZ Solutions SA

      JOERG H. KLAUBE, Age 64 - Director,  Chief Financial Officer,  Senior Vice
President.  Joined  Magnitude,  Inc. in December 1994.  From 1993 to 1994 he was
Vice President  Administration  for Comar  Technologies  Inc., a computer retail
firm, and from 1983 to 1993 Chief Financial Officer for Unitronix Corporation, a
publicly  traded software  design and computer  marketing  firm.  Prior to that,
Mr.Klaube  was employed for 16 years with Siemens  Corp.,  the US  subsidiary of
Siemens AG, where he served most recently as Director of Business Administration
for its  Telecommunications  Division.  He graduated  from the Banking School in
Berlin, Germany, and holds an MBA degree from Rutgers University.

      STEVEN W. JAGELS, Age 46 - Senior Vice President  Information Systems. Mr.
Jagels joined  Magnitude in February  1998.  Mr. Jagels has 20 years of software
development  experience  in such  diverse  disciplines  as  clinical  laboratory
analysis, stock market modeling,  artificial  intelligence,  and retail business
applications. Mr. Jagels also has experience in the software industry, including
software management, project development,  systems analysis, and training. Prior
to his software  career,  Mr.  Jagels had five years  experience  in  biomedical
engineering and management.

      JOSEPH J. TOMASEK, Age 59 - Director. Mr. Tomasek was appointed a director
in February  2000. He has been engaged in the private  practice of corporate and
securities  law in his own law  firm for the last ten  years.  Mr.  Tomasek  was
appointed  to serve as general  counsel for the Company in 1999.  In addition to
his work with the Company,  Mr. Tomasek  represents several other clients in the
area of corporate law.

      STEVEN L. GRAY,  Age 57 -  Director.  Mr. Gray was elected to serve on the
Board on May 18,  2000.  He is a resident of Venice,  Florida.  For the past six
years,  Mr. Gray has served as the President  and is a shareholder  of a private
Florida corporation engaged in the retail distribution of nutritional  products.
This corporation has a customer base in nine countries.  Prior to that time, Mr.
Gray ran his own real estate development company, specializing in the design and
construction of multi-family housing.

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

      The Company knows of no person, who at any time during the period from the
date at which it filed its  annual  report  on Form  10-KSB  for the year  ended
December 31, 2004 to the present, was a director,  officer,  beneficial owner of
more than ten  percent  of any  class of equity  securities  of the  Company  (a
"Reporting Person"),  that failed to file on a timely basis any reports required
to be furnished pursuant to Section 16(a).


                                                                              18
<PAGE>


ITEM 11: EXECUTIVE COMPENSATION

      The  following  table  sets  forth  the cash  compensation  and  executive
capacities for the fiscal years ended December 31, 2005,  December 31, 2004, and
December  31,  2003,  for the chief  executive  officer  and for each  executive
officer whose aggregate cash remuneration  exceeded $100,000,  for all executive
officers as a group, and for certain other most highly compensated employees:

<TABLE>
<CAPTION>

---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
                                                                       Other           Restricted     Securities        All
         Name and                                                      Annual            Stock        Underlying       Other
    Principal Position        Year    Salary ($)    Bonus ($)     Compensation($)      Awards ($)    Options ($)    Compens.($)
    ------------------        ----    ----------    ---------     ---------------      ----------    -----------    -----------
                                         (1)                            (2)               (3)            (4)            (5)
---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
<S>                          <C>       <C>                  <C>              <C>            <C>             <C>           <C>
Steven D. Rudnik             2005      133,333(6)             -              21,056               -             -          3,250
Chief Executive Officer,     2004      133,333(7)             -              13,364          36,000             -          3,250
President                    2003      133,333(8)             -              15,262          27,000             -          3,250

---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
 Mark Chroscielewski         2005         125,000             -               4,000               -             -          8,900
Sr. Vice President           2004         125,000             -               6,000               -             -          8,400
Business Development         2003         125,000             -               6,000               -             -          8,400
---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
Joerg H. Klaube              2005         117,308             -               9,577               -             -          2,626
Sr. Vice President,          2004         125,000             -              11,404          36,000             -          1,710
CFO                          2003         125,000             -              11,404          67,000             -          1,710

---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
Steven W. Jagels             2005         108,333             -              11,616               -             -          1,940
Sr. Vice President           2004         108,333             -               9,000               -             -          1,940
Information Systems          2003         108,333             -              11,083               -             -          1,940

---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
All executive officers
As a group (4 persons)       2005         483,974             -              46,549               -             -         16,716
---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
</TABLE>

-----------------------

(1)   The value of other  non-cash  compensation,  except  for the items  listed
      under (2), (3), (4) and (5), that was extended to or paid for  individuals
      named above did not exceed 10% of the aggregate cash  compensation paid to
      such individual, or to all executive officers as a group.
(2)   Consists of automobile expenses allowances and vacation pay-out.
(3)   During  2004,  the Board of  Directors  approved  stock  awards of 300,000
      restricted  shares to Rudnik and of 300,000  restricted  shares to Klaube.
      During  2003,  the Board of  Directors  approved  stock  awards of 300,000
      restricted  shares to Rudnik and of 800,000  restricted  shares to Klaube.
      During  2002,  the Board of  Directors  approved  stock  awards of 300,000
      restricted  shares each to Rudnik and Klaube.  These  shares are listed in
      the table above at the market price for  unrestricted  stock quoted at the
      time of the award. The number and value of the aggregate  restricted stock
      holdings  at  the  end  of  fiscal  year  2003  (using  market  prices  of
      unrestricted  stock  at the  end  of  the  fiscal  year)  are as  follows:
      S.Rudnik:  4,744,445  shares  -  $616,778;  J.Klaube:  1,400,000  shares -
      $182,000.  The  valuation of stock awards and  end-of-year  holdings is in
      conformity  with  guidelines  set  forth for SEC  Regulation  S-B Item 402
      (b)(2)(iv).  All such  shares  are  fully  vested.  The  Company  does not
      currently foresee to pay dividends on any of these shares.
(4)   .See table for "Stock Options" below.
(5)   Consists of premiums for health and personal life insurance.
(6)   During 2005,  the Board of Directors the issuance of 1,000,000  restricted
      shares  accompanied by 1,000,000 warrants in lieu of $100,000 cash salary;
      the stated  salary  figure  includes  such  shares,  valued at the nominal
      $100,000 which they replaced.
(7)   During 2004, the Board of Directors approved the issuance of 16,667 shares
      of Series E Senior  Convertible  Stock,  since  converted  into  1,666,667
      restricted shares, and warrants for the purchase of 833,333 common shares,
      exercisable  during three years at  $0.15/share,  in lieu of $100,000 cash
      salary;  the stated salary figure  includes such common shares,  valued at
      the nominal $100,000 which they replaced.
(8)   During  2003,  the Board of  Directors  approved the issuance of 1,000,000
      restricted  shares in lieu of  $100,000  cash  salary;  the stated  salary
      figure  includes such shares,  valued at the nominal  $100,000  which they
      replaced.



STOCK OPTIONS :

      The following  table sets forth stock options granted during 2005 pursuant
to the  Company's  1997 Stock  Option  Plan and 2000 Stock  Incentive  Plan,  to
executive   officers,   certain  other  employees  with  highest   remuneration,
directors,  and beneficial owners of more than 10 percent of any class of equity
securities of the Company:

                                                                              19
<PAGE>


--------------------------------------------------------------------------------
         Number of Common    % of Total Options
         Shares Underlying   Granted to Employees     Exercise        Expiration
Name     Options Granted     and Directors in FY      Price ($/Sh.)   Date
--------------------------------------------------------------------------------

There were no stock options granted to employees and directors under any of the
Company's stock option plans during 2005.


      The following table sets forth aggregated stock option and warrant
exercises during 2005 by executive officers, certain other employees with
highest remuneration, directors, and beneficial owners of more than 10 percent
of any class of equity securities of the Company:

<TABLE>

----------------------------------------------------------------------------------------

<S>      <C>              <C>            <C>                       <C>
         Shares                          #of Shares Underlying     Value of Unexercised
         Acquired         Value          Unexercised               In-the-Money Options
Name     on Exercise(#)   Realized($)    Options/Warrants          & Warrants at Y/E ($)
----------------------------------------------------------------------------------------
</TABLE>

There were no stock  options or warrants  exercised  by  employee-executives  or
directors during 2005.


1997 Stock Option Plan:
-----------------------

      The Company's 1997 Stock Option Plan, as filed with Information  Statement
pursuant  to  Section  14(c)  with  the  Commission  on July 1,  1997,  and with
Registration  Statement on Form S-8 with the Commission on September 8, 1997, is
hereby incorporated by reference.

2000 Stock Incentive Plan:
--------------------------

      The Company's 2000 Stock  Incentive  Plan, as filed with the Commission as
an exhibit to the quarterly report on Form 10-QSB for the period ended March 31,
2000, is hereby incorporated by reference.


Compensation of Directors:
--------------------------

      Outside  directors  are awarded  stock options for 40,000 shares each upon
commencement of their office.

      During  2005,  one outside  director of the Company who also serves as the
Company's  general and securities  counsel,  was paid an aggregate  $131,140 for
legal services.

AUDIT COMMITTEE
---------------

      The  Company has  appointed  an Audit  Committee  in  accordance  with the
provisions  of the  Sarbanes-Oxley  Act of 2002,  comprised  of two  independent
outside  directors of the Company,  one of whom, S. Gray, is a financial  expert
with knowledge of financial statements, generally accepted accounting principles
and accounting procedures and disclosure rules.


                                                                              20
<PAGE>

CORPORATE GOVERNANCE AND CODE OF ETHICS
---------------------------------------

      The Company has always been  committed to good  corporate  governance.  In
furtherance of this commitment,  during 2002 the Board of Directors expanded the
duties of the Company's  Audit  Committee by increasing the  Committee's  duties
specifically  to include  responsibility  and oversight of corporate  governance
matters and adherence to the Company's  Code of Ethics.  A copy of the Corporate
Code of Ethics and  Conduct  had been  included  as an exhibit to the  Company's
report on Form 10-KSB for the year ended December 31, 2002.










                                                                              21
<PAGE>


ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

      The  following  table sets  forth,  as of March 30,  2005,  the record and
beneficial  ownership of common stock of the Company by each  executive  officer
and director,  all executive  officers and directors as a group, and each person
known to the Company to own beneficially,  or of record, five percent or more of
the outstanding shares of the Company:

<TABLE>
<CAPTION>

Title           Name and Address of                 Amount and Nature of          Percent
of Class )*     Beneficial Owner                    Beneficial Ownership (1)      of Class
-----------     ----------------                    ------------------------      --------
<S>             <C>                                      <C>                       <C>
Common          Mark Chroscielewski                               -                    -
Stock           Steven L. Gray                            3,564,096 (2)             2.48 %
                Steven W. Jagels                            584,583 (3)             0.41 %
                Joerg H. Klaube                           1,400,000 (4)             0.99 %
                Steven D. Rudnik                          4,411,111 (5)             3.04 %
                Joseph J. Tomasek                         2,847,166 (6)             1.99 %

                Address of all persons above: c/o the Company.

                All Directors and Executive Officers     12,806,956                 8.41 %
                as a Group (6 persons)

                Christoph Marti                          10,300,000 (7)             7.06 %
                Kuerzestrasse 25, CH-4562 Biberist, Switzerland

                Victor Cilli                             14,000,000 (8)             9.42 %
</TABLE>

)* The Company also has issued and  outstanding  as of March 16,  2006,  193,190
shares of its Senior Convertible  Preferred Stock, with concentrations in excess
of 10% for  one or more of the  holders  of such  stock,  however,  none of such
shares bear any voting rights.
----------------------------

(1)   For purposes of this table, a person or group of persons is deemed to have
      "beneficial ownership" of any shares of Common Stock which such person has
      the right to acquire  within 60 days of March 8,  2005.  For  purposes  of
      computing  the  percentage of  outstanding  shares of Common Stock held by
      each  person or group of persons  named  above,  any  security  which such
      person or  persons  has or have the right to acquire  within  such date is
      deemed  to be  outstanding  but is not  deemed to be  outstanding  for the
      purpose of computing the percentage ownership of any other person.  Except
      as  indicated  in the  footnote to this table and  pursuant to  applicable
      community  property  laws,  the  Company  believes  based  on  information
      supplied by such  persons,  that the persons named in this table have sole
      voting and  investment  power with  respect to all shares of Common  Stock
      which they beneficially own.
(2)   Includes  convertible  preferred stock  convertible into 2,855,996 shares.
      (3)  Includes   options  to  acquire  564,853  shares.   (4)  Consists  of
      convertible   preferred  stock  convertible  into  1,400,000  shares.  (5)
      Consists of convertible preferred stock convertible into 4,411,111 shares.
(6)   Includes convertible preferred stock convertible into 2,180,500 shares and
      warrants for 333,333 shares.
(7)   Includes warrants for 5,300,000 shares.
(8)   Includes warrants for 8,000,000 shares held by affiliates.



                                                                              22
<PAGE>


ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On March 31,  2000,  the Company  and its  President  and Chief  Executive
Officer  agreed to convert a current  liability  payable to him in the amount of
$374,890  into  a  Company  obligation,   of  which  $100,000  was  subsequently
classified as due on demand,  which was repaid in April 2002, with the remaining
balance of $274,890 maturing July 1, 2002. On February 19, 2002, the maturity of
the term  portion  of  $274,890  was  extended  to July  2003,  and the board of
directors of the Company  approved a change in the  conversion  option towards a
rate of $0.10 per share.  In January 2004,  $175,000 was repaid and the maturity
of the  remaining  open balance of $99,890 was extended to January,  2005.  This
amount is currently open and unpaid and payable on demand.

      In May 2005,  the Company and its  President and Chief  Executive  Officer
agreed to convert  most of his base  salary for the  remainder  of the year 2005
into  1,000,000  shares  of  restricted  common  stock and  1,000,000  warrants,
exercisable  during  three  years at the  price of $0.15 per  share,  in lieu of
$100,000 cash.

      In September 2005 our officers and directors  surrendered for cancellation
4,507,709 stock options, 2,283,916 common stock purchase warrants and 11,247,607
common  shares  in order to  provide  sufficient  authorized  common  shares  to
accommodate the Company's current private placement. We replaced the surrendered
and cancelled  common  shares with shares of our Series E preferred  stock which
are automatically convertible in March, 2006, into 11,247,607 common shares, the
amount of common  shares equal to those  surrendered.  We also intend to reissue
the  4,507,709  stock  options  and  2,283,916  warrants  also  surrendered  for
cancellation by our officers and directors with an equal amount of common shares
underlying these securities following adoption by the shareholders of a proposed
amendment to the  Company's  certificate  of  incorporation  which  amendment if
adopted would increase the number of authorized  common shares from  200,000,000
to 300,000,000. The recipients of the Series E preferred stock have waived their
right to receive any dividends on these shares.

      During  2005,  one outside  director of the Company who also serves as the
Company's  general and securities  counsel,  was paid an aggregate  $131,140 for
legal services.


ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

      Rosenberg  Rich  Baker  Berman &  Company  ("Rosenberg")  billed us in the
aggregate amount of $63,028 and $40,307 for professional  services  rendered for
their  audit  of our  annual  financial  statements  and  their  reviews  of the
financial  statements  included in our Forms 10-QSB for the year ended  December
31, 2005 and December 31, 2004, respectively.

AUDIT-RELATED FEES

      Rosenberg did not bill us for, nor perform professional  services rendered
for  assurance  and  related  services  that  were  reasonably  related  to  the
performance  of audit or review of the Company's  financial  statements  for the
fiscal years ended December 31, 2005 and December 31, 2004.


                                                                              23
<PAGE>

TAX FEES

      Rosenberg  billed us in the  aggregate  amount of $4,790  and  $5,961  for
professional  services  rendered  for tax related  services for the fiscal years
ended December 31, 2005 and December 31, 2004, respectively.

ALL OTHER FEES

      The  aggregate  fees  billed by  Rosenberg  for  services  rendered to the
Company during the last two fiscal years,  other than as reported above, were $0
and $0, respectively.


                                                                              24
<PAGE>

                                     PART IV
                                     -------

ITEM 15: EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

      The Exhibits that are filed with this report or that are  incorporated  by
reference are set forth in the Exhibit Index attached hereto.


(b)   Reports on Form 8-K

      On October 24,  2005,  the Company  filed a report on Form 8-K,  informing
about a press  release  in  connection  with the  placement  of an order for its
software products by a major client.

      On October 28,  2005,  the Company  filed a report on Form 8-K,  informing
about a restatement  of its financial  results for the years ended  December 31,
2003 and 2004 and the quarters ended March 31, 2005 and June 30, 2005.

      On November 16, 2005,  the Company  filed a report on Form 8-K,  informing
about a press  release  in  connection  with the  placement  of an order for its
software products by a major client.

      On December 12, 2005,  the Company  filed a report on Form 8-K,  informing
about the  resignation  from the board of one director and the  appointment of a
replacement.



                                                                              25
<PAGE>


                                   SIGNATURES


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



         MAGNITUDE INFORMATION SYSTEMS, INC.



         By:   /s/ Steven D. Rudnik                      Date: March 30, 2006
             ----------------------------
             Steven D. Rudnik
             President and Chief Executive Officer
             (Principal Executive Officer),
             Chairman of the Board


         By:   /s/ Joerg H. Klaube                       Date: March 30, 2006
             ----------------------------
             Joerg H. Klaube
             Secretary, Chief Financial Officer
             (Principal Financial Officer)
             Director

In accordance with the requirements of the Securities  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.


         Name                                                 Date
         ----                                                 ----



          /s/ Steven L. Gray                                  March 30, 2006
         -----------------------------
         Steven L. Gray, Director


          /s/ Joseph J. Tomasek                               March 30, 2006
         -----------------------------
         Joseph J. Tomasek, Director



                                                                              26
<PAGE>


EXHIBIT INDEX

(A) Restated Financial Statements and Notes to Financial Statements

(3)(i)   Articles of Incorporation and Amendments  thereto,  incorporated herein
         by reference to Exhibits of previous filings with the Commission.

(3)(ii)  Bylaws of the Company,  incorporated herein by reference to Exhibits of
         previous filings with the Commission.

(21)     Subsidiaries of the Company:

         (i) Magnitude, Inc. is a corporation formed under the laws of the State
         of Delaware and is the name under which it conducts business.

(23)     Independent Auditors' Consent - attached to Exhibit A.

(31.1)   Certification of Steven D. Rudnik, Chief Executive Officer, pursuant to
         Section 302 of Sarbanes-Oxley Act of 2002.

(31.2)   Certification of Joerg H. Klaube, Chief Financial Officer,  pursuant to
         Section 302 of Sarbanes-Oxley Act of 2002.

(99.1)   Certifications  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of
         2002, 18 U.S.C. Section 1350



OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCE

(a)      The  Company's  Quarterly  Reports on Form 10-QSB for the periods ended
         March 31, 2005, June 30, 2005, and September 30, 2005.

(b)      All other  reports  filed by the Company  pursuant to Section  13(a) or
         15(d) of the  Exchange  Act  since  the  Company's  fiscal  year  ended
         December 31, 2004



                                                                              27
<PAGE>






              Magnitude Information Systems, Inc. and Subsidiaries

                        Consolidated Financial Statements

                                December 31, 2005









<PAGE>




              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005





                                                                            Page



Report of Independent Registered Public Accounting Firm.................       2

Financial Statements

     Consolidated Balance Sheet.........................................       3

     Consolidated Statements of Operations..............................       4

     Consolidated Statements of Stockholders Equity (Deficit)...........     5-6

     Consolidated Statements of Cash Flows..............................     7-9

     Notes to the Consolidated Financial Statements.....................   10-31


<PAGE>



3


                                 [letterhead of
                      Rosenberg Rich Baker Berman & Company
                   380 Foothill Road, Bridgewater, New Jersey]

             Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of
Magnitude Information Systems, Inc. and Subsidiaries

We have  audited  the  accompanying  consolidated  balance  sheet  of  Magnitude
Information  Systems,  Inc.  and  Subsidiaries  as of December  31, 2005 and the
related consolidated  statements of operations,  stockholders' equity (deficit),
and cash flows for the years ended December 31, 2005 and 2004.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

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

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue as a going  concern.  As  discussed  in the notes to the
financial statements, the Company's significant operating losses and significant
working capital deficiency raise substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.




Bridgewater, New Jersey
March 23, 2006




                                                                               2
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2005
<TABLE>
<CAPTION>

              Assets
<S>                                                                                                         <C>
Current Assets
        Cash                                                                                                $       118,696
        Accounts receivable, net of allowance for doubtful accounts of $0                                            22,298
        Prepaid expenses                                                                                             22,786
                                                                                                              --------------
              Total Current Assets                                                                                  163,780
Property and equipment, net of accumulated depreciation of $153,383                                                   7,359
Software, net of accumulated amortization of $1,186,796                                                             320,494
Deposits                                                                                                             23,996
                                                                                                              --------------
              Total Assets                                                                                          515,629
                                                                                                              ==============
              Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
        Accounts payable and accrued expenses                                                                       319,296
        Deferred revenues                                                                                            25,539
        Dividends payable                                                                                           601,499
        Loans payable                                                                                                75,000
        Notes payable                                                                                                25,000
        Current maturities of long-term debt (including $99,890 due to officer)                                     133,419
        Current maturities of capitalized lease obligations                                                             257
                                                                                                              --------------
              Total Current Liabilities                                                                           1,180,010
                                                                                                              --------------

Commitments and Contingencies                                                                                             -

Stockholders' Equity (Impairment)
        Convertible preferred stock, $.001 par value, non-voting, 3,000,000 shares authorized; 322,333
          shares issued and outstanding                                                                                 322
        Common stock, $.0001 par value, 200,000,000 shares authorized; 140,606,672 shares issued
             and outstanding                                                                                         14,061
        Additional paid in capital                                                                               30,516,359
        Accumulated (deficit)                                                                                  (31,167,065)
        Deferred compensation                                                                                      (28,058)
                                                                                                              --------------
              Total Stockholders' Equity (Impairment)                                                             (664,381)
                                                                                                              --------------
              Total Liabilities and Stockholders' Equity (Impairment)                                       $       515,629
                                                                                                              ==============

</TABLE>



See notes to the consolidated financial statements.


                                                                               3
<PAGE>





              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                              Year Ended December 31,
                                                                                          ---------------------------------
                                                                                               2005              2004
                                                                                          ---------------   ---------------
<S>                                                                                     <C>               <C>
Net Sales
     Software                                                                           $        189,552  $        121,886
                                                                                          ---------------   ---------------
         Total Net Sales                                                                         189,552           121,886
                                                                                          ---------------   ---------------

Cost of Goods Sold
     Software                                                                                    151,713           155,975
                                                                                          ---------------   ---------------
         Total Cost of Goods Sold                                                                151,713           155,975

Gross Profit (Loss)                                                                               37,839          (34,089)

Research and development costs                                                                   217,067           221,000
Stock-based compensation (see below)                                                             430,239           748,646
Selling, general and administrative expenses                                                   1,801,203         1,683,667
                                                                                          ---------------   ---------------

Loss From Operations                                                                         (2,410,670)        (2,687,402)
                                                                                          ---------------   ---------------

Other Income (Expense)
     Miscellaneous income                                                                          4,846                 -
     Interest income                                                                                   6               189
     Interest expense                                                                           (21,703)          (43,258)
     Loss on disposition of assets                                                                     -          (20,703)
     Change in fair value of options and warrants                                                      -           227,608
                                                                                          ---------------   ---------------

         Total Other Income (Expense)                                                           (16,851)         (163,836)
                                                                                          ---------------   ---------------

Loss Before Provision for Income Taxes                                                       (2,427,521)       (2,523,566)

Benefit from Income Taxes                                                                        209,264           214,618
                                                                                          ---------------   ---------------
Net Loss                                                                                $    (2,218,257) $     (2,308,948)
                                                                                          ---------------   ---------------


Dividends and Discount on Preferred Shares                                              $      (123,235) $     (2,200,219)
                                                                                          ---------------   ---------------
Net Loss Applicable to Common Shareholders, basic and diluted                           $    (2,341,492) $     (4,509,167)
                                                                                          ===============   ===============

Net Loss Per Common Share, basic and diluted                                                      (0.02)            (0.05)
                                                                                          ===============   ===============

Weighted Average of Common Shares Outstanding                                                138,097,577        96,968,697
                                                                                          ===============   ===============
All of the stock-based compensation relates to selling, general and
administrative expenses.

</TABLE>

See notes to the consolidated financial statements.




                                                                               4
<PAGE>



              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                          YEAR ENDED DECEMBER 31, 2005
<TABLE>
<CAPTION>

                                                          Cumulative    Discount on                          Additional
                                      Convertible         Preferred     Preferred                             Paid in
                                    Preferred Shares        Shares         Stock          Common Stock        Capital
                                   ------------------- ---------------------------------------------------
                                    Shares    Amount   Shares   Amount    Amount      Shares      Amount
                                  ---------  -------- -------  ------------------------------------------
<S>                                <C>       <C>           <C> <C>       <C>       <C>          <C>        <C>
    Balances, January 1, 2004       351,022   $   351       1   $    -    (874,566) 77,213,808   $  7,721   $ 24,890,819


   Issuance of convertible
   preferred stock pursuant
   to private equity
   placements                       156,993       157       -        -  (1,055,806)          -          -      1,991,609

   Issuance of convertible
   preferred stock for
   services performed                 1,900         2       -        -            -          -          -         28,098

   Issuance of convertible
   preferred stock  for
   compensation                      16,667        17       -        -            -          -          -         99,983

   Conversion of
   convertible preferred
   stock into common  stock        (333,392)    (334)       -        -            - 33,349,202      3,334        (3,000)

   Issuance of common stock
   for accrued bonus                      -         -       -        -            -    196,680         20         19,648

   Issuance of common stock
   for stock awards                       -         -       -        -            -  2,000,000        200        224,800

   Issuance of common stock
   pursuant to exercise of
   options                                -         -       -        -                 250,000         25          2,475

   Issuance of common stock
   for rent                               -         -       -        -            -    200,000         20         23,980

   Issuance of common stock
   pursuant to private
   equity placements                      -         -       -        -            - 12,215,000      1,222      1,176,828

   Issuance of common stock
   granted for private
   placement finders' fees                -         -       -        -            -    673,333         67           (67)

   Issuance of common stock
   for services performed                 -         -       -        -            -  1,680,000        169        139,281

   Issuance of common stock
   for accrued interest                   -         -       -        -            -     59,589          6          3,966

   Issuance of options for
   services performed                     -         -       -        -            -          -          -         30,150

   Private placement
   finders fees                           -         -       -        -            -          -          -      (132,096)

   Net loss, year ended
   December 31, 2004                      -         -       -        -            -          -          -              -

   Dividends on convertible
   preferred stock                        -         -       -        -            -          -          -              -

   Recognition of expense
   on deferred compensation               -         -       -        -            -          -          -              -

   Amortization of discount
   on preferred stock                     -         -       -        -    1,930,372          -          -         96,320
                                  ---------  -------- -------  -------------------------------   -----------------------

   Change in fair value of
   options and warrants                   -         -       -        -            -          -          -      (227,608)
                                  =========  ======== =======  =======    ========= ==========  ========================
   Balances, December 31,
   2004                             193,190   $   193       1   $    -    $      - 127,837,612   $ 12,784     28,365,186
                                  =========  ======== =======  =======   ========= ===========  ========================
</TABLE>


See notes to the consolidated financial statements.


                                                                               5
<PAGE>


<TABLE>
<CAPTION>

                                                                          Total
                                     Accumulated      Deferred         Stockholders'
                                       Deficit       Compensation     Equity (Deficit)
                                    -------------- ------------------------------------

                                   ----------------  ------------    ------------------
<S>                                <C>               <C>                <C>
    Balances, January 1, 2004       $  (24,316,404)   $ (171,544)        $    (463,623)


   Issuance of convertible
   preferred stock pursuant
   to private equity
   placements                                     -             -               935,960

   Issuance of convertible
   preferred stock for
   services performed                             -             -                28,100

   Issuance of convertible
   preferred stock  for
   compensation                                   -             -               100,000

   Conversion of
   convertible preferred
   stock into common  stock                       -             -                     -

   Issuance of common stock
   for accrued bonus                              -             -                19,668

   Issuance of common stock
   for stock awards                               -             -               225,000

   Issuance of common stock
   pursuant to exercise of
   options                                        -             -                 2,500

   Issuance of common stock
   for rent                                       -             -                24,000

   Issuance of common stock
   pursuant to private
   equity placements                              -             -             1,178,050

   Issuance of common stock
   granted for private
   placement finders' fees                        -             -                     -

   Issuance of common stock
   for services performed                         -             -               139,450

   Issuance of common stock
   for accrued interest                           -             -                 3,972

   Issuance of options for
   services performed                             -             -                30,150

   Private placement
   finders fees                                   -             -             (132,096)

   Net loss, year ended
   December 31, 2004                    (2,308,948)                         (2,308,948)

   Dividends on convertible
   preferred stock                        (173,529)                           (173,529)

   Recognition of expense
   on deferred compensation                       -       105,908               105,908

   Amortization of discount
   on preferred stock                   (2,026,692)             -                     -
                                     --------------  ------------    ------------------

   Change in fair value of
   options and warrants                           -             -             (227,608)
                                     ==============  ============ =====================
   Balances, December 31,
   2004                              $ (28,825,573)   $  (65,636)             (513,046)
                                     ==============  ============ =====================
</TABLE>


See notes to the consolidated financial statements.

                                                                               6
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                          YEAR ENDED DECEMBER 31, 2005
<TABLE>
<CAPTION>

                                                         Cumulative    Discount on                           Additional
                                     Convertible          Preferred     Preferred                             Paid in
                                    Preferred Shares       Shares          Stock        Common Stock          Capital
                                   ------------------- ---------------------------------------------------
                                    Shares    Amount   Shares   Amount    Amount      Shares      Amount
                                   ---------  -------- -------  -------------------------------  ---------
<S>                                 <C>     <C>           <C>   <C>        <C>     <C>          <C>        <C>
      Balances, January 1, 2005     193,190 $     193       1   $    -     $ -     127,837,612  $  12,784  $  28,365,186

   Issuance of convertible
   preferred stock pursuant
   to private equity
   placements                        16,667        17       -        -                       -          -         99,983

   Conversion of common
   stock into convertible
   preferred stock                  112,476       112       -        -           -  11,247,607    (1,125)          1,013

   Issuance of common stock
   for compensation                       -         -       -        -           -   1,000,000        100         99,900

   Issuance of common stock
   pursuant to private
   equity placements                      -         -       -        -           -  19,666,667      1,967      1,558,033

   Issuance of common stock
   for services performed                 -         -       -        -           -   3,350,000        335        297,465

   Issuance of warrants for
   services performed                     -         -       -        -           -           -          -         46,700

   Issuance of options for
   services performed                     -         -       -        -           -           -          -        108,780

   Private placement
   finders fees                           -         -       -        -           -           -          -       (67,000)

   Dividends on convertible
   preferred stock                        -         -       -        -           -           -          -              -

   Recognition of expense
   on deferred compensation               -         -       -        -           -           -          -              -

   Amortization of discount
   on preferred stock                     -         -       -        -           -           -          -          6,299
                                   ---------  -------- -------  -------   --------- -----------  ------------------------
   Net loss, year ended
   December 31, 2005                      -         -       -        -           -           -          -              -
                                   =========  ======== =======  =======   ========= ===========  ========================
   Balances, December 31,
   2005                             322,333    $  322       1   $    -     $     -  140,606,672  $ 14,061   $ 30,516,359
                                   =========  ======== =======  =======   ========= ===========  ========================

</TABLE>

See notes to the consolidated financial statements.


                                                                               7
<PAGE>


<TABLE>
<CAPTION>

                                                                          Total
                                     Accumulated       Deferred       Stockholders'
                                       Deficit       Compensation    Equity (Deficit)
                                    -------------- -------------------------------------

                                    ----------------  ------------    ------------------
<S>                                  <C>               <C>               <C>
      Balances, January 1, 2005      $ (28,825,573)    $ (65,636)        $    (513,046)

   Issuance of convertible
   preferred stock pursuant
   to private equity
   placements                                     -             -               100,000

   Conversion of common
   stock into convertible
   preferred stock                                -             -                     -

   Issuance of common stock
   for compensation                               -     (100,000)                     -

   Issuance of common stock
   pursuant to private
   equity placements                              -             -             1,560,000

   Issuance of common stock
   for services performed                         -     (205,000)                92,800

   Issuance of warrants for
   services performed                             -      (32,900)                13,800

   Issuance of options for
   services performed                             -             -               108,780

   Private placement
   finders fees                                   -             -              (67,000)

   Dividends on convertible
   preferred stock                        (116,936)                           (116,936)

   Recognition of expense
   on deferred compensation                       -       375,478               375,478

   Amortization of discount
   on preferred stock                       (6,299)             -                     -
                                      --------------  ------------ --------------------
   Net loss, year ended
   December 31, 2005                    (2,218,257)             -           (2,218,257)
                                      ==============  ============ ====================
   Balances, December 31,
   2005                               $(31,167,065)    $ (28,058)       $    (664,381)
                                      ==============  ============ ====================

</TABLE>

See notes to the consolidated financial statements.


                                                                               7
<PAGE>



              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
          AS RESTATED - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                       Year Ended December 31,
                                                                                  ----------------------------------

                                                                                      2005                2004
                                                                                  --------------     ---------------
<S>                                                                             <C>                <C>
Cash Flows From Operating Activities
    Net Loss                                                                    $   (2,218,257)    $    (2,308,948)
    Adjustments to Reconcile Net Loss to Net Cash Used by Operations
      Depreciation and amortization                                                     153,766             166,144
      Stock/options issued for various expenses                                         106,197             541,172
      Recognition of expense - deferred compensation                                    375,478             105,908
      Loss on disposition of assets                                                           -              20,703
      Writedown of inventories                                                            6,214                   -
      Bad debt provision                                                                      -               (212)
    Decreases (Increases) in Assets
        Accounts receivable                                                               8,332               5,422
        Miscellaneous receivables                                                        11,322             (9,522)
        Prepaid expenses                                                                 33,207            (27,322)
        Other assets                                                                    (2,167)               1,954
    Increases (Decreases) in Liabilities
      Accounts payable and accrued expenses                                            (38,905)              17,499
      Deferred revenue                                                                 (23,834)              32,732
      Deferred rental obligation                                                        (1,045)             (3,811)
                                                                                  --------------     ---------------
        Net Cash Used by Operating Activities                                       (1,509,884)         (1,458,284)
                                                                                  --------------     ---------------

Cash Flows From Investing Activities
    Purchases of equipment, fixtures, and software                                      (5,587)             (5,209)
                                                                                  --------------     ---------------
        Net Cash Used by Investing Activities                                           (5,587)             (5,209)
                                                                                                     ---------------

Cash Flows From Financing Activities
    Dividends paid                                                                            -            (58,991)
    Repayment of capital lease obligations                                              (2,977)             (2,805)
    Proceeds from loans payable                                                          54,500                   -
    Repayment of loans payable                                                         (54,500)           (282,851)
    Changes in fair value of warrants and options                                             -           (227,608)
    Proceeds from issuance of common and preferred stock                              1,593,000           1,981,914
                                                                                  --------------     ---------------
        Net Cash Provided by Financing Activities                                     1,590,023           1,409,659
                                                                                  --------------     ---------------

Net Increase (Decrease) in Cash                                                          74,552            (53,834)
Cash at beginning of period                                                              44,144              97,978
                                                                                  --------------     ---------------
Cash at end of period                                                           $       118,696    $         44,144
                                                                                  ==============     ===============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Interest Paid                                                               $        21,960    $         36,604
                                                                                  ==============     ===============
    Taxes Paid                                                                  $           630    $          1,800
                                                                                  ==============     ===============
</TABLE>

See notes to the consolidated financial statements.


                                                                               8
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2005



Schedule of non-cash investing and financing activities
<TABLE>

<S>                                                                                               <C>
     In connection with consideration for settlement of accruals for past services,
     130,000 common shares and options for 1,200,000 common shares were issued                    $      121,780
                                                                                                   ===============
     In connection with consideration for future services, 3,500,000 common shares
     and warrants for 1,000,000 were issued and recorded initially as deferred compensation
                                                                                                  $      337,900
 </TABLE>











               See notes to the consolidated financial statements

                                                                               9
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2004



Schedule of non-cash investing and financing activities

<TABLE>

<S>  <C>                                                                                          <C>
     In connection with consideration for current consulting services, stock options for
     250,000 common shares were issued                                                            $       30,150
                                                                                                   ===============
     In exchange for accrued interest, 59,589 common shares were issued                           $        3,972
                                                                                                   ===============
     In connection with the retirement of accrued bonuses, 196,680 common shares were issued      $       19,668
                                                                                                   ===============
     In connection with consideration for current services, 4,363,333 common shares were
     issued                                                                                       $      364,450
                                                                                                   ===============
     In exchange for rent, 200,000 common shares were issued                                      $       24,000
                                                                                                   ===============
     In connection with consideration of current year expenses, 250,000 common shares were
     issued in conjunction with an option exercise                                                $        2,500
                                                                                                   ===============
     In connection with consideration for current compensation, 16,667 convertible
     preferred shares with attached warrants were issued                                          $      100,000
                                                                                                   ===============
     Changes in fair value of options and warrants                                                $      227,608
                                                                                                   ===============
     In connection with consideration for current consulting services, 1,900 convertible
     preferred shares with attached warrants were issued                                          $       28,100
                                                                                                   ===============

</TABLE>




See notes to the consolidated financial statements.


                                                                              10
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Organization

         Magnitude Information Systems, Inc. (the "Company") was incorporated as
         a Delaware  corporation on April 19, 1988 under the name  Fortunistics,
         Inc. On November  18, 1998,  the Company  changed its name to Magnitude
         Information Systems, Inc.

         The Company and Magnitude, Inc. are two separate legal entities whereby
         Magnitude,  Inc. operates as a subsidiary of the Company.  However, the
         operations of the combined entity are currently comprised solely of the
         operations  of Magnitude,  Inc. The 1% of Magnitude,  Inc. not owned by
         the Company constitutes a minority interest which is valued at $0.

         The Company's  primary  product is an integrated  suite of  proprietary
         software  modules  marketed under the name  ErgoEnterpriseTM  which are
         designed to help  individual  computer  users and  businesses  increase
         productivity and reduce the risk of potentially  preventable repetitive
         stress injury (RSI). These software modules can be applied individually
         or together in a comprehensive ergonomic and early intervention program
         that seeks to modify a user's  behavior by  monitoring  computer  usage
         patterns over time and warning the user when to break a dangerous trend
         in repetitive  usage of an input  device,  such as a keyboard or mouse.
         The product was developed to train people working on computers, monitor
         computer-use related activities and evaluate a user's risk exposure and
         propensity  towards injury or loss of  effectiveness in connection with
         his/her  day-to-day work.  Moreover,  the software enables a company to
         not only address the issue of health risks  involving  employees and to
         minimize resulting potential liabilities,  but delivers a powerful tool
         to increase overall productivity.

     Principles of Consolidation

         The consolidated financial statements include the accounts of Magnitude
         Information  Systems,  Inc.  and its  subsidiary,  Magnitude,  Inc. All
         significant   inter-company   balances  and   transactions   have  been
         eliminated.

     Depreciation

         Property,  plant and  equipment are recorded at cost.  Depreciation  on
         equipment,   furniture  and  fixtures  and  leasehold  improvements  is
         computed on the straight line method over the estimated useful lives of
         such assets between 5-10 years.  Maintenance and repairs are charged to
         operations as incurred. Repairs and maintenance which do not extend the
         useful lives of the related assets are expensed as incurred.


                                                                              11
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

     Amortization

         Software  assets  have  been  capitalized  at the  fair  value of stock
         exchanged/granted  upon  acquisition  and are amortized on the straight
         line method on a  product-by-product  basis over the estimated economic
         life of the products which has been determined to be 10 years.

     Advertising Costs

         Advertising costs are charged to operations when incurred.  Advertising
         expense  was $811 and $491 for the years  ended  December  31, 2005 and
         2004, respectively.

     Evaluation of Long Lived Assets

         Long-lived assets are assessed for  recoverability on an ongoing basis.
         In evaluating the fair value and future benefits of long-lived  assets,
         their  carrying  value would be reduced by the  excess,  if any, of the
         long-lived  asset  over   management's   estimate  of  the  anticipated
         undiscounted future net cash flows of the related long-lived asset.

     Securities Issued for Services

         The Company accounts for stock, stock options and stock warrants issued
         for services and  compensation  by employees  under the intrinsic value
         method. For non-employees, the fair market value of the Company's stock
         on the date of stock  issuance  or  option/warrant  grant is used.  The
         Company determined the fair market value of the warrants/options issued
         under the Black-Scholes  Pricing Model.  Effective January 1, 1996, the
         Company adopted Statement of Financial  Accounting  Standard (SFAS) No.
         123, "Accounting for Stock-based Compensation". The statement generally
         suggests,  but  does not  require,  employee  stock-based  compensation
         transactions  to be  accounted  for  based  on the  fair  value  of the
         services rendered or the fair value of the equity  instruments  issued,
         whichever is more reliably  measurable.  As permitted by the statement,
         the  Company has  elected to  continue  to follow the  requirements  of
         Accounting  Principles  Board  Opinion  No. 25,  "Accounting  for Stock
         Issued to Employees' for employees under the intrinsic value method.

     Reclassification of Certain Securities under EITF 00-19

         Pursuant to Emerging Issues Taskforce (EITF) Issue 00-19, if a company
         has more than one contract subject to this issue, and partial
         reclassification is required, there may be different methods that could
         be used to determine which contracts, or portions of contracts, should
         be reclassified. The Company's method for reclassification of such
         contracts is reclassification of contracts with the latest maturity
         date first. The changes in fair value for any contracts reclassified
         during 2005 were not material.

     Income Taxes

         The  Company  provides  for income  taxes  based on enacted tax law and
         statutory  tax rates at which items of income and expenses are expected
         to be settled in the  Company's  income tax  return.  Certain  items of
         revenue and expense are  reported  for Federal  income tax  purposes in
         different  periods  than  for  financial  reporting  purposes,  thereby
         resulting in deferred income taxes.  Deferred taxes are also recognized
         for  operating  losses  that are  available  to offset  future  taxable
         income.  Valuation  allowances are established when necessary to reduce
         deferred tax assets to the amount expected to be realized.  The Company
         has  incurred  net  operating   losses  for   financial-reporting   and
         tax-reporting purposes.  Accordingly,  for Federal and state income tax
         purposes,  the benefit for income  taxes has been offset  entirely by a
         valuation  allowance against the related federal and state deferred tax
         asset for the year ended December 31, 2005.

     Net Loss Per Share

         Net loss per share,  in  accordance  with the  provisions  of Financial
         Accounting  Standards Board No. 128,  "Earnings Per Share," is computed
         by dividing net loss by the weighted average number of shares of Common
         Stock outstanding during the period.  Common Stock equivalents have not
         been   included  in  this   computation   since  the  effect  would  be
         anti-dilutive.


                                                                              12
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

     Revenue Recognition

         The  Company's  revenue  recognition  policy for  software  sales is in
         accordance with  Accounting  Statement of Position (SOP) 97-2 "Software
         Revenue  Recognition" and SOP 98-9 "Software Revenue recognition" which
         modifies  SOP 97-2.  Revenue  is  recognized  at the time of  licensing
         provided that the resulting receivable is deemed probable of collection
         and  is  fixed  or  determinable.  Revenue  from  software  maintenance
         contracts  is  recognized  ratably  as  earned.  When a sales  contract
         includes  multiple  elements,  revenues  are  allocated  to the various
         elements based on  Company-specific  objective  evidence of fair value,
         regardless  of any separate  prices for each element that may be stated
         within the contract.

     Use of Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted   principles   requires   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.  Actual  results could differ from those
         estimates.

GOING CONCERN

     As shown in the accompanying financial statements, the Company incurred net
     losses of $2,218,257  and  $2,308,948  during the years ended  December 31,
     2005  and  2004,  respectively,  and  has  a  significant  working  capital
     deficiency.  The ability of the  Company to continue as a going  concern is
     dependent  on  increasing  sales  and  obtaining   additional  capital  and
     financing.  The financial  statements do not include any  adjustments  that
     might be necessary if the Company is unable to continue as a going concern.
     Management's  plans are to  continue  discussions  with  several  potential
     investors to obtain additional capital in order to alleviate the situation.

CONCENTRATIONS OF BUSINESS AND CREDIT RISK

     The Company maintains cash balances in several financial institutions which
     are insured by the Federal  Deposit  Insurance  Corporation up to $100,000.
     Balances in these  accounts  may, at times,  exceed the  federally  insured
     limits.

     The Company  provides  credit in the normal course of business to customers
     located   throughout  the  world  The  Company   performs   ongoing  credit
     evaluations of its customers and maintains allowances for doubtful accounts
     based  on  factors  surrounding  the  credit  risk of  specific  customers,
     historical trends, and other information.

PREPAID EXPENSES

     Prepaid expenses at December 31, 2005 consist of:

                  Insurance         $13,341
                  Other               9,445
                                  ---------
                                    $22,786
PROPERTY AND EQUIPMENT

     Property and equipment consist of the following at December 31, 2005:

         Equipment                                           $          88,512
         Furniture and fixtures                                         72,230
                                                               ----------------
                                                                       160,742
         Less accumulated depreciation                                 153,383
                                                               ----------------

                                                             $           7,359
                                                               ================

Depreciation  expense  charged to operations  was $8,226 and $10,225 in 2005 and
2004, respectively.

                                                                              12
<PAGE>



              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

      Accounts payable and accrued expenses consisted of the following at
December 31, 2005:

     Accounts payable                                          $        158,005
     Accrued interest                                                    58,763
     Accrued consulting fees                                             28,550
     Accrued commissions                                                 22,183
     Accrued professional fees                                           44,500
     Accrued taxes                                                            -
     Accrued payroll                                                      5,295
     Miscellaneous accruals                                               2,000
                                                                  --------------
                                                                  --------------

                                                               $        319,296
                                                                  ==============

      Accrued commissions are due to a consultant who is retained in the
capacity of Senior Vice President of Business Development. In accordance with
the terms of the consulting agreement, one half of such commissions are payable
in cash and the other half in form of restricted shares of the Company's common
stock, valued at the market price of the Company's common stock on the date
payment of such commissions are made. At December 31, 2005, the price of the
stock was $0.08 which would, had payment of the commission been made that day,
require issuance of 138,644 shares.

LOANS PAYABLE

     The  Company  and  Magnitude,  Inc.  had  borrowings  under short term loan
     agreements with the following terms and conditions at December 31, 2005:


     On   December  4,  1996,   Magnitude,   Inc.
     repurchased  500,000  shares  of its  common
     stock and retired same against issuance of a
     promissory   note  maturing   twelve  months
     thereafter accruing interest at 5% per annum
     and  due  December  4,  1998.  This  note is
     overdue at  December  31, 2005 and no demand
     for payment has been made.                             $         75,000
                                                              ---------------

             Total                                          $         75,000
                                                              ===============

NOTES PAYABLE


     At   December   31,  1999  the  Company  had
     $1,475,000 of notes outstanding related to a
     June 1995 private placement offering. During
     2000  the  holders  of  $1,450,000  worth of
     notes agreed to accept partial  repayment of
     approximately  30% of the note  balances and
     converted the remaining balances into common
     shares  orconvertible  preferred shares. The
     total   amount   of   non-converted    notes
     outstanding at December 31, 2005 is $25,000.
     Attempts  to locate the holder of this note,
     to   settle   this   liability,   have  been
     unsuccessful.                                          $         25,000
                                                              ---------------


             Total                                          $         25,000
                                                              ===============






                                                                              14
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

LONG-TERM DEBT

     Long-term  debt as of  December  31, 2005 is
     comprised of the following:

     Pursuant to the February 2, 1998,  Agreement
     and Plan of Merger with Rolina  Corporation,
     the Company had issued  155,556  shares (the
     "Shares")   of  its  common   stock  to  the
     principal   of   Rolina    Corporation   who
     currently  serves  as  the  Company's  Chief
     Executive  Officer and Board  Chairman,  and
     had issued a Put Option for such Shares at a
     price of $2.41 per share in accordance  with
     the  provisions   contained  therein,   with
     notice for exercise  eligible to be given at
     any time after  February 1, 2000, and before
     5:00 p.m. on the 90th day  thereafter.  This
     liability  was  converted   into  a  Company
     obligation  for $274,890  maturing March 31,
     2002 and a demand  loan  for  $100,000  both
     carrying  interest  at  the  rate  of 7% per
     year, subsequently increased to 10%, payable
     monthly. The demand portion of this note was
     repaid  in  April  2002 and the due date for
     $274,890  of  the   remaining   balance  was
     extended to July 1, 2003. Subsequently,  the
     maturity  of the unpaid  balance was changed
     to a portion of $174,890  payable on demand,
     and a portion of $100,000 due and payable on
     January 2, 2005. During the first quarter of
     2004,  $175,000  was repaid and the maturity
     of the unpaid balance was changed to January
     1, 2005,  and is currently  due upon demand.
     The  obligation  includes  an  option to the
     holder  for  conversion  of the  outstanding
     principal   into  shares  of  the  Company's
     common stock at the rate of $0.06 per common
     share equivalent.                                      $         99,890

     Discounted  present value of a  non-interest
     bearing  $70,000  settlement  with a  former
     investor of Magnitude, Inc. to be paid in 24
     equal monthly  payments  commencing  July 1,
     1997.  The  imputed  interest  rate  used to
     discount  the  note  is 8% per  annum.  This
     obligation is in default.                                        33,529
                                                              ---------------
                                                                     133,419
       Total
            Less current maturities                                  133,419
                                                              ---------------
            Long-term debt, net of current maturities       $              -
                                                              ===============


CAPITALIZED LEASE OBLIGATIONS

     The Company leases office  equipment under a  non-cancelable  capital lease
     agreement  expiring in January 2006. The capital lease  obligation has been
     recorded at the present value of future minimum lease payments,  discounted
     at an interest rate of 6.00%. The capitalized cost of equipment at December
     31, 2005 amounted to $257 net of accumulated depreciation of $8,252.



                                                                              15
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DEFERRED REVENUES

     Deferred  revenues at December  31,  2005,  amounted to $25,539  related to
     prepaid  software  maintenance  and  support  charges  which are  amortized
     ratably over the duration of the underlying maintenance agreements.

PREFERRED STOCK

     Preferred  stock is  non-voting,  $.001 par value per share with  3,000,000
     shares authorized.

     Cumulative  Preferred Stock has 2,500 shares designated of which 1 share is
     issued and outstanding.  The total  Cumulative  Preferred Stock at December
     31, 2005 is $0 with a  liquidation  price of  $100,000.  As of December 31,
     2005,  there was  $9,000  of  cumulative  preferred  dividends  in  arrears
     representing $9,000 per cumulative preferred share.

     Series A of the Senior Convertible  Preferred Stock series which was issued
     in  2000  has  300,000   shares   designated,   29,300  shares  issued  and
     outstanding.  The total outstanding Series A Senior  Convertible  Preferred
     Stock at December 31, 2005 is $29 with a liquidation price of $146,500. The
     following is a description of the Series A convertible preferred stock:

     (1)  The  holders  of said  shares  of Series A Senior  Preferred  shall be
          entitled to receive cumulative  dividends at the rate of seven percent
          (7%)  per  annum  during  the  first  annual  period  after  issuance,
          increasing  by  increments  of one half of one  percent for every year
          thereafter until the rate reaches ten percent (10%) per annum at which
          time it will remain at 10% payable  semi-annually when declared by the
          Board of Directors,  before any dividend shall be declared,  set apart
          for, or paid upon the Common Stock of the Company.  The Dividend  Rate
          shall  accrue on the  Liquidation  Price of each share of the Series A
          Senior  Preferred.  The  dividends  on the Series A Senior  Preferred,
          payable in cash, shall be cumulative,  so that if the Company fails in
          any  fiscal  year  to  pay  such  dividends  on  all  the  issued  and
          outstanding  Series  A  Senior  Preferred,   such  deficiency  in  the
          dividends  shall be fully  paid,  but  without  interest,  before  any
          dividends  shall be paid on or set apart for the Cumulative  Preferred
          Stock or the Common Stock.

     (2)  The Series A Senior  Preferred  shall with respect to dividend  rights
          and liquidation  rights rank prior to all classes and series of Common
          Stock and the Cumulative Preferred Stock, and on a par with the Series
          B, C and D Senior Convertible Preferred Stock.

     (3)  In the event of any liquidation,  of the Company, whether voluntary or
          otherwise,  after  payment or  provision  for payment of the debts and
          other  liabilities of the Company,  the holders of the Series A Senior
          Preferred  shall be  entitled  to receive,  out of the  remaining  net
          assets of the  Company,  the amount of Five  ($5.00)  dollars for each
          share of Series A Senior Preferred (the  "Liquidation  Price") held of
          record  by  such  holder,  payable  in  cash or in  shares  of  stock,
          securities  or  other   consideration,   the  value  of  which  stock,
          securities  or other  consideration  shall  be  fixed by the  Board of
          Directors,  plus the amount of all  dividends  in arrears on each such
          share up to the date fixed for distribution,  provided,  however, that
          such  remaining  net  assets  are  sufficient  to cover all the before
          mentioned payments and also like payments to holders of Series B and C
          Senior Preferred, before any distribution shall be made to the holders
          of Common Stock or Cumulative  Preferred Stock of the Company. In case
          such remaining net assets are  insufficient to cover all such payments
          to holders of Series A, B, C and D Senior  Preferred,  the  holders of
          these series shall receive payments on a pro rata basis.


                                                                              16
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PREFERRED STOCK - (Continued)

     (4)  The Company  shall have the right to redeem pro rata any or all of its
          Series A Senior Preferred issued and outstanding at any time, with the
          Board of Directors of the Company in its sole discretion  deciding how
          many shares to redeem, provided,  however, that any such shares called
          for redemption have been issued and outstanding for a minimum of three
          (3) years at the time of notice of  redemption  to the holders of such
          shares,  by paying to the holders  thereof the  Liquidation  Price for
          each share of Series A Senior  Preferred  held by such  holder  plus a
          "call  premium" of 15% of the  Liquidation  Price,  together  with the
          amount of any accrued  and unpaid  dividends  as may have  accumulated
          thereon at the time of redemption (the "Redemption Price").

     (5)  Each share of Series A Senior  Preferred  shall be  convertible at any
          time prior to the Redemption Date, at the holder's  option,  into such
          number (the  "Conversion  Ratio") of shares of the Common Stock of the
          Company as arrived at by dividing the Liquidation Price by one hundred
          fifty  (150)  percent of the market  price of the Common  Stock of the
          Corporation ("Market Price") on the earlier of the dates such share of
          Series A Senior  Preferred is subscribed for or issued (the "Effective
          Date").

          As of December 31, 2005 there were $52,984 Series A Senior Convertible
          Preferred share dividends  accrued and unpaid  representing  $1.81 per
          share.

     Series B of the Senior Convertible  Preferred Stock series which was issued
     in 2000 has 350,000 shares  designated,  no shares issued and  outstanding.
     The  total  outstanding  Series B  Senior  Convertible  Preferred  Stock at
     December  31, 2005 is $0. The  following is a  description  of the Series B
     Senior Convertible Stock:

     (1)  The  holders  of said  shares  of Series B Senior  Preferred  shall be
          entitled to receive cumulative  dividends thereon at the rate of seven
          percent (7%) per annum,  payable  semi-annually  when  declared by the
          Board of Directors,  before any dividend shall be declared,  set apart
          for, or paid upon the Common Stock of the Company.  The Dividend  Rate
          shall  accrue on the  Liquidation  Price of each share of the Series B
          Senior  Preferred.  The  dividends  on the Series B Senior  Preferred,
          payable in cash, shall be cumulative,  so that if the Company fails in
          any  fiscal  year  to  pay  such  dividends  on  all  the  issued  and
          outstanding  Series  B  Senior  Preferred,   such  deficiency  in  the
          dividends  shall be fully  paid,  but  without  interest,  before  any
          dividends  shall be paid on or set apart for the Cumulative  Preferred
          Stock or the Common Stock.

     (2)  The Series B Senior Preferred  shall,  with respect to dividend rights
          and liquidation rights, rank prior to all classes and series of Common
          Stock and the Cumulative Preferred Stock, and on a par with the Series
          A, C and D Senior Convertible Preferred Stock.

     (3)  In the event of any liquidation of the Company,  whether  voluntary or
          otherwise,  after  payment or  providing  for payment of the debts and
          other  liabilities of the Company,  the holders of the Series B Senior
          Preferred  shall be  entitled  to receive,  out of the  remaining  net
          assets of the  Company,  the amount of nine  ($9.00)  dollars for each
          share of Series B Senior Preferred (the  "Liquidation  Price") held of
          record  by  such  holder,  payable  in  cash or in  shares  of  stock,
          securities  or  other   consideration,   the  value  of  which  stock,
          securities  or other  consideration  shall  be  fixed by the  Board of
          Directors,  plus the amount of all  dividends  in arrears on each such
          share up to the date fixed for distribution,  provided  however,  that
          such  remaining  net  assets  are  sufficient  to cover all the before
          mentioned payments and also like payments to holders of Series A and C
          Senior Preferred, before any distribution shall be made to the holders
          of Common Stock or Cumulative  Preferred Stock of the Company. In case
          such remaining net assets are  insufficient to cover all such payments
          to holders of Series A, B, C and D Senior  Preferred,  the  holders of
          these series shall receive payments on a pro rata basis.


                                                                              17
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PREFERRED STOCK - (Continued)

     (4)  The Company  shall have the right to redeem pro rata any or all of its
          Series B Senior Preferred issued and outstanding at any time, with the
          Board of Directors of the Company in its sole discretion  deciding how
          many shares to redeem, provided,  however, that any such shares called
          for redemption have been issued and outstanding for a minimum of three
          (3) years at the time of notice of  redemption  of the holders of such
          shares,  by paying to the holders  thereof the  Liquidation  Price for
          each share of Series B Senior  Preferred  held by such  holder  plus a
          "call  premium" of 10% of the  Liquidation  Price,  together  with the
          amount of any accrued  and unpaid  dividends  as may have  accumulated
          thereon at the time of redemption (the "Redemption Price").

     (5)  Each share of Series B Senior  Preferred  shall be  convertible at any
          time prior to the Redemption Date, at the holder's option, into shares
          of Common  Stock of the  Company  on the  basis of ten (10)  shares of
          Common Stock for 1 share of Series B Senior Preferred.

          As of  December  31,  2005 there  were no Series B Senior  Convertible
          Preferred share dividends accrued and unpaid.

     Series C of the Senior Convertible  Preferred Stock series which was issued
     in  2000  has  120,000  shares   designated,   100,000  shares  issued  and
     outstanding.  The total outstanding Series C Senior  Convertible  Preferred
     Stock at December  31, 2005 is $100 with a  liquidation  price of $900,000.
     The following is a description of the Series C Senior Convertible Stock:

     (1)  The  holders  of said  shares  of Series C Senior  Preferred  shall be
          entitled to receive cumulative  dividends thereon at the rate of seven
          percent (7%) per annum, payable monthly,  before any dividend shall be
          declared, set apart for, or paid upon the Common Stock of the Company.
          The  Dividend  Rate  shall  accrue  on  the   Liquidation   Price  (as
          hereinafter  defined) of each share of the Series C Senior  Preferred.
          The dividends on the Series C Senior Preferred, payable in cash, shall
          be cumulative,  so that if the Company fails in any fiscal year to pay
          such  dividends  on all the  issued  and  outstanding  Series C Senior
          Preferred,  such  deficiency in the dividends shall be fully paid, but
          without  interest,  before any dividends shall be paid on or set apart
          for the Cumulative Preferred Stock or the Common Stock.

     (2)  The Series C Senior  Preferred  shall with respect to dividend  rights
          and liquidation  rights rank prior to all classes and series of Common
          Stock and the Cumulative Preferred Stock, and on a par with the Series
          A, B and D Senior Convertible Preferred Stock.

     (3)  In the event of any liquidation of the Company,  whether  voluntary or
          otherwise,  after  payment or  provision  for payment of the debts and
          other  liabilities of the Company,  the holders of the Series C Senior
          Preferred  shall be  entitled  to receive,  out of the  remaining  net
          assets of the  Company,  the amount of nine  ($9.00)  dollars for each
          share of Series C Senior Preferred (the  "Liquidation  Price") held of
          record  by  such  holder,  payable  in  cash or in  shares  of  stock,
          securities  or  other   consideration,   the  value  of  which  stock,
          securities  or other  consideration  shall  be  fixed by the  Board of
          Directors,  plus the amount of all  dividends  in arrears on each such
          share up to the date fixed for distribution,  provided,  however, that
          such  remaining  net  assets  are  sufficient  to cover all the before
          mentioned payments and also like payments to holders of Series A and B
          Senior Preferred, before any distribution shall be made to the holders
          of Common Stock or Cumulative  Preferred Stock of the Company. In case
          such remaining net assets are  insufficient to cover all such payments
          to holders of Series A, B, C and D Senior  Preferred,  the  holders of
          these series shall receive payments on a pro rata basis.


                                                                              18
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PREFERRED STOCK - (Continued)

     (4)  The Company  shall have the right to redeem pro rata any or all of its
          Series C Senior Preferred issued and outstanding at any time, with the
          Board of Directors of the Company in its sole discretion  deciding how
          many shares to redeem, provided,  however, that any such shares called
          for redemption have been issued and outstanding for a minimum of three
          (3) years at the time of notice of  redemption  to the holders of such
          shares,  by paying to the holders  thereof the  Liquidation  Price for
          each share of Series C Senior  Preferred  held by such  holder  plus a
          "call  premium"  of 10% of the  Liquidation  Price  together  with the
          amount of any accrued  and unpaid  dividends  as may have  accumulated
          thereon at the time of redemption (the "Redemption Price").

     (5)  Each share of Series C Senior  Preferred  shall be  convertible at any
          time prior to the Redemption Date, at the holder's option, into shares
          of Common  Stock of the  Company  on the  basis of ten (10)  shares of
          Common Stock for 1 share of Series C Senior Preferred.

          As  of  December  31,  2005  there  were  $315,000   Series  C  Senior
          Convertible  Preferred share dividends accrued and unpaid representing
          $3.15 per share.

     Series D of the Senior Convertible  Preferred Stock series which was issued
     in  2000  has  500,000   shares   designated,   63,890  shares  issued  and
     outstanding.  The total outstanding Series D Senior  Convertible  Preferred
     Stock at December 31, 2005 is $64 with a liquidation price of $575,010. The
     following is a description of the Series D Senior Convertible Stock:

     (1)  The  holders  of said  shares  of Series D Senior  Preferred  shall be
          entitled to receive cumulative  dividends thereon at the rate of seven
          percent (7%) per annum,  payable  semi-annually  when  declared by the
          Board of Directors  before any dividend  shall be declared,  set apart
          for, or paid upon the Common Stock of the Company.  The Dividend  Rate
          shall accrue on the Stated Value (the  "Stated  Value"),  which Stated
          Value shall be noted on the certificate  issued to the holder, of each
          share of the Series D Senior Preferred.  The dividends on the Series D
          Senior Preferred, payable in cash, shall be cumulative, so that if the
          Company  fails in any  fiscal  year to pay such  dividends  on all the
          issued and outstanding  Series D Senior Preferred,  such deficiency in
          the dividends  shall be fully paid, but without  interest,  before any
          dividends  shall be paid on or set apart for the Cumulative  Preferred
          Stock or the Common Stock.

     (2)  The Series D Senior  Preferred  shall with respect to dividend  rights
          and liquidation  rights rank prior to all classes and series of Common
          Stock and the Cumulative Preferred Stock, and on a par with the Series
          A, B and C Senior Convertible Preferred Stock.

     (3)  In the event of any liquidation of the Company,  whether  voluntary or
          otherwise,  after  payment or  provision  for payment of the debts and
          other  liabilities of the Company,  the holders of the Series D Senior
          Preferred  shall be  entitled  to receive,  out of the  remaining  net
          assets of the  Company,  an amount  equal to the Stated  Value of each
          share of Series D Senior  Preferred  held of  record  by such  holder,
          payable  in  cash  or  in  shares  of  stock,   securities   or  other
          consideration,   the  value  of  which  stock,   securities  or  other
          consideration  shall  be fixed by the  Board  of  Directors,  plus the
          amount of all  dividends  in arrears on each such share up to the date
          fixed for  distribution,  provided,  however,  that such remaining net
          assets are sufficient to cover all the before  mentioned  payments and
          also like  payments to holders of Series A, B and C Senior  Preferred,
          before any  distribution  shall be made to the holders of Common Stock
          or Cumulative  Preferred Stock of the Company.  In case such remaining
          net assets are  insufficient  to cover all such payments to holders of
          Series A, B, C and D Senior  Preferred,  the  holders of these  series
          shall receive payments on a pro rata basis.


                                                                              19
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PREFERRED STOCK - (Continued)

     (4)  The Company  shall have the right to redeem pro rata any or all of its
          Series D Senior Preferred issued and outstanding at anytime,  with the
          Board of Directors of the Company in its sole discretion  deciding how
          many shares to redeem, provided,  however, that any such shares called
          for redemption have been  outstanding for a minimum of three (3) years
          at the time of notice of redemption to the holders of such shares,  by
          paying to the  holders  thereof  the  Stated  Value for each  share of
          Series D Senior Preferred held by such holder plus a "call premium" of
          10% of the Stated  Value,  together with the amount of any accrued and
          unpaid  dividends  as may  have  accumulated  thereon  at the  time of
          redemption (the "Redemption Price").

     (5)  Each share of Series D Senior  Preferred  shall be  convertible at any
          time prior to the Redemption Date, at the holder's option, into shares
          of Common Stock of the  corporation  on the basis of ten(10) shares of
          Common Stock for 1 share of Series D Senior Preferred.

          As  of  December  31,  2005  there  were  $209,621   Series  D  Senior
          Convertible  Preferred share dividends accrued and unpaid representing
          $3.28 per share.

Series E of the Senior  Convertible  Preferred  Stock series which was issued in
2005 has 500,000 shares designated,  129,143 shares issued and outstanding.  The
total outstanding Series E Senior  Convertible,  Preferred Stock at December 31,
2005  is  $129  with  a  liquidation  price  of  $774,858.  The  following  is a
description of the Series E convertible preferred stock:

     (1)  The  holders  of said  shares  of Series E Senior  Preferred  shall be
          entitled to receive  cumulative  dividends  at the rate of six percent
          (6%) per annum,  payable at the time said  shares are  converted  into
          shares of common  stock of the Company and when  declared by the board
          of Directors, before any dividend shall be declared, set apart for, or
          paid  upon the  Common  Stock  and any  other  Preferred  Stock of the
          Company.  The Dividend  Rate shall accrue on the Stated  Value,  which
          Stated Value shall be noted on the certificate issued to the holder of
          each  share of the Series E Senior  Preferred.  The  dividends  on the
          Series E Senior  Preferred,  payable in cash, shall be cumulative,  so
          that if the company fails in any fiscal year to pay such  dividends on
          all the  issued  and  outstanding  Series  E  Senior  Preferred,  such
          deficiency in the dividends shall be fully paid, but without interest,
          before any dividends shall be paid on or set apart for any other class
          of Preferred  Stock or the Common Stock.  The holders of the currently
          outstanding  shares of Series E Senior  Convertible  Stock have waived
          their  right  for  dividends,  consequently,  no  dividends  have been
          accrued on this stock.

     (2)  The Series E Senior  Preferred  shall with respect to dividend  rights
          rank  prior to all  classes  and  series of Common  Stock,  Cumulative
          Preferred  Stock , and the  Series  A, B, C, and D Senior  Convertible
          Preferred Stock and, with respect to liquidation  rights rank prior to
          all  classes  and series of Common  Stock,  the  Cumulative  Preferred
          Stock,  and  be on a  par  with  the  Series  A,  B,  C  and D  Senior
          Convertible Preferred Stock.

     (3)  In the event of any  liquidation,  dissolution,  or  winding up of the
          affairs of the Company, whether voluntary or otherwise,  after payment
          or  provision  for payment of the debts and other  liabilities  of the
          Company,  the  holders  of the  Series  E  Senior  Preferred  shall be
          entitled to receive,  out of the  remaining net assets of the Company,
          an amount  equal to the Stated  Value of each share of Series E Senior
          Preferred held of record by such holder,  payable in cash or in shares
          of stock, securities or other consideration, the value of which stock,
          securities  or other  consideration  shall  be  fixed by the  Board of
          Directors,  plus the amount of all  dividends  in arrears on each such
          share up to the date fixed for distribution,  provided,  however, that
          such  remaining  net  assets  are  sufficient  to cover all the before
          mentioned payments and also like payments to holders of Series A, B, C
          and D Senior Preferred,  before any distribution  shall be made to the
          holders of Common Stock or Cumulative Preferred Stock of the (1)


                                                                              20
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PREFERRED STOCK - (Continued)

          Company.  In case such remaining net assets are  insufficient to cover
          all  such  payments  to  holders  of  Series  A, B, C, D and E  Senior
          Preferred, the holders of these series shall receive payments on a pro
          rata basis.

     (4)  The holders of said shares of Series E Senior  Preferred  shall not be
          entitled to any voting rights.

     (5)  Shares  of  Series E Senior  Preferred  which  have  been  issued  and
          reacquired in any manner, including shares purchased or converted into
          Common Stock exchanged or redeemed,  shall be canceled on the books of
          the Company and shall not be considered outstanding for any purpose.

     (6)  During such time as there exist unpaid cumulative dividends due on the
          Series E Senior Preferred,  no  reclassification  of the shares of the
          Company  or  capital  reorganization  of the  Company  in  any  manner
          provided by law shall be valid  unless(a) the holders of a majority of
          all the Series E Senior Preferred  approve,  and (b) provision is made
          for the payment of the aggregate unpaid  cumulative  dividends then in
          arrears.

     (7)  Each share of Series E Senior Preferred shall  automatically  convert,
          on the date six months  after the date of  issuance  (the  "Conversion
          Date") which Conversion Date shall be noted on the certificate  issued
          to the  holder of each share of the  Series E Senior  Preferred,  into
          shares  of Common  Stock of the  Company  on the basis of one  hundred
          (100) shares of Common Stock for 1 share of Series E Senior Preferred.
          The holder of any shares of Series E Senior Preferred shall surrender,
          as soon  as  practicable  on or  after  the  Conversion  Date,  at the
          principal  office of the  Company  or at such  other  office or agency
          maintained  by the  Company  for  that  purpose,  the  certificate  or
          certificates  representing the shares of Series E Senior Preferred due
          for conversion.  As promptly as  practicable,  and in any event within
          ten business days after  surrender of such  certificates,  the Company
          shall deliver or cause to be delivered  certificates  representing the
          number of  validly  issued,  fully paid and  non-assessable  shares of
          Common  Stock of the  Company to which such  holder of Series E Senior
          Preferred so converted  shall be entitled.  Such  conversion  shall be
          deemed to have been made at the close of  business  on the  Conversion
          Date,  so that  the  rights  of the  holders  of the  Series  E Senior
          Preferred  shall  thereafter  cease  except  for the right to  receive
          Common  Stock  of  the  Company  in  accordance  herewith,   and  such
          converting  holder of Series E Senior  Preferred  shall be treated for
          all purposes as having  become the record  holder of such Common Stock
          of the Company at such time.

     (8)  In the event  that,  prior to the  conversion  of the  Series E Senior
          Preferred  Stock  by the  holder  thereof  into  Common  Stock  of the
          company,  there  shall occur any change in the  outstanding  shares of
          Common  Stock of the  Company  by reason of the  declaration  of stock
          dividends, or through a re-capitalization  resulting from stock splits
          or   combinations,   without  the  receipt  by  the  Company  of  fair
          consideration therefore in the form of cash, services or property, the
          conversion  ratio of the Series E Senior  Preferred  Stock into Common
          Stock of the Company  shall be adjusted such that any holder of Series
          E Senior  Preferred  Stock  converting  such stock into  Common  Stock
          subsequent to such change in the outstanding shares of Common Stock of
          the Company be entitled to receive, upon such conversion,  a number of
          shares of Common Stock of the Company representing the same percentage
          of common shares  outstanding as presented by the shares that he would
          have received had he converted his Series E Senior  Preferred Stock to
          Common Stock prior to such change in the outstanding  shares of Common
          Stock of the Company.


                                                                              21
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PREFERRED STOCK - (Continued)

     During the month of  November2005,  the company  issued  shares of Series E
     Convertible  Preferred Stock with detachable  warrants for an investment of
     $100,000.  Due to the convertible nature of the stock and the fact that the
     security was  in-the-money at the commitment  date, the Company  recorded a
     charge due to the  beneficial  conversion  feature of $25,194 in accordance
     with EITF  Issue No.  98-5,  Accounting  for  Convertible  Securities  with
     Beneficial  Conversion  Features  or  Contingently   Adjustable  Conversion
     Ratios,  and EITF Issue No.  00-27,  Application  of EITF Issue No. 98-5 to
     Certain  Convertible  Instruments.  The value of the beneficial  conversion
     feature was measured  using the intrinsic  value and is being  amortized to
     implied preferred stock dividends to the date of earliest  exercise,  which
     is six months from the date of  issuance.  The amount  amortized to implied
     preferred stock dividends in 2005 was  approximately  $6,298.  The warrants
     issued in connection with the preferred stock remain outstanding.

     As of December 31, 2005 there were no Series E Senior Convertible Preferred
     share dividends accrued.

INCOME TAXES

     The income tax provision (benefit) is comprised of the following:

                                                  Year Ended December 31,
                                            ------------------------------------
                                                 2005                2004
                                            ----------------    ----------------
     State current provision (benefit)    $       (209,264)   $       (214,618)
     State deferred provision (benefit)                  -                   -
                                            ----------------    ----------------
                                          $       (209,264)   $       (214,618)
                                            ================    ================

     In 1998,  the State of New Jersey  enacted  legislation  allowing  emerging
     technology and/or  biotechnology  companies to sell their unused New Jersey
     Net  Operating  Loss ("NOL")  Carryover  and Research and  Development  Tax
     Credits ("R&D  Credits) to corporate  taxpayers in New Jersey.  During 2004
     and 2003, the Company  entered into an agreement  under which it retained a
     third party broker to identify a buyer for its NOL Carryover. The total tax
     benefit of this transaction was $209,264 in 2005 and $216,418 in 2004.

     The Company's total deferred tax asset and valuation allowance are as
     follows:

                                                          December 31,
                                               ---------------------------------
                                                    2005              2004
                                               ---------------   ---------------
        Total deferred tax asset, noncurrent   $    9,155,000     $   7,882,000
        Less valuation allowance                   (9,155,000)       (7,882,000)
                                               ---------------   ---------------
        Net deferred tax asset, noncurrent     $            -     $           -
                                               ===============   ===============

     The differences between income tax benefits in the financial statements and
     the tax benefit computed at the combined state and U.S.  Federal  statutory
     rate of 40% are as follows:

                                                     Year Ended December 31,
                                               ---------------------------------
                                                    2005              2004
                                               ---------------   ---------------
                   Tax benefit                      40%               40%
                   Valuation allowance              40%               40%
                                               ---------------   ---------------
                   Effective tax rate                -                 -
                                               ===============   ===============


     At December 31, 2005, the Company has available  approximately  $26,319,000
     of net operating  losses to  carry-forward  and which may be used to reduce
     future  federal  taxable  income and expire  between  December 31, 2007 and
     2025.

     At December 31, 2005, the Company has available approximately $3,415,000 of
     net  operating  losses  to  carry-forward  and  which may be used to reduce
     future state taxable income which expire December 31, 2012.


                                                                              22
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

401(k) PLAN

     The Company adopted the qualified  Magnitude,  Inc.  sponsored  401(k) plan
     covering  substantially  all  full  time  employees  under  which  eligible
     employees may elect to contribute, within statutory limits, a percentage of
     their annual compensation.  The Company matches up to 50% of the employee's
     contribution  of which the match may not exceed 3% of the employee's  total
     compensation for the plan year.  Contributions to the plan were $13,017 and
     $14,389 for the years ended December 31, 2005 and 2004, respectively.

STOCK OPTION PLANS

     In April 1996, Magnitude,  Inc. adopted its 1996 Stock Incentive Plan ("the
     1996 Plan"). The 1996 Plan provides that certain options granted thereunder
     are  intended to qualify as  "incentive  stock  options"  (ISO)  within the
     meaning of Section 422A of the United States Internal Revenue Code of 1986,
     while non-qualified options may also be granted under the Plan. The initial
     plan and subsequent  amendments provided for authorization of up to 480,000
     shares.  Pursuant to the above  described  stock  exchange offer on July 2,
     1997,  all options  under the 1996 Plan were  converted  into shares of the
     Company at a rate of 3.4676  shares of  Magnitude,  Inc.  to 1 share of the
     Company.

     In September  1997, the Company adopted its 1997 Stock Incentive Plan ("the
     1997 Plan"). The 1997 Plan provides that certain options granted thereunder
     are  intended to qualify as  "incentive  stock  options"  (ISO)  within the
     meaning of Section 422A of the United States Internal Revenue Code of 1986,
     while non-qualified options may also be granted under the Plan. The initial
     plan and subsequent  amendments provided for the grant of options for up to
     1,000,000 shares.  The purchase price per share of common stock deliverable
     upon  exercise  of each ISO shall not be less than 100% of the fair  market
     value of the common stock on the date such option is granted.  If an ISO is
     issued to an individual  who owns,  at the time of grant,  more than 10% of
     the total  combined  voting  power of all classes of the  Company's  common
     stock, the exercise price of such option shall be at least 110% of the fair
     market  value of the common  stock on the date of grant and the term of the
     option  shall not exceed  five years from the date of grant.  The  purchase
     price of shares subject to non-qualified  stock options shall be determined
     by a committee  established  by the Board of Directors  with the  condition
     that such prices shall not be less than 85% of the fair market value of the
     common stock at the time of grant.

     In May 2000 the Company  adopted its 2000 Stock  Incentive  Plan ("the 2000
     Plan").  The 2000 Plan provides that certain options granted thereunder are
     intended to qualify as "incentive  stock  options" (ISO) within the meaning
     of Section 422A of the United States Internal  Revenue Code of 1986,  while
     nonqualified  options may also be granted under the Plan.  The initial Plan
     provides for the grant of options for up to 5,000,000 shares.  The purchase
     price per share of common stock deliverable upon exercise of each ISO shall
     not be less than 100% of the fair market  value of the common  stock on the
     date such option is granted. If an ISO is issued to an individual who owns,
     at the time of grant,  more than 10% of the total combined  voting power of
     all classes of the  Company's  common  stock,  the  exercise  price of such
     option  shall be at least 110% of the fair market value of the common stock
     on the date of the grant,  and the term of the option shall not exceed five
     years  from the date of grant.  The  purchase  price of shares  subject  to
     non-qualified stock options shall be determined by a compensation committee
     established by the Board of Directors.

                                                                              23
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTION PLANS - (Continued)

<TABLE>
<CAPTION>

                                                                                             Qualified and Non-Qualified
                                                                                           Shares Under Option Pursuant to
                                                                                                    the 1997 Plan
                                                                                                     December 31,
                                                                                           ---------------------------------
                                                                                               2005               2004
                                                                                           --------------    ---------------
<S>                                                                                              <C>                <C>
     Outstanding, beginning of year                                                              437,000            607,000
     Granted during the year                                                                           -                  -
     Expired during the year                                                                     (7,000)          (170,000)
     Surrendered during the year                                                                (10,000)                  -
                                                                                           --------------    ---------------
     Outstanding, end of year (at a price of $1.00 per share)                                    420,000            437,000
                                                                                           --------------    ---------------
     Eligible, end of year for exercise (at a price of $1.00 per share)                          420,000            437,000
                                                                                           ==============    ===============

     At December 31, 2005 and 2004, the weighted average exercise price and
     weighted average remaining contractual life is $1.00 and $1.00 per share
     and 4 months and 1 year 4 months, respectively.

     At December 31, 2005, there were 580,000 shares reserved for future option
     grants.

<CAPTION>

                                                                                             Qualified and Non-Qualified
                                                                                           Shares Under Option Pursuant to
                                                                                                    the 2000 Plan
                                                                                                     December 31,
                                                                                           ---------------------------------
                                                                                                 2005             2004
                                                                                             --------------   --------------
<S>                                                                                              <C>              <C>
     Outstanding, beginning of year                                                              2,688,442        2,818,942
     Granted during the year                                                                             -                -
     Exercised during the year                                                                           -                -
     Surrendered during the year                                                               (1,865,484)                -
     Expired during the year                                                                      (39,000)        (130,500)
                                                                                             --------------   --------------
     Outstanding, end of year (at prices ranging from $0.10 to $1.00)                              783,958        2,688,442
                                                                                             --------------   --------------
     Eligible, end of year for exercise (at prices ranging from $0.10 to $1.00)                    783,958        2,688,442
                                                                                             ==============   ==============
</TABLE>

     At  December  31, 2005 and 2004 the  weighted  average  exercise  price and
     weighted  average  remaining  contractual life is $0.53 and $0.61 per share
     and 10 months and 1 years 5 months, respectively.

     At December  31,  2005,  there were  4,216,042  shares  reserved for future
     option grants.

     At December 31, 2005 the company has four stock-based employee compensation
     plans, which are described more fully above. The company accounts for those
     plans under the recognition  and measurement  principles of APB Opinion No.
     25, Accounting for Stock Issued to Employees,  and related Interpretations.
     The Company has not granted any options to employees  during the years 2004
     and 2005.



                                                                              24
<PAGE>

              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTION PLANS - (Continued)

     The Company also issues options outside of the Stock Incentive Plans which
     are comprised as follows:

<TABLE>
<CAPTION>

                                                                                                      December 31,
                                                                                             -------------------------------
                                                                                                 2005             2004
                                                                                             --------------   --------------
<S>                                                                                              <C>              <C>
     Outstanding, beginning of year                                                              8,566,866        9,054,866
     Granted during the year                                                                     1,200,000          250,000
     Exercised during the year                                                                     -              (250,000)
     Surrendered during the year                                                               (2,632,225)                -
     Expired during the year                                                                     (908,525)        (488,000)
                                                                                             --------------   --------------
     Outstanding, end of year (at prices ranging from $0.01 to $1.00)                            6,226,116        8,566,866
                                                                                             --------------   --------------

     Eligible, end of year (at prices ranging from $0.01 to $1.00)                               6,226,116        8,566,866
                                                                                             ==============   ==============

     At December 31, 2005 and 2004 the weighted average exercise price and
     weighted average remaining contractual life is $0.57 and $0.32 per share,
     and 2 years 5 months and 3 years 9 months, respectively.

WARRANTS

     The Company granted common stock purchase warrants between May 1, 1998 and
     December 31, 2005 which are comprised as follows:.

<CAPTION>

                                                                                                      December 31,
                                                                                             -------------------------------
                                                                                                 2005             2004
                                                                                             --------------   --------------
<S>                                                                                             <C>              <C>
     Outstanding, beginning of year                                                             30,688,599       11,973,018
     Granted during the year                                                                    23,343,334       20,433,000
     Exercised during the year                                                                           -                -
     Surrendered during the year                                                               (2,631,916)                -
     Expired during the year                                                                     (514,000)      (1,717,419)
                                                                                             --------------   --------------
     Outstanding, end of year (at prices ranging from $.08 to $1.00)                           50,886,017        30,688,599
                                                                                             ==============   ==============
</TABLE>

     At December 31, 2005 and 2004,  the  weighted  average  exercise  price and
     weighted  average  remaining  contractual life is $0.14 and $0.18 per share
     and 1 year 10 months and 2 years 2 months, respectively.

COMMITMENTS AND CONTINGENCIES

     Lease Agreement

       On March 15, 2000, the Company  entered into a lease agreement for office
       space which is utilized for the Company's  principal offices.  Such lease
       commenced  April 15,  2000 and  extends  to March  31,  2007 at a monthly
       rental of $10,000.


                                                                              25
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCIES (continued)

     Under the lease  agreement,  the Company is required to make future minimum
     lease  payments  as follows  in  addition  to a  pro-rata  share of certain
     operating expenses:


           Year Ending December 31,

                    2006                                 $       120,000
                    2007                                 $        30,000
                    ----                                 ---------------
                   Total minimum payments                $       150,000
                                                         ===============


     Included  in general and  administrative  expenses  is rent  expense  which
     amounted to $125,742 and $116,734 for the years ended December 31, 2005 and
     2004, respectively.

    Employment Agreements

       The Company has  entered  into  employment  agreements  with  certain key
       personnel which provide for a base salary, yearly bonuses in common stock
       and/or  options of the Company  and other  benefits.  Termination  of the
       agreements may be made by either party with advance notice.

    Stock-Based Compensation Agreements

       In August 2004, the Company entered into an agreement with an individual
       to serve in an independent advisory function. The term of this agreement
       is for two years, and provides for the grant of 600,000 fully-vested
       common stock options at commencement, and grants an additional 600,000
       common stock options, which vest 100,000 at commencement of the agreement
       and 25,000 each subsequent month, in consideration for services under the
       agreement. The Company issued these options during 2005. These options
       expire on July 1, 2007.

       In March 2005, the Company entered into an agreement with a consultant
       providing 500,000 common shares as a sign-up bonus, 750,000 common shares
       for services rendered during the initial six month period of the contract
       and an additional 750,000 common shares for an extension period of six
       months (through March 2006). The Consultant is also entitled to
       contingent remuneration based on the achievement by the Company of
       certain profit goals. No obligation was incurred for this contingent
       provision in 2005. The consultant is also contingently entitled to a fee
       based on proceeds that may be obtained through mergers or other business
       combinations, as follows: 5% of first $1,000,000 in consideration, 4% of
       the second $1,000,000, 3% of the third $1,000,000, 2% of the fourth
       $1,000,000 and 1% of the consideration above $4,000,000.

       In October 2005, the Company entered into an agreement with two
       consultants, providing for a monthly retainer of $12,000 for a three
       month period. The retainer is to be paid as follows: (1) $4,000 per month
       starting October 2005, (2) $4,000 per month accruing until due in January
       2006 and (3) warrants to purchase 200,000 of the Company's common shares,
       exercisable at $0.10 per share. The consultants are contingently entitled
       to additional fees and warrants based on certain achievements for the
       remainder of the term of the agreement of one year, unless extended, and
       success fees for revenues generated at a rate of 15% for the first year
       of revenues from an introduced party and 7.5% for such revenues for the
       subsequent four years.

       Also during 2005, the Company enterered into agreements for consulting
       services, with the following provisions: (1) cash commission on sales
       and/or licensing of 5% on revenues within the first year and 2.5% on
       subsequent years' revenues from such transactions; (2) if determined to
       be directly involved in securing the initial sale, the consultants'
       commission rates per above would be 15% and 7.5%, respectively, for
       transactions with a Federal or State entity and 10% and 5%, respectively,
       for other clients; (3) any cash commission earned per the above shall be
       matched by the Company with a non-qualified stock option to purchase that
       number of shares of the Company's common stock which equates the amount
       of commission earned (for example, $10,000 in commission would equate to
       10,000 options). The exercise price of such options would be based on 90%
       of the average of the bid and ask prices of the Company's common stock
       during the 20 day trading period preceding the consummation of the
       transaction, with a minimum exercise price of $0.10 per share.

RELATED PARTY TRANSACTIONS

     In January 2004, the Company and its President and Chief Executive  Officer
     agreed to convert  most of his base  salary for the  remainder  of the year
     2004 into 16,667 shares of convertible  preferred  stock,  convertible into
     1,666,667  restricted  common  shares,  and 833,333  warrants,  exercisable
     during  three  years at the price of $0.15 per share,  in lieu of  $100,000
     cash. The Company also repaid $239,088 notes payable due to this officer.

     During the first  quarter of 2004,  an outside  director of the Company was
     awarded a stock grant for 150,000  restricted  common shares,  for services
     rendered.  The same  director  exercised  an option for 250,000  restricted
     common  shares at the price of $0.01 per share which option was acquired by
     him in a private transaction with an unrelated party.

     During the third  quarter  of 2004,  five  directors  and  officers  of the
     Company received a total 1,500,000 restricted common shares as remuneration
     for services as members of the board of directors. One outside director who
     also serves as the legal and  securities  counsel of the  Company  received
     500,000  restricted  common shares as  compensation  for his commitment and
     agreement  to  continue  to invoice  the  Company  for legal  services at a
     reduced rate, in connection with legal services rendered during fiscal year
     2004.

     During the third  quarter of 2004 the  Company's  chief  executive  officer
     extended short term loans aggregating $100,000 to the Company.  These loans
     carried  interest  at the rate of 10% per year and were  subject  to a loan
     origination  fee of 4%. At  December  31,  2004,  all such  loans have been
     repaid.

     During 2005 and 2004,  one outside  director of the Company who also serves
     as the  Company's  general and  securities  counsel,  was paid an aggregate
     $164,184 and 132,000,  respectively,  for legal services. One other outside
     director was paid $10,400 for services performed during 2004, and $0 during
     2005.  At December 31, 2005,  the Company has $12,717 due to these  parties
     which is included in accounts payable.


                                                                              26
<PAGE>



              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RELATED PARTY TRANSACTIONS (continued)

     In  May  2005  the  Company  issued   1,000,000  shares  of  common  stock,
     accompanied  by warrants  for the  purchase  of  1,000,000  common  shares,
     exercisable  during  three  years at the price of $0.15 per  share,  to the
     Company's president and chief executive officer, in lieu of $100,000 salary
     payable in cash.

     In September 2005 our officers and directors  surrendered for  cancellation
     4,507,709  stock  options,  2,283,916  common stock  purchase  warrants and
     11,247,607 common shares in order to provide  sufficient  authorized common
     shares to accommodate the Company's current private placement.  We replaced
     the  surrendered  and  cancelled  common shares with shares of our Series E
     preferred stock which are  automatically  convertible in March,  2006, into
     11,247,607  common  shares,  the  amount  of common  shares  equal to those
     surrendered.  We also intend to reissue  the  4,507,709  stock  options and
     2,283,916  warrants also  surrendered for  cancellation by our officers and
     directors with an equal amount of common shares underlying these securities
     following  adoption  by the  shareholders  of a proposed  amendment  to the
     Company's  certificate of  incorporation  which  amendment if adopted would
     increase  the  number of  authorized  common  shares  from  200,000,000  to
     300,000,000.  The  recipients  of the Series E preferred  stock have waived
     their right to receive any dividends on these shares.

MAJOR CUSTOMERS

     The Company had three major customers for the year ended December 31, 2005,
     which  comprised 36%, 26% and 16%,  respectively,  of total sales,  and two
     major  customers for the year ended December 31, 2004,  which comprised 31%
     and 19%,  respectively,  of total  sales.  One  customer  comprises  90% of
     accounts receivable at December 31, 2005.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     Cash,  accounts  receivable,  accounts  payable,  accrued  expenses,  notes
     payable, long-term debt and capitalized lease obligations:

     The  carrying  amount  approximates  fair  value  because of the short term
     maturity of these instruments.

     Limitations

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
     relevant information and information about the financial instrument.  These
     estimates are subjective in nature and involve uncertainties and matters of
     significant  judgment and therefore  cannot be determined  with  precision.
     Changes in assumptions could significantly affect the estimates.


                                                                              27
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NEW ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial  Accounting  Standards Board (FASB) issued
Statement of Financial  Accounting  Standard (SFAS) No. 154,  Accounting Changes
and Error  Corrections - a replacement  of APB Opinion No. 20 and FASB Statement
No.  3.  SFAS No.  154  requires  retrospective  application  to prior  periods'
financial  statements  of  changes  in  accounting   principle,   unless  it  is
impracticable to determine either the period-specific  effects or the cumulative
effect of the change. SFAS No. 154 also requires that retrospective  application
of a change in  accounting  principle  be limited  to the direct  effects of the
change Indirect effects of a change in accounting principle, such as a change in
nondiscretionary  profit-sharing  payments  resulting from an accounting change,
should be recognized in the period of the accounting  change.  SFAS No. 154 also
requires that a change in  depreciation,  amortization  or depletion  method for
long-lived,  non-financial  assets be  accounted  for as a change in  accounting
estimate effected by a change in accounting principle.

      SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal  years  beginning  after  December 15,  2005.  Early  adoption is
permitted for accounting  changes and corrections of errors made in fiscal years
beginning  after the date this Statement is issued.  Management  does not expect
the  implementation  of this  new  standard  to have a  material  impact  on the
Company's financial position, results of operations and cash flows.

      In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment".  Statement 123(R) will provide  investors and other users of financial
statements  with more complete and neutral  financial  information  by requiring
that the  compensation  cost relating to  share-based  payment  transactions  be
recognized in financial statements.

      That  cost  will be  measured  based on the fair  value of the  equity  or
liability   instruments  issued.   Statement  123(R)  covers  a  wide  range  of
share-based compensation arrangements including share options,  restricted share
plans,  performance-based  awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based  Compensation,  and  supersedes  APB Opinion No. 25,  Accounting for
Stock  Issued  to  Employees.  Statement  123,  as  originally  issued  in 1995,
established   as  preferable  a   fair-value-based   method  of  accounting  for
share-based  payment  transactions  with  employees.   However,  that  Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable  fair-value-based method been used. Public entities
(other than those filing as small  business  issuers)  will be required to apply
Statement  123(R) as of the first interim or annual reporting period that begins
after June 15, 2005.

      In March  2005,  the SEC  released  Staff  Accounting  Bulletin  No.  107,
"Share-Based  Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding  valuation of share-based  payment
arrangements.  In April  2005,  the SEC amended  the  compliance  dates for SFAS
123(R),  to allow  companies to implement the standard at the beginning of their
next fiscal year,  instead of the next reporting period beginning after June 15,
2005.


                                                                              28
<PAGE>


              MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NEW ACCOUNTING PRONOUNCEMENTS (continued)

      On August 31,  2005,  the FASB issued FASB Staff  Position FSP FAS 123R-1,
"Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee Services under FASB Statement No. 123R." In this
FSP,  the FASB  decided  to defer the  requirements  in FASB  Statement  No. 123
(Revised  2004),   Share-Based  Payment,  that  make  a  freestanding  financial
instrument subject to the recognition and measurement requirements of other GAAP
when the rights conveyed by the instrument are no longer dependent on the holder
being an  employee.  The  guidance  in this FSP should be applied  upon  initial
adoption of  Statement  123R.  The FSP  includes  transition  guidance for those
entities that have already adopted Statement 123R in their financial statements.

      The  Company  does not  expect  that  the  adoption  of SFAS  123R and the
implementation  of this new standard to have a material  impact on the Company's
financial position, results of operations and cash flows.


LITIGATION

            On March 21, 2005, the Company filed a patent  infringement  lawsuit
in the United  States  District  Court,  District of New Jersey,  against  Niche
Software,  Ltd.  of New  Zealand,  alleging  that its  software  product  called
Workplace(TM)  willfully  infringed  on  the  Company's  patent  underlying  its
ErgoEnterprise(TM) product line. The Company intends to vigorously prosecute its
infringement  claims  against  this  infringer.  Except  for  this  infringement
lawsuit, the Company is not a party in any legal proceedings.


                                                                              29