UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                   FORM 10-KSB


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

                            For the fiscal year ended
                                December 31, 2005

                        Commission File Number: 000-30771


                           INTERACTIVE MOTORSPORTS AND
                               ENTERTAINMENT CORP.
                          f.k.a. Pacific International
                                 Holding, Inc.
               (Exact name of registrant as specified in charter)


                                     Indiana
         (State or other jurisdiction of incorporation or organization)

                                   87-0678630
                           (I.R.S. Employer I.D. No.)

               5624 West 73rd Street, Indianapolis, Indiana 46278
                    (Address of principal executive offices)

                                 (317) 295-3500
              (Registrant's telephone number, including area code)


Indicate by checkmark  whether the Issuer:  (1) filed all reports required to be
filed by section 13 or 15 (d) of the  Exchange Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing  requirements  for the past 90 days. (1)
Yes [x] No [] (2) Yes [x] No []

Issuer's Revenues for its most recent fiscal year: $5,413,519

As of March 22,  2006,  the  aggregate  market value of the voting stock held by
non-affiliates  of the Issuer,  44,220,406  shares,  was $1,768,816.  The market
value of Common Stock of the Issuer,  par value $0.0001 per share,  was computed
by  reference to the average of the closing bid and asked prices of one share on
such date which was $0.04.

The number of shares of the issuer's Common Stock,  par value $0.0001 issued and
outstanding as of March 22, 2006, was 93,769,177.

                        Exhibit Index located on Page 47


                                       1


<PAGE>


                      INDEX TO ANNUAL REPORT ON FORM 10-KSB

                                                                          Page
Section                                                                  Number
-------------------------------------------------------------------------------

BASIS OF PRESENTATION.......................................................4

                                     PART I

Item 1.    Description of Business..........................................5
Item 2.    Description of Properties........................................9
Item 3.    Legal Proceedings................................................9
Item 4.    Submission of Matters to a Vote of Security Holders..............9

                                     PART II

Item 5.    Market for Common Equity and Related Stockholder Matters........10
Item 6.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.......................................11
Item 7.    Financial Statements and Notes to Financial Statements
              Report of Independent Registered Public Accounting Firm......19
              Consolidated Balance Sheet at December 31, 2005 .............20
              Consolidated Statements of Operations for the Years
                Ended December 31, 2005 and December 31, 2004..............22
              Consolidated Statements of Changes in Shareholders'
                Equity for the Years Ended December 31, 2005 and
                December 31, 2004..........................................23
              Consolidated Statements of Cash Flows for the Year
                Ended December 31, 2005 and December 31, 2004 .............24
              Notes to Consolidated Financial Statements...................26

Item 8.    Changes In and Disagreements with Accountants on
           Accounting and Financial Disclosure ............................39
Item 8A.   Controls and Procedures.........................................39

                                    PART III

Item 9.    Directors, Executive Officers, Promoters and
           Control Persons.................................................40
Item 10.   Executive Compensation..........................................41
Item 11.   Security Ownership of Certain Beneficial owners
           and Management..................................................42
Item 12.   Certain Relationships and Related Transactions..................43
Item 13.   Exhibits and Reports on Form 8-K................................44
Item 14.   Principal Accountant Fees and Services..........................44


SIGNATURES     ............................................................46

EXHIBITS       ............................................................47




                                       2


<PAGE>


                       NOTE ON FORWARD-LOOKING INFORMATION

This Form  10-KSB and other  statements  issued or made from time to time by the
Company  or  its  representatives  contain  statements,   which  may  constitute
"forward-looking  statements"  within the meaning of the  Securities Act of 1933
and the  Securities  Exchange Act of 1934, as amended by the Private  Securities
Litigation  Reform Act of 1995,  15  U.S.C.A  Sections  77z-2 and  78u-5.  Those
statements  include  statements   regarding  the  intent,   belief,  or  current
expectations  of the Company and members of its  management  team as well as the
assumptions on which such statements are based. All statements,  trend analyses,
and other  information  contained  in this  report  relative  to markets for the
Company's  products  and/or  trends in the  Company's  operations  or  financial
results,   as  well  as  other   statements   which   include   words   such  as
"anticipate(s),"   "could,"  "feel(s),"   "believes,"   "plan,"   "estimate(s),"
"expect(s),"  "should,"  "intend(s),"  "will,"  and other  similar  expressions,
constitute  forward-looking  statements  and are  subject  to known and  unknown
risks,  uncertainties  and other  factors  that may cause  actual  results to be
materially different from those contemplated by the forward-looking  statements.
Such factors include,  among other things: (i) general economic  conditions that
may impact the  disposable  income and spending  habits of  consumers;  (ii) the
availability of alternative  entertainment  for consumers;  (iii) the ability of
the Company to obtain  additional  capital;  (iv) the receipt of a going concern
opinion from the Company's  independent public accountants;  and (v) the ability
of the Company to control costs and execute its business plan.

The  reader  is  cautioned  that any  such  forward-looking  statements  are not
guarantees of future performance and involve risks and  uncertainties,  and that
actual  results  may  differ   materially   from  those   contemplated  by  such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ  materially  from those in  forward-looking
statements are set forth herein.  The Company undertakes no obligation to update
or  revise  forward-looking  statements  to  reflect  changed  assumptions,  the
occurrence of unanticipated  events or changes to future operating  results over
time.


                                       3


<PAGE>


                              BASIS OF PRESENTATION

Effective  August  2,  2002,  Pacific  International   Holding,   Inc.,  a  Utah
corporation  ("PIH"),  which was originally organized in 1986, changed its state
of  domicile  and name by  merging  with and into  Interactive  Motorsports  and
Entertainment   Corp.  (the  surviving  entity),  an  Indiana  corporation  (the
"Company"), pursuant to an Agreement and Plan of Reorganization.  Per the merger
agreement,  each share of PIH common stock outstanding  immediately prior to the
effective  date of the merger was cancelled  and  converted  into four shares of
Interactive  Motorsports and Entertainment  Corp. common stock.  Although it had
been in a variety of  businesses  for over 15 years,  at the time of the merger,
PIH had limited operations.

Subsequent to the merger and effective as of the same date, the Company acquired
pursuant to a Plan and  Agreement of Exchange all of the issued and  outstanding
shares of common stock and  preferred  stock of Perfect  Line,  Inc., an Indiana
corporation  ("Perfect Line"), from the Perfect Line shareholders in exchange on
a "share-for-share" basis for shares of the Company's common stock and preferred
stock. As a result of the share exchange,  the Perfect Line shareholders held as
of August 2, 2002 Company shares representing  approximately  eighty-two percent
(82%) of the Company's  capital stock.  Also effective as of August 2, 2002, the
members of the Board of  Directors  of Perfect  Line were elected to replace the
members of the  Company's  Board of  Directors  and the  executive  officers  of
Perfect Line became the executive officers of the Company.

As Perfect Line had revenues,  operations,  and business activity, for financial
reporting purposes,  Perfect Line is considered the acquirer,  and therefore the
predecessor,  and the Company is  considered  the  acquiree for  accounting  and
reporting  purposes.  Due to the fact  that the  merger  is being  treated  as a
reverse  acquisition,  the  equity of the  Company  has been  recapitalized  for
financial  reporting  purposes.  The operations of Interactive  Motorsports  and
Entertainment  Corp.  have been  included in  consolidation  from August 2, 2002
until December 31, 2005.

All  information  in this  Form  10-KSB is  presented  from the  perspective  of
Interactive  Motorsports and Entertainment Corp. and its subsidiary Perfect Line
and not from the perspective of PIH.


                                       4


<PAGE>


                                     PART I

ITEM 1. Description of Business
-------------------------------

Overview
--------

Interactive  Motorsports and Entertainment  Corp. ("IMTS" or the "Company"),  an
Indiana corporation, through its wholly owned subsidiary, Perfect Line, Inc., is
a  world  leader  in  race  simulation.  The  Company  is  in  the  business  of
manufacturing  and then selling,  revenue sharing or leasing race car simulators
to contracted parties in malls,  amusement parks, family entertainment  centers,
casinos and auto malls and mobile fan  interactive  experiences.  Under licenses
from America's fastest growing sport,  NASCAR,  simulator  customers  experience
driving in a NASCAR race car that simulates the motion,  sights and sounds of an
actual NASCAR event. The Company owns and operates NASCAR Silicon Motor Speedway
racing  centers  at the Mall of  America in  Minneapolis,  MN, and at  Universal
CityWalk in Hollywood,  CA, where racing on 12 simulators and NASCAR merchandise
are sold at each site.

The Company  currently has two versions of race car simulators,  the SMS and the
Reactor,  and in  marketing  these  two  products  it  leverages  its  strategic
relationships and proprietary  assets,  which include (a)  sophisticated  racing
simulation  technology  (including  2  patents),   (b)  an  exclusive  licensing
agreement with NASCAR,  and (c) license  agreements  with other racing  entities
including  race  tracks,  race  teams,  and race  sponsors to offer a unique and
affordable race simulation experience.

For the year ended December 31, 2005, the Company's  racing centers,  leased and
revenue share simulators and sold simulators  generated revenue of approximately
$5.414 million. Management has transitioned the Company's business model from an
owned and operated,  mall-based  racing center concept to a simulator  purchase,
revenue share or leasing  business,  with the owner of the purchased  simulators
required to enter into an ongoing license and maintenance agreement. The Company
now offers two  simulator  products,  both using the  proprietary  software  and
motion  platform,  but each  offering  different  features and  different  price
points.  The Company plans to offer territories for operators of its new Reactor
Mobile Experience (48 foot trailer with 4 Reactors installed).

Major Agreements:  During 2005, the Company entered into lease and revenue share
agreements  as well as entered  into  transactions  for the sale of the original
("SMS") simulators and the new Reactor and Reactor Mobile Experience simulators.
On December 31, the Company  entered into an asset  purchase  agreement and long
term note agreement with Checker Flag Lightning whereby the 28 simulators within
three  Mills  Corporation  mall  stores  were  sold in  exchange  for the  Mills
releasing Perfect Line of all past, current and future obligations.

Perfect  Line's race  simulators,  including  those owned by Race Car Simulation
Corp., are currently featured in the following locations.

Locations
---------

Company Owned (24 Simulators):

         Location                   Market            Sq. Ft.        Simulators
1)   Mall of America             Minneapolis, MN      5,899           12 SMS
2)   Universal CityWalk          Los Angeles, CA      5,000           12 SMS

Revenue Share (72 Simulators):

         Location                   Market            Sq. Ft.        Simulators
1)   Mall of Georgia             Atlanta, GA          5,895            8 SMS
2)   Riverchase Galleria         Birmingham, AL       6,188            8 SMS
3)   Jordan Creek Town Ctr       Des Moines, IA       4,000            8 SMS
4)   NASCAR SpeedPark            Sevierville, TN      1,584            6 SMS#
5)   NASCAR SpeedPark            St. Louis, MO        1,496            6 SMS#
6)   NASCAR SpeedPark            Toronto, Canada      1,500            6 SMS#
7)   NASCAR SpeedPark            Myrtle Beach, SC     1,600            6 SMS#
8)   Playcenter (b)              Sao Paulo, Brazil    1,000            4 SMS*
9)   Burdick Driver's Village    Syracuse, NY         3,472            8 SMS#
10)  Bass Pro Outdoor            Harrisburg, PA         500            2 SMS
11)  Bass Pro Outdoor            Clarksville, IN        750            3 SMS
12)  University Mall             Burlington, VT       3,700            5 SMS
13)  Bass Pro Outdoor (a)        Springfield, MO        500            2 SMS
            a.   Scheduled to open Q2
            b. Scheduled to open TBD


                                       5


<PAGE>


Mobile Unit Leases (16 Simulators):

1)   Nextel Mobile Experience      2004-06 NASCAR Nextel Cup
                                   series events                       6 SMS#
2)   Perfect Line/NTI Experience   Mobile Experience                   2 SMS
3)   Nextel Mini Experiences       Nextel regional marketing           6 SMS#
4)   DaimlerChrysler               European Auto Shows                 2 SMS

Sales of Simulators (74 Simulators):

      ___Buyer___              _____Market____                 Simulators
1)   Roltex                 Moscow, Russian Federation           8 SMS*
2)   Tonne Mgmt             Wisconsin Dells, WI                  4 SMS*
3)   Ft. Gordon             Ft. Gordon, GA                       2 SMS
4)   I-Vision Tech.         Abu Dhabi, UAE                       4 SMS
5)   I-Vision Tech.         Abu Dhabi, UAE                       2 SMS
6)   Fun City               Burlington, IA                       1 SMS*
7)   DaimlerChysler         US Auto Shows in 2006                2 SMS*
8)   NASCAR Speedpark       Concord, NC                          4 Reactors*
9)   Opry Mills             Nashville, TN                       10 SMS
10)  Gurnee Mills           Chicago, IL                          6 SMS
11)  Concord Mills          Charlotte, NC                       12 SMS
12)  H&H Motorsports        Boone, NC                            4 Reactors
13   Gate A Sports          Cleveland, OH                        5 SMS
14)  Skycoaster of Florida  Kissimmee, FL                        6 SMS
15)  Vacationland F.E.      Brainerd, MN                         4 SMS*

# Denotes assets sold to Race Car Simulation Corporation with no current
  revenue stream to Company
* Denotes that simulators are not yet installed

The balance of the 192 SMS simulators  buit since inception are at the Company's
warehouse or Elan Motorsports Technologies where they are built.


Pricing
-------

In a typical racing center,  an individual race typically costs  $8.50-$9.00 and
quantity  discounts are offered with purchases of multiple races.  Customers pay
an average of $25 per hour to use a simulator  during leagues and  competitions.
Depending on the program or package, the targeted yield for group sales averages
between $300 and $800 per hour for the use of the entire racing  center.  Prices
of merchandise range from $16 for a hat up to $200 for high-end leather jackets.
Prices for the  die-cast  and  collectable  cars range  between $15 and $65. The
Company's  owned  locations  provide  the only means to generate  revenues  from
merchandise  sales.  The Company does not receive any payments  from the revenue
share sites for merchandise sales.

In revenue share locations, the revenue share partner provides the space and the
labor,  and the  Company  provides  the  simulators  and the  license to use the
software that operates the  simulators.  The revenue share split varies,  but is
usually in the range of 60-65% to revenue share partner,  and 35-40% to Company.
The  Company   typically   requires  a  minimum   guarantee   per  simulator  of
$20,000-$25,000 per year for the SMS simulator,  and lower minimums are expected
for the new Reactor simulators.

Lease  agreements are typically one year flat fees, and the pricing depends upon
the number of uses per year.

Pricing  for the sale of  simulators  varies  between  the age and  usage of the
simulators.  A new SMS sold  domestically is priced at $95,000,  and refurbished
SMS simulators sold domestically range from $65,000-$80,000. International sales
can be 20-30%  higher  due to the added work that is  required  for use in other
markets.


                                       6


<PAGE>


History
-------

NSMS  racing   centers   were   originally   owned  and   developed  by  Silicon
Entertainment,  Inc.  ("SEI").  SEI opened its first site in August  1997 at the
Mall of  America  in  Bloomington,  Minnesota,  the  largest  mall in the United
States.  SEI raised large sums of initial  capital,  of which,  according to SEI
internal  documents,  approximately  $6.5  million  was  utilized  to create its
proprietary  software  technology and  approximately $25 million was utilized to
produce approximately 170 SMS simulators and complete the build-out of 15 stores
in high traffic malls.  SEI was unable to secure  additional long term financing
to  support  its  capital  expansion,  and  was  liquidated  through  Chapter  7
bankruptcy in April 2001.  Perfect  Line's assets were  primarily  acquired from
creditors  of SEI.  As a result of SEI's  bankruptcy,  Perfect  Line was able to
purchase the assets of SEI at a price substantially below SEI's cost.

Perfect Line,  LLC, a predecessor to Perfect Line,  Inc.,  initially  tested the
mall-based  business  model by  re-opening 12 of the SEI racing  centers,  which
utilized  136 of the SMS  simulators,  between  July 2001 and August  2002.  The
Company  then  warehoused  32 SMS  simulators  for future  deployment  and 2 SMS
simulators  were used for research  and  development  purposes at the  Company's
technology  center  in  Santa  Clara,  California.  The  proprietary  technology
includes two U.S. Patents,  which combine to create what management  believes to
be one of the world's  most  realistic  simulations  of the  sights,  sounds and
motions   experienced  by  driving  in  an  actual  NASCAR  race.  The  patented
motion-based  platform  that the  racecar  simulator  is mounted on is among the
other assets that were acquired and licensed as part of the SEI asset purchase.

In August 2002,  Perfect Line became a wholly owned subsidiary of IMTS,  through
an  exchange  of shares  that  resulted  in  Perfect  Line  shareholders  owning
approximately 82% of IMTS equity.  Simultaneous  with this event,  approximately
$2.6 million in private  equity  financing  was made  available to Perfect Line.
Approximately one-half of the funding was used to retire the Company's bank note
and the balance was used for working capital.

In July of 2003, management began the process of revising the Company's business
model,  changing  the  focus  from the  inherited  Company  owned  and  operated
mall-based racing centers to revenue share,  lease and purchased  simulators for
mall  merchandise  retailers,  family  entertainment  centers,  amusement parks,
casinos,  auto  malls,  etc.  and  mobile  lease  programs  such  as the  Nextel
Experience  and the  DaimlerChrysler  auto  show  exhibits.  After  testing  the
assignment  of one mall lease to Checker Flag  Lightning  ("CFL") of  Granville,
Michigan in November of 2003,  the Company  assigned an additional  six (6) mall
leases  to CFL in March of 2004.  The  business  model  change  resulted  in the
Company's first quarterly  operating profit for the quarter ending September 30,
2004, and first quarterly net profit for the quarter ended December 31, 2004.

While the Company was began to earn profits by late 2004,  management decided it
was  necessary to generate  cash to reduce debt and secure  growth  capital As a
result,  on December  31, 2004 and on March 31 and April 15,  2005,  the Company
entered into three Asset Purchase  Agreements  pursuant to which it sold a total
of  forty-four  (44) of its existing race car  simulators  in revenue  producing
sites to Race Car Simulation  Corporation ("RCSC"), a wholly owned subsidiary of
Dolphin Direct Equity Partners,  LP ("Dolphin") for an aggregate  purchase price
of $2,856,600.  While these transactions reduced debt and allowed the Company to
begin  building  new  simulators,  it also  reduced  cash flow by  approximately
$1,000,000  on an annual  basis  until the  Company  could  activate  another 44
simulators into the market on a revenue share basis. This, coupled with the fact
that Checker  Flag  Lightning  stopped  paying on its revenue  share  agreements
(approximately  $1,000,000  annually)  created  cash flow issues for the Company
during 2005. The sale of SMS simulators  during this period helped to offset the
cash flow problem.

The Company's Current Operations, Recent Developments and Plan for the Future
-----------------------------------------------------------------------------

The Company's  goal is to be the world leader in  experiential  simulation.  The
Company is initially leveraging its internationally unique, proprietary race car
simulation technology with domestic focus on the NASCAR experience.  The Company
believes that this can be done  profitably  through a  combination  of owned and
operated   racing  centers,   third  party  revenue  share   locations   (family
entertainment centers,  amusement parks, casinos, auto malls, etc.), mobile unit
sales and leases and the domestic and international  sales of its race simulator
products.





                                       7


<PAGE>


NASCAR racing is currently the #1 spectator sport in America. The Company has an
exclusive license agreement with NASCAR for location-based entertainment,  which
includes  the right to use the NASCAR  name within the  Silicon  Motor  Speedway
logo, on racing center signage,  within collateral sales materials,  on the NSMS
web site, and within the NSMS racing  simulator  software.  The Company has also
secured licenses with many popular racetracks in the United States, and the cars
driven by many of the race fans' favorite Nextel Cup teams and drivers,  ranging
from  established  stars such as Dale  Earnhardt,  Jr.,  Tony  Stewart  and Jeff
Gordon,  to rising stars like Kasey Kahne and Jimmie  Johnson.  These  licensing
agreements and the use of NASCAR related  identities and marks provide immediate
name recognition, credibility, and authenticity to the experience.

The  Company  has  integrated  these  license   agreements  with   sophisticated
proprietary  racing  simulator  technology to create one of the world's  leading
race car  simulations.  Simulator  races take place on famous  NASCAR Nextel Cup
racetracks such as Daytona International Speedway,  Indianapolis Motor Speedway,
Lowe's  (Charlotte)  Motor  Speedway,  Atlanta  Motor  Speedway,  Bristol  Motor
Speedway, and Richmond International Raceway.

The Company first tested the revenue share business model with the Burroughs and
Chapin Company of Myrtle Beach,  South  Carolina,  by installing 6 simulators at
their Smokey Mountain NASCAR  SpeedPark in April of 2003 Revenue share locations
provide the Company the opportunity to install simulators in existing or planned
entertainment  venues  and share  proportionately  in the sales  generated  with
owner-operators.  The Company  provides the  simulators at cost  (expected to be
financed  through a third party leasing firm,  although no agreements  have been
reached) and the host organization (owner-operator) provides the space, required
site  build-out,  and  day-to-day  operations  staffing.  Minimum  revenues  are
typically guaranteed to the Company within the revenue share agreements.

At the 2004  Daytona 500,  Nextel  debuted The Nextel  Experience,  a mobile fan
interactive  experience that features six of the Company's race simulators.  The
Nextel Experience  continues to have a prominent  location at each of the NASCAR
Nextel Cup events,  and , Nextel is also leasing an additional three mini mobile
experiences  that they use for  promotional  events  around  the  country,  each
featuring two of the Company's simulators.  The Company also has sold and leased
simulators to  DaimlerChrysler  for their domestic and international  trade show
exhibits, and the Dodge division takes 2 of the Companies simulators to selected
NASCAR events.

In  November  of 2005,  the Company  introduced  a prototype  of the new Reactor
simulator at the  International  Association of Amusement  Parks and Attractions
(IAAPA) convention in Atlanta.  The Reactor features a smaller footprint (5 feet
wide and 7.5 feet long)  allowing for more  simulators  per square foot and thus
greater throughput per hour. The Reactor is also on casters and collapses to a 3
foot wide unit so that it can be rolled into conference rooms, retail locations,
race suites, trade shows, etc. Using the same software and game experience as in
the SMS simulators, the Company reduced the size of the patented motion platform
for the  Reactor and reduced  the number of  projectors  from three to two.  The
Reactor can be plugged  into  standard  110 power,  and does not require 3 phase
power as does the SMS.  Both the lease price and  purchase  price of the Reactor
are substantially  lower than the SMS.  Management believes that the combination
of greater mobility,  portability and lower price points will broaden the market
for simulator purchases and leases, although there can be no assurances.

In February of 2006,  the first  Reactor  Mobile  Experience  was  introduced at
Daytona  Beach,  Florida  surrounding  the  Daytona  500  events.  Four  Reactor
simulators  were  installed into a 48 foot  Featherlite  car trailer that can be
towed by a 2-ton pickup truck. Under a newly developed License,  Maintenance and
Operating  ("LMO")  agreement,  management is now seeking  operators for Reactor
Mobile Experiences within specific  territories around the country.  Under terms
of the LMO agreement,  the Company administers the event contracts, and pays the
operator a percentage  of the  revenues  from event  bookings  and  sponsorships
associated with the events.  Management believes that taking this relatively low
cost experience to large crowds (sporting events, trade shows, festivals,  etc.)
and to corporate  retail sites (big box  retailers,  restaurants,  auto dealers,
etc.) is an attractive  business model for future growth,  although there can be
no assurance.

At  December  31,  2005,  the Company  had built 21 new SMS  simulators,  and an
additional  30 SMS  simulators  had  been  refurbished  at Elan.  Subsequent  to
December  31,  2005,  the  Company  has built or is in the process of building 8
Reactor  simulators,  4  of  which  have  been  installed  in a  Reactor  Mobile
Experience.







                                       8


<PAGE>


The Company has made several  technological  improvements  to the  simulation in
recent  years,   resulting  in  an  enhanced  racing  experience.   Two  popular
racetracks,  Bristol  and  Indianapolis,   were  introduced  to  the  simulation
experience late in 2002 and early in 2003.  MySpeedway was introduced in 2003 on
IMTS's website  (www.smsonline.com)  that allows  customers to find their recent
lap times,  and analyze their results to improve their  performance by comparing
their times to those of other racers throughout the country. Car parameters were
also  introduced in 2003 allowing  racers to set up their cars to their personal
preferences.  Adjustable parameters include traction control,  anti-lock brakes,
spoiler  angle,  steering  ratio,  front  anti-roll  bar,  engine,  transmission
gearing,  and rear end ratio.  The operating  system has been updated to a Linux
platform,  and  beginning in 2006 is  available as an upgrade to race  simulator
operators.  The  new  operating  system  is  incorporated  in  the  new  Reactor
simulators,  and will be incorporated  into all future SMS  simulators.  The new
platform  allows for each  simulator  to operate on one  computer as compared to
six, and allows for improved  graphics and game features as they are  introduced
in the future. New and improved projector technology has also been designed into
all future SMS and Reactor simulators.

Management is currently  discussing with potential  customers the opportunity to
expand  its  patented  motion  platform  to full size  passenger  vehicles,  and
creating customized  experiences for each vehicle.  This opportunity will likely
begin with trade show  experiences,  and then grow to local  markets from there,
although there can be no assurance.

ITEM 2. Description of Properties
---------------------------------

The Company is headquartered  at 5624 West 73rd Street in Indianapolis,  Indiana
where the Company leases  approximately 4,800 square feet. The facility consists
primarily  of office and  storage  areas and is leased from an  unrelated  third
party.  The  headquarters'  lease expires  September 14, 2006.  The Company also
maintains an engineering office at 2065 Martin Avenue in Santa Clara, California
where it leases approximately 1,800 square feet of office space. The engineering
office is  currently  a month to month  lease.  In  addition,  the Company has a
warehouse in Concord,  North Carolina that is also currently on a month to month
lease. The Company  believes its headquarters and engineering  space is adequate
for the present time and is reviewing  options for  relocating  or extending its
leases at these locations.

The two NASCAR Silicon Motor  Speedway  racing centers owned and operated by the
Company are:

                                                             Square
         Location                   Market                   Footage

    Mall of America            Minneapolis, Minnesota         5,899
    Universal CityWalk         Los Angeles, California        5,067


ITEM 3. Legal Proceedings
-------------------------

From  time to time,  the  Company  may be party to  various  legal  actions  and
complaints  arising in the  ordinary  course of  business.  While  waiting for a
response  to a payment  plan  proposed  by  Perfect  Line to the Mall of America
landlord (MOAC Mall Holdings,  LLC),  Perfect Line received an eviction  summons
from the  landlord on February 16, 2006.  Perfect Line has since  contacted  the
landlord  and the  parties  have  agreed  to terms for a  stipulation  agreement
whereby  Perfect Line will sign a promissory note totaling  $294,642  payable in
five (5) quarterly  installments,  the first of which has already been paid. The
agreement and note are being drafted and are expected to be signed by the end of
March,  2006. As of the filing of this Annual Report on Form 10-KSB, the Company
is not aware of any other material legal actions directed against the Company.

ITEM 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------

None, not applicable.









                                       9


<PAGE>


                                     PART II


ITEM 5.   Market for Common Equity, Related Stockholder Matters and Small
          Business Issuer Purchases of Equity Securities
-------------------------------------------------------------------------

Dividend Policy
---------------

To date, the Company has not paid dividends on its common stock.  The payment of
dividends,  if any, is within the  discretion  of the Board and will depend upon
the Company's earnings,  capital requirements and financial condition, and other
relevant  factors.  The Board does not intend to declare  any  dividends  in the
foreseeable future.

Holders of Record
-----------------

As of March 22,  2006  there  were  approximately  296  holders of record of our
Common Stock consisting of 93,769,177 shares issued and outstanding.  The number
of holders of record was  calculated  by reference to reports from the Company's
stock transfer agent.

Share Price History
-------------------

The   Company's   common   stock  (the   "Common   Stock")  has  traded  on  the
over-the-counter  market in what is commonly  referred  to as the "OTC  Bulletin
Board" or the "OTCBB" under the trading symbol "IMTS" since August 14, 2002. The
following  table sets forth the high and low bid prices of the Common  Stock for
the periods indicated. The price information contained in the table was obtained
from the OTCBB web site and other sources we consider  reliable.  Note that such
over-the-counter  market quotations reflect inter-dealer prices,  without retail
mark-up, markdown or commission and the quotations may not necessarily represent
actual transactions.

                                                Common Stock Price
     Quarter Ended                High                 Low                Close

     March 31, 2004               .24                 .09                 .10
     June 30, 2004                .14                 .05                 .07
     September 30, 2004           .07                 .04                 .05
     December 31, 2004            .09                 .05                 .07
     March 31, 2005               .12                 .05                 .06
     June 30, 2005                .09                 .06                 .07
     September 30, 2005           .07                 .03                 .04
     December 31, 2005            .04                 .02                 .02

Issuance of Securities
----------------------

In connection  with the Company's  merger with and into PIH on August 2, 2002, a
total of 11,300,000 shares of Interactive  Motorsports and  Entertainment  Corp.
common stock were issued to  shareholders of PIH in exchange for their shares of
common stock of that company.

On August 2, 2002, 4,745,456 shares of the Company's Preferred Stock were issued
for cash  consideration of $2,610,050.  The Convertible  Preferred Stock was all
converted to common stock, with 2,472,728 shares of Convertible  Preferred Stock
converted to 12,724,183  shares of common stock in 2003, and 2,272,728 shares of
Convertible  Preferred Stock were converted to 11,363,640 shares of common stock
in 2004.

In 2003, a total of 140,000  shares of common stock were issued under a Form S-8
filed on February 13, 2003 for consulting services.

On March 7, 2003,  the Company  entered  into a short term  financial  agreement
whereby  the  Company  borrowed  $700,000  for  working  capital  purposes.  The
Agreement  also involved the issuance of warrants for 2,941,176  common  shares.
The warrants had a strike price of $0.17, and expired on June 30, 2004.

In 2004, a total of 935,726  shares of common stock were issued per the terms of
the 2003 Bridge Notes.


                                       10


<PAGE>


In 2004,  a total of 260,000  shares of common  stock were  issued for  services
rendered.

In 2004,  a total of 842,361  shares of common  stock were issued for payment of
prior year accruals under the 2003 Bridge Notes.

Between February and June, 2004, the Company sold a series of notes collectively
referred to as the 2004 Note and Option  Purchase  Agreement in the total amount
of  $750,000.   The  Agreement   also  involved  the  issuance  of  options  for
approximately  6,904,395 common shares.  The options had a strike price equal to
the closing price of IMTS stock on the date the note was purchased, which ranged
from $.08 to $.21 per share.  2,804,395 of the options expired on March 1, 2005,
and  4,100,000  options were execised for repayment of the note per the terms of
the 2004 Note and Option Purchase Agreement.

On December  31, 2004,  the Company  entered  into an Asset  Purchase  Agreement
pursuant to which it sold  thirty-four  (34) of its existing race car simulators
to Race Car Simulation Corporation ("RCS"), a wholly owned subsidiary of Dolphin
Direct Equity Partners,  LP ("Dolphin").  The transaction also included the sale
of warrants to Dolphin for the purchase of 5,161,500 shares of common stock. The
warrants have a strike price of $.10 per share,  and expire on  12/31/2009.  The
transaction  also  required  the payment of $84,000 and the issuance of warrants
for 150,000 shares of common stock to Northeast Securities for their services in
the  transaction.  The warrants also have a strike price of $.10 per share,  and
expire on  12/31/2009.  At December  31, 2005,  none of these  warrants had been
exercised.

On March 31, 2005, the Company entered into an Asset Purchase Agreement pursuant
to  which it sold  four (4) of its  existing  race  car  simulators  to Race Car
Simulation  Corporation  ("RCS"),  a wholly owned  subsidiary of Dolphin  Direct
Equity  Partners,  LP  ("Dolphin").  The  transaction  also included the sale of
warrants to Dolphin for the purchase of 1,080,000  shares of common  stock.  The
warrants  have a strike  price of $.10 per share,  and expire on  3/31/2010.  At
December 31, 2005, none of these warrants had been exercised.

On April 15, 2005, the Company entered into an Asset Purchase Agreement pursuant
to  which  it sold  six (6) of its  existing  race  car  simulators  to Race Car
Simulation  Corporation  ("RCS"),  a wholly owned  subsidiary of Dolphin  Direct
Equity  Partners,  LP  ("Dolphin").  The  transaction  also included the sale of
warrants to Dolphin  for the  purchase of 900,000  shares of common  stock.  The
warrants  have a strike  price of $.10 per share,  and expire on  4/15/2010.  At
December 31, 2005, none of these warrants had been exercised.

In 2005, a total of 953,267  shares of common stock were issued per the terms of
the 2003 Bridge Notes.

In 2005,  a total of  1,000,000  shares of common stock were issued for services
rendered.

In 2005, a total of 4,100,000 shares of common stock were issued upon conversion
of 2004 Note and Option Purchase Agreement.

ITEM 6. Management's Discussion and Analysis of Financial Condition
        and Results of Operations
-------------------------------------------------------------------

The following  discussion and analysis  provides  information that we believe is
relevant to an  assessment  and  understanding  of the  consolidated  results of
operations and financial  condition of the Company.  The terms "Company",  "we",
"our" or "us" are used in this  discussion to refer to  Interactive  Motorsports
and  Entertainment  Corp. along with Interactive  Motorsports and  Entertainment
Corp.'s wholly owned  subsidiary,  Perfect Line, Inc., on a consolidated  basis,
except  where the  context  clearly  indicates  otherwise.  The  discussion  and
information  that follows concerns the Registrant as it exists today, as of this
filing,  including the  predecessor of the Company's  operations,  Perfect Line,
LLC. This  discussion  and analysis does not relate to the operations of Pacific
International  Holding,  Inc. which had limited  operations  prior to the merger
with the Company on August 2, 2002.

Overview
--------

The Company generated its first quarterly  operating profit in the third quarter
of 2004, and its first quarterly net profit in the fourth quarter of 2004. Since
inception  on May 31,  2001 and  through  December  31,  2005,  the  Company has
accumulated aggregate losses totaling $(7,113,517),  which includes the net loss
of  $(560,460)  for the twelve months ended  December 31, 2005,  the net loss of
$(118,402)  for the twelve months ended  December 31, 2004,  and the net loss of
$(6,434,655) for the period from inception to December 31, 2003.


                                       11


<PAGE>


The Company has funded its retained  losses  through the initial  investment  of
$650,000  in May  2001,  $400,000  of  capital  contributed  in  February  2002,
approximately  $2.6  million  received in August 2002 from the sale of Preferred
Stock,  $700,000  borrowed in March  2003,  $604,000  in net  proceeds  borrowed
between  February  2004 and June 2004,  $1.257  million  received in the form of
deposits for the placement of race car simulators in revenue share locations, or
for the future purchase by third parties of racecar simulators,  and $769,147 by
delaying  payments to its vendors.  See further  discussion under "Liquidity and
Capital Resources" and "Risk Factors" below.

During the twelve months ended December 31, 2005, the Company had total revenues
of $5,413,519  compared to $6,944,563  for the twelve months ended  December 31,
2004. The December 31, 2004 asset sale to Race Car Simulation  Corp.  referenced
above  contributed  approximately  $1.2  million to 2004  revenues.  The 22.02 %
decrease  in  revenue  is due  primarily  to  the  final  implementation  of the
Company's  revised  business model during 2005. All but two of the Company store
locations  at December 31, 2005 had been  converted  to Checker Flag  Lightning,
Inc.  revenue  share  locations,  or  closed  as part of the  Company's  ongoing
strategy of extracating itself from long-term leases.  Revenue share and leasing
revenue was primarily impacted by the sale of 44 revenue producing simulators at
the end of 2004 and early 2005.  Revenue was further impacted by the non-payment
of revenue share income by the Checker Flag  organization,  This resulted in the
Company  experiencing cash flow shortages  sufficient to hampered its ability to
replenish its stock of merchandise  inventory and also to replace the simulators
sold, and the associated revenue,  with new revenue producing  simulators in new
locations.

Review of Consolidated Financial Position
-----------------------------------------

Cash and Cash Equivalents: The Company had $353,180 in cash and cash equivalents
as of December  31, 2005  compared  with  $1,334,673  at December  31,  2004,  a
decrease of $981,493. This decrease in cash for the year ended December 31, 2005
relates principally to the December 31, 2004, and March and April 2005 sale of a
total of 44  simulators  and its  associated  reduction of  $1,000,000 in annual
revenue share and lease  payments.  Also impacting cash was the net repayment of
$431,500 in loans,  the default of Checker Flag  Lightning in the payment of its
revenue  share  payments,  and the $389,384 of  investment  in new revenue share
locations.

Trade  Accounts  Receivable:  The  balance  at  December  31,  2004 of  $428,726
decreased  by  $216,570  in 2005  to  $212,156.  Trade  accounts  receivable  is
primarily   revenue  share  and  credit  card   receivables.   The  decrease  is
attributable  to the  reserve  the  Company  established  due to the  default of
Checker Flag Lightning in the payment of its revenue share payments.

Inventory:  At December 31, 2005, inventory of $208,453 consisted of merchandise
inventory  of $7,763 and  simulator  inventory of  $200,690.  In  addition,  the
inventory  has a  very  conservative  $5,000  reserve  against  it.  Merchandise
inventory  decreased  by $19,536  from  December  31, 2004 due  primarily to the
conversion  of company  store sites to revenue  share sites,  thus  reducing the
outlets from which the Company sells  merchandise from nine to two.  Merchandise
inventory  was also the  victim  of  priorities  as the  Company  sought to make
maximum use of its tight cash flow by deploying  all  available  cash toward new
revenue share and sales opportunities.  At December 31, 2005 simulator inventory
available  for  placement  in new revenue  share sites,  or available  for sale,
totaled three new simulators and nine refurbished  simulators resulting from our
agreement with Elan Motorsports Technologies.

Accounts  Payable:  The balance of accounts  payable of $925,761 at December 31,
2005 represents an increase of $506,946 from the balance at December 31, 2004 of
$418,815.  This increase is primarily  attributable  to the cash flow shortfalls
the Company  experienced  resulting in the Company's reliance on trade credit to
help fund its operations.

Accrued Liabilities: The balance at December 31, 2004 of $1,158,929 decreased by
$779,108 in 2005 to $379,821 due primarily to sale of simulators  located in the
Mills Corporation malls to Checker Flag Lightning.  The sale eradicated $571,000
of back  rent due the Mills  Corporation.  Also  driving  the  decrease  was the
reduction of accruals for warranty expenses on sold simulators,  as the one year
warranty on a number of sold simulators either expired. or reduced to a shareing
of warranty related expenses.

Notes Payable: On March 7, 2003, the Company entered into a short term financial
agreement (the Secured Bridge Notes) whereby the Company  borrowed  $700,000 for
working capital  purposes.  The Agreement also involved the issuance of warrants
for  2,941,176  common  shares.  The warrants  had a strike price of $0.17,  and
expired on June 30, 2004.


                                       12


<PAGE>


Two of the four  Secured  Bridge Notes  continue to maintain a balance  totaling
$650,000,  of which a net $100,000 in new funds were advance in 2005. One of the
four  Secured  Bridge  Notes  dated  March,  2003 was paid in full in 2004,  and
another  of  the  notes,  along  with  an  additional  Company  obligation,  was
transferred  to a third party  controlled  by a major  Company  shareholder  and
rolled into the 2004 Note and Option Purchase Agreement described below.

Between February and June, 2004, the Company sold a series of notes collectively
referred to as the 2004 Note and Option  Purchase  Agreement in the total amount
of $750,000. These notes generated $604,000 in cash, while $146,000 of the notes
were the result of a transfer to a third  party  controlled  by a major  Company
shareholder  of a prior  company  obligation  under  the  Secured  Bridge  Notes
described  above.  The  Agreement  also  involved  the  issuance  of options for
approximately  6,904,395 common shares.  The options had a strike price equal to
the closing price of IMTS stock on the date the note was purchased, which ranged
from $.08 to $.21 per share.  2,804,395 of the options expired on March 1, 2005,
while the remaining  4,100,000  options were exercised for repayment of the Note
per the terms of the 2004 Note and Option Purchase Agreement.

Other  Liabilities:  Accrued  payroll and payroll  taxes,  sales taxes  payable,
unearned  revenue,  and other  accrued  expenses  fluctuate  with the  volume of
business,  timing of payments, and the day of the week on which the period ends.
At December 31, 2005, the payroll accrual was  approximately  two weeks payroll.
Gift certificates at December 31, 2005 decreased by $20,264 compared to December
2004.  This decrease can be attributed to the reduction in the number of company
locations from which gift certificates are sold and redeemed.

Review of Consolidated Results of Operations
--------------------------------------------

Sales for the twelve months ended December 31, 2005 were  $1,531,044  lower than
for the 12 month  period  ending  December  31, 2004 due  primarily to the final
implementation  of the Company's revised business model during 2005. All but two
of the Company  store  locations  at December  31, 2003 have been  converted  to
Checker Flag Lightning,  Inc. revenue share locations,  or closed as part of the
Company's ongoing strategy of extracating itself from long-term leases.  Revenue
share and  leasing  revenue  was  primarily  impacted  by the sale of 34 revenue
producing  simulators  at the end of 2004.  Revenue was further  impacted by the
non-payment  of revenue  share  income by the Checker  Flag  organization,  This
resulted in the Company  experiencing cash flow shortages sufficient to hampered
its ability to replenish its stock of merchandise  inventory,  and also impacted
the  Company's  ability to  replace  the  simulators  sold,  and the  associated
revenue, with new revenue producing simulators in new locations.

The resultant  reduction in revenue from store sites and revenue share locations
was offset in part by sales of simulators to third party operators. During 2005,
the company recorded the sale or partial sale of 45 simulators in 6 transactions
totaling  approximately  $2.4  million,as  compared  to the  approximately  $1.5
million generated by the sale of 38 simulators in 2 transactions in 2004.

Operating   expenses  for  the  year  ended   December  31,  2005   declined  by
approximately  22% from the period  ending  December  31, 2004.  These  expenses
represented  approximately  90% of net  sales  and  approximately  88%  for  the
comparable  period  in  2004.  Final  implementation  of the  Company's  revised
business  model resulted in a reduction in operating  expenses of  approximately
$1.4 million, with reductions occurring primarily in payroll of $0.9 million and
occupancy costs of $0.4 million.  as the Company either converted  company owned
stores to revenue share locations, or closed locations with sub-par performance.

Additionally, interest expense declined by approximately $199,027 as the Company
paid off the 2004 notes in the first quarter of 2005. Additionally,  most of the
value of the  warrants  associated  with the 2004 notes were  amortized in 2004,
thus increasing interest expense in that year.

EBITDA of $7,354 for the period ending December 31, 2005 decreased  dramatically
as compared to EBITDA of $695,349 for the period ending  December 31, 2004. This
decline  in  performance  is  directly  attributable  to the  size  of the  loss
generated by the Company in 2005 as compared to 2004.

Qualitative and Quantitative Disclosures of Market Risk
-------------------------------------------------------

The fair value of the assets and liabilities  comprising the Company's condensed
consolidated  balance  sheet are not subject to an  inordinate  amount of market
risk.  The term  market  risk refers to the risk of loss  arising  from  adverse
changes in  interest  rates and other  relevant  market  rates and  prices.  The
Company's  primary  assets are the racing  simulators and the software that runs
them. As such, the Company does not believe it has any  significant  exposure to
market risk, as defined.


                                       13


<PAGE>


Critical Accounting Policies
----------------------------

The  Company's  critical  accounting  policies,  including the  assumptions  and
judgments underlying them, are disclosed in the Notes to Consolidated  Financial
Statements  for the year ended December 31, 2005 included in Item 7 in this Form
10-KSB.  The Company has  consistently  applied these policies in the year ended
December 31, 2005.  Management  does not believe  that  operations  to date have
involved uncertainty of accounting treatment, subjective judgment, or estimates,
to any significant degree.

Internal Controls
-----------------

Pursuant  to  Section  302 of the  Sarbanes-Oxley  Act of 2002,  management  has
reviewed  the  Company's  disclosure  controls  and  procedures  (as  defined in
Exchange  Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to this
annual report (the "Evaluation Date").  Management believes that such disclosure
controls and procedures as of the  Evaluation  Date were adequate to ensure that
employees and others with material information relating to the Company make that
information  known to  management.  To  management's  knowledge,  there  were no
significant  changes  in  internal  controls  or in  other  factors  that  could
significantly affect internal controls subsequent to the Evaluation Date.

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

The various  sources of funds available to the Company are receipts from revenue
share sites,  payments on leased  simulators,  receipts collected on the sale of
simulator assets, deposits collected on future sales or revenue share sites, and
from customers in our company owned stores for simulator  rides and  merchandise
sales,  proceeds  from equity  offerings  including the  $2,610,050  received in
August  2002,  loans from  related  parties  including  net proceeds of $687,500
received in March,  2003, and net proceeds  received  between  February 2004 and
June 2004 totaling $604,000, $122,500 in loan proceeds form the sale of the 2005
Notes  between  October and  Novemebr,  2005,  credit  extended by vendors,  and
possible future financings.

In July of 2003,  management revised the Company's business model,  changing the
focus from Company owned and operated mall-based racing centers to revenue share
racing  centers  (mall  merchandise  retailers,  family  entertainment  centers,
amusement parks,  casinos,  auto malls,  etc.) and mobile lease programs such as
the Nextel Experience, and simulator purchases.  Without the burden of occupancy
costs and labor costs,  the Company  realized its first quarterly profit for the
quarter ending  September 30, 2004,  and its first  quarterly net profit for the
quarter ended December 31, 2004.

On December  31,  2004,  and again on March 31 and April 15,  2005,  the Company
entered into an Asset Purchase  Agreements  pursuant to which it sold a total of
forty-four  (44) of its race car simulators to Race Car  Simulation  Corporation
("RCSC"),  a wholly owned  subsidiary  of Dolphin  Direct  Equity  Partners,  LP
("Dolphin") for an aggregate purchase price of $2,856,600.

During the year ended December 31, 2005, the operating activities of the Company
used net cash of $(160,609) compared to net cash generated of $1,035,683 for the
comparable  period in 2004.  The drivers for the $1.2 million  reduction in cash
generated from operations can be attributed to the decline in profitability, the
decline in  simulator  deposits as the Company  completed  the  installation  of
simulators  sold, the increase in the reserve  established  for  receivables due
from  Checker  Flag  Lightining,  and the  decrease  in accrued  expenses as the
Company  resolved its  indebtedness  associated with the Mills  Corporation mall
sites.  These requirements for cash were offset by increases in accounts payable
of $533,510,  and decreases in inventory  related to the production and delivery
of new race car simulators of approximately $51,000.

During the year ended  December 31, 2005,  the Company used $389,384 of net cash
in investing  activities  compared  with  $504,015 of net cash used in investing
activities  during the  comparable  period in 2004. In both years,  the net cash
used relates  primarily to the  capitalization  of the costs associated with the
installation  of  simulators in new revenue  share  locations,  and the costs of
components for simulators currently in production.

During the year ended  December 31, 2005, the Company used $431,500 of cash from
financing  activities  compared  with  $554,000  of cash  generated  during  the
comparable period in 2004. The Company was able to secure  additional  financing
from the sale of $122,500 in new notes,  and from the net  $100,000  increase in
the  financing  under of the Secured  Bridge Notes dated March,  2003.  This was
offset by the decrease of $660,000 of the $750,000 in notes sold in 2004.


                                       14


<PAGE>


Between  October  and  November,  2005,  the  Company  sold a  series  of  notes
collectively  referred to as the 2005 Note and Option Purchase  Agreement in the
total amount of $122,500.

As of December  31,  2005,  the Company had cash and cash  equivalents  totaling
$353,180  compared to $1,334,673 at December 31, 2004.  Current  assets  totaled
$868,703 at December  31, 2005  compared to  $2,058,820  on December  31,  2004.
Current  liabilities  totaled  $3,599,700  on December  31, 2005  compared  with
$4,618,647  on December 31, 2004. As such,  these  amounts  represent an overall
decrease in working capital of $171,770 from December 31, 2004.

Inflation
---------

We do not expect the impact of inflation on our operations to be significant.

RISK FACTORS
------------

The  Company is subject to certain  risk  factors  due to the  organization  and
structure  of the  business,  the industry in which we compete and the nature of
our operations. These risk factors include the following:

Operating History, Operating Losses, and Accumulated Deficit
------------------------------------------------------------

Perfect Line,  LLC was formed in June 2001 for the purpose of acquiring  certain
of the assets of SEI, a bankrupt  corporation,  and  modifying and improving the
business model under which SEI operated,  as more fully described under Overview
above. While the concept is a modification and improvement upon the prior model,
the modified  business model was only in place for less than two full years, but
also proved to be unprofitable.  It is for that reason,  among others,  that the
Company  designed and  implemented a revised  business model focusing on revenue
share  locations  and to a lesser  extent,  sales  of the  race car  simulators.
Perfect Line has a limited  operating  history and is subject to numerous risks,
expenses,  problems,  and difficulties typically encountered in establishing any
business.  For the 5 months ended  December 31, 2001,  Perfect Line had sales of
$3,533,402,  and a loss of  $(719,854).  For the year ended  December  31, 2002,
Perfect  Line  generated  net sales of  $9,636,278,  resulting  in a net loss of
$(2,189,220).  For the year ended December 31, 2003,  Perfect Line had net sales
of $7,557,978 generating a net loss of $(3,525,581). For the year ended December
31,  2004,  Perfect  Line  had net  sales  of  $7,071,834  generating  a loss of
$(118,402).  For the year ended  December 31, 2005, the Company had net sales of
$5,413,519  generating a loss of $(560,460).  This overall financial performance
resulted in an accumulated  deficit of  $(7,113,517) as of December 31, 2005 for
the Company. Management believes the addition of simulators to its two owned and
operated  sites,  upcoming sales and licening  revenues from the new Reactor and
Reactor Mobile  Experience,  and upcoming new sales and installations in revenue
share and lease sites,  will return the Company to  profitability in the future,
although there can be no assurance.

Dependence on Discretionary Consumer Spending and Competition
-------------------------------------------------------------

Much of the revenue  anticipated by the Company will ultimately be the result of
discretionary  spending by consumers.  If the current trepidation in the economy
continues for an extended time or worsens, either overall or in the locations in
which Company racing centers and revenue share sites are located,  the amount of
discretionary  spending may be reduced which would have a negative effect on the
Company results from operations and its financial position.  In addition, if the
popularity of NASCAR diminishes, it is likely that the Company will experience a
similar  reduction in  simulator  usage and  merchandise  sales that will have a
negative impact on the Company and its future.

There is  considerable  competition  for  consumer  entertainment  dollars.  The
Company feels its patented technology, high-traffic, premium locations, licenses
with NASCAR and various teams,  drivers,  and tracks and the ability to take its
driving  experience to the public  through the  intergration  of its new Reactor
simulator with a Featherlite  trailer,  create  significant points of difference
between its competitors and NSMS. However,  there can be no assurance that these
factors will be sufficient to assure  successful  product  development  into the
marketplace.


                                       15


<PAGE>


Significant Capital Requirements and Need for Additional Financing
------------------------------------------------------------------

The Company has been and  continues to build back the  approximately  $83,000 in
monthly  revenue share and lease  payments that were given up as a result of the
asset sale of 44 simulators to Race Car  Simulation  Corporation  in three asset
purchases totaling $2,856,600 in December, 2004 and March and April of 2005. The
Company is both  using its  current  inventory  of used and new  simulators  and
building new simulators to install  simulators  within  revenue share,  lease or
purchased racing center sites to meet the installation  demand.  At December 31,
2005, the Company had built, or partially built, 192 SMS simulators, of which 98
had been sold or were in the process of being sold, 24 were in company owned and
operated  sites,  45 were in  revenue  share or  lease  sites  (includes  mobile
experiences).  Of the remaining 25 (21 used or refurbished  and 4 new) 2 were at
corporate  offices  and 23  were at the  Company's  warehouse  or at Elan  being
prepared to install into future asset  purchase,  revenue  share or lease racing
center  sites.  In  addition,  the  Company  had built or were in the process of
building 8 Reactor simulators, 4 of which were installed in a new Reactor Mobile
Experience in February.  Reactors are typically  purchased with advance payments
that cover manufacturing costs so that no financing is required by the Company.

Going forward,  asset purchases  (both SMS and Reactor)  require an advance that
will cover the  manufacturing  costs,  so no  financing  is  required  for these
installations.  Financing  will be required  to  manufacture  the revenue  share
simulators  that will be owed by the Company and installed  into a revenue share
partner's  site.  The Company seeks  financially  viable revenue share and lease
partners for financing these installations,  secured by simulators as collateral
and minimum guarantee contracts.

Management  has  been and  plans to  continue  to sell SMS  simulators  from its
inventory base if necessary to cover cash flow needs until cash is built back up
from any  combination of revenue share,  lease or new Reactor and Reactor Mobile
Experiences,  although  there can be no assurance that the demand will continue,
or that the  orders  will  come in a timely  manner to meet the  Company's  cash
needs.

Dependence on Revenue Share Partners For Timely Payments
--------------------------------------------------------

The Company  relies on the timely  payments from its revenue  share  partners in
order to meet  operational  cash flow needs.  The Company has also made  certain
guarantees to Race Car Simulation Corporation of minimum levels of revenue share
payments from the revenue share  partners where the assets were sold to Race Car
Simulation Corporation.  At the year ending December 31, 2005, the allowance for
bad debt was increased to cover the receivable from Checker Flag Lightning,  who
was in default on revenue share  payments.  The Company  continues to review all
its options,  legal and otherwise,  to try to resolve this situation in the most
expedited  manner  possible.  At the  time of this  filing,  no  resolution  had
occurred.

Dependence on Updated Technology and Licenses/Leases
----------------------------------------------------

The  Company  will  likely  have a need to  routinely  update  and  upgrade  its
simulation  technology.  If  the  Company  is not  able  to  retain  appropriate
personnel with the skills and ability to maintain its simulators, it will likely
have a material  adverse  effect on the  Company.  The Company will also need to
routinely  upgrade the appearance of the simulators to closely  approximate that
of the then current NASCAR sponsors.  This updating may involve significant time
and expense and, in certain  instances,  require  additional  license agreements
from new teams and/or  sponsors.  The Company  will also need to renew  existing
licensing agreements with NASCAR teams and/or drivers. The Company currently has
executed either contracts or term sheets with fourteen teams and/or drivers. The
Company has established  licensing  relationships  with a significant  number of
racetracks at which NASCAR events are held.  The Company has license  agreements
with International Speedway Corp (ISC), Speedway Motorsports International (SMI)
and the  Indianapolis  Motor Speedway  (IMS),  and has  incorporated to date six
NASCAR tracks into its proprietary software.  The Company has the rights to many
more  prominent  NASCAR  tracks,  and plans to add tracks to its  software  once
funded. The Company has entered into an exclusive  location based  entertainment
license agreement with NASCAR to utilize its logo. The license agreement permits
the  continued  use of the  NASCAR  logo in the Las  Vegas  NASCAR  Cafe and the
Daytona USA simulator  and provides  that it is not a breach of the  exclusivity
clause  for  those  two  venues  to  continue  to use  their  current  simulator
experiences.  The license  requires  the Company to utilize its best  efforts to
maintain a minimum of eight  entertainment  stores.  The Company's  confidential
licensing  agreement with NASCAR  required an annual royalty payment in 2002 and
quarterly  royalty payments  commencing in 2003 through 2009 based on simulator,
merchandise,  food,  beverage,  sponsor,  and remote  site  revenues  at varying
percentages.  The licensing  agreement was amended on December 31, 2004, and the
Company was able to reduce its minimum  royalty  guarantees.  The exclusivity is
subject  to a  minimum  guarantee  by July of 2007,  and the  license  is up for
renewal on December 31, 2009.


                                       16


<PAGE>


Dependence on Small Number of Key Management Personnel
------------------------------------------------------

We do not have  employment  agreements  with any of our  employees.  Our  future
success  depends,  in  part,  on the  continued  service  of our key  executive,
management,  and technical personnel. If key officers or employees are unable or
unwilling to continue in their present  positions,  our business and our ability
to raise capital could be harmed.

Our business is especially dependent upon the continued services of our Chairman
and Chief Executive Officer,  William R. Donaldson.  Should we lose the services
of Mr. Donaldson,  our operations will be negatively  impacted.  The loss of the
services  of Mr.  Donaldson  would  have a  material  adverse  effect  upon  our
business.

Officers and Directors Have Limited Liability and Indemnification Rights
------------------------------------------------------------------------

Our  officers  and  directors  are  required  to  exercise  good  faith and high
integrity in the management of our affairs. Our certificate of incorporation and
bylaws,  however,  provide,  that  the  officers  and  directors  shall  have no
liability to the stockholders for losses sustained or liabilities incurred which
arise from any transaction in their respective managerial capacities unless they
did not act in good  faith,  engaged  in  intentional  misconduct  or  knowingly
violated the law, approved an improper dividend or stock repurchase,  or derived
an improper benefit from the transaction.  Our certificate of incorporation  and
bylaws also provide for us to indemnify our officers and  directors  against any
losses or  liabilities  they may incur as a result of the  manner in which  they
operate our business or conduct our internal affairs, provided that the officers
and directors  reasonably  believe such actions to be in, or not opposed to, our
best  interests,  and  their  conduct  does  not  constitute  gross  negligence,
misconduct or breach of fiduciary obligations.

Market and Capital Risks
------------------------

Future issuance of Common Stock of the Company may lead to dilution in the value
of our common stock, a reduction in shareholder voting power, and allow a change
in control.

Stock  issuances  may result in  reduction  of market  price of our  outstanding
shares of common stock. If we issue any additional shares of common or preferred
stock,  proportionate  ownership  of our common  stock and voting  power will be
reduced.  Further,  any new issuance of common or preferred shares may prevent a
change in our control or management.

Issuance  of our  preferred  stock  could  depress  the market  value of current
shareholders.  We have  10,000,000  authorized  shares of convertible  preferred
stock (with zero shares  outstanding)  that may be issued by action of our Board
of Directors. Our Board of Directors may designate voting control,  liquidation,
dividend and other  preferred  rights to preferred  stock holders.  Our Board of
Directors'  authority to issue preferred stock without  shareholder  consent may
have a depressive  effect on the market value of our common stock.  The issuance
of  preferred  stock,  under  various  circumstances,  could  have the effect of
delaying or  preventing a change in our control or other  take-over  attempt and
could adversely affect the rights of holders of our shares of common stock.

High-Risk Investment and Restrictions on Marketability
------------------------------------------------------

Our common stock has traded on the Over-the  Counter Bulletin Board since August
2002.  The bid price of our common  stock has been less than $5.00  during  this
period.  As such,  our stock is subject to the penny stock rules  adopted by the
Securities and Exchange  Commission  that require  brokers to provide  extensive
disclosure to its  customers  prior to executing  trades in penny stocks.  These
disclosure  requirements  may cause a reduction  in the trading  activity of our
common stock.







                                       17


<PAGE>


Broker-dealer  practices in  connection  with  transactions  in penny stocks are
regulated by certain  penny stock rules adopted by the  Securities  and Exchange
Commission.  Penny stocks  generally are equity  securities with a price of less
than $5.00.  Penny stock rules require a broker dealer prior to a transaction in
a penny stock not  otherwise  exempt from the rules,  to deliver a  standardized
risk disclosure  document that provides  information  about penny stocks and the
risks in the  penny  stock  market.  The  broker-dealer  also must  provide  the
customer  with  current  bid and  offer  quotations  for the  penny  stock,  the
compensation of the  broker-dealer  and its salesperson in the transaction,  and
monthly account  statements showing the market value of each penny stock held in
the customer's  account.  In addition,  the penny stock rules generally  require
that prior to a transaction in a penny stock, the broker-dealer  makes a special
written  determination  that the penny  stock is a suitable  investment  for the
purchaser and receives the purchaser's written agreement to the transaction.

Because we are  subject to the penny stock  rules our  shareholders  may find it
difficult to sell their shares.


                                       18


<PAGE>



                          ITEM 7. Financial Statements
                          ----------------------------



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------


To the Board of Directors and Shareholders of
Interactive Motorsports and Entertainment Corp. and Subsidiaries
Indianapolis, Indiana

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

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  position  of  Interactive
Motorsports and Entertainment  Corp. and Subsidiaries,  as of December 31, 2005,
and the  results of their  operations  and their cash flows for the years  ended
December 31, 2005 and 2004, in conformity with United States generally  accepted
accounting principles.

As discussed in Note 14 to the consolidated  financial  statements,  the Company
has restated its financial statements for the year ended December 31, 2004. This
action was taken as a result of a warrant valuation.  Adjustments have been made
to correct this error.



HJ & Associates, LLC
Salt Lake City, Utah
March 1, 2005










                                       19


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheet


                                     ASSETS
                                     ------


<TABLE>
                                                                                             December 31,
                                                                                                  2005
                                                                                             ------------

CURRENT ASSETS

<S>                                                                                          <C>
   Cash                                                                                      $   353,180
   Accounts receivable                                                                           212,156
   Inventory                                                                                     208,453
   Prepaid expenses                                                                               73,314
   Notes Receivable                                                                               21,600
                                                                                             ------------

    Total Current Assets                                                                         868,703
                                                                                             ------------

TOTAL PROPERTY AND EQUIPMENT, NET (Note 4)                                                       789,014
                                                                                             ------------

OTHER ASSETS

   Deposits                                                                                       28,471
   Other intangible assets, net                                                                    1,742
   Notes Receivable                                                                              290,400
                                                                                             ------------

    Total Other Assets                                                                           320,613
                                                                                             ------------


Total Assets                                                                                 $ 1,978,330
                                                                                             ============

</TABLE>












The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       20


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                     Consolidated Balance Sheet (Continued)


                  LIABILTIES AND SHAREHOLDERS' EQUITY (DEFICIT)
                  ---------------------------------------------


<TABLE>

                                                                                             December 31,
                                                                                                  2005
                                                                                             ------------

CURRENT LIABILITIES

<S>     <C>    <C>    <C>    <C>    <C>    <C>

   Accounts payable                                                                          $   925,761
   Accrued payroll expense                                                                        56,438
   Accrues sales tax payable                                                                      12,018
   Gift certificates & customer deposits                                                          22,624
   Deposits on simulator sales (Note 13)                                                       1,257,101
   Accrued liabilities (Note 12)                                                                 379,820
   Deferred revenue                                                                              118,715
   Notes payable - related parties (Note 9)                                                      146,000
   Notes payable - current portion (Note 5)                                                      681,223
                                                                                             ------------

    Total Current Liabilities                                                                  3,599,700
                                                                                             ------------

LONG-TERM LIABILITIES

    Notes payable - long term portion (Note 5)                                                   122,500
                                                                                             ------------

    Total Liabilities                                                                          3,722,200
                                                                                             ------------

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS EQUITY (DEFICIT)

   Convertible preferred stock, $0.0001 par value, 10,000,000 shares
    authorized, zero shares outstanding                                                                -
   Common stock, $0.0001 par value, 200,000,000 shares authorized
    93,769,177 shares issued and outstanding                                                       9,377
   Additional paid in capital                                                                  5,360,270
   Retained deficit                                                                           (7,113,517)
                                                                                             ------------

    Total Shareholders' Equity (Deficit)                                                      (1,743,870)
                                                                                             ------------

Total Liabilities & Shareholders' Equity (Deficit)                                           $ 1,978,330
                                                                                             ============


</TABLE>




The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       21


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                      Consolidated Statements of Operations

<TABLE>

                                                                                          For the Years Ended
                                                                                                December 31
                                                                     ----------------------------------------------
                                                                                      2005                     2004
                                                                                                           Restated
                                                                     ----------------------------------------------
REVENUES

<S>     <C>    <C>    <C>    <C>    <C>    <C>

    Company owned stores                                             $           2,386,209   $            4,236,350
    Revenue share revenues                                                         581,145                  975,296
    Leasing revenue                                                                 57,000                  262,500
    Sales of simulator systems                                                   2,389,165                1,470,417
                                                                     ---------------------   ----------------------

      Total Revenues                                                             5,413,519                6,944,563
                                                                     ---------------------   ----------------------

COST OF SALES

    COGS - Merchandise                                                             115,972                  279,519
    Group sales expenses                                                            12,645                   18,749
    COGS - Sale of simulators                                                      851,214                  185,607
                                                                     ---------------------   ----------------------

      Total Cost of Sales                                                          979,831                  483,875
                                                                     ---------------------   ----------------------

GROSS PROFIT                                                                     4,433,688                6,460,688
                                                                     ---------------------   ----------------------

GENERAL & ADMINISTRATIVE EXPENSES

    Payroll related expenses                                                     1,995,651                2,920,426
    Occupancy expenses                                                           1,161,423                1,558,870
    Other operating expenses                                                     1,657,919                1,745,377
                                                                     ---------------------   ----------------------

      Total Operating Expenses                                                   4,814,993                6,224,673
                                                                     ---------------------   ----------------------

INCOME (LOSS) BEFORE OTHER INCOME
   (EXPENSE)                                                                      (381,305)                 236,015
                                                                     ---------------------   ----------------------

OTHER INCOME (EXPENSE)

    Interest expense                                                              (205,719)                (404,746)
    Gain on extinguishments of debt                                                 26,564                   50,329
                                                                     ---------------------   ----------------------

      Total Other Income (Expense)                                                (179,155)                (354,417)
                                                                     ---------------------   ----------------------

INCOME (LOSS) BEFORE INCOME TAXES                                                 (560,460)                (118,402)

INCOME TAX EXPENSE                                                                       -                        -
                                                                     ---------------------   ----------------------

NET INCOME (LOSS)                                                    $            (560,460)  $             (118,402)
                                                                     =====================   ======================

INCOME (LOSS) PER SHARE                                              $               (0.01)   $               (0.00)
                                                                     =====================   ======================

WEIGHTED AVERAGE SHARES OUTSTANDING                                  $          90,278,841   $           85,900,541
                                                                     =====================   ======================
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       22


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                  Statements of Shareholders' Equity (Deficit)

<TABLE>

                                                                                                                           Total
                                                                                       Additional                      Shareholders'
                                     Preferred Stock              Common Stock          Paid-In         Retained          Equity
                                  Shares       Amount         Shares       Amount       Capital          Deficit         (Deficit)
                                  ------       ------         ------       ------       -------          -------          --------

<S>     <C>    <C>    <C>    <C>    <C>    <C>

Balance at December 31, 2003     2,272,728    $   227      74,314,183     $ 7,431    $   4,029,002    $ (6,434,655)    $ (2,397,995)

Common stock issued for
  2003 Bridge Loan Interest              -          -         935,726          94           78,112               -           78,206

Common stock issued
  for services                           -          -         260,000          26           17,248               -           17,274

Conversion of preferred
  stock to common stock         (2,272,728)      (227)     11,363,640       1,136             (909)              -                -

Fair value of options and
   warrants granted                      -          -               -           -          571,779               -          571,779

Common stock issued for
  payment of prior year accruals         -          -         842,361          85          115,535               -          115,620

Net loss for the year ended
  December 31, 2004 (Restated)           -          -               -           -                -        (118,402)        (118,402)
                               -----------    -------     -----------     -------    -------------    -------------    -------------

Balance at December 31, 2004             -          -      87,715,910       8,772        4,810,767      (6,553,057)      (1,733,518)

Common stock issued for
  payment of  Loan Interest              -          -       5,053,267       1,363          376,466               -          377,829

Common stock issued
  for services                           -          -       1,000,000         100           69,900               -           70,000

Warrants issued for
  Dolphin Asset Purchase                 -          -               -        (858)          87,250               -           86,392

Cost of options
  for 2005 notes                         -          -               -           -           15,887               -           15,887

Net loss for the year  Ended
  December 31, 2005                      -          -               -           -                -        (560,460)        (560,460)
                               -----------    -------     -----------     -------    -------------    -------------    -------------

Balance at December 31, 2005             -    $     -      93,769,177     $ 9,377    $   5,360,270    $ (7,113,517)    $ (1,743,870)
                               ===========    =======     ===========     =======    =============    =============    =============


</TABLE>




The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       23


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows


<TABLE>

                                                                                       For the Years Ended
                                                                                            December 31
                                                                            ---------------------------------------
                                                                                        2005                2004
                                                                                                           Restated
                                                                            ---------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                                         <C>                  <C>
   Net Income (Loss)                                                        $         (560,460)  $        (118,402)
   Adjustments to reconcile net income (loss) to net cash
    used by operating activities:
     Depreciation and amortization                                                     362,095             409,005
     Common stock issued for services and interest                                     119,829              95,479
     Warrants issued related to sales agreements                                        86,392             135,184
     Options exercised to repay note                                                   343,887                   -
     Amortization of notes payable discount                                             37,455             376,435
     Gain on extinguishment of debt                                                    (26,564)            (50,329)
     Bad debt expense                                                                  253,481              15,266
   Net changes in operating assets and liabilities:
     Increase in trade accounts and other receivable                                  (348,910)           (394,533)
     (Increase) decrease in inventory                                                   51,478            (211,056)
     Increase in prepaid expenses and other assets                                     (24,294)            (38,242)
     Decrease in intangibles                                                            12,927                   -
     Increase (decrease) in accounts payable                                           533,510            (990,886)
     Decrease in accrued payroll and payroll taxes                                     (10,947)            (31,473)
     Decrease in sales tax payable                                                     (14,705)            (24,586)
     Decrease in gift certificates and customer deposits                               (20,264)            (70,199)
     Increase (decrease) in accrued expenses                                          (683,528)            638,905
     Increase in deferred revenue                                                       44,886              73,829
     Increase (decrease) in deposits on simulator sales                               (316,877)          1,221,286
                                                                            -------------------  ------------------

       Net Cash Provided (Used) by Operations                                         (160,609)          1,035,683
                                                                            ------------------   ------------------

CASH FLOWS FROM INVESTING ACTIVITIES

   Purchase of property and equipment                                                 (412,075)           (563,746)
   Sale of property and equipment                                                       22,691              59,731
                                                                            ------------------   ------------------
       Net Cash Used by Investing Activities                                          (389,384)           (504,015)
                                                                            ------------------   ------------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Loans from and (repayments to) related parties                                      (50,000)            (50,000)
   Proceeds from issuance (payment) of notes payable                                  (381,500)            604,000
                                                                            ------------------   ------------------

       Net Cash Provided by Financing Activities                                      (431,500)            554,000
                                                                            ------------------   ------------------

INCREASE (DECREASE) IN CASH                                                           (981,493)          1,085,668

CASH, BEGINNING OF YEAR                                                              1,334,673             249,005
                                                                            ------------------   ------------------

CASH, END OF YEAR                                                           $          353,180   $       1,334,673
                                                                            ==================   ==================


</TABLE>




The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       24


<PAGE>



        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                Consolidated Statements of Cash Flows (Continued)



<TABLE>



                                                                                          For the Years Ended
                                                                                                December 31
                                                                            ---------------------------------------
                                                                                      2005                     2004
                                                                                                           Restated
                                                                            ---------------------------------------

SUPPLEMENTAL CASH FLOW DISCLOSURES:

<S>                                                                          <C>                <C>
    Cash paid for interest                                                   $      87,455      $          122,332
    Cash paid for income taxes                                               $           -      $                -

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

    Common stock issued for payment of prior year accruals                   $           -      $          115,620
    Common stock issued for services and interest                            $     447,829      $           95,480
    Warrants sold                                                            $      86,392      $          571,779
    Options granted on notes payable                                         $      15,887      $                -

</TABLE>



















The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       25


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004

NOTE 1 - BASIS OF PRESENTATION

          Interactive  Motorsports and  Entertainment  Corp was  incorporated in
          Indiana and began operations on August 3, 2002. Perfect Line, Inc. was
          also incorporated in Indiana, and began operations on August 2, 2002.

          Interactive  Motorsports and  Entertainment  Corp,  through its wholly
          owned  subsidiary,  Perfect  Line,  Inc. (the  Company),  (1) owns and
          operates three NASCAR Silicon Motor Speedway stores offering  licensed
          NASCAR-branded  entertainment  products, (2) has ongoing revenue share
          agreements  with third parties  allowing them use of our NASCAR racing
          simulators  and  proprietary  software,  (3) sells its  simulators and
          licenses its  proprietary  software to third  parties,  (4) leases its
          simulators  and  its  proprietary  software  to  third  parties..  The
          cornerstone  of the  Company's  revised  business  model  includes the
          expansion of the revenue share base. In revenue  sharing,  the Company
          enters into an agreement  whereby the Company is entitled to an agreed
          percentage  of the revenue  generated by the  simulator,  subject to a
          minimum due each month.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          a. USE OF ESTIMATES

          The preparation of financial  statements in conformity with accounting
          principles generally accepted in the United States of America requires
          management to make estimates and assumptions  that affect the reported
          amounts of assets and  liabilities  and the  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.

          b. SIGNIFICANT ESTIMATES

          The most significant  estimates made by management are determining the
          estimated   useful  lives  of  the  fixed  assets,   determining   the
          obsolescence of merchandise  inventory,  and assessing the realization
          of deferred tax benefits  relating to the Company's net operating loss
          carry forwards.

          c. LONG-LIVED ASSETS

          Long-lived  assets are  reviewed  for  impairment  whenever  events or
          changes in circumstances indicate that the carrying amount of an asset
          may not be  recoverable.  Recoverability  is measured by comparison of
          the carrying amount to future net undiscounted  cash flows expected to
          be generated by the related asset. If such assets are considered to be
          impaired, the impairment to be recognized is measured by the amount by
          which the carrying amount exceeds the fair market value of the assets.
          To date, no  adjustments to the carrying  amount of long-lived  assets
          have been required.

          d. MERCHANDISE INVENTORY

          Merchandise  inventories are carried at the lower of cost or market as
          determined  by the  first-in,  first-out  (FIFO)  method.  The Company
          reduces  the  stated  value of  inventory  for  excess  quantities  or
          obsolescence in an amount equal to the difference  between the cost of
          inventory and the estimated market value based upon assumptions  about
          future demand and market conditions. If actual future demand or market
          conditions  are less  favorable  than those  projected by  management,
          additional reductions in stated value may be required.







                                       26


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          e. MANUFACTURING INVENTORY

          Manufacturing  inventories  are carried at the lower of cost or market
          as determined by the first-in,  first-out  method.  These  inventories
          consist of  completed  simulators  that are ready to be installed in a
          site, as well as various components of our simulation system that have
          not been allocated to a specific site.

          f. PROPERTY AND EQUIPMENT

          The Company  records its  property  and  equipment at cost and once in
          service,  depreciates  it  using  the  straight-line  method  over the
          estimated useful lives of the respective asset classes as follows:

          Software 3 Years, Furniture, Fixtures, and Equipment 5 to 7 Years

          g. CONSTRUCTION IN PROGRESS

          The  Company  records all costs  associated  with the  acquisition  of
          components  and build out of new sites in  Construction  in  Progress.
          Once the site build is completed,  costs associated with the build are
          capitalized as Property and Equipment, and are depreciated as noted in
          paragraph (f) above.

          h. DIVIDENDS

          The Company has not paid any dividends  and any dividends  that may be
          paid in the future will depend upon the financial  requirements of the
          Company and other  relevant  factors.  The Company does not  presently
          intend to pay dividends at any point in the foreseeable future.

          i. CONSOLIDATION

          The  consolidated  financial  statements at December 31, 2005 and 2004
          include the  accounts of the  Company and its wholly  owned  operating
          subsidiaries, Perfect Line, Inc. and Race Car Simulators. Intercompany
          transactions and balances have been eliminated in consolidation.

          j. NET LOSS PER SHARE

          The  computation of net loss per share of common stock is based on the
          weighted  average  number of shares  outstanding  during  the  periods
          presented. The Company calculates loss per share pursuant to Statement
          of Financial Accounting  Standards No. 148 ("SFAS 148"),  Earnings Per
          Share.  Basic  loss per  share is  computed  based  upon the  weighted
          average  number of common  shares issued and  outstanding  during each
          year. Diluted loss per share amounts assume conversion,  exercise,  or
          issuance of all potential common stock instruments (stock options,







                                       27


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          warrants  and  convertible  preferred  stock).   Potentially  dilutive
          securities  including preferred stock,  warrants and stock options are
          excluded  from diluted loss per share during net loss periods  because
          these  securities  would be  anti-dilutive.  The Company has  excluded
          9,228,695 of dilutive instruments at December 31, 2005.

          k. INCOME TAXES

          The Company  provides for income taxes based on the liability  method,
          which  requires  recognition  of deferred  tax assets and  liabilities
          based on differences  between the financial reporting and tax bases of
          assets and liabilities  measured using enacted tax rates and laws that
          are  expected to be in effect  when the  differences  are  expected to
          reverse. At December 31, 2005, the Company's net deferred tax asset is
          fully offset by a valuation allowance.

          l. REVENUE RECOGNITION AND UNEARNED REVENUE

          The  Company  recognizes  revenue  for its  services  at the  time the
          services  have been  rendered.  In the case of gift  certificates  and
          customer  deposits for group  events,  these  amounts are deferred and
          recognized   when  the  associated   services  are  rendered  or  upon
          expiration. During 2003 the Company began a program of selling some of
          its new or used simulators. The Company has outstanding as of December
          31,  2005,  deposits  of  $1,257,101  relating  to  these  sales.  The
          Company's policy is to recognize revenue on a percentage of completion
          basis  throughout the procurement and  installation  process until all
          terms of the contract have been met and no obligations  remain for the
          Company to perform.  The  percentage of completion for any given sales
          contract is determined  by the ratio of costs  incurred to date to the
          total  estimated cost for each site build.  Costs incurred  consist of
          purchased  components,  outside  services,  and outside contract labor
          cost.

          On December 31,  2004,  the Company and its two  subsidiaries  entered
          into an agreement to sell 34 of its race car simulators and granted an
          option to purchase 10  additional  simulators.  The purchase  price of
          $1,536,600 was paid in cash by the date of the agreement.  In addition
          to transferring title to the simulators, the Company sold a management
          agreement  to provide  services  for the term of the contract and sold
          5,161,500  common stock warrants which are  exercisable for 5 years at
          $0.10 per warrant.

          Furthermore, on March 31, 2005 and April 15, 2005, the Company and its
          two  subsidiaries  entered into an agreement to sell the additional 10
          simulators  referred to in the  purchase  option  above.  The purchase
          price of $720,000 and $600,000  respectively,  was paid in cash by the
          date of the  agreement.  In  addition  to  transferring  title  to the
          simulators, the Company sold management agreements to provide services
          for the term of the  contracts and sold  1,080,000 and 900,000  common
          stock  warrants,  respectively,  which are  exercisable for 5 years at
          $0.10 per warrant.

          In accordance with EITF 00-21, the Company  estimated the future costs
          of the management service agreement.  These revenues were deferred and
          are being  recognized  over the life of the agreement.  As outlined in
          EITF 00-21 the Company  recognized  the  purchase  price less the fair
          value of the management service agreements as sales in 2004 and 2005.







                                       28


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          m. CASH AND CASH EQUIVALENTS

          For purposes of the statement of cash flows, the Company considers all
          demand  deposit  balances  and  all  highly  liquid  debt  instruments
          purchased   with   maturity  of  three  months  or  less  to  be  cash
          equivalents.

          n. CONCENTRATION OF RISK

          The Company  maintains a demand  deposit  account where the balance in
          the account may at times exceed the FDIC insurance limits of $100,000.
          At December 31, 2005, the amount exceeding the FDIC limit was $72,962.

          o. ADVERTISING

          Advertising  expenses  were  $75,702  and  $42,787 for the years ended
          December 31, 2005 and 2004, respectively.

          p. RECLASSIFICATIONS

          Certain  prior year amounts have been  reclassified  to conform to the
          current year presentation.

          q. INVENTORY

          At December 31, 2005, inventory consisted of the following:

               Merchandise Inventory                  $               7,763
               Simulators Inventory                                 205,690
               Net of Reserve                                        (5,000)
                                                      ---------------------

               Total Inventory                        $             208,453
                                                      =====================

NOTE 3 - EQUITY TRANSACTIONS AND COMMON STOCK WARRANTS

          Preferred Stock
          ---------------

          At June 30, 2002, Perfect Line placed with investors  4,745,456 shares
          of  convertible  preferred  stock  (the,  "Preferred  Stock") for cash
          proceeds of $2,610,050 under a private placement  memorandum dated May
          10, 2002.  These funds were to be held in escrow until the  occurrence
          of certain  events..  The proceeds of this  offering  were used to pay
          down debt and other  liabilities  and to provide working capital funds
          for the business.  The Preferred Stock is mandatorily  convertible one
          year after issuance into one share of Common Stock or one dollar worth
          of Common Stock as of the conversion date, as calculated by the 10-day
          trailing  average  of the bid  and  ask  price  prior  to  conversion,
          whichever is more favorable to the  shareholder.  On July 31, 2003 the
          Company entered into an agreement with one preferred shareholder which
          extended  the  conversion  date to January 1, 2004.  These shares were
          subsequently  converted into  11,363,640  Common shares on January 29,
          2004.







                                       29


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004



NOTE 3 - EQUITY TRANSACTIONS AND COMMON STOCK WARRANTS (Continued)

          For every two shares of Preferred  Stock,  the  investor  received one
          warrant (the "Preferred Stock Warrants") to purchase Common Stock at a
          price  of  $1.50  per  share  expiring  three  years  from the date of
          issuance. The Preferred Stock Warrants are callable by the Company for
          $0.10  per  warrant  at any  time at the  option  of the  Company.  At
          December 31, 2005 all these warrants had expired.

          Common Stock
          ------------

          In connection  with a certain asset  purchase  agreement,  the Company
          granted  warrants  to allow the seller to purchase up to $2 million in
          value of the Company's  common stock at a price equal to the value per
          share  at the  time the  warrants  are  exercised.  The  warrants  are
          exercisable  at  any  time  prior  to  December  14,  2011,  upon  the
          occurrence of certain events. Management has determined the likelihood
          of  occurrence  of these  certain  events is remote and has  therefore
          assigned no value to these  warrants.  No warrants have been exercised
          as of December 31, 2005.

          On May 12, 2005, the Company issued  1,000,000  shares of common stock
          for consulting  services that were rendered.  Total consulting expense
          associated with this issuance was $70,000.

          On July 26, 2005, the Company issued  4,100,000 shares of common stock
          for the repayment of a 2004 Note and Option  Purchase  Agreement.  The
          value of the options were $328,000.

          On November  10, 2005,  the Company  issued  953,267  shares of common
          stock per the terms of the Secured  Bridge Notes due December 31, 2003
          (Note 5). Total  interest  expense  associated  with this issuance was
          $49,829.

          Warrants
          --------

          On December 31, 2004,  March 31, 2005 and April 15, 2005,  the Company
          and its two  subsidiaries  entered into  agreements  to sell 44 of its
          race  car  simulators  to  a  single  buyer.   Simultaneous   to  this
          transaction,  the  Company  sold the buyer  5,161,500,  1,080,000  and
          900,000 common stock warrants, respectively, which are exercisable for
          5 years from the date of the  transaction at $0.10 per warrant.  Using
          the Black Sholes valuation model, the Company  determined the value of
          these  warrants to be $ 287,308,  $47,123 and  $39,269,  respectively,
          assuming a risk-free interest rate of 3.95% over a period of 5 years.


















                                       30


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004



NOTE 4 - PROPERTY AND EQUIPMENT

          At December 31,  2005,  property and  equipment  was  comprised of the
          following:

                                                                2005
                                                      ---------------------

               Furniture, Fixtures and Equipment      $             960,866
               Revenue share installation costs                     278,299
               Construction in Progress                             201,992
               Software                                             659,574
                                                      ---------------------
                 Total Property and Equipment                     2,100,731

               Less: Accumulated depreciation                     1,311,717
                                                      ---------------------

               Property and Equipment, net            $             789,014
                                                      =====================

          Depreciation  expense for the years ended  December  31, 2005 and 2004
          was $362,095 and $374,362 respectively.

NOTE 5 - DEBT AND CREDIT ARRANGEMENTS

          On March 7, 2003,  Perfect Line,  Inc. issued Secured Bridge Notes due
          December  31, 2003 (the  "Bridge  Notes") in the  aggregate  principal
          amount  of  $700,000   to  one   institutional   investor   and  three
          related-party   investors  (See  Note  9).  Under  the  terms  of  the
          agreement;  Ropart Asset  Management  Fund, LLC ("Ropart"),  Tampa Bay
          Financial, Inc. (related-party),  William R. Donaldson (related-party)
          and Erik R. Risman  (related-party  at that time), were to receive the
          principal   sum  of   $500,000,   $100,000,   $50,000   and   $50,000,
          respectively,  on December  31,  2003.  Interest was to be paid on the
          unpaid principal  balance existing prior to maturity at an annual rate
          of twelve percent (12%).  Interest on the unpaid  principal  under the
          Notes was due and  payable in arrears on the first day of each  month,
          commencing April 1, 2003. Additionally,  interest accrued at an annual
          rate of  twelve  percent  (12%),  which  was to be repaid in shares of
          common  stock.  All  amounts  due under the notes were due and payable
          December  31,  2003.  Ropart  and  Donaldson  have  signed  amendments
          extending  the  note  until  the  end  of  December  2005,  Tampa  Bay
          Financial's  balance was transferred to a third party  controlled by a
          major  Company  shareholder,  and  along  with an  additional  Company
          obligation,  was rolled over to the Company's February 2 2004 Note and
          Option and  Security  offering  (below) and Risman was paid in full in
          2004 by the Company.

          Ropart and Risman also  received  warrants in the amounts of 2,941,176
          and  294,118,  respectively,  entitling  them  to  purchase  from  the
          Company,  at an exercise price of $0.17,  common shares of the Company
          at any  time  before  the  earlier  of June  30,  2004  or six  months
          following  payment of the Bridge Note in full.  The  warrants  expired
          unexercised in 2004.

          Pursuant  to the Note  and  Option  Purchase  Agreement  and  Security
          Agreement  dated  February  2, 2004  ("2004  Agreement"),  the Company
          issued  notes  bearing an interest  rate of 9.6%  payable in the total
          amount of $750,000.  These notes were issued between  February 2, 2004
          and June 6,  2004.  Each note came with an option to  purchase  common
          shares of the Company equal to the amount of notes  purchased  divided
          by the  fair  market  value  of the  Company's  stock  on the  date of
          issuance.  The notes  became due on February 2, 2005,  and $260,000 of
          the  notes  was  paid  in  full  at that  time.  A note  holder  of an
          additional  $344,000 of the notes elected to receive a cash payment of
          $16,000 and exercise  options  granted with the note purchase for full
          payment  of the note per the  terms  of the 2004  Agreement.  The note
          holder of the final $146,000 in notes has been repaid $50,000, and has
          agreed to extend the maturity date of their note to December 31, 2005,
          with the expiration of the accompanying option to February 1, 2006.




                                       31


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 5 - DEBT AND CREDIT ARRANGEMENTS (Continued)

          The value of the options was amortized to interest  expense over their
          original  life which  expired  March 1, 2005.  Amortization  of option
          discount for the options  related to the 2004 Agreement of $51,812 was
          included in  interest  expense for the twelve  months  ended  December
          31,2005.

          Pursuant  to the Note  and  Option  Purchase  Agreement  and  Security
          Agreement dated November 2005 ("2005  Agreement"),  the Company issued
          notes  bearing an interest  rate of 12% payable in the total amount of
          $122,500.  These  notes  were  issued  between  October  13,  2005 and
          November  4, 2005.  Each note came with an option to  purchase  common
          shares of the Company equal to the amount of notes  purchased  divided
          by the exercise  price of the option.  The notes are due on October 1,
          2007.

          The value of the options will be  amortized  to interest  expense over
          their life which expires on November 1, 2007.  Amortization  of option
          discount for the options  related to the 2005  Agreement of $1,530 was
          included in interest  expense for the twelve months ended December 31,
          2005.

          Notes Payable consisted of the following at December 31, 2005:

          Note payable to investor bearing interest at 12%,
          due December 31, 2005.  Secured by certain
          simulators of the Company and a personal guaranty
          of the President of the Company.                          $   600,000

          Note payable to individuals bearing interest
          at 12%, due October 1, 2007.  Secured by certain
          simulators of the Company.                                    122,500

          Note payable to a landlord bearing interest
          at 10.9%, due May, 2006.                                       95,580

          Less: unamortized discount                                    (14,357)
                                                                    -----------
          Total Notes Payable                                           803,723
                                                                    -----------
          Less: current portion                                        (681,223)
                                                                    -----------
          Notes Payable - long term portion                         $   122,500
                                                                    ===========

          Future maturities of notes payable as of December 31,
          2006                                                      $   681,223
          2007                                                          122,500
                                                                    -----------
          Total Notes Payable                                       $   803,723
                                                                    ===========







                                       32


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 6 - LICENSING AND CONSULTING AGREEMENTS

          The Company has a licensing  agreement  with the National  Association
          for  Stock  Car  Auto  Racing,   Inc.  ("NASCAR")  for  location-based
          entertainment,  which  allows the  Company to use the NASCAR  name and
          logo.  The  Company's  confidential  licensing  agreement  with NASCAR
          requires  annual  royalty  payments  in  2002  and  quarterly  royalty
          payments from 2003 through 2009 based on simulator, merchandise, food,
          beverage,  sponsor,  and remote site revenues at varying  percentages.
          The licensing agreement is subject to renewal on December 31, 2009.

          The Company also has  licensing  agreements  with several  NASCAR race
          teams,  drivers,  and racetracks  that expire on various dates between
          December 31, 2005 and December 31, 2007.

NOTE 7 - RENT COMMITMENTS

          The Company  rents  various  office and retail space under  long-term,
          non-cancelable   operating  leases,  some  of  which  include  renewal
          options,  expiring on various  dates  through  2010.  The Company also
          leases certain office equipment pursuant to a non-cancelable operating
          lease with terms of three years. Rent expense approximated  $1,035,336
          and  $1,289,294  for the  years  ended  December  31,  2005 and  2004,
          respectively. During 2004, the Company entered into various agreements
          with  Checker  Flag  Lightning  (CFL) and the  landlords  of  specific
          company  stores  whereby CFL assumed the  operation of the store,  and
          assumed primary  responsibility  for payments of the monthly rent. The
          first column below shows the full impact of all the rental  agreements
          the  Company  is a party to.  The second  column  shows the  Company's
          rental  obligations as a consequence  of our  agreements  with CFL and
          various mall owners.

          At December 31, 2005,  the future  minimum  rental  payments  required
          under all non-cancelable operating leases were as follows:


                                            All                  Net of CFL
             Payable In                Rental Payments          Rental Payments
          ---------------------------------------------------------------------
                2006                 $      954,306           $      623,561
                2007                        933,718                  580,510
                2008                        749,866                  396,658
                2009                        703,677                  379,944
                2010                        379,944                  379,944
                                     --------------           --------------

          Total Required Rental
          Payments                   $    3,697,403           $    2,360,617
                                     ==============           ==============

NOTE 8 - COMMITMENTS AND CONTINGENCIES

          From time to time,  the Company may be party to various  legal actions
          and  complaints  arising in the  ordinary  course of  business.  As of
          December  31,  2005,  the Company is not aware of any  material  legal
          actions directed against the Company.








                                       33


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 9 - RELATED PARTY NOTES PAYABLE

          Note payable to President of the Company,
          bearing interest at 12% per annum.
          Due December 31, 2005.
          Secured by certain assets of the Company.                 $    50,000

          Note payable to an entity controlled by
          a major shareholder of the Company,
          bearing interest at 9.6% per annum.
          Due February 2, 2005.
          Secured by certain simulators of
          the Company and personal guarantee
          of the President.                                              96,000
                                                                    -----------
          Total Related Parties Notes Payable                       $   146,000
                                                                    ===========


NOTE 10 - INCOME TAXES

          Deferred taxes are provided on a liability method whereby deferred tax
          assets  are  recognized  for  deductible  temporary   differences  and
          operating  loss  and  tax  credit   carryforwards   and  deferred  tax
          liabilities   are  recognized  for  taxable   temporary   differences.
          Temporary differences are the differences between the reported amounts
          of assets and liabilities and their tax bases. Deferred tax assets are
          reduced by a valuation  allowance  when, in the opinion of management,
          it is more  likely that not that some  portion or all of the  deferred
          tax assets will not be realized.  Deferred tax assets and  liabilities
          are  adjusted  for the effects of changes in tax laws and rates on the
          date of enactment.

          Net  deferred tax assets  consist of the  following  components  as of
          December 31, 2005 and 2004:

                                                      2005            2004
                                                 --------------  --------------

          Deferred tax assets:
           NOL Carryover                         $  1,872,382    $    1,715,498
           Depreciation                               146,890            59,434

          Deferred tax liabilities:
          Valuation allowance                      (2,019,272)       (1,774,932)
                                                 --------------  --------------

          Net deferred tax asset                 $          -    $            -
                                                 ==============  ==============

          The  income  tax  provision  differs  from the  amount of  income  tax
          determined  by  applying  the U.S.  federal  income tax rate of 39% to
          pretax income from continuing  operations for the years ended December
          31, 2005 and 2004 due to the following:

          Book loss                              $   (218,618)   $        3,401

          Loss on the Sale of Assets                  (11,572)                -

          Depreciation                                 24,750                 -

          Meals and Entertainment                       1,823             1,628

          Stock for services/options expense           46,733           144,924
          Other                                             -            53,176
          Valuation Allowance                         156,884          (203,129)
                                                 --------------  --------------

          Net income tax provision               $          -    $           -
                                                 =============   ==============






                                       34


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


          At December 31, 2005, the Company had net operating loss carryforwards
          of approximately  $4,082,038 that may be offset against future taxable
          income  from the year  2005  through  2024.  No tax  benefit  has been
          reported in the  December  31,  2005  financial  statements  since the
          potential  tax benefit is offset by a valuation  allowance of the same
          amount.

          Due to the  change in  ownership  provisions  of the Tax Reform Act of
          1986,  net  operating  loss   carryforwards  for  Federal  income  tax
          reporting purposes are subject to annual limitations.  Should a change
          in ownership occur, net operating loss carryforwards may be limited as
          to use in the future years.


NOTE 11 -     RECENT ACCOUNTING PRONOUNCEMENTS

          During the year ended  December  31,  2004,  the  Company  adopted the
          following accounting pronouncements:

          On December  16, 2004 the FASB  issued  SFAS No.  123(R),  Share-Based
          Payment,  which  is an  amendment  to SFAS  No.  123,  Accounting  for
          Stock-Based Compensation.  This new standard eliminates the ability to
          account for share-based  compensation  transactions  using  Accounting
          Principles  Board ("APB") Opinion No. 25,  Accounting for Stock Issued
          to Employees, and generally requires such transactions to be accounted
          for using a fair-value-based  method and the resulting cost recognized
          in our financial statements. This new standard is effective for awards
          that are  granted,  modified  or settled in cash in interim and annual
          periods beginning after June 15, 2005. In addition,  this new standard
          will apply to unvested options granted prior to the effective date. We
          will adopt this new standard  effective for the fourth fiscal  quarter
          of 2005,  and have not yet  determined  what impact this standard will
          have on our financial position or results of operations.

          In November 2004, the FASB issued SFAS No. 151,  Inventory  Costs - an
          amendment of ARB No. 43, Chapter 4. This Statement amends the guidance
          in ARB  No.  43,  Chapter  4,  "Inventory  Pricing,"  to  clarify  the
          accounting  for abnormal  amounts of idle facility  expense,  freight,
          handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
          Chapter 4,  previously  stated  that ". . . under some  circumstances,
          items  such as  idle  facility  expense,  excessive  spoilage,  double
          freight,  and  re-handling  costs  may be so  abnormal  as to  require
          treatment as current period  charges.  . . ." This Statement  requires
          that those items be recognized as current-  period charges  regardless
          of whether they meet the criterion of "so abnormal." In addition, this
          Statement  requires that allocation of fixed  production  overheads to
          the  costs  of  conversion  be  based on the  normal  capacity  of the
          production facilities. This statement is effective for inventory costs
          incurred during fiscal years beginning after June 15, 2005. Management
          does  not  believe  the  adoption  of this  Statement  will  have  any
          immediate material impact on the Company.

          In December  2004,  the FASB issued SFAS No. 152,  Accounting for Real
          Estate Time-sharing Transactions,  which amends FASB statement No. 66,
          Accounting  for  Sales of Real  Estate,  to  reference  the  financial
          accounting  and  reporting  guidance  for  real  estate   time-sharing
          transactions  that is provided in AICPA  Statement  of Position  (SOP)
          04-2,  Accounting  for Real  Estate  Time-Sharing  Transactions.  This
          statement also amends FASB Statement No. 67,  Accounting for Costs and
          Initial Rental  Operations of Real Estate Projects,  to state that the
          guidance for (a) incidental  operations and (b) costs incurred to sell
          real  estate  projects  does  not  apply to real  estate  time-sharing
          transactions. The accounting for those operations and costs is subject
          to the guidance in SOP 04-2. This Statement is effective for financial
          statements for fiscal years beginning after June 15, 2005.  Management
          believes  the  adoption of this  Statement  will have no impact on the
          financial statements of the Company.








                                       35


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


          In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary
          Assets.  This  Statement  addresses  the  measurement  of exchanges of
          nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for
          Nonmonetary Transactions,  is based on the principle that exchanges of
          nonmonetary  assets should be measured  based on the fair value of the
          assets  exchanged.  The guidance in that  Opinion,  however,  included
          certain exceptions to that principle. This Statement amends Opinion 29
          to  eliminate  the  exception  for  nonmonetary  exchanges  of similar
          productive  assets  and  replaces  it  with a  general  exception  for
          exchanges of nonmonetary assets that do not have commercial substance.
          A nonmonetrary  exchange has  commercial  substance if the future cash
          flows of the entity are expected to change  significantly  as a result
          of the exchange.  This Statement is effective for financial statements
          for fiscal years beginning after June 15, 2005. Earlier application is
          permitted for  non-monetary  asset  exchanges  incurred  during fiscal
          years beginning after the date of this statement is issued. Management
          believes  the  adoption of this  Statement  will have no impact on the
          financial statements of the Company.

          The  implementation of the provisions of these  pronouncements are not
          expected to have a significant  effect on the  Company's  consolidated
          financial statement presentation.

NOTE 12 - ACCRUED LIABILITIES

          Accrued Liabilities consisted of the following at December 31, 2005

          Back rent owed to various landlords on
           sites now operated by Checker Flag Lightning,
           Inc.  The Company is in various stages of
           negotiation to resolve this liability                 $      125,834
          Vacation pay accrual                                           60,617
          Accrued warrant expenses on sold simulators                    26,302
          Accrued licensing fees                                        106,401
          Accrued property taxes                                         22,354
          Accrued miscellaneous expenses                                 38,312
                                                                 --------------

          Total Accrued Liabilities                              $      379,820
                                                                 ==============

NOTE 13 - DEPOSITS ON SIMULATOR SALES

          Deposits on simulator  sales  consist of the following on December 31,
          2005


          Company                  Number of Simulators              Amount
          -------                  --------------------              ------

          Roltex Group                    8                      $      552,692
          Kissimmee                       6                             250,000
          Tonne Management                4                             222,000
          Burroughs & Chapin              4                             108,000
          H & H Motorsports, Inc.         4 (1 RME)                      91,020
          All Others                                                     33,389
                                                                 --------------

         Total deposits on simulator sales                       $    1,257,101
                                                                 ==============

          These deposits represent funds received by the Company for the sale of
          simulators.








                                       36


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 14 - RESTATEMENT

          The Company has restated its financial  statements  for the year ended
          December 31, 2004. This restatement  action was taken as the result of
          management's  conclusion  that  there  was an error in the  accounting
          treatment  that had been applied to the  valuation of warrants  issued
          with the sale of  simulators on December 31, 2004.  Specifically,  the
          Company  misinterpreted  a  provision  of EITF  00-21,  an  accounting
          pronouncement  dealing with the accounting for transactions  involving
          multiple  deliverables,  which the Company used to guide its recording
          of the December 31, 2004 transaction.

          As has been disclosed in previous 8-K and 10-KSB filings,  on December
          31, 2004 IMTS closed a transaction  in which it sold 34 simulators and
          also sold warrants for the purchase of 5,161,500 shares of IMTS common
          stock.  Per the  provisions of EITF 00-21,  management  determined the
          fair value of the deliverables (the simulators,  the warrants, and the
          management  agreement) in the transaction,  and allocated the purchase
          price  amongst the  deliverables.  The fair value of the  warrants was
          determined using the Black Scholes valuation model.

          The Company has since  concluded  that the  warrants  should have been
          recorded at their full  value,  and the  purchase  price less the full
          value of the warrants  should have been allocated to the remaining two
          deliverables in the transaction. The discovery has prompted management
          to restate its 2004  financial  statements to recognize a reduction of
          $127,271 in revenue from simulator sales.


<TABLE>


                                                                   December 31, 2004
                                                 As Reported         As Adjusted          Difference
                                                ------------------------------------------------------

<S>                                             <C>                 <C>               <C>
          Revenue from Sim Sales                $  1,597,688        $  1,470,417      $    127,271

          Total Revenue                            7,071,834           6,944,563           127,271

          Net income (loss)                            8,869            (118,402)          127,271

          Additional Paid in Capital               4,675,583           4,810,768           135,185

          Retained Deficit                        (6,425,786)         (6,553,057)          127,271

          Deferred Revenue                            81,742              73,828             7,913

          Net income (loss) per share                   0.00               (0.00)            (0.00)


</TABLE>







                                       37


<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2005 and 2004


NOTE 15 - SUBSEQUENT EVENTS

          The  Company  has  completed  the sale of four SMS  simulators  to the
          operator of the Mentor, OH location, the sale of six SMS simulators to
          an operator in Kissimmee, FL, and the sale of two SMS simulators to be
          used by DaimlerChrysler at various North American automotive shows and
          corporate events.  In addition,  the Company has completed the sale of
          its first Reactor Mobile  Experience to an operator in North Carolina,
          and  has a  purchase  agreement  and  deposit  for  the  sale of 4 SMS
          simulators from Vacationland Family Entertainment in Brainerd, MN.

          While  waiting  for a response to a payment  plan  proposed by Perfect
          Line to the  Mall of  America  landlord  (MOAC  Mall  Holdings,  LLC),
          Perfect  Line  received  an  eviction  summons  from the  landlord  on
          February 16, 2006.  Perfect Line has since  contacted the landlord and
          the parties have agreed to terms for a stipulation  agreement  whereby
          Perfect Line will sign a promissory note totaling  $293,642 payable in
          five (5) quarterly  installments,  the first of which has already been
          paid.  The agreement and note are being drafted and are expected to be
          signed by the end of March.






















..



                                       38


<PAGE>


ITEM 8. Changes In and Disagreements With Accountants on Accounting
        and Financial Disclosure
-------------------------------------------------------------------

By letter  dated March 15,  2004,  Crowe  Chizek and Company LLC (Crowe  Chizek)
informed  the  Company  that  it  was  notifying  the  Securities  and  Exchange
Commission of its earlier termination of the client-auditor relationship between
Crowe Chizek and the Company.  That letter referred to the letter to the Company
dated December 31, 2003 that effective December 31, 2003 Crowe Chizek terminated
the client-auditor relationship with the Company. However, the Company continued
to meet with and  provide  information  to Crowe  Chizek  after  receipt  of the
December 31, 2003 letter.  The Company believed that Crowe Chizek had continuing
interest in an auditor-client relationship with the Company and as late as March
1, 2004 had held discussions  with  representatives  of Crowe Chizek  requesting
continuation of the auditor-client relationship in connection with the audit for
the fiscal year ended  December  31,  2003.  It was not until the March 15, 2004
letter that the Company believed the relationship had ended.

The report of Crowe Chizek for the fiscal year ended December 31, 2002, the only
year for which the  Company  was  subject  to the  reporting  provisions  of the
Securities Exchange Act of 1934 and which Crowe Chizek served as auditors of the
Company,  contained a "going concern" uncertainty explanatory paragraph, but did
not contain an adverse opinion or disclaimer of opinion,  or qualification as to
audit scope or accounting principles.

During  the  fiscal  year  ended  December  31,  2002 and the  periods up to and
including December 31, 2003, there were no disagreements between the Company and
Crowe Chizek on any matter of  accounting  principles  or  practices,  financial
statement  disclosure,  or auditing scope or procedure which, if not resolved to
the satisfaction of Crowe Chizek,  would have caused it to make reference to the
subject  matter  of the  disagreement  in  connection  with  its  report  on the
Company's consolidated statements for such periods; and there were no reportable
events as defined in Item 304(a)(1) of Regulation S-K.

The Company has provided Crowe Chizek with a copy of the  information  disclosed
in the Current  Report on Form 8-K which was filed with the  Commission on March
18, 2004 and is  incorporated  herein by  reference.  Crowe Chizek  provided the
Company a letter dated March 18, 2004,  for filing as an Exhibit to the Form 8-K
which  indicated.  The letter  stated,  in  essence,  that Crowe  Chizek did not
disagree with the above disclosure,  although it expressed no opinion as to what
the Company  believed as stated in the fourth and fifth  sentences  of the first
paragraph of this Item 8.

Effective March 17, 2004, the Company engaged HJ & Associates,  L.L.C. ("HJ") of
Salt Lake City,  Utah, as its new independent  accountant to audit the Company's
financial  statements  for the year ended December 31, 2003. The retention of HJ
was  reported  on a  current  report  on Form 8-K on March  19,  2003,  which is
incorporated herein by reference.

During the years ended  December 31, 2002 and 2003 and the interim  period up to
and  including  March 17,  2004,  neither the  Company nor anyone  acting on the
Company's  behalf  consulted  HJ  regarding  either:   (i)  the  application  of
accounting  principles  to  a  specified  transaction,  either  contemplated  or
proposed;  to the type of audit  opinion that might be rendered on the Company's
financial statements,  and neither a written report nor oral advice was provided
by HJ to the Company that HJ concluded was an important factor considered by the
Company in  reaching a decision  as to any  accounting,  auditing  or  financial
reporting  issues;  or  (ii)  any  matter  that  was  either  the  subject  of a
"disagreement" as that term is describe in Item 304 (a)(1)(iv) of Regulation S-K
promulgated  under the  Securities  Exchange  Act of 1934,  as amended,  and the
related  instruction to Item 304 of Regulation  S-K, or a "reportable  event" as
that term is described in Item 304 (a)(1)(v) of Regulation S-K.

The Company has provided to HJ a copy of the disclosure  regarding its retention
as  auditors  to the  Company,  prior to  filing of the Form 8-K  reporting  the
retention.  HJ informed the Company that it did not disagree with the disclosure
contained in the Form 8-K which is  substantially  duplicated in the immediately
proceeding paragraph of this Item 8.

ITEM 8A. Controls and Procedures
--------------------------------

The Principal  Executive  Officer ("PEO"),  who is also the Principal  Financial
Officer ("PFO") of the Company has evaluated the effectiveness of its disclosure
controls and  procedures  (as defined in Rule 13a-14 of the Exchange Act) within
90 days  prior to the  filing  of this  report.  Based on that  evaluation,  the
PEO/PFO has concluded that the Company's  disclosure controls and procedures are
adequate and effective.  There have been no significant changes in the Company's
internal  controls,  or in factors  that  could  significantly  affect  internal
controls, subsequent to the most recent evaluation of such controls.





                                       39


<PAGE>



                                    PART III

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

The Board of  Directors  and  Executive  Officers of the Company  consist of the
persons  named in the table below.  Vacancies in the Board of Directors may only
be filled by the Board of  Directors by majority  vote at a Board of  Director's
meeting, or at a shareholders  meeting at which stockholders  holding a majority
of the issued and outstanding shares of capital stock are present. The directors
are elected annually by the  stockholders at the annual meetings.  Each director
shall be elected  for the term of one year,  and until his or her  successor  is
elected and qualified,  or until his earlier resignation or removal.  The bylaws
provide that we have at least one director. The directors and executive officers
of the Company are as follows:

Name                            Age     Position
----                            ---     --------

William R. Donaldson             49     Chairman, Chief Executive Officer,
                                        and Secretary
Carl L. Smith, Sr.               63     Director
Cary Agajanian                   64     Director

Mr.  Donaldson has been a major influence in the  international  racing industry
for over 25 years. He served as the Executive Vice President of the Indianapolis
Motor  Speedway  ("IMS"),  the  largest  spectator  stadium  in the  world,  and
concurrently  served as President of IMS  subsidiaries,  IMS  Properties and IMS
Events.  At IMS, he was on the executive  management  team that  initiated  such
events as the NASCAR Brickyard 400, Indy FanFest, the Senior PGA Tournament held
at Brickyard Crossing,  the Indy 200 at Walt Disney World, and the launch of the
Indy Racing  League.  Donaldson  also managed the Inaugural  NASCAR  Winston Cup
event at Las Vegas  Motor  Speedway,  and he managed  the launch of the Petit Le
Mans at Road  Atlanta,  and the American  and  European Le Mans  Series.  He has
extensive experience with domestic and international television broadcasting. He
has a Bachelor of Arts degree from DePauw University in Greencastle, Indiana.

Mr. Smith is a successful entrepreneur,  whose business interests and ownerships
have  over his  professional  life,  spanned  a wide  variety  of  products  and
services.  With over 38 years of experience in business development,  marketing,
sales and finance, he provides a diverse level of knowledge and expertise to the
Company. He was the founder of Catalyst Marketing Corporation,  a public company
that,  under  his  leadership,  grew  to  become  one  of  the  most  successful
telecommunications  marketing  agencies  for  products  and services of industry
giant,  MCI, which was later acquired by WorldCom.  In 1991, he co-founded Tampa
Bay  Financial,  Inc.,  a  former  venture  capital  firm  that  specialized  in
micro-cap,  first stage corporate  investments and, one year later, was selected
as a member of the prestigious "Who's Who of American Business Executives".  Mr.
Smith has successfully  engineered the turn around and revitalization of several
troubled public  companies and has also been involved in capitalizing and taking
many young  private  companies  public  through a reverse  merger  strategy.  He
presently sits on the Board of Directors of NeoGenomics,  Inc. (OTCBB: NOGN) and
several private companies.

Mr.  Agajanian  literally  grew up in the sport of auto racing,  with his family
running  racing  teams  and  racetracks.  He  now  owns  Motorsports  Management
International,  a multi-faceted  company that is an industry leader in the areas
of event representation,  corporate consulting, and sponsorship negotiation. For
the past 10 years,  Mr.  Agajanian has served on Motorsports  boards such as the
Automobile  Competition  Committee of the United  States  (ACCUS),  the American
Motorcyclist Association (AMA, Vice-Chairman) and United States Auto Club (USAC)
Properties.  Mr.  Agajanian's  company has been involved in securing hundreds of
sponsorship  arrangements  and is the only company in the United States to offer
star race  drivers  premium  representation  services in  corporate  structures,
pension benefits, trusts and estates and contract negotiation. NASCAR NEXTEL Cup
star Tony Stewart has been represented by Motorsports Management  International,
and Agajanian also  previously  represented  Jeff Gordon.  Mr.  Agajanian's  car
ownership  division has entered cars in the  Indianapolis 500 for 36 consecutive
years and now owns one of the premier teams in the NASCAR Busch Series.







                                       40


<PAGE>


The Company has no standing or separate audit  committee,  but rather the entire
Board of Directors functions as the audit committee,  The Board of Directors has
determined  that due to the  size of the  board of  directors,  and the  limited
resources  of the  Company,  it is in the  Company's  best  interest to have the
entire board function as the audit committee.

Our Executive  Officers are elected by the Board on an annual basis and serve at
the discretion of the Board.

Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------

Section 16(a) of the Securities Exchange Act of 1934 requires that our executive
officers,  directors  and  persons  who  beneficially  own more  than 10% of the
Company's  Common  Stock to file  initial  reports of  ownership  and reports of
changes in ownership with the SEC. Such persons are required by SEC  regulations
to furnish us with copies of all Section 16(a) forms filed by such persons.

Based  solely on our review of such forms  furnished  to us and  representations
from certain reporting persons,  filing requirements applicable to our executive
officers,  directors  and more than 10%  stockholders  have been  complied  with
during the twelve  months  ending  December 31, 2005 with the exception of James
Matheny,  who has  failed  to file a Form 3,  Initial  Statement  of  Beneficial
Ownership,  reporting  their  ownership  of in excess of 10% of the  issued  and
outstanding voting shares of the Company.

Code of Ethics
--------------

The Company has adopted a Code of Ethics which is  applicable  to all  officers,
directors  and  employees  of the  Company.  A copy  of the  Code of  Ethics  is
available on the Company's website which is www.smsonline.com under the investor
relations button.  The Company will forward,  without charge, a copy of the Code
of Ethics to any  person  requesting  a copy.  Requests  should be  directed  to
Interactive  Motorsports and Entertainment Corp. Attn: Code of Ethics at 5624 W.
73rd Street, Indianapolis, Indiana, 46278.

ITEM 10. Executive Compensation
-------------------------------

The following table sets forth  information  concerning the compensation paid to
all persons serving as the Company's  chief executive  officer and the Company's
most  highly  compensated  executive  officers  other  than its chief  executive
officer who were  serving as  executive  officers at December 31, 2005 and whose
annual compensation exceeded $100,000 during such year (collectively, the "Named
Executive Officers").


<TABLE>

                                               Annual Compensation                    Long-Term Compensation Awards
                                               -------------------                    -----------------------------

                                                                                                  Securities
                                                              Other Annual      Restricted        Underlying
   Name and Principal      Year/                              Compensation        Stock          Options/SARs     LTIP
       Position            Period     Salary       Bonus          (2)             Awards              (#)        Payouts
       --------            ------     ------       -----          ---             ------              ---        -------
<S>                         <C>       <C>                        <C>
William R. Donaldson        2005      $150,000       -           $7,055             -                  -             -
Chairman and CEO

                            2004      $150,000       -           $6,659             -                  -             -

(2) Includes cost of medical and life insurance.


</TABLE>


Director Compensation
---------------------

Directors of the Company are currently not paid for their services; however, the
Company  intends to establish a compensation  plan utilizing stock awards versus
cash payments in 2006.







                                       41


<PAGE>


Indemnification for Securities Act Liabilities
----------------------------------------------

Indiana  law  authorizes,  and the  Company's  Bylaws and  Indemnity  Agreements
provide for,  indemnification  of the Company's  directors and officers  against
claims,  liabilities,  amounts paid in  settlement  and expenses in a variety of
circumstances.  Indemnification  for  liabilities  arising  under the Act may be
permitted  for  directors,  officers  and  controlling  persons  of the  Company
pursuant to the  foregoing or otherwise.  However,  the Company has been advised
that,  in  the  opinion  of  the  Securities  and  Exchange   Commission,   such
indemnification  is  against  public  policy  as  expressed  in the  Act and is,
therefore, unenforceable.


Stock Options and Warrants
--------------------------

The Company does not currently have a stock option plan.


Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------

No executive officers of the Company serve on the Compensation  Committee (or in
a like capacity) for the Company or any other entity.

ITEM 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

Security Ownership of Certain Beneficial Owners
-----------------------------------------------

The  following  table  sets  forth  certain  information  with  respect  to  the
beneficial ownership of our Common Stock as of March 22, 2006 for each person or
entity that is known by us to beneficially own more than 5 percent of our Common
Stock.  As of March 22, 2006, the Company had 93,769,177  shares of Common Stock
outstanding.


<TABLE>


                                                                    Amount of
                                                                    Beneficial          Nature of        Percent of
       Name and Address of Beneficial Owner                         Ownership           Ownership           Class
       ------------------------------------                         ---------           ---------           -----

<S>                                                                  <C>                                   <C>
    William R. Donaldson, Carmel, IN                                 17,736,450          Direct            18.92%
    Vikki Cook, Sarasota, FL                                         10,833,324          Direct            11.44%
    James Matheny, Cary, NC                                           8,691,151          Direct             9.27%
    Alliance Investment Management, LTD, Nassau, Bahamas              7,287,846          Direct             7.77%
    Norman Pessin, New York, NY                                       5,000,000          Direct             5.33%

    Dolphin Direct Equity Partners, LP (a)                            7,141,500          Direct             7.62%
                                                                      =========                             =====

    Total                                                            49,548,771                            52.73%
                                                                     ==========                            ======
</TABLE>

     (a)  Dolphin Direct Equity  Partners,  LP (Dolphin) is the beneficial owner
          of 5,161,500 and $1,980,000 warrants that expire December 31, 2009 and
          March 31, 2010, respectively, and are exercisable at any time prior to
          expiration.  The  calculation  used to determine  The Percent of Class
          attributable  to Dolphin  assumes all the warrants held by Dolphin are
          exercised. The Totals do not include Dolphin's beneficial ownership.








                                       42


<PAGE>


Security Ownership of Management
--------------------------------

The  following  table  sets  forth  certain  information  with  respect  to  the
beneficial  ownership  of our Common  Stock as of March 22, 2006 for each of our
directors  and each of our  Named  Executive  Officers,  and all  directors  and
executive  officers as a group.  As of March 22, 2006 the Company had 93,769,177
shares of Common Stock outstanding.

<TABLE>


                                                                    Amount of
                                                                    Beneficial          Nature of        Percent of
       Name, Position and Address of Beneficial Owner               Ownership (1)       Ownership           Class
       ----------------------------------------------               -------------       ---------           -----

<S>                                                                  <C>                               <C>
    William R. Donaldson, Chairman, Chief Executive Officer,         17,736,450          Direct            18.92%
    and Secretary; Carmel, Indiana
    Carl L. Smith, Director; Sarasota, Florida                                -           n/a                  -
    Cary Agajanian, Director; Los Angeles, California                         -           n/a                  -
                                                                     ----------                            ------
        Total                                                        17,736,450                            18.92%

    All Executive Officers & Directors as a Group
    (3 persons)                                                      17,736,450                            18.92%
                                                                     ==========                            ======

</TABLE>


(1)  Beneficial  ownership  is  determined  in  accordance  with SEC  rules  and
generally  includes  holding  voting and  investment  power with  respect to the
securities.  Shares of Common  Stock  subject to options or  warrants  currently
exercisable, or exercisable within 60 days, are deemed outstanding for computing
the  percentage  of  the  total  number  of  shares  beneficially  owned  by the
designated  person,  but are not deemed outstanding for computing the percentage
for any other person.



Change in Control
-----------------

We are  not  currently  engaged  in  any  activities  or  arrangements  that  we
anticipate will result in a change in control of the Company.


ITEM 12. Certain Relationships and Related Transactions
-------------------------------------------------------

On March  10,  2003,  the  Company  issued to three  related  parties a total of
$200,000 of Secured Bridge Notes as previously  disclosed in that Form 8-K filed
on March 13,  2003.  These  notes  were  issued to Tampa Bay  Financial  and Mr.
William R. Donaldson in the amounts of $100,000 and $50,000,  respectively.  The
Chairman and Chief Executive Officer of Tampa Bay Financial,  Mr. Carl L. Smith,
is also a director of the  Company.  Mr.  Donaldson  is the  Chairman  and Chief
Executive Officer of the Company.  On February 17, 2004, at the direction of Mr.
Smith,  the note was transferred to a third party  controlled by a major Company
shareholder.




                                       43


<PAGE>


ITEM 13. Exhibits and Reports on Form 8-K
-----------------------------------------

A. Exhibits.

         3(i)     Articles of Incorporation (1)
         3(ii)    By-Laws (1)
        10.1      Form of Secured Bridge Notes (2)
        10.2      Form of Procurement Contract (3)
        10.3      Form of Master Revenue Sharing Agreement (3)
        10.4      Asset Purchase Agreement with Race Car Simulation Corporation,
                  a portfolio company of Dolphin Direct Equity Partners, LP (4)
        10.5      Asset Purchase Agreement with Checker Flag Lightning, LLC
                  ("CFL"), a Michigan limited liability corporation (5)
        11.1      Computation of Earnings (Loss) Per Share
        14.1      Code of Ethics
        21.1      Subsidiaries
        31.1      Certification of William R. Donaldson as Chief Executive
                  Officer and Chief Financial Officer pursuant to
                  Rule 13a-14 of the Security Exchange Act of 1934
        32.1      Certification of William R. Donaldson as Chief Executive
                  Officer pursuant to 18 U.S.C. Section 1350
        32.2      Certification of William R. Donaldson as Chief Financial
                  Officer and Treasurer pursuant to 18 U.S.C. Section 1350

          (1) Incorporated by reference from Form 10-QSB filed on November 14,
              2002.
          (2) Incorpdrated by reference from Form 8-K filed on March 13, 2003.
          (3) Incorporated by reference from Form 10-QSB filed on May 17, 2004.
          (4) Incorporated by reference from Form 8-K filed on January 6, 2005.
          (5) Incorporated by reference from From 8-K filed on January 6, 2006.

B. Reports on Form 8-K.

         1.   Form 8-K    Filed March 14, 2005         Announcement of the
                                                       financial results for
                                                       the Fourth Quarter, 2004




ITEM 14.  Principal Accountant Fees and Services
------------------------------------------------

AUDIT FEES
----------

Fees for audit  services  from HJ and  Associates  totaled  $50,152 for the year
ended December 31, 2004. Fees for audit services from HJ and Associates  totaled
$43,491 for the year ended December 31, 2005.  Those auditing fees included fees
associated with the annual audit,  reviews of quarterly reports on Form 10-Q and
procedures required by GAAP and GAAS.

AUDIT-RELATED FEES
------------------

Fees for audit-related  services from HJ and Associates  totaled $0 for the year
ended December 31, 2004. Fees for audit-related  services from HJ and Associates
totaled  $6,320 for the year ended December 31, 2005.  These  auditing  services
consisted of assistance related to comment letter responses.

TAX FEES
--------

Fees from HJ and Associates  for tax services,  including fees for review of the
consolidated  federal income tax return,  totaled $0 for the year ended December
31, 2004.  Fees from HJ and  Associates  for tax  services,  including  fees for
review of the consolidated federal income tax return, totaled $62 the year ended
December 31, 2005.




                                       44


<PAGE>


ALL OTHER FEES
--------------

No fees were billed by HJ and Associates for the fiscal year ending December 31,
2004 and for the fiscal year ending December 31, 2005 other than those specified
above.

PRE-APPROVAL POLICY FOR AUDIT AND NON-AUDIT SERVICES

The  Company  does not  have a  standing  audit  committee,  and the full  Board
performs all functions of an audit committee,  including the pre-approval of all
audit and non-audit  services before the Company  engages an accountant.  All of
the  services  rendered to the Company by HJ &  Associates,  LLC after March 18,
2004 were pre-approved by the Board of Directors of the Company.

The Company  contemplates  working with its legal  counsel to  establish  formal
pre-approval  policies and  procedures  for future  engagements of the Company's
accountants.  The  new  policies  and  procedures  will  be  detailed  as to the
particular service, will require that the Board or an audit committee thereof be
informed of each  service,  and will  prohibit the  delegation  of  pre-approval
responsibilities to management.  It is currently  anticipated that the Company's
new policy will  provide (i) for an annual  pre-approval,  by the Board or audit
committee,  of all audit,  audit-related  and non-audit  services proposed to be
rendered  by the  independent  auditor  for the  fiscal  year,  as  specifically
described  in  the  auditor's   engagement  letter,  and  (ii)  that  additional
engagements of the auditor,  which were not approved in the annual  pre-approval
process,  and  engagements  that are anticipated to exceed  previously  approved
thresholds,  will be presented on a case-by-case  basis,  by the Chairman of the
Board of Directors,  for  pre-approval by the Board or audit  committee,  before
management  engages  the  auditors  for any such  purposes.  The new  policy and
procedures  may  authorize the Board or audit  committee to delegate,  to one or
more of its members,  the authority to pre-approve  certain permitted  services,
provided that the estimated fee for any such service does not exceed a specified
dollar amount (to be  determined).  All  pre-approvals  shall be contingent on a
finding,  by the Board, audit committee,  or delegate,  as the case may be, that
the provision of the proposed services is compatible with the maintenance of the
auditor's  independence  in the conduct of its auditing  functions.  In no event
shall any  non-audit  related  service  be  approved  that  would  result in the
independent auditor no longer being considered  independent under the applicable
rules and regulations of the Securities and Exchange Commission.

There  were  no fees in  2005  which  were  not  pre-approved  by the  Board  of
Directors.  All services described above under the captions "Audit Fees", "Audit
Related Fees" and "Tax Fees" were approved by the Board of Directors pursuant to
SEC Regulation S-X, Rule 2-01(c)(7)(i).





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<PAGE>



                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                 INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP.

     Date: March 30, 2006               By:  /s/ William R. Donaldson
                                             ------------------------------
                                             William R. Donaldson
                                             Chairman of the Board and
                                             Chief Executive Officer


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


     Date: March 30, 2006               By:  /s/ William R. Donaldson
                                             ------------------------------
                                             William R. Donaldson
                                             Chairman of the Board and
                                             Chief Executive Officer
                                             (Principal Executive Officer)


     Date: March 30, 2006               By:  /s/ William R. Donaldson
                                             -------------------------------
                                             William R. Donaldson
                                             Chief Financial Officer and
                                             Treasurer
                                             (Principal Financial Officer)

     Date: March 30, 2006               By:  /s/ Carl L. Smith
                                             -------------------------------
                                             Carl L. Smith
                                             Director

     Date: March 30, 2006               By:  /s/ Cary Agajanian
                                             -------------------------------
                                             Cary Agajanian
                                             Director




















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<PAGE>


                                  EXHIBIT INDEX


Exhibits:

         3(i)     Articles of Incorporation (1)
         3(ii)    By-Laws (1)
        10.1      Form of Secured Bridge Notes (2)
        10.2      Form of Procurement Contract (3)
        10.3      Form of Master Revenue Sharing Agreement (3)
        10.4      Asset Purchase Agreement with Race Car Simulation Corporation,
                  a portfolio company of Dolphin Direct Equity Partners, LP (4)
        10.5      Asset Purchase Agreement with Checker Flag Lightning, LLC
                  ("CFL"), a Michigan limited liability corporation (5)
        11.1      Computation of Earnings (Loss) Per Share
        14.1      Code of Ethics
        21.1      Subsidiaries
        31.1      Certification of William R. Donaldson as Chief Executive
                  Officer and Chief Financial Officer pursuant to
                  Rule 13a-14 of the Security Exchange Act of 1934
        32.1      Certification of William R. Donaldson as Chief Executive
                  Officer pursuant to 18 U.S.C. Section 1350
        32.2      Certification of William R. Donaldson as Chief Financial
                  Officer and Treasurer pursuant to 18 U.S.C. Section 1350

          (1) Incorporated by reference from Form 10-QSB filed on November 14,
              2002.
          (2) Incorpdrated by reference from Form 8-K filed on March 13, 2003.
          (3) Incorporated by reference from Form 10-QSB filed on May 17, 2004.
          (4) Incorporated by reference from Form 8-K filed on January 6, 2005.
          (5) Incorporated by reference from From 8-K filed on January 6, 2006.













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