**U.S. Securities and Exchange Commission**


**Washington,
D.C. 20549**







**FORM
10-KSB**


**(Mark
One)**


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





**For
the fiscal year ended December 31, 2004**


**OR**


**[  
      ]**
    **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**





**For
the transition period from to**





**Commission
file number 0-24269**









**INFINIUM
LABS, INC.**


(Name of
small business issuer in its charter)


****





**Delaware**
      (State
      or other jurisdiction of
      incorporation
      or organization)
    
    **65-1048794**
      (I.R.S.
      Employer
      Identification
      No.)**2033
      Main Street, Suite 309,**
      **Sarasota,
      FL 34237**
      
      (Address
      of principal executive offices) (Zip Code)**941-556-8004**
      
      (Issuer’s
      telephone number)


****


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





**Securities
registered under Section 12(g) of the Exchange Act:**





**Common
      Stock****(Title
      of each class)**





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





Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [  ]





State
issuer’s revenues for its most recent fiscal year: $0





At April
12, 2005, the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the average bid and asked price
of such common equity, was $30,108,984.67.





The
number of shares outstanding of our Company’s common stock at April 12, 2005 was
151,829,349.





Transitional
Small Business Disclosure Format (check one): [   ] Yes [ X ]
No














**INDEX**







Page
      NumberPART
      IItem
      1.
    Description
      of Business
    3Item
      2.
    Description
      of Property
    20Item
      3.
    Legal
      Proceedings
    20Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    21PART
      IIItem
      5.
    Market
      for Common Equity and Related Stockholder Matters
    21Item
      6.
    Management’s
      Discussion and Analysis or Plan of Operation
    22Item
      7.
    Financial
      Statements
    34Item
      8.
    Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
    34Item
      8A.
    Controls
      and Procedures
    34PART
      IIIItem
      9.
    Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
    35Item
      10.
    Executive
      Compensation
    38Item
      11.
    Security
      Ownership of Certain Beneficial Owners and Management
    41Item
      12.
    Certain
      Relationships and Related Transactions
    42Item
      13.
    Exhibits
      and Reports on Form 8-K
    42











-2-





**CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION**





THIS
ANNUAL REPORT ON FORM 10-KSB, INCLUDING EXHIBITS THERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE
WORDS "ANTICIPATES”, "BELIEVES”, "EXPECTS”, "INTENDS”, "FORECASTS”, "PLANS”,
"FUTURE”, "STRATEGY”, OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
STATEMENTS, INCLUDING THOSE DESCRIBED IN "RISK FACTORS" IN THIS FORM 10-KSB. THE
COMPANY ASSUMES NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN OTHER FACTORS,
EXCEPT AS REQUIRED BY LAW.





**PART
I**





As used
in this annual report on Form 10-KSB, "we," "us," "our," "Infinium " and "our
Company" refer to Infinium Labs, Inc. and our subsidiaries, unless the context
otherwise requires.





**ITEM
1.**  **DESCRIPTION
OF BUSINESS**




**BUSINESS
OF OUR COMPANY**





*General
Overview*





We are
launching the Phantom Game Service, a broadband game delivery system designed
for consumers to purchase and play games. The Phantom Game Service is a platform
to deliver on-demand games, allowing consumers to search, preview and play a
large selection of games online via a broadband Internet connection.





Since
inception through December 31, 2004, we have incurred aggregate losses of
$36,000,363. Our loss from operations for year ended December 31, 2004 was
$33,131,286; our loss from operations for the two months ended December 31, 2003
was $598,948. In addition, we have an accumulated deficit as of $36,000,363 and
we need approximately $22,000,000 to continue operations. Also, we do not have a
firm launch date for our product.





In their
report dated April 14, 2005, our independent auditors have expressed substantial
doubt about our ability to continue as a going concern in our financial
statements for the year ended December 31, 2004. Our ability to continue as a
going concern is an issue raised as a result of recurring losses from
operations, a stockholders' deficit, and requirement for a significant amount of
capital financing to proceed with our business plan.





*Corporate
History*





Currently
the Company's business activities are solely dedicated to the development of the
Phantom Game Receiver and the Phantom Game Service. Infinium's Product
Development engineering team has successfully completed and tested the advanced
beta version of the Phantom Game Receiver and Phantom Game Service as
demonstrated at the 2005 Consumer Electronics Show (CES). The Company has
entered into content distribution agreements that include 4 of the top ten; game
companies that represent collectively 1/3 of the PC games sales market according
to PC Data's July report.  (see http://www.npd.com/ ). While
we continue to define our retail distribution partners, the Company does not
believe that securing proper retail distribution partners will be an issue.





The
Company is currently seeking funding for the launch of the Phantom Game Service
and manufacture of the Phantom Game Receiver. Management estimates that the
Phantom Game Receiver and Phantom Game Service will be available for launch
120-150 after it has secured funding of the first $11.5 million.





The
Phantom Game Receiver is a "family room" unit derived from existing PC (Personal
Computer) technologies and designed to work seamlessly with the Phantom Game
Service. The Phantom Game Receiver and Service provide integration of broadband
receiver hardware, subscription-based service and streaming game delivery
network, allowing consumers to try, purchase and play PC-based games from a
catalog of new and classic titles from the comfort of their living room.





To access
the Phantom Game Service, our customers will pay a monthly subscription fee.
Subscribers will have access to a number of free games and will be able to
purchase or demo games from a library of titles. Subscribers will have access to
community features and will be able to learn about the latest games and to try
new release titles. If subscribers purchase a game, they will have full access
to the title for the life of their subscription, as well as access to any
modifications, updates or additional content made available for the game.





-3-


The
Phantom Game Receiver is a "family room" unit that is designed to fit in an
entertainment center and be integrated into a family's home entertainment
system. The Phantom Game Receiver connects to any standard television, as well
as A/V receivers. The Phantom Game Receiver accesses the Phantom Game Service by
connecting to a broadband Internet connection, such as a cable or DSL line or
through existing home networks, including wireless home networks. The Phantom
Game Receiver is equipped with a "lapboard," which consists of a keyboard and
mouse, and can also be used with a console-style game controller. The Phantom
Game Receiver features multiple controller ports to enable multi-player gaming
and additional ports to provide flexibility for specialized peripherals.





The
Phantom Game Receiver differs from current game consoles in a number of
significant respects. First, it is built from components that are not
proprietary and which are readily available. Its primary components consist of a
central processing unit, high-end video processor, high-speed memory, computer
motherboard and large hard disk drive. The Phantom Game Receiver also differs
from PCs in that it is designed for game play, not to perform other functions
such as data processing. This dedicated functionality enables the Phantom Game
Receiver to preserve operating resources in order to provide game-play
performance.





Additionally,
the Phantom Game Receiver does not use external media to play games. The Phantom
Game Receiver only plays content downloaded through the Phantom Game Service,
The Phantom Game Receiver does not use disks, cartridges or other media that can
be easily lost, damaged or copied. Instead, content is downloaded in real time
to the internal hard drive of the Phantom Game Receiver to enable game play.





The
primary technical characteristics of the receiver are expected to include:





*
Display: Any TV


* HDTV
Compatible


*
Connectivity: Any broadband connection


*
Processor: Advanced Micro Devices (AMD) Sempron family


*
Graphics Processor: NVIDIA 3D graphics accelerator


* System
Memory: 256 Megabyte


* Dolby
digital 5.1 Channel Audio


*
Operating System: Microsoft Windows XP Embedded


* Hard
Disk Drive: 80GigaByte hard drive w/ intelligent cache management


*
Accessories: Wireless Lapboard and game pad controllers to be sold separately


* Wide
variety of input and output connectors


*
Sophisticated security, digital rights management (DRM) and content encryption


*
Transparent patches and upgrades


* Client
updates add new features to the service


* Content
management keeps games fresh and reliable





The
Phantom Game Service will be delivered on a hardware and backend platform that
makes it possible to securely deliver games directly to consumers over broadband
Internet access networks. The Phantom Game Service will use hosted
infrastructure for content servers, which will store games and other content and
provide for e-commerce transactions. Games will be stored in a proprietary,
compressed, encrypted store and distributed over a secure, encrypted connection
from our servers.





**INFINIUM
OPPORTUNITIES**





**OVERVIEW**





Our
Phantom Game Service is designed to address the four principal deficiencies
identified in the current video game distribution model in order to provide the
following significant benefits to publishers, retailers and consumers:





**WINDOWS-BASED
PLATFORM**





The
Phantom Game Receiver enables consumers to receive games via the Phantom Game
Service. The Phantom Game Receiver and Phantom Game Service are compatible with
all PC games developed for the Windows operating system - literally thousands of
PC games that have been developed over the years.





-4-





**UNLIMITED
SPACE FOR GAME SOFTWARE**





The
Phantom Game Service will be deliver games into customers' living rooms securely
over broadband Internet access networks. Our content servers will store all of
the games and provide for all e-commerce transactions. There is essentially no
limit to the number of games that can be stored and made available to our
customers, and as a result, we intend to offer a robust catalog of both new
releases and previously released games.





**INCREASED
PROFITABILITY**





The
Phantom Game Service offers both publishers and developers a content
distribution platform that eliminates production, packaging, and retail
merchandising costs (including open box returns) from their gross revenues. In
addition, both publishers and developers can continue to earn revenues on games
that are no longer on retail shelves. The Phantom Game Service can offer
publishers and developers a virtually unlimited lifespan of revenue earning for
each of their PC games.





**CLOSED
SYSTEM PREVENTS PIRACY**





The
Phantom Game Service is a "private" network that runs over any broadband
Internet connection. The Phantom Game Service can be accessed only by
subscribers though the Phantom Game Receiver. The Phantom Game Receiver is
designed as a "closed box" with no removable media and employs a series of
authentication protocols. The Phantom Game Service and the Phantom Game Receiver
have been designed to ensure security in order to protect game content from
piracy.





**CONTENT
STRATEGY**





The
Company has entered into content agreements with 11 PC game publishers and
developers, representing over 500 titles for launch. The content distribution
agreements include four of the top ten game companies that represent
collectively 1/3 of the PC games market according to PC Data's July
report.  (see http://www.npd.com/ ). The
Company has not yet made payments to some of these publishers, and our failure
to make payments could result in cancellation of these agreements. The Company
currently owes these entities an aggregate of $885,000 and intends to pay the
developers and publishers with the proceeds derived from additional bridge
financing transaction and by issuing additional shares of equity. The Company
communicates frequently with our content partners about our financing status.





We have
signed agreements with the following content providers:





Atari


Chronic
Logic


Codemasters


Eidos


Enlight
Interactive


Framework
Studios


Gamerblitz


Gameware


GarageGames.com


O-3
Entertainment


Riverdeep





These
games will be available for purchase through the Phantom Game Service and
publishers will receive a percentage of the revenue generated by the sales of
these games. We believe that this arrangement represents an extremely attractive
proposition for game publishers because no additional work is required of the
Publishers to distribute a game developed for PCs to our subscriber base via the
Phantom Game Service. With no extra engineering effort or assumed costs,
publishers can access a new distribution channel for past, current and future PC
games and receive incremental revenues from existing investments.





Because
the Phantom Game Service does not have the shelf space restrictions faced by
traditional software retailers, we expect to offer a much broader range of games
than that offered in a traditional retail environment, including a large
cross-section of games for families and games for children. Unlike traditional
video game consoles, the Phantom Game Receiver does not require "exclusive" or
platform-specific content in order to operate.





To date,
we have been successful in securing front-line, high-profile game release in our
content agreements with game publishers.





-5-


The
company has negotiated terms with over 20 publishers or developers of video game
content. These publishers and developers are listed below with the status and
salient terms of the agreements. Many of the publishers and developers have
given consent to be included in the Company’s content announcement even though
final agreements were not signed.





Our
standard program includes a definition of Net which is the actuals of credit
card processing fees, refunds, rebates, returns, allowances and adjustments,
taxes, duties or other governmental charges on production, sales,
transportation, delivery, importation or use and bad debit.





1) Garage
Games - includes





2) 21-6
Productions





3) Brave
Tree





4) Max
Gaming Technologies.


Status:
Signed Contract


Term:
Multi-Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: N/A


Advance:
None


Definition
of Net: Standard Program





5) Atari


Status:
Signed Contract


Term:
Multi Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: Yes - Varies by Game


Advance:
Yes


Definition
of Net: Royalty on Gross Billing





6) Chronic
Logic


Status:
Signed Contract


Term:
Multi Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance:
No


Definition
of Net: Standard Program





7) Codemasters


Status:
Signed Contract


Term: 1
Year w/ Auto Renewal


Revenue
Share on Game Titles Purchased


Minimum
Royalty: Yes- varies by game


Advance:
Yes


Definition
of Net: Standard Program + withholding taxes





8) Dreamcatcher
Interactive


Status:
Terms finalized but agreement is not signed; approval to list in press
release


Term: 1 Year
w/1 year auto renewal


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance: Yes


Definition
of Net: Standard
Program





9) eGames.com


Status:
In Negotiations; approval to list in Press Release


Term:


Revenue
Share:


Minimum
Royalty:


Advance:


Definition
of Net:





-6-


10) Eidos


Status:
Signed Contract


Term: 1
year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance:
Yes


Definition
of Net: Standard Program





11) Enlight
Interactive


Status:
Signed Contract


Term:
Multi Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance:
Yes


Definition
of Net: Standard Program





12) Framework
Studios


Status:
Signed Contract


Term:
Multi Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance:
No


Definition
of Net: Standard Program





13) GamerBlitz


Status:
Signed Contract


Term: 1
Year w/ Auto Renewal


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance:
No


Definition
of Net: Standard Program





14) Gameware
Development


Status:
Signed Contract


Term:
Multi Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance:
No


Definition
of Net: Standard Program





15) Global
Software Publishing


Status:
Terms finalized but not Signed; approval to include in press
release


Term: Multi
Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance: No


Definition
of Net: Standard
Program





16) Interplay


Status:
In Final Negotiations; approval to include in press release


Term:


Revenue
Share:


Minimum
Royalty:


Advance:


Definition
of Net:





-7-


17) Kuju
Interactive


Status:
Final but not signed


Term: Multi
Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance: No


Definition
of Net: Standard Program





18) Kuma
Reality Games


Status:
Negotiating; approval to include in press release


Term:


Revenue
Share


Front Line Titles:


Catalog Titles:


Digital Distribution Only Titles:


Minimum
Royalty:


Advance:


Definition
of Net:





19) Legacy
Interactive


Status:
Negotiating; approval to include in press release


Term:


Minimum
Royalty:


Advance:


Definition
of Net:





20) O-3
Entertainment


Status:
Signed


Term:
Multi Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance:
No


Definition
of Net: Standard Program





21) Riverdeep


Status:
Signed


Term: 18
Months


Revenue
Share on Game Titles Purchased


Minimum
Royalty: Yes- varies by game


Advance:
Yes


Definition
of Net: Standard Program





22) Skunk
Studios


Status:
Negotiating; approval to include in press release


Term:


Revenue
Share


Minimum
Royalty:


Advance:





23) Vivendi
Universal Games


Status:
Signed Contract


Term: Multi
Year


Revenue
Share on Game Titles Purchased


Minimum
Royalty: No


Advance: Yes





-8-


The
Company currently has outstanding balances in the sum of $885,000 owed to
publishers and developers. These content providers include Riverdeep,
Codemasters, Atari, Inc., Enlight Interactive, Vivendi Universal and Eidos. Due
to the outstanding balances, these content providers may elect to terminate
their agreements with the Company and not provide content now or in the future.
This would add risk to the success of the Phantom Game Service and to viability
of the Company.





The
Company believes that based on Ms. Schoback’s resignation and the outstanding
balances due to the above noted content suppliers, there is additional risk in
securing the content needed to fully populate the service. However it should be
noted that due to the fact that the Company only requires the Gold Master
version of each PC-based game, there is no new production on the part of
publishers and developers of game content and any revenues are purely
incremental. This is to say that no content provider has expended significant
financial resources against producing product for the Phantom Game Service and
while the Company may have less than ideal relations with the content community
at this time, the viability of repairing any damaged relationship is feasible
and no out of pocket financial risk on the part of publishers or developers is
at stake.





**DISTRIBUTION
STRATEGY**





We intend
to market and sell the Phantom Game Service, the Phantom Game Receiver and
related accessories primarily through retail channels.





Our
retail partner program is designed to generate new recurring revenue streams for
retailers from the sale of the Phantom Game Service. Retailers will receive a
percentage of the subscription revenue and games purchased over the life of the
subscription in addition to their profit margin from sales of the Phantom Game
Receiver. In today’s model there is no commitment from the consumer to return to
the same retailer for additional purchases nor is there a monthly service fee
for the retailer to share revenue from. Under our model the original selling
retailer will receive a recurring revenue stream in two forms from each consumer
they sell to 1) they will receive a percentage of the monthly service fee and 2)
they will receive a percentage of each additional titles purchased through the
receiver. We are in the process of entering into distribution agreements with
prominent retail partners in order to provide the Phantom Game Service with
nationwide retail coverage.





We have
contracted with Pinnacle Marketing Group and Summit Sales to assist Infinium
Labs with securing retail channel distribution for the Phantom Game Service.
Pinnacle Marketing Group is based in Minneapolis where Target and Best Buy
corporate reside. Summit Sales is based in Richmond Virginia were Circuit City
corporate is located. By working with these two firms we are able to provide
local support to our potential retail partners. The fees associated with this
agreement are 3% retail price of the Phantom Receiver





We are
negotiating terms with retail partners. We have presented term sheets to
Electronic Boutique and expect to finalize the contract within the next 90 days.
We have presented terms to Best Buy, Circuit City and Target. We expect to
contract one of the three within 120 days. All contracts include 10% - 20% gross
margin on the Phantom Receiver, 10% - 40% on Phantom accessories, 10% revenue
share on the monthly subscription and approximately 10% on Phantom game
purchases.





**COMPETITION**





**OVERVIEW**





While we
are not aware of any direct competitors to our Phantom Game Service, we still
face indirect competition from other gaming platforms, game developers and
distributors and PC gaming services.





**GAMING
PLATFORMS**





The
gaming platforms that are most dominant in the market today are Sony
PlayStation2, Microsoft Xbox, Nintendo GameCube and PCs. The following is a
summary comparison of the strengths and weaknesses we see in each of these
systems:





The
Phantom Game Service and Phantom Game Receiver are designed to take advantage of
the strengths of the PC platform without being subject to the weaknesses
inherent in the platform. We believe that the Phantom Game Service and Phantom
Game Receiver will compete with other systems based on the games available for
each system, price of the system and games, reputation and convenience. Our
ability to compete effectively with these existing platforms will depend heavily
on our ability to acquire desirable game content for the Phantom Game Service
and Phantom Game Receiver and to achieve attractive price points.





-9-


**GAME
DEVELOPERS AND DISTRIBUTORS**





While the
Phantom Game Receiver competes with other video game consoles, the Phantom Game
Service also competes with other game developers and distributors. While the
Phantom Game Service presents an opportunity for distributors of PC games to
sell their games through a new channel, we will compete with game developers and
distributors whose games are designed for the proprietary platforms of the video
game console manufacturers. Because we will initially have a small installed
base, developers and distributors of games for the dominant video game consoles
may be reluctant to alienate the video game console manufacturers by providing
content for the Phantom Game Service. Furthermore, although we look at retailers
as partners and customers and believe the Phantom Game Service offers them a
compelling opportunity, some retailers may view us as a competitor because the
Phantom Game Service will sell games directly to subscribers, where otherwise
the retailers might enjoy a direct sales relationship with those customers. Once
customers have purchased the Phantom Game Receiver and become subscribers to the
Phantom Game Service, we believe that to remain competitive, we must maintain a
software portfolio that is attractive enough to cause subscribers to continue
using the Phantom Game Service rather than switching to another platform.





**PC
GAME SERVICES**





The past
several years have seen the introduction of on-demand gaming services on the PC.
These services include Yahoo! Games, Comcast Games on Demand and RealNetworks'
RealArcade, as well as other services from or enabled by such companies as Exent
Technologies, Trymedia Systems and Stream Theory. We believe that these services
complement our offering and legitimize the category of games-on-demand, but are
restricted by the limitations of the PC as an entertainment platform, by
concerns over PC-based piracy and by reluctance on the part of game publisher to
distribute their newest games online due to perceived channel conflicts with
traditional retail.





**INTELLECTUAL
PROPERTY STRATEGY**





We will
rely on a combination of patent, copyright, trademark and trade secret laws, as
well as confidentiality procedures and contractual restrictions, to establish
and protect our intellectual property rights.





With
respect to patents, we intend to protect all aspects of technologies associated
with the make and use of the Phantom Game Service and Phantom Game Receiver
through both design and utility patent applications in the United States and
potentially in other countries in which we intend to market our products and
services. The Phantom Game Service and Phantom Game Receiver will also utilize
proprietary software that we develop.





We are
pursuing federal registration of our trademarks and service marks in the United
States with the U.S. Patent and Trademark Office. We have applied for
registration of the marks INFINIUM LABS, INFINIUM LABS (with Infinity Design),
PHANTOM, PHANTOM (with Helmet Design), the Phantom Helmet Design No. 1, the


Phantom
Helmet Design No. 2, BLACK KNIGHT, BLACKNIGHT, VIRTUAL PRIVATE GAME NETWORK,
VPGN, PAY PER PLAY, BUILT BY GAMERS FOR GAMERS and ANY GAME, ANY TIME. The
trademark and service mark applications were filed for use in connection with
either or both "interactive computer game consoles" in International Class 9,
and/or "entertainment services, namely, providing interactive computer gaming
network that allows end-users to demo, rent, purchase and play computer games"
in International Class 41.





Infinium
Labs has filed the following patents:





Patent
      Title
    
    Number
    
    Filed
    
    ExpiresVideo
      Game Platform and User Interface
    
    
    60/569,187
    
    
    5/7/04
    
    
    5/7/05The
      Method for Automatic Patching of a Sparsely Streamed
      Application
    
    
    10/953,313
    
    
    9/29/04
    
    
    9/29/24Method
      and Apparatus for Backlighting of a Keyboard for Use with a Game
      Device
    
    
    10/910,510
    
    
    8/2/04
    
    
    8/2/24








-10-





US
Patents are pending.  60/569,187 is a provisional patent filing that will
be supplemented with multiple utility and design patent filings in April 2005
i.e.





Patent
      Title
    
    Status
    
    FiledModified
      Keyboard and Systems Containing Keyboard
    
    
    Final
      edits
    
    
    unfiledMulti-Mode
      Pointing Device
    
    
    Final
      edits
    
    
    unfiledSystem
      for Securely Booting a Computer Device
    
    
    Final
      edits
    
    
    unfiledMultiposition
      Multilevel User Interface System
    
    
    Final
      edits
    
    
    unfiledDesign
      Patent - Receiver
    
    
    Draft
    
    
    unfiledDesign
      Patent - Lapboard
    
    
    Draft
    
    
    unfiledDesign
      Patent - Mouse
    
    
    Draft
    
    
    unfiled




Although
we do not believe that our trademarks or service marks infringe the rights of
third parties, third parties have in the past asserted, and may in the future
assert, trademark infringement claims against us which may result in costly
litigation or which require us to either settle or obtain a license to use
third-party intellectual property rights.





***Number
of Total Employees and Number of Full-time Employees***





At
December 31, 2004, we had 40 full-time employees, three of whom are in
marketing, 22 of whom are in research and development and 15 of whom are
administrative and executive personnel. There is no collective bargaining
agreement in place.








-11-





**RISK
FACTORS**





**RISKS
RELATED TO OUR BUSINESS AND COMPANY**





The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements in this annual report. The
risks described below are not the only ones facing our Company. Additional risks
not presently known to us may also impair our business operations.





**WE
REQUIRE ADDITIONAL FINANCING IN ORDER TO CONTINUE IN BUSINESS AS A GOING
CONCERN, THE AVAILABILITY OF WHICH IS UNCERTAIN. WE MAY BE FORCED BY BUSINESS
AND ECONOMIC CONDITIONS TO ACCEPT FINANCING TERMS WHICH WILL REQUIRE US TO ISSUE** **OUR
SECURITIES AT A DISCOUNT, WHICH COULD RESULT IN FURTHER DILUTION TO OUR EXISTING
STOCKHOLDERS.**





As
discussed under the heading, "Management's Discussion and Analysis - Liquidity
and Capital Resources," we require additional financing to fund our operations.
There can be no assurance that additional financing will be available to us when
needed or, if available, that it can be obtained on commercially reasonable
terms. In addition, any additional equity financing may involve substantial
dilution to our stockholders. If we fail to raise sufficient financing to meet
our immediate cash needs, we will be forced to scale down or perhaps even cease
the operation of our business, which may result in the loss of some or all of
your investment in our common stock.





In
addition, in seeking debt or equity private placement financing, we may be
forced by business and economic conditions to accept terms which will require us
to issue our securities at a discount from the prevailing market price or face
amount, which could result in further dilution to our existing stockholders.





**WE
HAVE A HISTORY OF OPERATING LOSSES AND FLUCTUATING OPERATING RESULTS, WHICH
RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH
MAY CAUSE US TO GO UT OF BUSINESS.**





Since
inception through December 31, 2004, we have incurred aggregate losses of
$36,000,363. Our loss from operations for the fiscal year ended December 31,
2004 was $33,131,286 .There is no assurance that we will operate profitably or
will generate positive cash flow in the future. In addition, our operating
results in the future may be subject to significant fluctuations due to many
factors not within our control, such as the unpredictability of when customers
will order products, the size of customers' orders, the demand for our products,
and the level of competition and general economic conditions.





Although
we are confident that revenues will increase, we also expect an increase in
development costs and operating costs. Consequently, we expect to incur
operating losses and negative cash flow until our products gain market
acceptance sufficient to generate a commercially viable and sustainable level of
sales, and/or additional products are developed and commercially released and
sales of such products made so that we are operating in a profitable manner.





**WE
WILL REQUIRE ADDITIONAL FUNDING TO LAUNCH OUR PHANTOM GAME SERVICE AND IF WE ARE
UNSUCCESSFUL IN OBTAINING ADDITIONAL FUNDING, WE WILL BE UNABLE TO EXECUTE OUR
BUSINESS PLAN AND GO OUT OF BUSINESS.**





We will
need to obtain additional funding in order to:





·
    fund
      the final phases of product development and launch of our Phantom Game
      Service;


·
    finance
      additional growth and working capital requirement;


·
    respond
      to competitive pressures; and


·
    respond
      to other opportunities or challenges as they arise.





We expect
that additional equity financing will result in substantial dilution of our
stockholders. Debt financing will result in higher interest expense. The amount
of any such debt cannot be predicted at this time, nor can our ability to obtain
or service such debt be predicted. Moreover, there is no assurance that future
equity or debt financing will be available on terms acceptable to us. Failure to
obtain additional financing could cause us to go out of business.





-12-


**BECAUSE
WE HAVE A LIMITED OPERATING HISTORY, WE ARE UNABLE TO ACCURATELY FORECAST OUR
REVENUES, AND A SHORTFALL IN REVENUES COULD CAUSE A MATERIAL ADVERSE EFFECT IN
OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.**





We
currently intend to increase our operating expenses substantially in order to,
among other things:





·
    expand
      our current operating expenses;


·
    fund
      sales and marketing activities;


·
    manufacture
      inventory; and


·
    incur
      capital expenditures.





See "PLAN
OF OPERATION - Cash Requirements." Our expense levels are based, in part, on our
expectations with regard to potential future revenues, and to a large extent
such expenses will be fixed, particularly in the short term. To the extent we
are not successful in generating such revenues, we may be unable to
appropriately adjust spending in a timely manner to compensate for any
unexpected revenue shortfall or will have to reduce our operating expenses,
causing us to forego potential revenue-generating activities, either of which
could cause us to go out of business. In addition, as a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing or marketing decisions that may adversely affect our revenues. Retail
sales revenue is also subject to seasonal fluctuations. These factors add to the
difficulty in accurately forecasting revenue.





**BECAUSE
WE HAVE A LIMITED OPERATING HISTORY AND THE VIDEO GAME INDUSTRY IS RAPIDLY
CHANGING, WE ARE UNABLE TO ACCURATELY FORECAST OUR ACTUAL COSTS OF OPERATIONS,
AND INCREASED COSTS OF OPERATIONS COULD CAUSE US TO GO OUT FO BUSINESS.**





Because
we have a limited operating history and because the video game and online gaming
markets are characterized by rapidly changing technologies, evolving industry
standards, frequent new product and service introductions, and changing customer
demands, our costs may change dramatically over time. For example, in the event
that the cost to manufacture the Phantom Game Receiver is higher than projected
or our manufacturing costs increase dramatically, we may not be able to generate
profit, which may cause us to go out of business. As a further example, in the
event that the cost to host and download games on our Phantom Game Service is
higher than projected or in the event that those costs increase dramatically
over time, we may not be able to generate profit, which may cause us to go out
of business.





**IF
WE ARE NOT ABLE TO OBTAIN DESIRABLE GAME CONTENT, OUR PHANTOM GAME SERVICE WILL
NOT BE ATTRACTIVE TO CONSUMERS.**





We must
obtain access to desirable games to make our Phantom Game Service and Phantom
Game Receiver attractive to consumers. We may not be able to obtain adequate
desirable games for our Phantom Game Service due to a number of factors,
including existing relationships or contracts between game developers and the
dominant video game manufacturers, our limited operating history and our limited
financial resources. There are some desirable games that are available only on
proprietary platforms and to which we will likely never gain access. Even if we
are able to obtain desirable game titles, we may not be able to gain access to
them when they are first released. If our competitors have access to the most
desirable games before we obtain such access, it will be more difficult for us
to attract customers to our Phantom Game Service.





The
Company currently has outstanding balances in the sum of $885,000 owed to
publishers and developers. These content providers include Riverdeep,
Codemasters, Atari, Inc., Enlight Interactive, Vivendi Universal and Eidos. Due
to the outstanding balances, these content providers may elect to terminate
their agreements with the Company and not provide content now or in the future.
This would add risk to the success of the Phantom Game Service and to viability
of the Company.





**WE
WILL DEPEND ON A LIMITED NUMBER OF THIRD PARTIES TO MANUFACTURE, DISTRIBUTE, AND
SUPPLY CRITICAL COMPONENTS AND SERVICES FOR THE PHANTOM GAME RECEIVER AND OUR
PHANTOM GAME SERVICE. WE MAY BE UNABLE TO OPERATE OUR BUSINESS IF THESE PARTIES
DO NOT PERFORM THEIR OBLIGATIONS.**





Our
Phantom Game Service will be enabled through the use of the Phantom Game
Receiver, which we expect will be manufactured by a third-party contract
manufacturer. We expect to rely on sole suppliers for a number of key components
for the Phantom Game Receiver and Phantom Game Service. We will not control the
time and resources that these third parties devote to our business. We cannot be
certain that these parties will perform their obligations as expected or that
any revenue, cost savings, or other benefits will be derived from the efforts of
these parties. If any of these parties breaches or terminates its agreement with
us or otherwise fails to perform their obligations in a timely manner, we may be
delayed or prevented from commercializing our Phantom Game Service. Because our
relationships with these parties are expected to be non-exclusive, they may also
support products and services that compete directly with us, or offer similar or
greater support to our competitors. Any of these events could require us to
undertake unforeseen additional responsibilities or devote additional resources
to commercialize our Phantom Game Service. This outcome would harm our ability
to compete effectively and achieve increased market acceptance and brand
recognition.





-13-


If our
manufacturing relationships are not successful, we may be unable to satisfy
demand for our Phantom Game Service and the Phantom Game Receiver. The ability
of our manufacturers to reach sufficient production volume of the Phantom Game
Receiver to satisfy anticipated demand is subject to delays and unforeseen
problems such as defects, shortages of critical components and cost overruns.





Moreover,
our manufacturers will require substantial lead times to produce anticipated
quantities of the Phantom Game Receiver. Delays, product shortages and other
problems could impair our retail distribution and brand image and make it
difficult for us to attract customers. In addition, the loss of a manufacturer
would require us to identify and contract with alternative sources of
manufacturing, which we may be unable to do and which could prove time-consuming
and expensive.





**WE
HAVE LIMITED EXPERIENCE IN OVERSEEING MANUFACTURING PROCESSES AND MANAGING
INVENTORY AND FAILURE TO DO SO EFFECTIVELY MAY RESULT IN SUPPLY IMBALANCES OR
PRODUCT RECALLS.**





We intend
to contract the production of the Phantom Game Receiver to a third-party
manufacturer. We expect to sell these units to retailers and distributors. As
part of this effort, we expect to maintain some finished goods inventory of the
units throughout the year. Overseeing manufacturing processes and managing
inventory are outside of our core business and our experience in these areas is
limited. If we fail to effectively oversee the manufacturing process and manage
inventory, we may suffer from insufficient inventory to meet consumer demand or
excess inventory. Ineffective oversight of the manufacturing process could also
result in product recalls.





**WE
EXPECT TO DEPEND ON RETAIL DISTRIBUTION TO SELL THE PHANTOM GAME RECEIVER AND
SUBSCRIPTIONS TO THE PHANTOM GAME SERVICE AND IF RETAILERS ARE NOT SUCCESSFUL OR
ARE UNWILLING TO SELL OUR PRODUCTS AND SERVICES, WE MAY BE UNABLE TO SELL TO
CONSUMERS.**





We plan
to distribute the Phantom Game Receiver and sell subscriptions to our Phantom
Game Service through traditional brick-and-mortar retailers. In the event that
retailers are reluctant to sell our products and services or in the event that
their proposed financial terms are unacceptable to us, we would be forced to
seek alternative channels of distribution, potentially delaying the introduction
of our Phantom Game Service or slowing the growth of our subscriber base, which
may cause us to go out of business.





**OUR
PHANTOM GAME SERVICE AND PHANTOM GAME RECEIVER, WHILE COSTLY TO DEVELOP, MAY
FAIL TO GAIN MARKET ACCEPTANCE. IF OUR PRODUCTS AND SERVICES DO NOT GAIN MARKET
ACCEPTANCE, WE MAY BE UNABLE TO OPERATE OUR BUSINESS.**





We plan
to invest a significant amount of money and resources in the launch of our
Phantom Game Service and Phantom Game Receiver. However, our Phantom Game
Service and Phantom Game Receiver are unproven and may fail to gain market
acceptance. Because the market for our Phantom Game Service and Phantom Game
Receiver is new and evolving, it is difficult to predict the size of the market
and its rate of growth, if any. We cannot assure you that the market for video
game or online gaming entertainment services will continue to develop or be
sustainable. If the market for the Phantom Game Service fails to develop,
develops more slowly than expected or becomes more competitive than is currently
expected, we may no be able to keep up and go out of business.





**WE
MAY BE UNABLE TO ANTICIPATE CHANGES IN CONSUMER DEMANDS, AND IF WE ARE UNABLE TO
EFFECTIVELY MEET CONSUMER DEMAND, WE WILL NOT MAKE SALES AND GO OUT OF BUSINESS.**





Our
Phantom Game Service appeals primarily to children, teenagers and young adults,
whose preferences cannot be predicted with certainty and are subject to rapid
change. Our success will depend on our ability to identify gaming and
entertainment trends as well as to anticipate, interpret, and react to changing
consumer demands in a timely manner.





We cannot
provide assurances that we will be able to continue to offer the types of games
that appeal to our consumers, or that we will satisfy changing consumer demands
in the future. If we misjudge the market for our Phantom Game Service, our sales
may decline significantly, which may lead us to bankruptcy.





**WE
WILL FACE COMPETITION FROM A NUMBER OF SOURCES, WHICH MAY IMPAIR OUR REVENUES,
INCREASE OUR CUSTOMER ACQUISITION COST, AND HINDER OUR ABILITY TO GENERATE NEW
CUSTOMERS.**





While we
are not aware of any direct competitors to our Phantom Game Service, we will
indirectly with a large number of hardware manufacturers, Internet sites, media
companies, and other companies providing gaming and entertainment services. Our
competitors include companies offering gaming and entertainment services either
on a stand alone basis or integrated into other products and media properties;
vertical markets where competitors may have advantages in expertise, brand
recognition, and other factors; and manufacturers of personal computers or game
consoles who may develop their own Internet portals to which they would direct
their customers.





-14-


Our
competitors generally have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than ours. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products or services to
address the needs of our prospective customers. We cannot be certain that we
will be able to successfully compete against current or future competitors. In
order to compete effectively, we may need to expend significant internal
engineering resources or acquire other technologies or companies to provide or
enhance such capabilities. Any of these efforts will take resources we may not
have, which may force us to go out of business.





**WE
DEPEND ON A NUMBER OF KEY PERSONNEL, AND THEIR LOSS MAY CAUSE US TO GO OUT OF
BUSINESS.**





Our
success will depend upon our senior management and key sales and technical
personnel, particularly Timothy M. Roberts, our Chairman and CEO, and Kevin
Bachus, our President and COO. The loss of the services of one or more of these
persons may cause us to go out of business. Our success also depends on our
ability to attract and retain qualified technical, sales and marketing, customer
support, financial and accounting, and managerial personnel. Competition for
such personnel in the video game entertainment industry is intense, and we
cannot be certain that we will be able to retain our key personnel or that we
can attract, integrate or retain other highly qualified personnel in the future.





**WE
MAY BE UNABLE TO SUCCESSFULLY MANAGE RAPID GROWTH, AND THE FAILURE TO DO SO
COULD HARM OUR BUSINESS.**





We plan
to dramatically increase the scope of our operations in both sales and marketing
as well as technological development. We expect that we will need to expand and
improve our financial and managerial controls, reporting procedures and systems.
This rapid growth and expansion in operations will place a significant strain on
our managerial, operational and financial resources. We expect the number of our
employees to increase in the future. To successfully compete in the evolving
gaming industry, we must implement financial and management controls; maintain
our reporting systems and procedures; continue to scale our serving systems and
upgrade their functional capabilities; and expand, train, retain and manage our
work force. We cannot be certain that our systems, procedures or controls will
be adequate to support our expanding operations, or that management will be able
to respond effectively to such growth. Our future results of operations also
depend on the expansion of our sales, marketing and customer support
departments.





**CONSUMERS
WILL NEED A BROADBAND INTERNET CONNECTION TO ACCESS OUR PHANTOM GAME SERVICE,
AND IF BROADBAND IS NOT WIDELY ADOPTED BY CONSUMERS, THE POTENTIAL MARKET FOR
OUR PRODUCTS AND SERVICES COULD BE LIMITED.**





Our
anticipated revenues and profits from our Phantom Game Service are dependent
upon the widespread acceptance and use of broadband Internet access. Rapid
growth in the use of broadband Internet is a recent phenomenon and there can be
no assurance that this growth will continue, or that a sufficiently broad base
of consumers will adopt broadband as a method of accessing the Internet. For us
to be successful, consumers must accept and use broadband as a method of
accessing the Internet.





**OUR
CUSTOMERS WILL ACCESS OUR PHANTOM GAME SERVICE THROUGH A BROADBAND INTERNET
CONNECTION, AND IF THEY CANNOT RELIABLY ACCESS THE INTERNET, THEY MAY CANCEL
THEIR SUBSCRIPTIONS TO OUR PHANTOM GAME SERVICE, REDUCING OUR REVENUES.**





Our
success will depend, in large part, upon the maintenance of the Internet
infrastructure, such as a reliable network backbone with the necessary speed,
data capacity and security, and timely development of enabling products such as
high speed modems, for providing reliable Internet access and services and
improved content. The Internet infrastructure may not continue to effectively
support the demands placed on it as the Internet continues to experience
increased numbers of users, frequency of use or increased bandwidth requirements
of users. Even if the necessary infrastructure or technologies are developed, we
may have to spend considerable amounts to adapt our solutions accordingly.
Furthermore, the Internet has experienced a variety of outages and other delays
due to damage to portions of its infrastructure. Such outages and delays could
negatively impact our customers' use of the Phantom Game Service and could lead
to cancellation of subscriptions, which would reduce our revenues.





**WE
ARE SUBJECT TO U.S. AND FOREIGN GOVERNMENT REGULATION OF THE INTERNET, AND
COMPLYING WITH THESE REGULATIONS COULD IMPOSE SIGNIFICANT COSTS.**





Our
subscribers will require a broadband connection to the Internet in order to
access our Phantom Game Service. Existing laws and regulations applicable to the
Internet relate to issues such as user privacy, defamation, pricing,
advertising, taxation, gambling, sweepstakes, promotions, financial market
regulation, content regulation, quality of products and services and
intellectual property ownership and infringement. In addition, we will also be
subject to new laws and regulations directly applicable to our activities. Any
existing or new legislation applicable to us could expose us to substantial
liability, including significant expenses necessary to comply with such laws and
regulations, and dampen the growth in use of the Internet.





-15-


Several
federal laws could have an impact on our business. The Digital Millennium
Copyright Act is intended to reduce the liability of online service providers
for listing or linking to third-party Websites that include materials that
infringe copyrights or other rights of others. The Children's Online Protection
Act and the Children's Online Privacy Protection Act are intended to restrict
the distribution of certain materials deemed harmful to children and impose
additional restrictions on the ability of online services to collect user
information from minors. In addition, the Protection of Children from Sexual
Predators Act of 1998 requires online service providers to report evidence of
violations of federal child pornography laws under certain circumstances. Such
legislation may impose significant additional costs on our business or subject
us to additional liabilities.





Due to
the global nature of the Internet, it is possible that the governments of other
states and foreign countries might attempt to regulate Internet transmissions or
prosecute us for violations of their laws. We might unintentionally violate such
laws, such laws may be modified and new laws may be enacted in the future. Any
such developments (or developments stemming from enactment or modification of
other laws) could have a material adverse effect on our business, operating
results and financial condition.





**OUR
SUCCESS WILL DEPEND ON OUR ABILITY TO SECURE AND PROTECT PATENTS, TRADEMARKS AND
OTHER PROPRIETARY RIGHTS.**





Our
success and ability to compete will be substantially dependent on our internally
developed technologies and trademarks, which we plan to protect through a
combination of patent, copyright, trade secret and trademark law. Our patent
applications or trademark applications may not be approved. Even if they are
approved, such patents or trademarks may be successfully challenged by others or
invalidated. If our trademark registrations are not approved because third
parties own such trademarks, our use of such trademarks will be restricted
unless we enter into arrangements with such third parties that may be
unavailable on commercially reasonable terms.





We
generally enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and generally control access to and
distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our solutions or technologies. The steps we have taken may not prevent
misappropriation of our solutions or technologies, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.





We may
license in the future elements of our trademarks, trade dress and similar
proprietary rights to third parties. While we attempt to ensure that the quality
of our brand is maintained by these business partners, such partners may take
actions that could materially and adversely affect the value of our proprietary
rights or our reputation. Our proprietary rights may not be viable or of value
in the future since the validity, enforceability and scope of protection of
certain proprietary rights in Internet-related industries is uncertain and still
evolving.





**RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK**





**THE
"PENNY STOCK RULE" COULD MAKE IT CUMBERSOME FOR BROKERS AND DEALERS TO TRADE IN
OUR COMMON STOCK, MAKING THE MARKET FOR OUR COMMON STOCK LESS LIQUID WHICH COULD
CAUSE THE PRICE OF OUR STOCK TO DECLINE.**





Trading
of our common stock on the OTC Bulletin Board may be subject to certain
provisions of the Securities Exchange Act of 1934, commonly referred to as the
"penny stock" rule. A penny stock is generally defined to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker-dealer to:





·
    make
      a special suitability determination for purchasers of our shares;





·
    receive
      the purchaser's written consent to the transaction prior to the purchase;
      and





·
    deliver
      to a prospective purchaser of our stock, prior to the first transaction, a
      risk disclosure document relating to the penny stock market.





-16-


Consequently,
penny stock rules may restrict the ability of broker-dealers to trade and/or
maintain a market in our common stock. Also, prospective investors may not want
to get involved with the additional administrative requirements, which may have
a material adverse effect on the trading of our shares.





**SECURITIES
AND EXCHANGE COMMISSION'S PUBLIC REFERENCE**





Any
member of the public may read and copy any materials filed by us with the
Securities and Exchange Commission at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet web site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.





**RISKS
RELATED TO OUR FINANCING AGREEMENTS**





THE LARGE
NUMBER OF SHARES UNDERLYING THE 8% CONVERTIBLE DEBENTURES AND WARRANTS MAY BE
AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET
PRICE OF OUR COMMON STOCK.





As of
December 31, 2004, we had 121,090,655 shares of common stock issued and
outstanding and an obligation to reserve 46,656,000 shares issuable upon
conversion of the debentures. In addition, we have outstanding options and
warrants to purchase 41,014,493 shares of common stock. Under certain
circumstances described in the next risk factor, the number of shares of common
stock issuable upon conversion of the outstanding debentures may increase if the
market price of our stock declines. All of the shares, including all of the
shares issuable upon conversion of the debentures and upon exercise of our
warrants, may be sold without restriction. The sale of these shares may
adversely affect the market price of our common stock.





IF
CERTAIN CONDITIONS ARE MET, THE ADJUSTABLE CONVERSION PRICE FEATURE OF THE 8%
CONVERTIBLE DEBENTURES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER
OF SHARES, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.





The
conversion price of the debentures means seventy-five percent of the lowest
closing price during the five trading days ending on the trading day before the
conversion date; provided, however, that in no event will such price be (x) more
than $0.10 or (y) until the earlier of (I) the Scheduled Expiration Date, (II)
the date after the closing date on which we file a registration statement on
Form SB-2 or (III) the date on which we first issue a mandatory conversion
notice, lower than $0.10; provided, however, if a certain events occur then the
conversion price is fixed at $0.10. The term "Scheduled Expiration Date" means
April 16, 2005, except that, if prior to that date we file with the SEC a
definitive proxy statement seeking stockholder authorization at a meeting of
stockholders scheduled to be held no later than June 16, 2005 to amend our
certificate of incorporation to increase our authorized shares to at least 400
million shares, it means June 16, 2005.





Accordingly,
if one of the above triggering events occur, the conversion price will fluctuate
with the market price of our common stock and the number of shares we will be
required to issue will increase, perhaps substantially.





If we
complete the first tranche of a financing of no less than $12 million and in
connection with such financing, retire or convert our debt (other than the
convertible debentures), the conversion price of the debentures will be fixed at
$0.10





The
following is an example of the number of shares of our common stock that are
issuable, upon conversion of the debentures, based on market prices 25%, 50% and
75% below the current conversion price of $0.10.





Number
      of SharesPercentage
      of% Below Market
    
    WithPrice
      Per Share
    
    Discount
      of 25%
    
    Issuable
    
    Outstanding
      Stock25%
    
    $
    0.075
    
    $
    0.056
    
    
    38,571,428
    
    
    24.30
    %50%
    
    $
    0.050
    
    $
    0.037
    
    
    58,378,378
    
    
    32.70
    %75%
    
    $
    0.025
    
    $
    0.018
    
    
    120,000,000
    
    
    49.97
    %




As
illustrated, upon a triggering event described above, the number of shares of
common stock issuable upon conversion of the debentures will increase if the
market price of our stock declines below $0.10, which will cause dilution to our
existing stockholders and require us to file a new registration statement to
cover the additional shares of common stock because there is no limit on the
number of shares that may be issued in connection with a downward spiraling
market.





-17-


THE
CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF THE 8% CONVERTIBLE
DEBENTURES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK,
WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.





Upon
certain triggering events described above, the debentures are convertible into
shares of our common stock at a 25% discount to the trading price of the common
stock prior to the conversion. The significant downward pressure on the price of
the common stock as the selling stockholder converts and sells material amounts
of common stock could encourage short sales by investors. This could place
further downward pressure on the price of the common stock. The selling
stockholders could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause the further
downward pressure on the stock price. In addition, even prior to the time of
actual conversions, exercises, and public resales, the market "overhang"
resulting from the mere existence of our obligation to honor such conversions or
exercises could depress the market price of our common stock.





THE
ISSUANCE OF SHARES UPON ANY CONVERSION OF THE 8% CONVERTIBLE DEBENTURES OR
EXERCISE OF OUTSTANDING WARRANTS WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION
TO OUR EXISTING STOCKHOLDERS.





The
issuance of shares upon conversion of the debentures and exercise of warrants
will result in substantial dilution to the interests of other stockholders since
the selling stockholders would likely thereafter sell the shares issued upon
such conversion. Although, pursuant to their terms, each selling stockholder
individually may not convert their debentures and/or exercise their warrants if
such conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock at a given point in time, this restriction does not
prevent each selling stockholder from converting and/or exercising some of their
holdings seriatim. In this way, the selling stockholders could sell more than
the 4.99% limit while never owning at any time more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.





IF WE ARE
REQUIRED FOR ANY REASON TO REPAY THE 8% CONVERTIBLE DEBENTURES, WE WOULD BE
REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL
FUNDS. OUR FAILURE TO REPAY THE DEBENTURES, IF REQUIRED, COULD RESULT IN LEGAL
ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.





The
debentures are due and payable, with 8% interest, one year from the date of
issuance, unless sooner converted into shares of our common stock. In addition,
any event of default as described in the debentures could require the early
repayment of the debentures, including a default interest rate of 18% on the
outstanding principal balance of the debentures if the default is not cured with
the specified grace period. We anticipate that the full amount of the
debentures, together with accrued interest, will be converted into shares of our
common stock, in accordance with the terms of the debentures. If we are required
to repay the debentures, we would be required to use our limited working capital
and raise additional funds. If we were unable to repay the debentures when
required, the debenture holders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action would
require us to curtail or cease operations.





***Future
sales of our common stock may cause our stock price to
decline.***





Our stock
price may decline by future sales of our shares or the perception that such
sales may occur. If we issue additional shares of common stock in private
financings under an exemption from the registration laws, then those shares will
constitute "restricted shares" as defined in Rule 144 under the Securities Act.
The restricted shares may only be sold if they are registered under the
Securities Act, or sold under Rule 144, or another exemption from registration
under the Securities Act.





Some of
our outstanding restricted shares of common stock are either eligible for sale
pursuant to Rule 144 or have been registered under the Securities Act for resale
by the holders. We are unable to estimate the amount, timing, or nature of
future sales of outstanding common stock. Sales of substantial amounts of our
common stock in the public market may cause the stock's market price to decline.
See "Description of Securities."





***Our
stock price can be extremely volatile.***





Our
common stock is traded on the OTC Bulletin Board. There can be no assurance that
an active public market will continue for the common stock, or that the market
price for the common stock will not decline below its current price. Such price
may be influenced by many factors, including, but not limited to, investor
perception of us and our industry and general economic and market conditions.
The trading price of the common stock could be subject to wide fluctuations in
response to announcements of our business developments or our competitors,
quarterly variations in operating results, and other events or factors. In
addition, stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market prices of
companies, at times for reasons unrelated to their operating performance. Such
broad market fluctuations may adversely affect the price of our common
stock.





-18-


***We
do not expect to pay dividends.***





We have
not paid dividends since inception on our common stock, and we do not
contemplate paying dividends in the foreseeable future on our common stock in
order to use all of our earnings, if any, to finance expansion of our business
plans.





***If
we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board which would limit the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in
the secondary market.***





Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.





***Our
common stock is subject to the "Penny Stock" rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our
stock.***





The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:





·
    that
      a broker or dealer approve a person's account for transactions in penny
      stocks; and


·
    the
      broker or dealer receive from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.





In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:





·
    obtain
      financial information and investment experience objectives of the person;
      and


·
    make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.





The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:





·
    sets
      forth the basis on which the broker or dealer made the suitability
      determination; and


·
    that
      the broker or dealer received a signed, written agreement from the
      investor prior to the transaction.





Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.





Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.








-19-





**ITEM
2.**  **DESCRIPTION
OF PROPERTY**





Our
corporate headquarters are located in Sarasota, Florida in a 12,112 square foot
office. Our lease for this office space expires on November 30, 2009 and our
monthly rent expense for this office space is $21,644. In addition, we have
leased 22,284 square feet of office in Seattle, Washington from which we oversee
product development. Our lease for this space expires on August 30, 2006 and our
monthly rent expense for this office space is $25,070.





We
believe that the facilities are well maintained. We also believe that these
leased facilities are not unique and could be replaced, if necessary, at the end
of the term of the existing leases.





**ITEM
3.**  **LEGAL
PROCEEDINGS**





On
October 27, 2003, SensAble Technologies, Inc. filed a complaint against Infinium
in the U.S. District Court for the District of Delaware, alleging federal
trademark infringement, federal trademark dilution, federal unfair competition,
and Delaware common law unfair competition regarding the trademark "Phantom".
The complaint sought damages, injunctive relief against Infinium's use of the
name "Phantom", surrender of the Company's website www.phantom.com withdrawal of
trademark applications for the "Phantom" mark and other unspecified damages. The
complaint was settled in full via a $150,000 payment to SensAble Technologies on
January 10, 2005 per the Second Amendment to Concurrent Use and Settlement
Agreement dated May 28, 2004. As a condition of the Second Amendment to
Concurrent Use and Settlement Agreement dated May 28, 2004, Sensable
Technologies subsequently returned their 120,000 shares of common stock after
receipt of the $150,000 payment in 2005.





On or
around November 24, 2004, SBI-USA, LLC, filed suit against us and our chief
executive officer, Timothy M. Roberts, in United States District Court, Central
District of California. The suit alleges breach of contract and fraud and seeks
to recover damages of approximately $600,000 under a contract that we terminated
with plaintiff, as well as punitive damages and attorney's fees. In connection
with the breach of contract claim, the plaintiff alleges that, since March 6,
2004, we raised more than $30 million in financing and owe plaintiff 2% of all
amounts received. In connection with the fraud claim, plaintiff claims that we
represented that plaintiff would be our exclusive investment banker during the
term of the agreement with plaintiff, and that we hired a competing firm. Prior
to filing suit, plaintiff demanded that we pay approximately $66,000 in unpaid
expenses as full compensation for amounts due under the agreement. Shortly
following our refusal to do so absent documentation of the claimed expenses,
plaintiff initiated this suit. Our counsel has advised us that this suit is
completely meritless and we intend to vigorously defend it.





A default
to the suit was entered against Timothy Roberts on January 5, 2005, but no
default judgment has been entered. A motion to set aside the default was filed
on February 7, 2005 and set to be heard on March 21, 2005. The complaint was
settled in full via a $55,000 payment to SBI-USA, LLC on April 4, 2005. As of
December 31, 2004, the Company has accrued expenses of $55,000 for this
settlement.





KB
Networks, Inc., Kyle Bennett and Steve Lynch v. Infinium Labs, Inc. and Timothy
Roberts was
filed on February 27, 2004 in the United States District Court for the Northern
District of Texas, Dallas Division. The case bore the Cause Number
3:04-CV-423-D.





The
parties to the proceeding are identified in the style set forth above. The
Complaint asserted only claims for declaratory relief. In this regard, the
Complaint did not seek any compensatory damages whatsoever. The subject matter
of the Complaint arose out of the publication by the Plaintiffs of an article
about the Defendants on a website maintained by the Plaintiffs. That publication
took place on September 17, 2003. Defendants sent the Plaintiffs cease and
desist letters asserting that the article was defamatory in a number of
respects. Defendants also asserted that the use of Infinium Labs, Inc.’s
registered marks constituted a violation of the Lanham Act and otherwise
constituted trademark infringement. The Original Declaratory Judgment Complaint
was filed in order to obtain a declaratory judgment that the publication of the
article was not defamatory and that the Plaintiffs’ use of Infinium Labs, Inc.’s
trademarks in connection with the article did not constitute infringement and
was an act of fair use.





Rather
than respond to the Complaint, Defendants filed a Motion to Dismiss the
Complaint asserting that the Court lacked both subject matter and personal
jurisdiction. However, rather than provide a timely ruling on the Motion to
Dismiss, the Court allowed the Plaintiffs to engage in discovery related to the
question of personal jurisdiction. However, the Plaintiffs’ tactics during this
discovery phase of the action were extremely burdensome and expensive.
Accordingly, the decision was made to terminate the litigation by consenting to
the exercise of personal jurisdiction and responding to the Complaint in such a
way as to concede that the article did not give rise to any liability for the
Plaintiffs as a result of its publication. As a result, the District Court
entered a declaratory judgment declaring that the Plaintiffs were not liable to
the Defendants as a result of the publication of the article.





During
the dismissal process, the Plaintiffs asserted a right to recover sanctions
against the Defendants for their conduct during the discovery phase of the
litigation. The Plaintiffs asserted a sanction claim in the approximate amount
of $100,000. Rather than continue to litigate the question of sanctions, the
company agreed to pay the Plaintiffs the sum of $50,000 to completely terminate
the litigation. As a result, the final declaratory judgment was ultimately
entered terminating the litigation with prejudice. In this regard, the Agreed
Declaratory Judgment terminating the litigation in all respects was entered by
the Court on February 16, 2005. As of December 31, 2004, the Company has accrued
expenses of $50,000 for this settlement.





-20-


A
confidential, non-public SEC investigation entitled “ *In re
Certain Fax Blasts* ” is
ongoing. The Company has provided documents in response to SEC subpoenas, and
two Company employees, including the CEO, have testified in the investigation
concerning, among other things, events at the Company. The Company’s response to
the SEC subpoenas is continuing.





Except as
described above and as of December 31, 2004, we are not a party to any
litigation other than litigation arising in the ordinary course of its business,
which is not expected to have a material adverse effect on its financial
condition or results of operations and has not accrued any amounts relating to
any litigation.





**ITEM
4.**  **SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS**





There was
no matter submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders, through the solicitation of proxies or
otherwise.





NONE




**PART
II**





**ITEM
5.**  **MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





**Market
for Common Stock**





Our
common stock is quoted on the OTC Bulletin Board under the symbol
"IFLB.OB".





The
following quotations obtained from Yahoo Finance (http://finance.yahoo.com)
reflect the high and low bids for our common stock based on inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. The high and low bid prices of our common stock for the periods
indicated below are as follows:





**Quarter
      Ended**
    
    **High**
    
    **Low**12/31/2004
    
    $
    1.45
    
    $
    0.1909/30/2004
    
    $
    1.81
    
    $
    0.3106/30/2004
    
    $
    2.02
    
    $
    0.9203/31/2004
    
    $
    2.50
    
    $
    0.3012/31/2003
    
    $
    0.01
    
    $
    0.0109/30/2003
    
    $
    1.56
    
    $
    0.0006/30/2003
    
    $
    1.26
    
    $
    0.0103/31/2003
    
    
    n/a
    
    
    n/a





Our
common shares are issued in registered form. Corporate Stock Transfer, Inc. is
the registrar and transfer agent for our common shares.





As of
April 12, 2005, we had 151,829,349 shares of common stock outstanding and
approximately 315 stockholders of record.





**Dividend
Policy**





We have
never declared or paid dividends on our common stock, and we do not anticipate
that we will do so in the foreseeable future. We intend to retain future
earnings, if any, for use in our operations and the expansion of our
business.





-21-


**Recent
Unregistered Sales of Securities**





During
2005, the Company issued 2,747,632 shares of common stock for consulting
services with a fair value of $931,805 ($0.34 per share). These transactions
were exempt from registration under Section 4(2) of the Securities Act because
it did not involve a public offering.





During
2005, the Company issued 1,465,000 shares of common stock to employees with a
fair value of $767,850 ($0.52 per share). These transactions were exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.





On
January 6, 2005, the Company issued 7,043,750 shares of common stock to convert
a note payable with a fair value of $704,375 ($0.10 per share). There was no
gain or loss on the conversion of this note. This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.





On
February 11, 2005, the Company issued 4,925,291 shares of common stock to
convert a note payable with a fair value of $1,058,938 ($0.215 per share). There
was no gain or loss on the conversion of this note. This transaction was exempt
from registration under Section 4(2) of the Securities Act because it did not
involve a public offering.





On March
22, 2005, the Company issued 5,815,069 shares of common stock to convert a note
payable with a fair value of $581,507 ($0.10 per share). There was no gain or
loss on the conversion of this note. This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.





On April
11, 2005, the Company issued 7,825,000 shares of common stock to convert a note
payable with a fair value of $1,565,000 ($0.15 per share). There was no gain or
loss on the conversion of this note. This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.





During
April 2005, the Company issued 816,952 shares of common stock for consulting
services with a fair value of $200,323 ($0.25 per share). These transactions
were exempt from registration under Section 4(2) of the Securities Act because
it did not involve a public offering.





During
April 2005, the Company issued 100,000 shares of common stock to an employee
with a fair value of $26,000 ($0.26 per share). This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.




Unless
otherwise stated all of the above-referenced securities were issued in a
transaction exempt from the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Rule 506 of Regulation D promulgated thereunder based on the
following facts (the "Rule 506 Conditions"):





(i) the
securities were sold only to accredited investors;





(ii) the
securities were not offered by any form of general solicitation or general
advertising;





(iii)
each investor had represented that such investor was acquiring the securities
for such investor's own account for investment; and





(iv) the
securities were issued with restrictive legends.





**ITEM
6.**  **MANAGEMENT'S
DISCUSSION AND ANALYSIS**





The
following discussion of our financial condition, changes in financial condition
and results of operations for the fiscal years ended December 31, 2004, should
be read in conjunction with the audited annual financial statements and the
notes thereto.





Our
consolidated financial statements are stated in United States Dollars and are
prepared in accordance with United States Generally Accepted Accounting
Principles.





**PLAN
OF OPERATION**





We are
currently in the development stage of operations and expect to be in that mode
for at least the next three to six months. Our goal is to commence the launch of
the Phantom Game Service in the fourth quarter of 2005. Our primary mission is
to sell video games to consumers who subscribe to our service, which is a
combination of gaming hardware, software and secure online digital distribution.





The
Company is characterized as a development company until it launches the Phantom
Game Service. All product development and testing is near complete. The company
does not face risk associated with development, but the company faces certain
risk if it fails to secure the required funding to launch the service. At this
point management feels that there exists a 9-12 month window to bring the
product to market without a competitor taking first mover advantage.





-22-


Any
delays in launch are not based on product development or content acquisition, as
those key elements are in place. Any delays to market are based upon securing
the proper amount of funding required to fund the existing Operating Plan. The
Company anticipates that it will take 120-150 days to bring the service to
market, post funding. Most of that time will be required to manufacture and ship
the Phantom Game Receiver and to complete the Electronic Content Delivery.





In the
situation where the Company fails to raise the required $11.5 million to launch
the Phantom Gaming Service, the company has contingency plans to carry the
business going forward. One such scenario involves the Company allowing other
hardware manufactures to produce the Phantom Game Receiver. In this example the
company's business will be Content Acquisition, Channel Programming and
Electronic Content Distribution.





The
company has hit all its internal milestones for product development, content
licensing and marketing planning. The Phantom Game Receiver has been designed;
working prototypes have been built and tested. The Company has contractually
secured an ample amount of premium games content to launch its Service. The
content delivery has been designed and is awaiting development. The initial
subscriber sell thru milestone is 3,000 subscribers in the first month of
launch.





We intend
to pursue product development and marketing activities, concentrating primarily
on the creation of the Phantom Game Service and on generating consumer demand.
We are in the latter stages of negotiations with PC component suppliers and
contract manufacturers to provide engineering support services, necessary parts
and fabrication and assembly of hardware units. We are also in the latter stages
of negotiations with data center operators to host our servers and with other
providers to perform our customer support functions. Consistent with our
business strategy, we have entered into a development agreement with respect to
the engineering and industrial design of the Phantom Game Service.





Infinium
Labs, Inc., has development agreements with Teague and BIOSTAR(R) Microtech
International Corp. for engineering and industrial design of the Phantom Game
Service. The company had two contracts with Walter Dorwin Teague for development
of the industrial design of the Phantom Game Receiver and Lapboard. Terms were
standard time and materials, work-for-hire. The work is complete and the company
owns the designs. The company is filing design and utility patents to cover this
work. The company has a development agreement in place with BIOSTAR(R) for the
Phantom Game Receiver mainboard and graphics adapter. Terms are: 1/2 the total
amount ($156k) due at signing; 1/4 ($78k) due before ship of pilot production
units from Biostar to IFLB; 1/4 ($78k) due on acceptance of pilot units by IFLB.
The end design product will be wholly owned by the company. This work is
ongoing.





We have
identified a core group of potential customers/distribution partners for the
Phantom Game Service and Phantom Game Receiver and continue to meet with these
potential partners on a regular basis. We expect to announce some of our
distribution partners during the second quarter of 2005.





Our goal
is to enter into distribution arrangements with several or more of these parties
whereby each partner will purchase the Phantom Game Receiver through a purchase
order process and resell the systems to their customers. In exchange, these
partners will receive a share of the recurring subscription and/or software
sales/rental revenues.





We have
contracted with Pinnacle Marketing Group and Summit Sales to assist Infinium
Labs with launching the Phantom Game Service into the retail channel.





In
keeping with our goal to develop a library of available games, over 20
publishers, including Vivendi Universal Games, Atari Inc., Riverdeep and Eidos,
have agreed to supply content. We currently are in negotiations with many other
major game publishers with which we expect to build similar content-supplying
relationships.





We have
signed agreements with the following content providers:





Atari


Chronic
Logic


Codemasters


Eidos


Enlight
Interactive


Framework
Studios


Gamerblitz


Gameware


GarageGames.com


O-3
Entertainment


Riverdeep





-23-


The
following are estimated prices for the Phantom Game Receiver, a basic monthly
subscription, an enhanced subscription and games that might be included in a
basic subscription.





Phantom
Game Receiver: $299.95


Activation
Fee: $19.99 one time fee


Basic
Subscription: $19.95 monthly, with a 2 year commitment. Enhanced Subscription:
(not available at launch)


Game
Store: $9.95-$54.95 per game purchased, depending on title.





We expect
subscribers will able to play up to 10 games per month out of Phantom's Basic
Tier library of over 200+ titles (over $300 game play value per month). Each
month the subscriber may choose to pick new games, continue to play the same
games or purchase any favorites from the previous month. The final value
proposition for the basic tier is subject to further consumer testing and
modification.





Some
examples of games that may be included in the Basic Subscription are:


Unreal
Tournament, Quake, Men of Valor, Mafia, Neverwinter, Nights, Baldur's Gate,
Sacred, Vampire the Masquerade: Redemption, Civilization: Call to Power II,
Tropico, Railroad Tycoon II Platinum Edition, Battleground 5: Antietam, Deus Ex,
Tom Clancy's Rainbow Six, Uru: Ages Beyond, Myst, Deer Hunter 2004, Backyard
Baseball, Backyard Basketball, Backyard Soccer, Microsoft Links Golf , Pro Bass
Fishing, Austin Powers Pinball, Celebrity Deathmatch, Tournament Chess 2,
Pitfall: Mayan Adventure, Trivial Pursuit.





Phantom
Game Store allows subscribers the ability to purchase any game, anytime from an
extensive library of over 500 titles. Once purchased the downloaded games remain
on the hard drive of subscriber's Phantom Game Receiver, where updates, versions
and patches are maintained by the Company. The library of available games at
launch range from recent releases to classic favorites, the Phantom Game Store
offers something for everyone in the family ranging in price from $9.95 to
$54.95





Examples
of Games in the Phantom Store are: Unreal Tournament 2004, Far Cry, Call of
Duty,Tom Clancy's Splinter Cell: Pandora Tomorrow, Warcraft III, Beyond Good and
Evil, The Suffering, Rise of Nations.





The
consumer will own all the games he or she downloads to the Phantom Game Receiver
and will not lose the games if the consumer cancels his or her subscription.
Subject to local hard drive space, purchased games can still be played on the
Phantom Game Receiver after the consumer cancels his or her subscription. If the
consumer renews the subscription, full access to all games will be restored.





At this
point in time, the company has achieved the following milestones: The Phantom
Game Console has been designed; working prototypes have been built and tested.
The Company has contractually secured game content to launch its Service. The
content delivery has been designed and is awaiting development. The unachieved
component is securing at least $11.5 million in funding for launch. The Company
will require approximately 120-150 days post financing to launch the Phantom
Gaming Service. The initial subscriber sell thru milestone is 3,000 subscribers
in the first month of launch.





The
Company’s target date for a limited regional rollout of 10,000 units of the
Phantom Game Service is Q4 2005. This date and the milestones listed below are
contingent upon raising sufficient capital, as also noted on the schedule below.
The Company has failed to meet its operating milestones in the past due to
insufficient funding on the operating timetable and has thus shifted launch date
on numerous occasions.





The
Company believes, based on past performance, that there is a high likelihood
that sufficient capital will not be available on the timeline outlined below and
many or all of these milestones will be missed and the launch date will again
shift and/or the company will go out of business





-24-


There are
however contingency options in place in the event that these milestones are not
met, which are also outlined below the following table.




**Period**
    **Capital
      Requirements**
    **Detail****Q2
      2005**
    $
      2,306,000G&A, Salary, Benefits, T&E, Marketing & Product
      Development
      
      **$
      2,306,000****Total Expense**
    **Marketing**
      Milken
      Event Los Angeles
      E3
      Los Angeles (May 17-20)
      Microsoft
      DevCon (May 9-12)
      Public
      Relations Retainer
      Public
      Relations Expenses
      Corporate
      Branding
      Business
      Trade Media Relations
      Web
      Site/Search Engine Optimization
      
      **Product
      Development**
      Patent
      Completion and Filing
      System
      Board Development
      Lapboard
      Development
      Receiver
      Enclosure Development
      Sample
      Hardware
      Hardware
      Development Tools
      Prototypes
      BIOS
      Development
      Prototype
      Engineering
      Usability
      Testing
      UI
      Redesign
      Tooling
      e-commerce
      Development Specs
      Content
      Delivery Network**Q3
      2005**
    $
      703,000 G&A, Salary, Benefits, T&E
      
      $
      2,763,000 Marketing Costs
      
      $
      2,372,000 Product Development
      
      $
      656,000e-commerce Development
      
      **$
      6,494,000****Total
      Expense**
    **Marketing**
      Secure
      Print Media
      Secure
      Local Spot Media
      Begin
      Internet Marketing
      Secure
      Promotions
      Hire
      Agencies
      Develop
      Retail Channel Displays
      Begin
      Creative Development
      Begin
      Public Relations
      ****
      **Product
      Development**
      Pilot
      Program - 100 Test Units
      Tooling
      Parts
      Assembly
      Line
      ****
      **e-commerce
      Development**
      *Service
      Hosting*
      *Service
      Bandwidth*
      *Customer
      Service*
      *Billing
      Systems*
      e-commerce
      Development Completion
      Content
      Delivery Network Completion**Q4
      2005**
    $
      703,000 G&A, Salary, Benefits, T&E
      
      $
      5,800,000 Marketing and Manufacturing
      
      $
      550,000e-commerce Development
      
      **$
      7,053,000****Total
      Expense**
      
      **REVENUE:
      $3,500,000**
    **Marketing**
      Begin
      Local Spot Media
      Continue
      Print Media
      Continue
      Internet Marketing
      Execute
      Promotions
      Execute
      Channel Marketing
      Continue
      Public Relations
      Plan
      for CES
      
      **Manufacturing**
      Manufacture
      and Regional Rollout of 10,000 Units**Q1
      2006**
    $
      703,000 G&A, Salary, Benefits, T&E
      
      $
      4,375,000 Marketing
      
      $12,305,000
      Manufacturing
      
      $
      1,061,000e-commerce Development
      
      **$18,444,000****Total
      Expense**
      
      **REVENUE:
      $9,787,000**
    **Marketing**
      Trade
      Show - CES
      Continue
      local Spot Media
      Continue
      Print Media
      Continue
      Internet Marketing
      Execute
      Promotions
      Execute
      Channel Marketing
      Continue
      Public Relations
      Plan
      for E3
      
      **Manufacturing**
      Manufacture
      and National Rollout of 25,000 Units**Total**
      **04/05
      - 03/06**
    **$34,297,000****Total Expense**
      
      **TOTAL
      REVENUE: $13,287,000**





Contingencies





Provided
the company is not successful in securing the necessary capital required to fund
this operating plan the company will seek an Original Equipment Manufacturer
(OEM) to produce the Phantom Gaming Console. This would alleviate some portion
of headcount expense and all of the hardware manufacturing expense.





-25-


**CASH
REQUIREMENTS**





We
estimate that based on our current business strategy, we will have operating
cash requirements over the next twelve months of approximately $22,200,000. We
estimate we will need approximately $11,500,000 to launch the Phantom Game
Service and sell the first 10,000 units of the Phantom Game Receiver, as
follows:




Operating
      expenses, including employee salaries and benefits, office expenses, rent
      expense, legal and accounting, financing fees, publicity, investor
      relations, net of payables
    
    $
    3,600,000Marketing
    
    
    3,100,000Manufacturing
      of Inventory (Net of Revenues)
    
    
    3,600,000Capital
      Expenditures
    
    
    1,200,000Total
      Cash Requirements
    
    $
    11,500,000




After
launch, we estimate that we will need approximately $10,700,000 to achieve cash
flow break-even, as follows:







Operating
      expenses, including employee salaries and benefits, office expenses, rent
      expense, legal and accounting, financing fees, publicity, investor
      relations, net of payables
    
    $
    11,200,000Marketing
    
    
    17,100,000Manufacturing
      of Inventory (Net of Revenues)
    
    
    (18,100,000
    )Capital
      Expenditures
    
    
    500,000Total
      Cash Requirements
    
    $
    10,700,000




Our
estimate of operating expenses represents the expenditures we anticipate
incurring in the operation of our business. Our estimated operating expenses for
the next 16 months includes $7,600,000 of employee salaries and corresponding
benefits.





In
addition to negotiations with the debt holders to convert their notes to equity
in order to reduce our debt service expense, the Company is pursuing additional
bridge financing, plans on issuing additional shares of equity into a volatile
equity market and using the cash proceeds from the sales of its receiver and
service to meet the Company's long term capital needs. If the Company does not
close on sufficient bridge financing transactions, issue sufficient additional
shares of equity into a volatile equity market or is unable to launch its
service when currently planned, the Company will need to raise additional
capital from other sources or curtail its proposed spending and delay the
product launch date.





The
Company anticipates its SB-2 registration statement will become effective before
the end of July 2005. The Company projects a cash need of $1,400,000 through
July 2005 and intends to meet this cash need with bridge financing. The Company
is seeking additional bridge financing from PIPE investors who expressed a
willingness to provide debt and equity financing going forward.





The
Company has been in discussions with Roth Capital to assist the Company with
raising capital immediately following the Company’s SB-2 registration statement
becoming effective.





The
Company also has been engaged in discussions with the following lenders to
obtain short-term straight debt loans in the cumulative range of $2,000,000 to
provide bridge financing until the Company’s SB-2 registration statement becomes
effective:





Redwood
Grove Capital Management, LLC


LH
Capital


Platinum
Partners


Equity
First Holdings


West
Hastings


Hazinu
Limited


Argilus


Phoenix
Capital Holdings


Chicago
Ventures


Ron
Westman


Fred
Niedrich


Robert
Shambro





-26-


Once the
Company’s SB-2 registration statement becomes effective, the Company anticipates
that its PIPE investors will exercise their cash warrants, which
potentially will generate more than $3,000,000 in equity investments. The amount
of cash generated by the warrants is dependent on the Company’s common share
prices at the time of the warrants are exercised. The Company may re-price the
warrants to attract additional investment. Both Platinum and LH have indicated
interest in additional equity investment in the Company after the Company’s SB-2
registration statement becomes effective.





The
Company is seeking to retain Roth Capital or another investment bank to raise
equity investments to meet the balance of the Company’s $22,000,000 cash
requirement to fully fund its plan of operation. .





We will
seek to increase consumer demand for the Phantom Game Service through a number
of significant marketing programs, ranging from traditional paid advertising to
sponsorships and publicity. We maintained a significant presence at the 2004
Electronic Entertainment Expo (E3), which was held May 12-14, 2004, at the Los
Angeles Convention Center. This event is the preeminent annual sales conference
for the video game industry, and we showcased the Phantom Game Receiver and
Phantom Game Service during this event. We estimate that our marketing plan will
require approximately $20,200,000 over the next 16 months, dedicated to the
following activities:







Expected
      Marketing Budget Breakdown12
      Month ForecastMarketing,
      Promotions & Channel
    
    $
    8,900,000Advertising
    
    
    6,900,000Printing,
      Reproduction and Website
    
    
    3,300,000Trade
      Shows
    
    
    1,100,000Total
    
    $
    20,200,000





**Assumptions:**





·
    Total
      subscribers acquired (less churn/theft) in 12 month period: 97,981


·
    Per
      subscriber acquisition cost: 10,000 subscribers in 3 month regional
      launch: $310


·
    Per
      subscriber acquisition cost: 87,981 in remaining 9 months: $150


·
    Total
      12 month marketing budget: $16.7M (including past due accounts payable)





The basis
for the expected marketing budget assumptions is an analysis combining annual
marketing spends or subscriber acquisition costs (SAC) of similar or competitive
products and services and a per-market media plan associated with key reach,
frequency and conversion rate metrics.





Comparables
included TiVO, Sirius Satellite Radio, Direct TV, XM Satellite Radio and
NetFlix. Information was gathered primarily from publicly available information
such as SEC filings.





However,
no firm launch date has been set thus the expected marketing budget breakdown
will continue to be revised in reaction to seasonality, market forces,
competition and the Company’s ability to raise sufficient capital. It is
possible that significantly more marketing budget will be needed or
substantially less.





Based on
the comparable analysis and per-market reach, frequency and conversion rate
costs, we have budgeted our per subscriber acquisition cost (SAC) in two phases;
$310 per subscriber in a three month, 6 market launch phase with the target of
acquiring 10,000 net subscribers and phase two national rollout with a target
SAC of $150 to acquire an incremental 87,981 subscribers for the nine months
remaining in the first 12 month cycle.





-27-


By
cross-indexing gamer households and broadband using third party syndicated
research from Scarborough, we determined that our first six launch markets would
be Boston, San Francisco, Detroit, Dallas, Seattle and San Diego. These markets
over index in gamer and broadband households compared with the national average
and represent a combined audience of 2.6M targeted potential customers. The
Company’s goals are to reach 50% of these potential subscribers with advertising
and promotional messages and covert .77% potential customers into paying
subscribers.





On a
national basis, we have identified over 15 million broadband households with
home networks and at least 1 gamer, based on research from Penn, Schoen &
Berland, Yankee Group and Parks Associates. The Company will need to reach 50%
of this population with advertising and promotional messages and convert 1.28%
of this potential customer population into paying subscribers.





The
Company needs less than 1% of all households w. a broadband home network to
achieve it’s Year 1 forecast of 97,981 subscribers.




Rationale
for Marketing Spend





$310
Launch SAC (Subscriber Acquisition Cost):


Ø
    Phantom
      will need incremental funds to jump start channel presence with sales
      education, incentives and in store kiosks


Ø
    While
      product recognition is high amongst a small niche of game enthusiasts,
      Phantom will need to investment spend in initial markets to create greater
      brand awareness and validity


Ø
    Investment
      in channel and partner programs will strengthen Phantom’s position in the
      market


Ø
    Advertising
      and promotions options locally lack national efficiency. We anticipate
      higher CPMs (Cost Per Thousand) and greater field/grassroots tactical
      expense to fund a local launch


Ø
    Heavier
      A&P (Advertising & Promotions) investment needed to overcome
      limited launch retail presence




$150
National SAC:


Ø
    Phantom
      intends to invest in specific sales promotional periods and to leverage
      partnerships with existing vendors to gain awareness and acceptance for
      the product.


Ø
    We
      believe our reach and conversion projections are conservative against
      retailer feedback


Ø
    Publicity
      efforts and game-industry media outreach will help carry early gross
      impressions for the brand


Ø
    Steep
      retail ramp up expected against regional launch should alleviate some
      A&P expenditure


Ø
    Initial
      brand investment will alleviate some A&P
expenditure




Marketing
Goals





§
    Establish
      Phantom’s brand, price point and value
proposition


Ø
    Highlight
      Phantom’s launch offer with convenience, breadth of content, “best in
      category” performance and great price





§
    Create
      demand, intent and drive acquisition through
retail


Ø
    Ignite
      the brand with promotions, alliances, events and
ideas


Ø
    Inspire
      retail participation through innovative channel
programs


Ø
    Break
      through the pre-holiday clutter with a compelling
  thematic





§
    Drive
      usage, game purchases and build loyalty


Ø
    Superior
      experience through the integration of hardware and distribution
      services


Ø
    Customer
      support and satisfaction is the top
priority





§
    Focus
      on driving value growth attracting the best
customer





Marketing
Strategies


§
    Launch
      Phantom Service into key broadband hive (key influencer) markets to
      stimulate trendsetter buzz among initial enthusiast
    customer


§
    Roll
      out Phantom nationally with advertising and promotions that builds off of
      initial trial and broadens the brand’s scope to include lifestyle and
      casual gamers


§
    Maximize
      marketing efforts by focusing expenditures during “retail power
      periods”


§
    Use
      advertising and promotion to impact Phantom’s audience at critical stages
      in the product’s sales cycles


§
    Work
      with key distributors/vendors on MDF (retail marketing development funds)
      and promotional partnerships to ensure maximum point-of-sale
      impact




-28-




Launch
Campaign Objectives


§
    Plan
      delivers estimated total men 18-49 impressions of roughly 61million at a
      reach/frequency of 55/14 and an estimated CPM of
$51.29


§
    We
      believe plan can convert .77% or 10,000 subs in six markets, Men 18-49
      with broadband


§
    For
      plan to be effective, we anticipate a spend of $3 million or $310 per
      subscriber





Launch
Campaign Calendar - Typical Three Month Period











National
Campaign Rationale





§
    TV
      (32%) - most impact, delivers highest reach, offers immediacy of message,
      strong brand builder, supports retailer needs for driving availability
      awareness and most gaming/home electronics brands are built with
      TV


§
    Print
      (6%) - supports retailer and co-op needs, is timely, and can reach target
      audience through placement in heavily read sections (i.e. sports, biz).
      Use of promotional free-standing-inserts as well to support co-op
      marketing


§
    Internet
      (5%) - targeted, efficient, can tie into retailer site for ordering
      information, locations, etc


§
    Channel
      (26%) - Marketing development funds - paid to retailers for end-caps, POS
      materials, sales rep training, FSI inclusion, in-channel
      promotions


§
    Promotions
      (6%) - One-to-one, guerilla and on-premise marketing techniques. 
      Utilize event marketing strategies to demo the product and generate
      interest from core target groups, develop sweepstakes, giveaways and other
      direct marketing tactics


§
    Marketing
      (11%) - includes all agencies that will support the execution of the
      marketing plan; also include public relations services


§
    Production
      (5%) - TV spots, print, in-store materials, etc.


§
    Trade
      Shows (7%) - company will secure space, attend and demo the Phantom Game
      Service at industry trade shows


§
    Alternative
      (2%) - developing advertising opportunities through alternative channels
      such as TiVO, text messaging







-29-


National
Campaign Mix





$16.7
Million marketing budget is expected to be allocated in the following
ways:











§
    Third
      party vendors will be used to:


§
    Solidify
      media plan (Media Planning Vendor)


§
    Develop
      Creative Campaigns (Advertising Agency)


§
    Promotions
      Vendor will execute promotions, alternative and channel marketing
      (Promotional Vendor)


§
    Public
      Relations firm will execute trade shows and editorial
    outreach


§
    Interactive
      marketing vendor will execute online
campaigns





***Acronym
definitions***





**MDF** -
Marketing Development Funds - a fund established to execute co-marketing
programs with retail outlets. These include circulars, aisle-end caps and
rebates


**Jobbers** -
Jobbers are people hired to help sell the product in a retail outlet. Jobbers
will hand out flyers, answer questions, help restock shelves. Jobbers work for
the Company, not the retailer


**E3** - The
Electronic Entertainment Expo (E3) is the largest video game and interactive
entertainment trade show in the world.


**CES** - The
Consumer Electronics Show (CES) is the largest consumer electronics trade show
in the world


**IEMA** - The
Interactive Entertainment Merchants Association (IEMA) is a trade organization
that facilitates the relationship between publishers/manufacturers and
retailers. IEMA hosts an annual trade show to set up meetings between buyers and
sellers


**Demo
Swat Teams & Viral Guerilla Marketing** : -
Abrupt and interruptive marketing techniques that grab attention and break
through clutter. This type of marketing tactic targets and educates key prospect
groups that sets trends and creates word of mouth “pass along
value”


**SMS** - A
protocol that enables text messages to be sent and received via certain mobile
phones. SMS advertising is a new way to reach mobile phone users





Our
current strategic plan does not indicate a need for material capital
expenditures in the conduct of marketing or distribution activities. Advertising
costs are expensed either in the periods in which those costs are incurred or
the first time the advertising takes place. We currently employ 6 full-time
individuals for marketing, distribution and content acquisition.





The
Company believes it has completed all the Research and Development required in
launching the Phantom Game Service and Phantom Game Receiver. We continue to
refine processes by seeking better, faster and more cost effective ways to
deliver our goods and services.





-30-


**SOURCES
OF CAPITAL**





As of
December 31, 2004, we had cash on hand of $4,102 and restricted cash of $894,910
which represents the remaining proceeds from the sale of common stock during
2004 for aggregate proceeds of $3,589,987 and from bridge financing transactions
completed in an aggregate amount of $11,177,260. These proceeds have been used
as follows:




$3.8
      million
    Payroll,
      Payroll Taxes and Employee Benefits$2.4
      million
    Consultants$3.1
      million
    Development
      Costs$1.4
      million
    Conventions
      & Trade Shows$1.4
      million
    Advertising
      & Marketing$1.1
      million
    Repay
      Bridge Financing








Balance
of funds spent on General & Administrative expenses.





Of the
$3.8 million of proceeds used for payroll, payroll taxes and employee benefits,
key individuals received gross compensation as follows:





Timothy
      M. Roberts
    
    $
    110,417Kevin
      Bachus
    
    $
    143,750Richard
      S. Skoba
    
    $
    131,042





The
Company is actively pursuing additional bridge financing and issuing additional
shares of equity into a volatile equity market to meet its capital needs for the
short term. In addition, the Company is in negotiations with the debt holders to
convert their notes to equity in order to reduce our debt service expense. The
Company plans on issuing additional shares of equity into a volatile equity
market and using the cash proceeds from the sales of its receiver and service to
meet the Company's long term capital needs. If the Company does not close on
sufficient bridge financing transactions, issue sufficient additional shares of
equity into a volatile equity market or is unable to launch its service when
currently planned, the Company will need to raise additional capital from other
sources or curtail its proposed spending and delay the product launch date.







-31-




APPLICATION OF CRITICAL ACCOUNTING POLICIES
  STOCK-BASED
COMPENSATION
 
 We
believe that stock-based compensation is a critical accounting policy that
affects our financial condition and results of operations. Statement of
Financial Account Standards (“SFAS”) No. 123, Accounting for Stock-Based
Compensation defines a fair-value based method of accounting for stock-based
employee compensation plans and transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees, and
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for employee stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (“APB No. 25) and related
interpretations
 
 In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R “Share-Based Payment”, which addresses the accounting for share-based
payment transactions. SFAS 123R eliminates the ability to account for
share-based compensation transactions using APB 25, and instead, generally
requires that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123R will be effective for small
business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. SFAS No. 123R offers the Company
alternative methods of adopting this standard. The Company has not yet
determined which alternative method it will use. Depending upon the number and
terms of options that may be granted in future periods, the implementation of
this standard could have a material impact on the Company’s financial position
and results of operations.
 
 IMPAIRMENT
OF GOODWILL AND LONG-LIVED ASSETS
 
 In
accordance with Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets” (SFAS No. 142”), and Statement of Financial
Accounting Standards No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), the Company reviews its non-amortizable
long-lived assets, including intangible assets and goodwill for impairment
annually, or sooner whenever events or changes in circumstances indicate the
carrying amounts of such assets may not be recoverable. Other depreciable or
amortizable assets are reviewed when indications of impairment exist. Upon such
an occurrence, recoverability of these assets is determined as follows. For
long-lived assets that are held for use, the Company compares the forecasted
undiscounted net cash flows to the carrying amount. If the long-lived asset is
determined to be unable to recover the carrying amount, then it is written down
to fair value. For long-lived assets held for sale, assets are written down to
fair value. Fair value is determined based on discounted cash flows, appraised
values or management’s estimates, depending upon the nature or the assets.
Intangibles with indefinite lives are tested by comparing their carrying amounts
to fair value. Impairment within goodwill is tested using a two step method. The
first step is to compare the fair value of the reporting unit to its book value,
including goodwill. If the fair value of the unit is less than its book value,
the Company then determines the implied fair value of goodwill by deducting the
fair value of the reporting unit’s net assets from the fair value of the
reporting unit. If the book value of the goodwill is greater than its implied
fair value, the Company writes down goodwill to its implied fair value.





-32-






INCOME
TAXES
 
 Income
taxes are provided for using the liability method whereby future tax assets and
liabilities are recognized using current tax rates on the difference between the
financial statement carrying amounts and the respective tax basis of the assets
and liabilities. The Company provides a valuation allowance on future tax assets
when it is more likely than not that such assets will not be realized.
 
 RESEARCH
AND DEVELOPMENT COSTS
 
 Research
costs are expensed as incurred. Development costs are also generally expensed as
incurred unless such costs meet the criteria necessary for deferral and
amortization. To qualify for deferral, the costs must related to a technically
feasible, identifiable product that the Company intends to produce and market,
there must be a clearly defined market for the product and Company must have the
resources, or access to the resources, necessary to complete the development.
The Company has not deferred any development costs to date.




-33-






**ITEM
7.**  **FINANCIAL
STATEMENTS**





Our
consolidated financial statements are included beginning immediately following
the signature page to this report. See Item 13 for a list of the financial
statements and financial statement schedules included.





**ITEM
8.**  **CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE**





**PREVIOUS
INDEPENDENT ACOUNTANTS**





(i)  On
January 5, 2004, Baumann, Raymondo & Company PA resigned as the independent
accountants of Infinium Labs, Inc.





(ii)  The Board
of Directors approved the decision to change independent
accountants.





(iii)  The
report of Baumann, Raymondo & Company PA on the financial statements for the
fiscal year ended October 31, 2003 of the Company contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.





(iii)  The Board
of Directors approved the decision to change independent
accountants.





(iv)  In
connection with its audit for the most recent fiscal year ended October 31,
2003, there were no disagreements with Baumann, Raymondo & Company PA on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Baumann, Raymondo & Company PA would have caused Baumann,
Raymondo & Company PA to make reference thereto in their report on the
financial statements for such years.





(v)  During
the most recent fiscal year ended October 31, 2003 and through January 5, 2004
there were no reportable events as that term is defined in Item 304(a)(l)(v) of
Regulation S-X.





(vi)  The
Company has requested, and Baumann, Raymondo & Company PA has furnished, a
letter addressed to the Commission stating that Baumann, Raymondo & Company
PA agrees with subparagraphs (a)(ii), (iv) and (v) above. A copy of such letter,
dated January 5, 2004, is filed as Exhibit 16 of this Form 8-K.





**NEW
INDEPENDENT ACOUNTANTS**





On
January 5, 2004, the Company engaged Webb & Company PA as its new principal
independent accountant. The engagement was approved by the Board of Directors on
January 5, 2004





(i)  The
Company has not consulted with Webb & Company PA on the application of any
accounting principles or proposed transactions, the type of audit opinion that
might be given, any matter that was either the subject of a disagreement, as
that term is defined in Item 304(a)(l)(iv) of Regulation S-K, or a reportable
event, as that term is defined in Item 304(a)(l)(v) of Regulation
S-K.





**Item
8A.**  **CONTROLS
AND PROCEDURES**





As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms. There was no change in
our internal controls or in other factors that could affect these controls
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





-34-


**Item
8B.**  **OTHER
INFORMATION**





None.




**PART
III**





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





**The
following table sets forth the names, ages and positions held with respect to
each Director and Executive Officer of our Company during fiscal
2004.**





**Name**
    **Position
      Held with Our Company**
    **Age**
    **Date
      First**
      **Elected
      or Appointed****Directors**Timothy
      M. Roberts
    Chairman,
      Chief Executive Officer and Director
    34
    January
      5, 2004Richard
      Angelotti
    Director
    59
    January
      5, 2004**Executive
      Officers Who Are Not Directors**Kevin
      Bachus
    President
      and Chief Operating Officer
    35
    January
      5, 2004Richard
      S. Skoba
    Executive
      Vice President of Sales and Business Development
    40
    February
      9, 2004Tyrol
      R. Graham
    Vice
      President of Product Development
    41
    February
      9, 2004





The
directors of our Company are elected at each annual general meeting and hold
office until the next annual general meeting or until their successors are
appointed.




***Business
Experience***




The
following is a brief account of the education and business experience during at
least the past five years of each director, executive officer and key employee,
indicating the principal occupation during that period, and the name and
principal business of the organization in which such occupation and employment
were carried out.




***Directors
and Executive Officers***





TIMOTHY
M. ROBERTS was the founder of our predecessor, Infinium Labs Operating
Corporation, and has been our Chairman and Chief Executive Officer and a member
of our board of directors since the merger of our subsidiary into Infinium Labs
Operating Corporation. Prior to founding Infinium Labs in December 2002, Mr.
Roberts was Chairman and Chief Executive Officer for Broadband Investment Group
from 1999 through 2000. Broadband Investment Group was a holding company which
owned a portfolio of service companies which handled technology layers 1-7.
Broadband Investment Group was a general contractor of sorts which owned all of
the sub contractors which allowed customers to have a one stop shop for network
application design, build, hosting and also provided the managed services and
security. Prior to that, he was Chairman and Chief Executive Officer for Intira
Corporation from 1997 through 1999 of which Mr. Roberts was a co-founder, which
provided network-based computing and communication services on an outsourced
basis for our customers, allowing them to focus on their core business
objectives rather than on building and supporting IT infrastructure. Mr. Roberts
left Intira on good terms. The board had hired a CFO, 45 days later Mr. Roberts
was in a boating accident which put him in intensive care for 6 weeks with a 1
year recovery time. Due to this leave of absence, the board (of which Mr.
Roberts was a member) determined that it was in the best interest of the company
for CFO to move from CFO and take over as the CEO and Chairman. Mr. Roberts was
also a co-founder of broadband services provider Savvis Communications (NASDAQ
SVVS). Mr. Roberts co-founded Savvis in 1995 and left Savvis 2 years later to
start Intira Corporation.





-35-


RICHARD
ANGELOTTI was a director of our predecessor, Infinium Labs Operating
Corporation, since its formation and has been a member of our board of directors
since the merger. Mr. Angelotti has been the CEO of Angelotti & Rosenberg
Financial Group from March 2004 through the present. Mr. Angelotti served as the
Principal of Global Financial Asset Management from August 2003 through February
2004 and was a Senior Vice President of Morgan Keegan from February 1999 through
August 2003. He has over 12 years of experience as a financial advisor, and has
held executive positions for major investment firms such as Northern Trust Bank
of Sarasota, Bank of Boston in Florida, UBS Paine Webber, and Morgan Keegan. Mr.
Angelotti holds Series 6, 7, 63, 65 Insurance and Annuity licenses. Drawing on
his 13 years of experience as a practicing attorney, he has specialized his
investment strategy to work with his clients on estate planning, tax planning,
insurance needs, and annuities. Mr. Angelotti graduated from the University of
Notre Dame, and received his Juris Doctor from the Loyola University of Law.





***Executive
Officers Who Are Not Directors***





KEVIN
BACHUS became our President and Chief Operating Officer in January 2004. From
1999 through September 2003, Mr. Bachus was Vice President, Publishing of
Capital Entertainment Group, of which he was a co-founder. Capital Entertainment
Group provided funding and guidance to video game developers for development
projects, as well as, selling complete or near-complete projects to publishers
allowing developers to focus on working on the game, and cutting down the amount
of input a publisher needed to the development process itself. From 1997 through
2001 Mr. Bachus held various positions at Microsoft Corporation. While at
Microsoft, Mr. Bachus was a founding member of the Xbox project team where he
was instrumental in the development and funding of the Xbox videogame console.
Mr. Bachus served as the first director of third party relations and led efforts
that brought the hottest games to XBOX from more than 200 of the world's leading
developers and publishers. Mr. Bachus previously served as the group product
manager for DirectX, where he was responsible for promoting Windows as an
entertainment vehicle and ensuring that the DirectX suite of tools became the
primary choice for games and multimedia developers. DirectX is a Microsoft
Windows technology that enables higher performance in graphics and sound when
you're playing games or watching video on your PC (Personal Computer).





RICHARD
S. SKOBA became our Executive Vice President of Sales and Business Development
in February 2004. Prior to joining us, Mr. Skoba was a HP Services from December
2002 through December 2003 where he served as a Director of Sales and a Director
of Business Development. HP Services is a $14 billion business division of
Hewlett Packard. HP Services provides customer support, consulting and
integration and managed services. Mr. Skoba was a founder and corporate vice
president at Intira Corporation, where he also held the positions of vice
president of business development and vice president of sales from February 1998
through February 2001. While at Intira, Mr. Skoba provided the vision for
Intira's Netsourcing business and provided strategic direction in product
development, engineering and operations. Mr. Skoba's career includes his role as
one of the founders of Direct Connect Systems, an enterprise storage management
company





TYROL R.
GRAHAM became our Vice President of Product Development in February 2004. Prior
to joining us, Mr. Graham was at Microsoft Corporation from 1991 through 1999.
While at Microsoft, Ty created the Windows Hardware Quality Labs (WHQL), a
testing facility chartered with ensuring compatibility between Windows and the
wide range of hardware and device drivers designed to work with Windows.
Subsequently, Mr. Graham became the first hardware evangelist for DirectX, the
multimedia technology that serves as the foundation for audio and video in
Windows, and was responsible for driving adoption and support of DirectX
graphics initiatives. In this role, Mr. Graham forged relationships between
Microsoft and over 50 leading graphics component and board manufacturers such as
ATI, NVIDIA, Intel, S3 and many others. In 2000 Ty was a founder of Wildseed
Ltd., a technology start-up funded in part by Ignition Partners, to create
youth-targeted wireless products and was personally responsible for lead product
feature specifications, user interface design and industrial design.





***Key
Employees***





ANDREW
SCHNEIDER became our Senior Vice President of Marketing in May 2004. Prior to
joining us, Mr. Schneider served as Senior Vice President/General Manager for
Sony Pictures Digital Entertainment (SPDE) from 1996-2003, where he was
responsible for developing media software products and online broadband
entertainment based on Columbia TriStar Television Group and Sony Pictures
Entertainment brands. At Sony, Schneider was responsible for the online
development of the award-winning Dawson's Desktop, the online companion to the
hit show Dawson's Creek and the launch of interactive television versions of
Wheel of Fortune and JEOPARDY! Schneider's career includes serving as Director
of Marketing for Columbia TriStar Interactive and as senior producer for NBC
Marketing Interactive from 1994-1996, NBC's Network Television Marketing
division.





JAMES J.
ROBERTS **** is our
Vice President of Corporate Development. Mr. Roberts joined Infinium Labs after
serving from May 2001 to July 2003 as Director of Corporate Marketing and
Regional Manager for Interactive Services, Inc., a nationwide provider of
telecommunications and broadband services. James served from January 2000 to
January 2001 as Vice President of Marketing at Phoenix Networks, a nationwide
Internet services provider. James was a
founder **** and Vice
President of Marketing at Intira Corporation and Senior Account Manager at
UNICOM Group. James has more than 25 years of experience in advertising,
marketing and public relations working for Fortune 500, Enterprise and fast
growing startup companies. Jim started his career as a reporter, staff writer
and news editor at the St. Louis Globe-Democrat newspaper **.**





-36-


***Family
Relationships***




There are
no family relationships between any of our Company's directors or executive
officers.




***Involvement
In Certain Legal Proceedings***




None of
our directors, executive officers, promoters or control persons have been
involved in any of the following events during the past five years:




1.
    any
      bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the
      bankruptcy or within two years prior to that
time;




2.
    any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offences);




3.
    being
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities;
      or




4.
    being
      found by a court of competent jurisdiction (in a civil action), the
      Commission or the Commodity Futures Trading Commission to have violated a
      federal or state securities or commodities law, and the judgment has not
      been reversed, suspended, or vacated.





**SECTION
16(a) REPORTING**





To our
knowledge, based solely on a review of the copies of such reports furnished to
the Company and written representations that no other reports were required, the
Company believes that during the year ended December 31, 2004, its officers,
directors and 10% shareholders complied with all Section 16(a) filing
requirements, except for the following:





None of
our Directors or Executive Officers has filed Form 4s during 2004.





**BOARD
COMMITTEES**





We are in
the process of forming our audit, compensation and nominating committees. None
of our Directors are an “audit committee expert” within the meaning of Item
401(e) of Regulation S-B.





**CODE
OF ETHICS**





Our
Company’s board of directors adopted a Code of Business Conduct and Ethics and
Compliance Program that applies to, among other persons, our Company’s President
and Chief Executive Officer (being our principal executive officer), our
Company’s Chief Financial Officer (being our principal financial and accounting
officer and controller), as well as persons performing similar functions. As
adopted, our Code of Business Conduct and Ethics sets forth written standards
that are designed to deter wrongdoing and to promote:





(1)
    honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships;


(2)
    full,
      fair, accurate, timely, and understandable disclosure in reports and
      documents that we file with, or submit to, the Securities and Exchange
      Commission and in other public communications made by
  us;


(3)
    compliance
      with applicable governmental laws, rules and
  regulations;


(4)
    the
      prompt internal reporting of violations of the Code of Business Conduct
      and Ethics to an appropriate person or persons identified in the Code of
      Business Conduct and Ethics; and


(5)
    accountability
      for adherence to the Code of Business Conduct and
  Ethics.





Our Code
of Business Conduct and Ethics requires, among other things, that all of our
Company’s personnel shall be accorded full access to our Chief Financial Officer
with respect to any matter which may arise relating to the Code of Business
Conduct and Ethics. Further, all of our Company’s personnel are to be accorded
full access to our Company’s Audit Committee if any such matter involves an
alleged breach of the Code of Business Conduct and Ethics by the Chief Financial
Officer or by any person who would be considered an “insider” for the purposes
of our Company’s Insider Trading Compliance Policy by virtue of such person’s
relationship to the Chief Financial Officer.





In
addition, our Code of Business Conduct and Ethics emphasizes that all employees,
and particularly managers and/or supervisors, have a responsibility for
maintaining financial integrity within our Company, consistent with generally
accepted accounting principles, and federal, provincial and state securities
laws. Any employee who becomes aware of any incidents involving financial or
accounting manipulation or other irregularities, whether by witnessing the
incident or being told of it, must report it to his or her immediate supervisor
or to our Company’s Chief Financial Officer. If the incident involves an alleged
breach of the Code of Business Conduct and Ethics by the Chief Financial
Officer, the incident must be reported to any member of our Company’s Audit
Committee. Any failure to report such inappropriate or irregular conduct of
others is to be treated as a severe disciplinary matter. It is against our
Company policy to retaliate against any individual who reports in good faith the
violation or potential violation of our Company’s Code of Business Conduct and
Ethics by another.








-37-





**ITEM
10. EXECUTIVE COMPENSATION**





**SUMMARY
OF EXECUTIVE COMPENSATION**





Particulars
of compensation awarded to, earned by or paid to:





(a)
    our
      Company's chief executive officer (the
"CEO");





(b)
    each
      of our Company's four most highly compensated executive officers who were
      serving as executive officers at the end of the most recently completed
      fiscal year and whose total salary and bonus exceeds $100,000 per year;
      and





(c)
    any
      additional individuals for whom disclosure would have been provided under
      (b) but for the fact that the individual was not serving as an executive
      officer of our Company at the end of the most recently completed fiscal
      year;





(all such
persons are referred to as the "Named Executive Officers") are set out in the
summary compensation table below.





**SUMMARY
      COMPENSATION TABLE****Annual
      Compensation**
    **Long
      Term Compensation****Awards**
    **Payouts**Name
      and Principal Position
    Year
    Salary
    Bonus
    Other
      Annual Compen-sation(1)
    Securities
      Underlying Options/ SARs Granted (#)
    Restricted
      Shares or Restricted Share Units
    LTIP
      Payouts
    All
      Other Compen-sationTimothy
      M. Roberts Chairman, Chief Executive Officer and Director
    2004
      2003
      2002
    $250,0001
      $2,500
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      NilKevin
      Bachus President and Chief Operating Officer
    2004
      2003
      2002
    $250,0002
      $16,667
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    2,100,000
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      NilRichard
      S. Skoba Executive Vice President of Sales and Business
      Development
    2004
      2003
      2002
    $207,9653
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      NilAndrew
      Schneider Senior Vice President of Marketing
    2004
      2003
      2002
    $190,0004
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      NilTyrol
      R. Graham Vice President of Product Development
    2004
      2003
      2002
    $150,0005
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil
    Nil
      Nil
      Nil







1
    includes
      500,000 shares of S-8 stock issued in lieu of cash
  compensation.


2
    includes
      500,000 shares of S-8 stock issued in lieu of cash
  compensation.


3
    includes
      224,574 shares of S-8 stock issued in lieu of cash
  compensation.


4
    includes
      203,400 shares of S-8 stock issued in lieu of cash
  compensation.


5
    includes
      265,966 shares of S-8 stock issued in lieu of cash
  compensation.







-38-




The
following table sets forth for each of the Named Executive Officers certain
information concerning stock options granted to them during fiscal 2004. Our
Company has never issued stock appreciation rights. Our Company grants options
that generally vest immediately at an exercise price equal to the fair market
value of a share of common stock as determined by its closing price on the OTC
Bulletin Board. The term of each option granted is generally five years from the
date of grant. Options may terminate before their expiration dates if the
optionee’s status as an employee is terminated or upon the optionee’s death or
disability.





**OPTION/SAR
GRANTS IN THE LAST FISCAL YEAR**





**Name**
    
    **Number
      of Securities Underlying Options/ SARs Granted
(#)**
    
    **%
      of Total Options/ SARs Granted to Employees in Fiscal
      Year**
    
    **Exercise
      Price**
      **($/Share)**
    
    **Expiration
      Date**Timothy
      Roberts
    
    
    4,000,000
    
    
    28
    %
    $
    1.43
    
    
    June
      1, 2009Kevin
      Bachus
    
    
    4,000,000
    
    
    28
    %
    $
    0.53
    
    
    June
      1, 2009Richard
      S. Skoba
    
    
    1,500,000
    
    
    11
    %
    $
    0.53
    
    
    June
      1, 2009Andrew
      Schneider
    
    
    1,000,000
    
    
    7
    %
    $
    1.43
    
    
    June
      1, 2009Tyrol
      R. Graham
    
    
    1,000,000
    
    
    7
    %
    $
    0.53
    
    
    June
      1, 2009


The
percentages are based on 14,155,000 total options granted to current
employees




**AGGREGATED
OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES**





No
options were exercised during 2004.





-39-





**EMPLOYMENT
CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS**





On
September 17, 2004, Infinium Labs, Inc. entered into an employment agreement
with Timothy M. Roberts, Chief Executive Officer. The agreement is for a one
year term and sets Mr. Roberts’ salary at $150,000 per year, automatically
increasing to $250,000 per year when the Company’s stockholders’ equity equals
or exceeds $5,000,000.





On
November 1, 2003, Infinium Labs, Inc. entered into an employment agreement with
Kevin Bachus, President and Chief Operating Officer. Per the agreement, Mr.
Bachus’ salary is $200,000 per year from November 1, 2003 through April 30, 2004
and, thereafter, increased to $250,000 per year.





On June
1, 2004, Infinium Labs, Inc. entered into a revised employment agreement with
Richard S. Skoba, Executive Vice President of Sales and Business Development,
that supersedes in its entirety an original employment agreement with Infinium
Labs Corporation dated January 3, 2003. The revised agreement sets January 3,
2004 as the effective date of hire and the initial salary is $125,000 per year.
Effective February 4, 2004, Mr. Skoba's salary automatically increased to
$175,000 per year. Effective June 1, 2004, Mr. Skoba received monthly increases
to his salary for five months, in equal installments, until reaching $225,000
per year. Upon termination by us without cause, Mr. Skoba will be entitled to
six months' salary and benefits.





On
January 15, 2004, Infinium Labs, Inc. entered into an employment agreement with
Tyrol Graham, Vice President of Product Development. Per the agreement, Mr.
Graham’s salary is $150,000 per year and grants Mr. Graham the option to
purchase 150,000 shares of the Company’s common stock pursuant to the Company’s
stock option plan and the eligibility to participate in the Company’s MBO Plan
for a maximum of 400,000 additional shares of common stock to be awarded
pursuant to the Company’s Incentive Stock Option Plan.





On May
24, 2004, Infinium Labs, Inc. entered into an employment agreement with Andrew
Schneider, Senior Vice President of Marketing. Per the agreement, Mr.
Schneider’s salary is $190,000 per year and grants Mr. Schneider the option to
purchase 300,000 shares of the Company’s common stock, of which, 20% vested on
Mr. Schneider’s first day of employment.




**COMPENSATION** **OF DIRECTORS AND EXECUTIVE OFFICERS**




Directors
and executive officers receive, on an annual basis, incentive stock options to
purchase shares of our common stock as awarded by our Board of Directors in
consultation with the compensation committee.




Our Board
of Directors may award special remuneration to any director undertaking any
special services on our behalf other than services ordinarily required of a
director. Other than indicated herein, no director received and/or accrued any
compensation for his services as a director, including committee participation
and/or special assignments.




There are
no arrangements or plans in which we provide pension, retirement or similar
benefits for directors or executive officers.




To date,
we have granted to directors, officers, employees and consultants incentive
stock options to purchase shares of our common stock subject to and in
accordance with the prevailing policies of the stock exchange on which our
shares were then listed. Options are granted based on the assessment by our
Board of Directors and/or compensation committee of the optionee's past and
present contribution to the success of our company. These options are not
transferable and are exercisable from the date granted until the earliest of (i)
such number of years (up to ten years) from the date of the grant, or (ii) such
number of days following the death of the optionee as is specified in each
optionee's option agreement.




Other
than the management agreements, the advisory agreements and the stock incentive
plans discussed herein, we presently have no material bonus or profit sharing
plans pursuant to which cash or non-cash compensation is or may be paid to our
directors or executive officers.








-40-





**ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT**





**VOTING
SECURITIES AND PRINCIPAL HOLDERS THEREOF**





The
authorized capital of our Company consists of: 600,000,000 million shares of
common stock.





**SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





***Principal
Stockholders***





The
following table sets forth, as of April 12, 2005 certain information with
respect to the beneficial ownership of our common stock by each stockholder
known by us to be the beneficial owner of more than 5% of our common stock and
by each of our current directors and executive officers. Each person has sole
voting and investment power with respect to the shares of common stock, except
as otherwise indicated. Beneficial ownership consists of a direct interest in
the shares of common stock, except as otherwise indicated.





Name
      and Address of Beneficial Owner
    
    Amount
      and Nature of
      Beneficial
      Ownership(1)
    
    Percentage
      of
      Class(2)Timothy
      M. Roberts
    
    
    19,442,276
    
    
    12.28
    %Kevin
      Bachus
    
    
    4,655,556
    
    
    2.94
    %Richard
      S. Skoba
    
    
    583,333
    
    
    0.37
    %Tyrol
      R. Graham
    
    
    388,889
    
    
    0.25
    %Richard
      Angelotti
      2080
      Ringling Blvd
      Sarasota,
      Florida 34237
    
    
    1,064,000
    
    
    0.67
    %All
      Officers and Directors as a group (5 persons)
    
    
    26,134,054
    
    
    16.51
    %





*
Represents less than 1% of our Company’s outstanding stock





(1)  Shares
inclusive of vested stock options.





(2)  Based on
151,829,349 shares of common stock issued and outstanding and 6,351,529 vested
stock options as of April 12 , 2005. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Except
as otherwise indicated, we believe that the beneficial owners of the common
stock listed above, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.





-41-





***Changes
in Control***





We are
unaware of any contract or other arrangement the operation of which may at a
subsequent date result in a change of control of Infinium, other than the
conversion of our outstanding convertible debentures in certain
circumstances.





***Equity
Compensation Plan Information***





The
following table provides certain information with respect to all of our
Company's equity compensation plans in effect as of December 31,
2004





Plan
      Category
    
    Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
    
    Weighted
      average exercise price of outstanding options, warrants and
      rights
    
    Number
      of securities remaining available for future issuanceEquity
      compensation plans approved by stockholders
    
    
    0
    
    
    0
    
    
    0Equity
      compensation plans not approved by stockholders(1)
    
    
    0
    
    
    0
    
    
    0Total
    
    
    0
    
    
    0
    
    
    0





**ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





Other
than as listed below, we have not been a party to any transaction, proposed
transaction, or series of transactions in which the amount involved exceeds
$60,000, and in which, to our knowledge, any of our directors, officers, five
percent beneficial security holders, or any member of the immediate family of
the foregoing persons has had or will have a direct or indirect material
interest.





**TRANSACTIONS
WITH CERTAIN OFFICERS**





On
January 5, 2004, our wholly owned subsidiary merged with and into Infinium Labs
Operating Corporation, with Infinium Labs Operating Corporation surviving as our
wholly-owned subsidiary. In connection with such merger, Timothy M. Roberts, our
Chief Executive Officer and one of our directors, received 36,199,220 shares of
our common stock as merger consideration based on the shares he owned in
Infinium Labs Operating Corporation immediately prior to the merger. Also in
connection with the merger, Mr. Roberts' mother, sister and brother received,
respectively, 3,141,660, 31,400 and 31,400 shares of our common stock as merger
consideration.





The
Company issued a director 800,000 shares of common stock as consideration for
the director's personal guaranty of a $500,000 note payable secured by a real
estate mortgage encumbering the director's residence.





The
Company compensated the Chief Executive Officer $50,000 as consideration for the
Chief Executive Officer's personal guaranty of a $1,500,000 note payable secured
by a real estate mortgage encumbering the Chief Executive Officer's residence.





**TRANSACTIONS
WITH PROMOTER**





Immediately
prior to the merger described above, Peter Goldstein surrendered to us
10,000,000 shares of our common stock in exchange for all of the issued and
outstanding of our wholly-owned subsidiary Global Business Resources, Inc., a
Florida corporation. The operations of such subsidiary were not material to us
and were not desired to be retained following the merger.





The
promoters of our Company are our directors and officers.





**ITEM
13. EXHIBITS**





(a)  Exhibits.
See “Exhibit Index”.








-42-





**ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**


Audit
Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of the Company's annual financial statements for the year
ended December 31, 2004 and for the reviews of the financial statements included
in the Company's Quarterly Reports on Form 10-QSB during those fiscal years were
$53,625 and $18,988  respectively.
The aggregate fees billed by our auditors, for professional services rendered
for the audit of the Company's annual financial statements for the period from
December 9, 2002 (Inception) to October 31, 2003 was $23,280.
 
 Tax Fees.
The Company incurred fees to auditors of $44,764 and $5,000 for tax compliance
matters during the years ended December 31, 2004 and December 31, 2003,
respectively.
 
 All Other
Fees. The aggregate fees billed by our auditors, for other non-audit
professional services, other than those services listed above, totaled $0 and
$0.


**POLICY
ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF
INDEPENDENT AUDITORS**





The
Company currently does not have a designated Audit Committee, and accordingly,
the Company's Board of Directors' policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The independent auditors and
management are required to periodically report to the Company's Board of
Directors regarding the extent of services provided by the independent auditors
in accordance with this pre-approval, and the fees for the services performed to
date. The Board of Directors may also pre-approve particular services on a
case-by-case basis.








-43-







Exhibit
      No.
    
    Exhibit
      Description
    
    Location2-1
    
    Agreement
      and Plan of Merger dated as of Filed herewith
    
    Incorporated
      by Reference to ExhibitDecember
      24, 2003 by and among Global Business
    
    2-1
      to Form 8-K filed with the SEC onResources,
      Inc., Global Infinium Merger Sub, Inc.,
    
    January
      20, 2004Infinium
      Labs Corporation and Peter J. Goldstein3-1
    
    Certificate
      of Incorporation
    
    Incorporated
      by Reference to Exhibit3-0
      to Form SB-2 (Registration No.333-67990)
      filed with the SEC onAugust
      20, 2001
  3-2
    
    Certificate
      of Amendment of Certificate of Incorporation
    
    Incorporated
      by reference to Exhibit3-2
      to the Company's Form 10-KSB forthe
      year ended December 31, 2003 (the"Form
      10-KSB")3-3
    
    Certificate
      of Amendment of Certificate of Incorporation
    
    Incorporated
      by reference to Exhibit3-3
      to the Company's Form 10-KSB forthe
      year ended December 31, 2003 (the"Form
      10-KSB")3-4
    
    By-laws
    
    Incorporated
      by reference to Exhibit3-4
      to the Company's Form 10-KSB forthe
      year ended December 31, 2003 (the"Form
      10-KSB")4-1
    
    Stock
      Purchase Agreement dated as of January 22, 2004
    
    Incorporated
      by reference to Exhibitbetween
      Infinium Labs, Inc. and SBI Brightline VI, LLC
    
    4-1
      to Form 8-K filed with the SEC onJanuary
      26, 20044-2
    
    Stock
      Purchase Agreement dated as of January 22, 2004
    
    Incorporated
      by reference to Exhibitbetween
      Infinium Labs, Inc. and Infinium Investment
    
    4-2
      to Form 8-K filed with the SEC onPartners,
      LLC
    
    January
      26, 20044-3
    
    Form
      of Subscription Agreement between Infinium Labs,
    
    Incorporated
      by reference to ExhibitInc.
      and certain stockholders of Infinium Labs, Inc.
    
    4-3
      to the Form 10-KSB10-1
    
    12%
      Secured Subordinated Debenture between the Company
    
    Incorporated
      by reference to Exhibitand
      Contare Ventures, LLC, dated February 23, 2004
    
    10-12
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-2
    
    12%
      Secured Subordinated Debenture between the Company
    
    Incorporated
      by reference to Exhibitand
      Gary Kurfirst, dated February 23, 2004
    
    10-9
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-3
    
    15%
      Secured Debenture between the Company and James
    
    Incorporated
      by reference to ExhibitBeshara,
      dated March 29, 2004
    
    10-4
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-4
    
    15%
      Secured Debenture between the Company and Ronald
    
    Incorporated
      by reference to ExhibitWestman,
      dated April 7, 2004
    
    10-11
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-5
    
    15%
      Secured Subordinated Debenture between the Company
    
    Incorporated
      by reference to Exhibitand
      James Beshara, dated May 3, 2004
    
    10-3
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-6
    
    15%
      Secured Debenture between the Company and Ronald
    
    Incorporated
      by reference to ExhibitWestman,
      dated May 7, 2004
    
    10-1
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-7
    
    Pledge
      Agreement between Robert F. Shambro in favor of
    
    Incorporated
      by reference to ExhibitPhoenix
      Capital Opportunity Fund, dated May 12, 2004
    
    10-6
      to the Form 10-QSB filed with theSEC
      on August 23, 2004
  -44-
  10-8
    
    Promissory
      Note between the Company and Sharon M.
    
    Incorporated
      by reference to ExhibitBeshara,
      dated May 18, 2004
    
    10-5
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-9
    
    15%
      Secured Subordinated Debenture between the Company
    
    Incorporated
      by reference to Exhibitand
      SBI USA, LLC, dated May 28, 2004
    
    10-10
      to the Form 10-QSB filed with theSEC
      on August 23, 200410-11
    
    Amended
      and restated convertible secured promissory note
    
    Incorporated
      by reference to Exhibitdated,
      June 16, 2004, between the Company and Phantom
    
    10-2
      to the Form 10-QSB filed withInvestors,
      LLC
    
    the
      SEC on August 23, 200410-12
    
    Commercial
      Promissory Note between the Company and
    
    Incorporated
      by reference to ExhibitVideo
      Associates, LLC, dated June 2004
    
    10-8
      to the Form 10-QSB filed withthe
      SEC on August 23, 200410-13
    
    Employee
      Stock Ownership
    
    Incorporated
      by reference to Exhibit10-13
      to the Form 10-QSB filed withthe
      SEC on August 23, 200410-14
    
    Promissory
      Note between the Company and Stephen
    
    Incorporated
      by reference to ExhibitA.
      Witzer, dated July 28, 2004
    
    10-14
      to the Form SB-2/A filed withthe
      SEC on February 14, 200510-15
    
    10%
      Secured Promissory Note between the Company and
    
    Incorporated
      by reference to ExhibitHazinu
      Ltd., dated October 20, 2004
    
    4-2
      to Form 8-K filed with the SEC onOctober
      29, 200410-16
    
    10%
      Secured Promissory Note between the Company and JM
    
    Incorporated
      by reference to ExhibitInvestors,
      LLC, Fenmore Holdings, LLC, Viscount
    
    4-6
      to Form 8-K filed with the SEC onInvestments
      Limited and Congregation Mishkan Sholom,
    
    October
      29, 2004dated
      October 27, 200410-17
    
    Securities
      Purchase Agreement between the Company and
    
    Incorporated
      by reference to ExhibitHazinu
      Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
    
    4-1
      to Form 8-K filed with the SEC onViscount
      Investments Limited and Congregation Mishkan
    
    December
      22, 2004Sholom,
      dated December 13, 200410-18
    
    Registration
      Rights Agreement between the Company and
    
    Incorporated
      by reference to ExhibitHazinu
      Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
    
    4-2
      to Form 8-K filed with the SEC onViscount
      Investments Limited and Congregation Mishkan
    
    December
      22, 2004Sholom,
      dated December 13, 200410-19
    
    8%
      Convertible Debenture between the Company and Hazinu
    
    Incorporated
      by reference to ExhibitLtd.,
      JM Investors, LLC, Fenmore Holdings, LLC, Viscount
    
    4-3
      to Form 8-K filed with the SEC onInvestments
      Limited and Congregation Mishkan Sholom,
    
    December
      22, 2004dated
      December 13, 200410-20
    
    8%
      Convertible Debenture between the Company and
    
    Incorporated
      by reference to Form 8-Kaccredited
      investors, dated December 23, 2004
    
    filed
      with the SEC on January 5, 200510-21
    
    Employment
      agreement between the Company and Richard
    
    Filed
      herewithSkoba
      dated January 3, 200310-22
    
    Pinnacle
      Marketing agreement to serve as manufacturing
    
    Incorporated
      by reference to ExhibitRepresentatives
    
    10-22
      to the Form SB-2/A filed withthe
      SEC on February 14, 200510-23
    
    Summit
      Marketing agreement to serve as manufacturing
    
    Incorporated
      by reference to ExhibitRepresentatives
    
    10-23
      to the Form SB-2/A filed withthe
      SEC on February 14, 200510-24
    
    Limelight
      Networks agreement to provide digital
    
    Incorporated
      by reference to Exhibitdelivery
      network services
    
    10-24
      to the Form SB-2/A filed withthe
      SEC on February 14, 200510-25
    
    Chicony
      agreement to manufacture system hardware
    
    Incorporated
      by reference to Exhibit10-25
      to the Form SB-2/A filed withthe
      SEC on February 14, 200510-26
    
    Saitek
      agreement to manufacture system hardware
    
    Incorporated
      by reference to Exhibit10-26
      to the Form SB-2/A filed withthe
      SEC on February 14, 2005
  -45-
  10-27
    
    BIOSTAR®
      Microtech International Corp. agreement for
    
    Incorporated
      by reference to Exhibitengineering,
      industrial design and manufacturing
    
    10-27
      to the Form SB-2/A filed withthe
      SEC on February 14, 200510-28
    
    Teague
      agreement for engineering and industrial design
    
    Incorporated
      by reference to Exhibit10-28
      to the Form SB-2/A filed withthe
      SEC on February 14, 200510-29
    
    Employment
      agreement between the Company and Richard
    
    Filed
      herewithSkoba
      dated June 1, 200410-30
    
    Employment
      agreement between the Company and Timothy
    
    Filed
      herewithM.
      Roberts dated September 17, 200410-31
    
    Employment
      agreement between the Company and Kevin
    
    Filed
      herewithBachus
      dated November 1, 200310-32
    
    Employment
      agreement between the Company and Tyrol
    
    Filed
      herewithGraham
      dated January 15, 200410-33
    
    Employment
      agreement between the Company and Andrew
    
    Filed
      herewithSchneider
      dated May 24, 200410-34
    
    Baumann,
      Raymondo & Company, P.A. consent to the
    
    Filed
      herewithincorporation
      of their report as independent auditors











-46-





**SIGNATURES**





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





****INFINIUM LABS,
      INC.**Date:
    By:
    /s/ Timothy M.
    RobertsTimothy M. RobertsChairman and
      Chief Executive Officer**





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




Signature
    
    Title
    
    Date/s/
      Timothy M. Roberts
    
    Chairman,
      Chief Executive Officer and
    
    April
      15, 2005Timothy
      M. Roberts
    
    Director
      (Principal Executive Officer)and
      Acting Chief Financial Officer(Principal
      Financial and Accounting Officer)/s/
      Richard Angelotti
    
    Director
    
    April
      15, 2005Richard
      Angelotti






-47-
    
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **FINANCIAL
STATEMENTS**
 **AS
OF DECEMBER 31, 2004 CONSOLIDATED AND 2003**
 
 
 
    
 
 
   
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 
 
 **CONTENTS**
 
 
 PAGES
    1
    Reports
      of Independent Registered Public Accounting FirmsPAGE
    2
    Balance
      Sheets as of December 31, 2004 (Consolidated) and 2003PAGE
    3
    Statements
      of Operations for the Year Ended December 31, 2004 (Consolidated) and for
      the Two Months Ended December 31, 2003 and for the Period from December 9,
      2002 (Inception) to December 31, 2004 and for the Period from December 9,
      2002 (Inception) to October 31, 2003PAGES
    4 -
      7
    Statement
      of Changes in Stockholders’ Deficiency for the Period from December 9,
      2002 (Inception) Through December 31, 2004PAGES
    8
    Statements
      of Cash Flows for the Year Ended December 31, 2004 (Consolidated) and for
      the Two Months Ended December 31, 2003 and for the Period from December 9,
      2002 (Inception) to December 31, 2004 and for the Period from December 9,
      2002 (Inception) to October 31, 2003PAGES
    9 -
      35
    Notes
      to Financial Statements
  
 
  
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To the
Board of Directors of:
 Infinium
Labs, Inc.
 (A
Development Stage Company)
 
 We have
audited the accompanying balance sheets of Infinium Labs, Inc. and subsidiary (A
Development Stage Company) as of December 31, 2004 (consolidated) and 2003, and
the related statements of operations, changes in stockholders’ deficiency and
cash flows for the year ended December 31, 2004 (consolidated), for the two
months ended December 31, 2003 and for the period from December 9, 2002
(inception) to December 31, 2004 (consolidated). These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit. . The financial
statements of Infinium Labs Corporation as of October 31, 2003, were audited by
other auditors whose report dated December 11, 2003, except for Note G as to
which the date is January 26, 2004, expressed an unqualified opinion on those
statements.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Infinium Labs, Inc. and subsidiary
(A Development Stage Company) as of December 31, 2004 (consolidated) and 2003
and the results of its operations and its cash flows for the year ended December
31, 2004 (consolidated), for the two months ended December 31, 2003 and for the
period from December 9, 2002 (inception) to December 31, 2004, in conformity
with accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 9 to the
consolidated financial statements, the Company has had recurring losses from
inception of $36,000,363, has a working capital deficiency of $12,223,911, a
stockholders deficiency of $11,468,854 and used cash in operations from
inception of $11,996,783. This raises substantial doubt about its ability to
continue as a going concern. Management’s plans concerning this matter are also
described in Note 9. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
 
 
 WEBB
& COMPANY, P.A.
 
 Boynton
Beach, Florida
 April 14,
2005
 
  1




**INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Balance
Sheets**


**ASSETS**December
      31,
      2004(Consolidated)
    
    
    December
      31, 2003**Current
      Assets:**Cash
    
    $
    4,102
    
    $
    45,852Restricted
      Cash
    
    
    894,910
    
    
    -Other
      Receivable
    
    
    407
    
    
    3,350Total
      Current Assets
    
    
    899,419
    
    
    49,202**Property
      and Equipment, Net**
    
    
    475,122
    
    
    162,763**Other
      Assets:**Deposits
    
    
    5,440
    
    
    7,490Intangible
      asset, net (Note 2)
    
    
    256,495
    
    
    300,000Total
      Other Assets
    
    
    261,935
    
    
    307,490**Total
      Assets**
    
    
    1,636,476
    
    
    519,455**LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCY****Current
      Liabilities:**Accounts
      payable
    
    $
    4,583,885
    
    $
    349,005Accrued
      interest expense
    
    
    301,415
    
    
    6,781Other
      accrued expense
    
    
    105,000
    
    
    120,850Accrued
      payroll and payroll taxes
    
    
    834,682
    
    
    -Promissory
      notes (Note 4)
    
    
    7,298,348
    
    
    366,154**Total
      Current Liabilities**
    
    
    13,123,330
    
    
    842,790**Commitments
      and Contingencies**
    
    
    -
    
    
    -**Stockholders’
      Deficiency:**Preferred
      stock, $0.001 par value, 10,000,000 shares authorized, none issued and
      outstanding
    
    
    -
    
    
    -Common
      stock, $0.0001 par value, 200,000,000 shares authorized, 121,090,655 and
      69,115,900 shares issued and outstanding, respectively (Note
      5)
    
    
    12,109
    
    
    6,911Additional
      paid-in capital (Note 5)
    
    
    24,523,917
    
    
    2,702,348Subscription
      receivable
    
    
    (22,517
    )
    
    (163,517
    )Accumulated
      deficit during development stage
    
    
    (36,000,363
    )
    
    (2,869,077
    )Total
      Stockholders’ Deficiency
    
    
    (11,486,854
    )
    
    (323,335
    )**Total
      Liabilities and Stockholders’ Deficiency**
    
    
    1,636,476
    
    
    519,455
 
  
 See
accompanying Notes to Financial Statements.
 2
 
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Statement
of Operations**


For
      the Year Ended December 31, 2004(Consolidated)
    
    
    For
      the Two Months Ended December 31, 2003
    
    
    For
      the Period
      from
      December
      9, 2002 (Inception) to
      October
      31, 2003
    
    
    For
      the Period from
      December
      9, 2002
      (Inception
      to December 31, 2004)
      (Consolidated)**Operating
      Expenses:**Development
      costs
    
    $
    3,130,854
    
    $
    145,943
    
    $
    259,407
    
    $
    3,536,204Advertising
    
    
    1,380,377
    
    
    55,141
    
    
    153,038
    
    
    1,588,556Salary
      expense
    
    
    6,776,876
    
    
    -
    
    
    -
    
    
    6,776,876Professional
      fees
    
    
    2,808,733
    
    
    58,133
    
    
    837,737
    
    
    3,704,603Consultants
    
    
    9,130,767
    
    
    191,740
    
    
    783,860
    
    
    10,106,367Impairment
      of assets
    
    
    352,299
    
    
    -
    
    
    -
    
    
    352,299General
      and administrative
    
    
    3,864,787
    
    
    130,032
    
    
    236,087
    
    
    4,230,906Total
      Operating Expenses
    
    
    27,444,693
    
    
    580,989
    
    
    2,270,129
    
    
    30,295,811**Net
      Loss from Operations**
    
    
    (27,444,693
    )
    
    (580,989
    )
    
    (2,270,129
    )
    
    (30,295,811
    )**Other
      Income (Expense):**Other
      income
    
    
    1,897
    
    
    37
    
    
    -
    
    
    1,934Loss
      on sale of equipment
    
    
    (448
    )
    
    -
    
    
    -
    
    
    (448
    )Interest
      expense
    
    
    (5,688,042
    )
    
    (17,996
    )
    
    -
    
    
    (5,706,038
    )Total
      Other Income (Expense)
    
    
    (5,686,593
    )
    
    (17,959
    )
    
    -
    
    
    (5,704,552
    )**Loss
      before Income Taxes**
    
    
    (33,131,286
    )
    
    (598,948
    )
    
    (2,270,129
    )
    
    (36,000,363
    )**Income
      Taxes**
    
    
    -
    
    
    -
    
    
    -
    
    
    -**Net
      Loss**
    
    $
    (33,131,286
    )
    $
    (598,948
    )
    $
    (2,270,129
    )
    $
    (36,000,363
    )**Per
      Common Share**Loss
      per common share - basic and diluted
    
    $
    (0.33
    )
    $
    (0.01
    )
    $
    (0.04
    )
    $
    (0.45
    )Weighted
      average - basic and diluted
    
    
    100,688,617
    
    
    67,745,088
    
    
    57,420,568
    
    
    79,230,175
 
 
  
 See
accompanying Notes to Financial Statements.
 3
  **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Statement
of Stockholders' Deficiency**
 **For
the Period from December 9, 2002 (Inception) to December 31,
2004**
 Preferred
      Stock
    Common
      Stock
    
    Additional
      Paid-In
    
    
    Accumulated
      Deficit During Development
    
    
    Stock
      SubscriptionsShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stage
    
    
    Receivable
    
    
    TotalStock
      issued to founders ($0.0004 per share)
    
    
    -
    
    $
    -
    
    
    58,189,728
    
    $
    5,819
    
    $
    12,703
    
    $
    -
    
    $
    (18,517
    )
    $
    5Stock
      issued for cash ($0.12 per share)
    
    
    -
    
    
    -
    
    
    4,423,012
    
    
    442
    
    
    526,261
    
    
    -
    
    
    -
    
    
    526,703Stock
      issued for services ($0.3775 per share)
    
    
    -
    
    
    -
    
    
    2,957,376
    
    
    296
    
    
    1,112,709
    
    
    -
    
    
    -
    
    
    1,113,005Net
      loss for the period from December 9, 2002 (inception) to October 31,
      2003
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,270,129
    )
    
    -
    
    
    (2,270,129
    )Balance,
      October 31, 2003
    
    
    -
    
    
    -
    
    
    65,570,116
    
    
    6,557
    
    
    1,651,673
    
    
    (2,270,129
    )
    
    (18,517
    )
    
    (630,416
    )Stock
      issued for cash ($0.28 per share)
    
    
    -
    
    
    -
    
    
    2,169,148
    
    
    217
    
    
    612,172
    
    
    -
    
    
    (145,000
    )
    
    467,389Stock
      issued for signage rights ($0.3175 per share)
    
    
    -
    
    
    -
    
    
    942,600
    
    
    94
    
    
    299,906
    
    
    -
    
    
    -
    
    
    300,000Stock issued for services ($0.3175 per share)
    
    
    -
    
    
    -
    
    
    434,036
    
    
    43
    
    
    138,597
    
    
    -
    
    
    -
    
    
    138,640Net
      loss for the two months ended December 31, 2003
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (598,948
    )
    
    -
    
    
    (598,948
    )Balance,
      December 31, 2003
    
    
    -
    
    
    -
    
    
    69,115,900
    
    
    6,911
    
    
    2,702,348
    
    
    (2,869,077
    )
    
    (163,517
    )
    
    (323,335
    )Recapitalization
      of Global Business Resources
    
    
    -
    
    
    -
    
    
    16,156,000
    
    
    1,615
    
    
    (1,615
    )
    
    -
    
    
    -
    
    
    -Shares
      issued for cash ($0.25 per share)
    
    
    -
    
    
    -
    
    
    6,650,000
    
    
    665
    
    
    1,661,835
    
    
    -
    
    
    -
    
    
    1,662,500Stock
      issued for cash ($0.257 per share)
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    141,000
    
    
    141,000Shares
      issued with note payable ($0.78 per share)
    
    
    -
    
    
    -
    
    
    560,000
    
    
    56
    
    
    433,944
    
    
    -
    
    
    -
    
    
    434,000Shares
      issued for legal settlement ($1.475 per share)
    
    
    -
    
    
    -
    
    
    66,668
    
    
    7
    
    
    98,328
    
    
    -
    
    
    -
    
    
    98,335Shares
      issued for services ($1.475 per share)
    
    
    -
    
    
    -
    
    
    1,750,000
    
    
    175
    
    
    2,581,075
    
    
    -
    
    
    -
    
    
    2,581,250Shares
      issued with note payable ($1.47 per share)
    
    
    -
    
    
    -
    
    
    7,500
    
    
    -
    
    
    11,025
    
    
    -
    
    
    -
    
    
    11,025
 
  
 See
accompanying Notes to Financial Statements.
 4
  **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Statement
of Stockholders' Deficiency**
 **For
the Period from December 9, 2002 (Inception) to December 31,
2004**
 Preferred
      Stock
    Common
      Stock
    
    Additional
      Paid-In
    
    
    Accumulated
      Deficit During Development
    
    
    Stock
      SubscriptionsShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stage
    
    
    Receivable
    
    
    TotalShares
      issued with note payable ($1.42 per share)
    
    
    -
    
    
    -
    
    
    200,000
    
    
    20
    
    
    283,980
    
    
    -
    
    
    -
    
    
    284,000Shares
      issued with note payable ($1.475 per share)
    
    
    -
    
    
    -
    
    
    100,000
    
    
    10
    
    
    147,490
    
    
    -
    
    
    -
    
    
    147,500Shares
      issued with note payable ($1.13 per share)
    
    
    -
    
    
    -
    
    
    60,000
    
    
    6
    
    
    67,794
    
    
    -
    
    
    -
    
    
    67,800Shares
      issued with note payable ($1.43 per share)
    
    
    -
    
    
    -
    
    
    33,000
    
    
    3
    
    
    47,187
    
    
    -
    
    
    -
    
    
    47,190Shares
      issued with note payable ($1.475 per share)
    
    
    -
    
    
    -
    
    
    511,000
    
    
    51
    
    
    753,674
    
    
    -
    
    
    -
    
    
    753,725Share
      issued for loan default penalty
    ($1.475 per share)
    
    
    -
    
    
    -
    
    
    74,999
    
    
    8
    
    
    110,616
    
    
    -
    
    
    -
    
    
    110,624Share
      issued for loan default penalty
($1.13 per share)
    
    
    -
    
    
    -
    
    
    75,000
    
    
    8
    
    
    84,742
    
    
    -
    
    
    -
    
    
    84,750Share
      issued for loan default penalty
    ($1.475 per share)
    
    
    -
    
    
    -
    
    
    80,000
    
    
    8
    
    
    117,992
    
    
    -
    
    
    -
    
    
    118,000Share issued for loan default penalty
      ($1.56 per share)
    
    
    -
    
    
    -
    
    
    603,038
    
    
    61
    
    
    942,487
    
    
    -
    
    
    -
    
    
    942,548Shares issued for loan default penalty
      ($1.47 per share)
    
    
    -
    
    
    -
    
    
    955,312
    
    
    96
    
    
    1,404,213
    
    
    -
    
    
    -
    
    
    1,404,309Shares issued for cash ($2.50 per share)
    
    
    -
    
    
    -
    
    
    40,000
    
    
    4
    
    
    99,996
    
    
    -
    
    
    -
    
    
    100,000Shares issued for legal settlement
      ($1.455 per share)
    
    
    -
    
    
    -
    
    
    53,332
    
    
    5
    
    
    77,560
    
    
    -
    
    
    -
    
    
    77,565Shares issued for cash ($2.00 per share)
    
    
    -
    
    
    -
    
    
    100,000
    
    
    10
    
    
    199,990
    
    
    -
    
    
    -
    
    
    200,000
 
  
 See
accompanying Notes to Financial Statements.
 5
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Statement
of Stockholders' Deficiency**
 **For
the Period from December 9, 2002 (Inception) to December 31,
2004**
 Preferred
      Stock
    Common
      Stock
    
    Additional
      Paid-In
    
    
    Accumulated
      Deficit During Development
    
    
    Stock
      SubscriptionsShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stage
    
    
    Receivable
    
    
    TotalShare issued to consultants for services
      ($1.44 per share)
    
    
    -
    
    
    -
    
    
    830,000
    
    
    83
    
    
    1,195,117
    
    
    -
    
    
    -
    
    
    1,195,200Share issued to consultants for services ($1.475 per
      share)
    
    
    -
    
    
    -
    
    
    100,000
    
    
    10
    
    
    147,490
    
    
    -
    
    
    -
    
    
    147,500Share issued to consultants for services
      ($1.60 per share)
    
    
    -
    
    
    -
    
    
    279,260
    
    
    28
    
    
    446,788
    
    
    -
    
    
    -
    
    
    446,816Share issued to consultants for services
      ($0.92 per share)
    
    
    -
    
    
    -
    
    
    440,000
    
    
    44
    
    
    404,756
    
    
    -
    
    
    -
    
    
    404,800Beneficial conversion of promissory notes at $0.75 per
    share
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    71,275
    
    
    -
    
    
    -
    
    
    71,275Shares issued for loan guaranty ($1.04 per share)
    
    
    -
    
    
    -
    
    
    800,000
    
    
    80
    
    
    831,920
    
    
    -
    
    
    -
    
    
    832,000Shares issued to consultants ($1.13 per share)
    
    
    -
    
    
    -
    
    
    1,000,000
    
    
    100
    
    
    1,129,900
    
    
    -
    
    
    -
    
    
    1,130,000Share issued to consultants for services
      ($0.64 per share)
    
    
    -
    
    
    -
    
    
    21,460
    
    
    2
    
    
    13,732
    
    
    -
    
    
    -
    
    
    13,734Share issued to consultants for services
      ($0.61 per share)
    
    
    -
    
    
    -
    
    
    200,000
    
    
    20
    
    
    121,980
    
    
    -
    
    
    -
    
    
    122,000Share issued to consultants for services
      ($0.60 per share)
    
    
    -
    
    
    -
    
    
    36,000
    
    
    4
    
    
    21,416
    
    
    -
    
    
    -
    
    
    21,420Share issued to consultants for services
      ($0.60 per share)
    
    
    -
    
    
    -
    
    
    1,933,224
    
    
    193
    
    
    1,162,251
    
    
    -
    
    
    -
    
    
    1,162,444Shares issued to employees ($0.33 per share)
    
    
    -
    
    
    -
    
    
    300,000
    
    
    30
    
    
    98,970
    
    
    -
    
    
    -
    
    
    99,000Shares
      issued for cash ($0.25 per share)
    
    
    -
    
    
    -
    
    
    1,900,400
    
    
    190
    
    
    474,910
    
    
    -
    
    
    -
    
    
    475,100
 
  
 See
accompanying Notes to Financial Statements.
 6
  **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Statement
of Stockholders' Deficiency**
 **For
the Period from December 9, 2002 (Inception) to December 31,
2004**
 Preferred
      Stock
    Common
      Stock
    
    Additional
      Paid-In
    
    
    Accumulated
      Deficit During Development
    
    
    Stock
      SubscriptionsShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stage
    
    
    Receivable
    
    
    TotalShares
      issued to employees ($0.32 per share)
    
    
    -
    
    
    -
    
    
    1,790,000
    
    
    179
    
    
    565,321
    
    
    -
    
    
    -
    
    
    565,500Shares
      issued to employees ($0.22 per share)
    
    
    -
    
    
    -
    
    
    5,199,967
    
    
    520
    
    
    1,136,579
    
    
    -
    
    
    -
    
    
    1,137,099Shares
      issued to executives ($0.22 per share)
    
    
    -
    
    
    -
    
    
    1,100,000
    
    
    110
    
    
    240,432
    
    
    -
    
    
    -
    
    
    240,542Share
      issued to consultants for services
    ($0.21 per share)
    
    
    -
    
    
    -
    
    
    3,885,410
    
    
    388
    
    
    811,753
    
    
    -
    
    
    -
    
    
    812,141Shares
      issued with notes payable ($0.42 per share)
    
    
    -
    
    
    -
    
    
    1,750,000
    
    
    175
    
    
    734,825
    
    
    -
    
    
    -
    
    
    735,000Share
      issued to consultants for services
    ($0.28 per share)
    
    
    -
    
    
    -
    
    
    1,350,000
    
    
    135
    
    
    377,365
    
    
    -
    
    
    -
    
    
    377,500Shares issued for interest ($0.18 per share)
    
    
    -
    
    
    -
    
    
    375,000
    
    
    38
    
    
    67,462
    
    
    -
    
    
    -
    
    
    67,500Shares issued for services ($0.25 per share)
    
    
    -
    
    
    -
    
    
    150,000
    
    
    15
    
    
    37,485
    
    
    -
    
    
    -
    
    
    37,500Shares
      issued for cash ($0.16 per share)
    
    
    -
    
    
    -
    
    
    1,649,635
    
    
    165
    
    
    263,910
    
    
    -
    
    
    -
    
    
    264,075Beneficial conversion of promissory notes at $0.10 per
    share
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    318,500
    
    
    -
    
    
    -
    
    
    318,500Fair value of warrants issued in conjunction with promissory notes ranging
      from $0.10 per share to $1.00 per share
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    2,025,000
    
    
    -
    
    
    -
    
    
    2,025,000Shares
      contributed in kind
    
    
    -
    
    
    -
    
    
    (1,191,450
    )
    
    (119
    )
    
    119
    
    
    -
    
    
    -
    
    
    -Net loss, December 31, 2004
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (33,131,286
    )
    
    -
    
    
    (33,131,286
    )**BALANCE, DECEMBER 31, 2004 (CONSOLIDATED)**
    
    
    -
    
    $
    -
    
    $
    121,090,655
    
    
    12,109
    
    $
    24,523,917
    
    $
    (36,000,363
    )
    $
    (22,517
    )
    $
    (11,486,854
    )
 
  
 See
accompanying Notes to Financial Statements.
 7
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Statement
of Cash Flows**
 For
      the Year Ended
      December
      31, 2004(Consolidated)
    
    
    For
      the Two Months Ended December 31, 2003
    
    
    For
      the Period from December 9, 2002 (Inception) to
      October
      31, 2003
    
    
    For
      the Period from
      December
      9, 2002
      (Inception)
      to December 31, 2004**Cash
      Flows from Operating Activities:**Net
      loss
    
    $
    (33,131,286
    )
    $
    (598,948
    )
    $
    (2,270,129
    )
    $
    (36,000,363
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
    
    
    170,059
    
    
    3,614
    
    
    675
    
    
    174,348Impairment
      of assets
    
    
    352,299
    
    
    -
    
    
    -
    
    
    352,299Loss
      on disposal of assets
    
    
    448
    
    
    -
    
    
    -
    
    
    448Common
      stock issued for services
    
    
    8,452,305
    
    
    138,680
    
    
    1,113,005
    
    
    9,703,990Common
      Stock issued to employees
    
    
    2,042,141
    
    
    -
    
    
    -
    
    
    2,042,141Common
      stock issued for legal settlements
    
    
    175,900
    
    
    -
    
    
    -
    
    
    175,900Common
      stock issued for interest
    
    
    2,727,731
    
    
    -
    
    
    -
    
    
    2,727,731Common
      stock issued for loan guarantee
    
    
    832,000
    
    
    -
    
    
    -
    
    
    832,000Amortization
      of interest expense
    
    
    2,150,588
    
    
    25,000
    
    
    -
    
    
    2,175,588Changes
      in operating assets and liabilities:Decrease
      (increase) in current assets:Other
      receivables
    
    
    2,943
    
    
    (36
    )
    
    (3,314
    )
    
    (407
    )Deposits
    
    
    2,050
    
    
    (7,490
    )
    
    -
    
    
    (5,440
    )Increase
      (decrease) in current liabilities:Accounts
      payable and accrued expenses
    
    
    5,348,346
    
    
    (126,424
    )
    
    603,060
    
    
    5,824,982Net
      Cash Used in Operating Activities
    
    
    (10,874,476
    )
    
    (565,604
    )
    
    (556,703
    )
    
    (11,996,783
    )**Cash
      Flows from Investing Activities:**Purchase
      of property and equipment
    
    
    (803,415
    )
    
    (103,388
    )
    
    (63,664
    )
    
    (970,467
    )Sale
      of property and equipment
    
    
    11,755
    
    
    -
    
    
    -
    
    
    11,755Increase
      in restricted cash
    
    
    (894,910
    )
    
    -
    
    
    -
    
    
    (894,910
    )Net
      Cash Used in Investing Activities
    
    
    (1,686,570
    )
    
    (103,388
    )
    
    (63,664
    )
    
    (1,853,622
    )**Cash
      Flows from Financing Activities:**Repayments
      of notes payable
    
    
    (1,075,000
    )
    
    -
    
    
    -
    
    
    (1,075,000
    )Proceeds
      from stockholder
    
    
    -
    
    
    -
    
    
    4,940
    
    
    4,940Payments
      to stockholder
    
    
    -
    
    
    (4,940
    )
    
    -
    
    
    (4,940
    )Proceeds
      from sale of common stock, net
    
    
    7,737,690
    
    
    478,588
    
    
    515,469
    
    
    8,731,747Promissory
      note
    
    
    5,856,606
    
    
    241,154
    
    
    100,000
    
    
    6,197,760Net
      Cash Provided by Financing Activities
    
    
    12,519,296
    
    
    714,802
    
    
    620,409
    
    
    13,854,507NET
      INCREASE (DECREASE) IN CASH
    
    
    (41,750
    )
    
    45,810
    
    
    42
    
    
    4,102CASH
      AT BEGINNING OF PERIOD
    
    
    45,852
    
    
    42
    
    
    -
    
    
    -CASH
      AT END OF PERIOD
    
    $
    4,102
    
    $
    45,852
    
    $
    42
    
    $
    4,102**Supplemental
      Disclosure of Cash Flow Information:**Cash
      paid for interest
    
    $
    508,308
    
    $
    6,780
    
    $
    -
    
    $
    515,088
 
 **Supplemental
Disclosure of Non-Cash Investing and Financing
Activities:**
 During
2003, the Company issued 235,600 shares of common stock with a fair value of
$300,000 for intangible signage rights.
 
  
 8
  **INFINIUM
LABS, INC. AND SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **Notes
to Financial Statements**
 
 **NOTE****1****SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION**
 
 ***(A)
Organization***
 
 Infinium
Labs, Inc. (“Infinium”) a Delaware corporation, formed on December 9, 2002, and
located in Sarasota, Florida, is a development stage company, and as such has
devoted most of its efforts since inception to developing its business plan,
issuing common stock, raising capital and developing its products.
 
 Infinium
Labs, Inc. is developing an innovative broadband video game delivery system
designed to allow consumers to purchase and play games directly over the
internet. Infinium
Labs Inc.’s service also will have the capacity to allow multiplayer tournaments
and contests, both against other subscribers and against PC gamers. The
subscriber can access all of this without ever having to go to a store to
purchase games.
 
 On
January 5, 2004, Global Business Resources, Inc., a State of Delaware
Corporation, consummated an agreement with Infinium Labs, Inc. a Delaware
corporation, pursuant to which Infinium Labs, Inc. exchanged all of its then
issued and outstanding shares of common stock for 58,189,728 shares or
approximately 81% of the common stock of Global Business Resources, Inc. As a
result of the agreement, the transaction was treated for accounting purposes as
a capital transaction and recapitalization by the accounting acquirer (Infinium
Labs, Inc.) and as reorganization by the accounting acquiree (Global Business
Resources, Inc.). Subsequent to the merger, Global Business Resources, Inc.
changed its name to Infinium Labs, Inc. and Infinium Labs, Inc. changed its
fiscal year end to December 31 from October 31.
 
 Accordingly,
the financial statements include the following:
 
 (1)  The
balance sheet consists of the net assets of the acquirer at historical cost and
the net assets of the acquiree at historical cost.
 
 (2)  The
statement of operations includes the operations of the acquirer for the periods
presented and the operations of the acquiree from the date of the
merger.
 
 ***(B)
Use of Estimates***
 
 In
preparing financial statements in conformity with generally accepted accounting
principles, management is required 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 revenues and
expenses during the reported period. Actual results could differ from those
estimates.
 
 9
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 
 ***(C)
Consolidation***
 
 The
accompanying December 31, 2004 consolidated financial statements include the
accounts of Infinium Labs, Inc. and its wholly owned subsidiary, Infinium Labs
Operating Corporation. The accompanying financial statements for the period from
November 1, 2003 through December 31, 2003 are for our wholly owned subsidiary,
Infinium Labs Operating Corporation. The accompanying financial statements for
the period from December 9, 2002 (Inception) through October 31, 2003 are for
our wholly owned subsidiary, Infinium Labs Operating Corporation. Intercompany
transactions and balances have been eliminated in consolidation.
 
 ***(D)
Research and Development Costs***
 
 The
Company’s software products reach technological feasibility shortly before the
products are released for manufacturing. Costs incurred after technological
feasibility is established are not material, and accordingly, the Company
expenses all research and development costs when incurred.
 
 ***(E)
Property and Equipment***
 
 Property
and equipment are stated at cost, less accumulated depreciation. Expenditures
for maintenance and repairs are charged to expense as incurred. Depreciation is
provided using the straight-line method over the estimated useful life of three
to seven years. Various note holders have a security interest in the Company’s
assets.
 
 ***(F)
Income Taxes***
 
 The
Company accounts for income taxes under the Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
 
 ***(G)
Loss Per Share***
 
 Basic and
diluted net loss per common share is computed based upon the weighted average
common shares outstanding as defined by statement of Financial Accounting
Standards “SFAS” No. 128, “Earnings per Share.” For the twelve months
ended December 31, 2004, two months ended December 31, 2003, the period
from December 9, 2002 (Inception) to October 31, 2003 and from the period from
December 9, 2002 (Inception) to December 31, 2004, the effect of common share
equivalents was anti-dilutive and not included in the calculation of diluted net
loss per common share.
   10
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 ***(H)
Advertising***
 
 Advertising
costs are expensed either in the periods in which those costs are incurred or
the first time the advertising takes place. For the year ended December 31,
2004, the two months ended December 31, 2003, the period from December 9, 2002
(Inception) to October 31, 2003 and the period from December 9, 2002 (Inception)
to December 31, 2004 the company incurred advertising costs of $1,380,377,
$55,141, $153,038 and $1,588,556, respectively.
 
 ***(I)
Business Segments***
 
 The
Company operates in one segment and therefore segment information is not
presented.
 
 ***(J)
Recent Accounting Pronouncements***
 
 Statement
of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
amendment of ARB No. 43, Chapter 4”” SFAS No. 152, “Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,” SFAS
No. 153, “Exchanges of Non-monetary Assets - an amendment of APB Opinion No.
29,” and SFAS No. 123 (revised 2004), “Share-Based Payment,” were recently
issued. SFAS No. 151, 152, 153 and 123 (revised 2004) have no current
applicability to the Company and have no effect on the financial
statements.
 
 ***(K)******Cash
and Cash Equivalents***
 
 The
Company considers all highly liquid temporary cash investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
2004, the Company had $894,910 held in an attorney trust account related to the
notes payable issued in December 2004. The release of the funds to the Company
was contingent upon the Form SB-2 being filed with the SEC. The form SB-2 was
filed with the SEC on January 5, 2005 and, subsequently, the $894,910 was
transferred from the attorney trust account into Infinium Labs, Inc.’s bank
account on January 6, 2005.
 
 ***(L)******Concentration
of Credit Risk***
 
 The
Company at times has cash in banks in excess of FDIC insurance limits and places
its temporary cash investments with high credit quality financial institutions.
At December 31, 2004, the Company had no cash in excess of FDIC insurance
limits.
   11
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 ***(M)
Fair Value of Financial Instruments***
 
 The
carrying amounts reported in the balance sheet for cash, receivables, accrued
expenses and notes payable approximate fair value based on the short-term
maturity of these instruments.
 
 ***(N)
Stock Based Compensation***
 
 The
Company accounts for employee stock options in accordance with APB Opinion No.
25, “Accounting For Stock Issued To Employees” and has adopted the
disclosure-only option under SFAS No. 123. The Company accounts for non-employee
stock transactions in accordance with SFAS No. 123 as amended by SFAS 148
“Accounting for Stock-Based Compensation - Transition and Disclosure” requires
that companies, which do not elect to account for stock-based compensation as
prescribed by this statement, disclose the pro-forma effects on earnings per
share as id SFAS 123 has been adopted.
 ******
 ***(O)
Long-Lived Assets, Goodwill and Intangible Assets***
 
 In
accordance with SFAS 142 and 144, long-lived assets, goodwill and certain
identifiable intangible assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, goodwill and intangible assets, the
recoverability test is performed using undiscounted net cash flows related to
the long-lived assets.
 
 **NOTE****2****INTANGIBLE
ASSETS**
 
 During
2003, the Company entered into an agreement for the signage rights to a building
located in Sarasota, Florida. The agreement called for the Company to issue
942,600 shares of common stock in exchange for signage rights beginning April 1,
2004 through May 31, 2009. The shares were valued at the recent cash offering
price aggregating $300,000. The Company will amortize the cost over the life of
the agreement. As of December 31, 2004, the Company has amortized $43,505 of
expense of the signage rights.
 
 **NOTE 3** **PROPERTY
AND EQUIPMENT**
 
 Property
and equipment consisted of the following as of:
 
 December
      31, 2004
    
    
    December31,
      2003
    
    
    October
      31,
      2003Office
      equipment
    
    $
    79,331
    
    $
    25,684
    
    $
    10,467Computer
      equipment
    
    
    347,677
    
    
    69,072
    
    
    15,161Computer
      software
    
    
    368,232
    
    
    10,451
    
    
    -Office
      furniture
    
    
    126,631
    
    
    40,558
    
    
    28,503Leasehold
      improvements
    
    
    36,914
    
    
    21,288
    
    
    9,533958,785
    
    
    167,053
    
    
    63,664Less
      accumulated depreciation
    
    
    (131,364
    )
    
    (4,290
    )
    
    (675
    )Less
      impairment
    
    
    (352,299
    )
    
    -
    
    
    -$
    475,122
    
    $
    162,763
    
    $
    62,989
 
 
 12
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 
 Depreciation
expense during the twelve month period ended December 31, 2004, the two month
period ended December 31, 2003, the period from December 9, 2002 (Inception) to
October 31, 2003 and the period from December 9, 2002 (Inception) to December
31, 2004 was $127,075, $3,614, $675 and $131,364, respectively. During 2004, the
Company recognized impairment of property and equipment of $352,299 due to the
closing of the Company’s Dallas, Texas office as well as the restructuring and
consolidation of the corporate office in Sarasota, Florida.
 
 **NOTE****4****NOTES
PAYABLE**
 
 During
2003, the Company received $275,000, net of offering costs of $25,000 in the
form of a 20% secured convertible debenture that matures on February 28, 2004
and is guaranteed by the Company's Chairman and Chief Executive officer. The
maximum borrowings available under the debenture agreement are $750,000. The
debenture is secured by all of the Company's assets and is convertible in its
entirety at the option of the holder into the Company's common stock at a
conversion price of $1.00. There was no beneficial conversion recognized on the
issuance of the convertible notes payable as the conversion price was equal to
recent cash offering price. During February 2004, the entire convertible note
was repaid with cash of $275,000. At December 31, 2004, the outstanding balance
on the convertible debenture was $0.
 
 During
2003, the Company entered into a $100,000 convertible note payable in full
settlement of a lawsuit. The note is non-interest bearing and was due August 11,
2004. The note is convertible at the option of the note holder at any time at
the current trading price of the Company's common stock. During February 2004,
the entire convertible note was repaid with cash of $100,000. At December 31,
2004, the balance on the note payable was $0.
 
 In
February 2004, the Company authorized a private debt offering of secured 12% and
15% promissory notes with due dates one year from the date of issuance, within
sixty days of the Company's SB-2 becoming effective or upon the Company
receiving an equity investment of at least $15,000,000. For each loan to the
Company, the lender was also entitled to 20,000 shares of the Company's common
stock. During the twelve months ended December 31, 2004, the Company issued an
aggregate of $2,400,000 promissory notes and issued 560,000 common shares. The
shares were treated as a discount to the private offering, the shares were
valued at $434,000 based on the market price on the dates the funds were
received and the discount is being amortized over the life of the notes. These
notes secured with the assets of the Company are currently in
default.
   13
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 On
February 27, 2004, the Company borrowed $500,000 under a 12% secured
subordinated debenture for a maximum term of 12 months. As additional
consideration, the Company issued to the holder 200,000 shares of common stock
having a fair value of $284,000. The shares were treated as a discount to the
debenture and the discount is being amortized over the life of the debenture.
This debenture is secured with the assets of the Company and is currently in
default.
 
 On April
7, 2004, the Company borrowed $500,000 under a 15% promissory note which was
initially payable on December 15, 2004 and subsequently became payable on March
31, 2005 per a conversion option agreement dated November 10, 2004 that entitles
the note holder to convert the amount of the note into shares of stock at a per
share price of $0.10; in addition, the note holder is entitled to a Stock
Purchase Warrant for 150% of the number of shares obtained in the conversion at
a warrant exercise price of $0.10. The note is secured with the assets of the
Company. On March 22, 2005, the note was paid in full via a Conversion Agreement
which converted the entire amount of the note into common stock at a per share
price of $0.10.
 
 On May 7,
2004, the Company borrowed $100,000 under a 15% promissory note. The note
was fully paid off as of December 31, 2004.
 
 On May 7,
2004, the Company borrowed $250,000 under a 15% promissory note which was
initially payable on September 15, 2004 and was extended to April 30, 2005 per a
conversion option agreement dated November 10, 2004 that entitles the note
holder to convert the amount of the note into shares of stock at a per share
price of $0.10. In addition, the note holder is entitled to a Stock Purchase
Warrant for 200% of the number of shares obtained in the conversion at a warrant
exercise price of $0.10. As additional consideration, the Company issued to the
holder 100,000 shares of common stock having a fair value of $147,500. The
shares were treated as a discount to the note and the discount is being
amortized over the life of the note. The note is secured with the assets of the
Company.
 
 On May
19, 2004, the Company borrowed $417,260 under a 15% secured promissory note
which was initially payable on June 3, 2004 but has been amended to January 15,
2005 for an additional consideration of $30,000. The additional consideration is
being amortized over the life of the amendment as of December 31, 2004. This
note is currently in default.
 
 On May
28, 2004, the Company borrowed $350,000 under a 15% secured promissory note,
which was payable August 1, 2004. As additional consideration, the Company
issued the holder 33,000 shares of common stock having a fair value of $47,190.
The shares were treated as a discount to the note and the discount is being
amortized over the life of the note. The note is secured with the assets of the
Company. As of December 31, 2004, this note was in default but was subsequently
settled on January 6, 2005 via a Conversion Agreement which converted the entire
amount of the note into common stock at a per share price of $0.10 (see Note
11).
   14
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 On May
28, 2004, the Company borrowed $350,000 under a 15% promissory note which was
initially payable on June 8, 2004 but has been amended to January 1, 2005 for
additional consideration of $30,000. The additional consideration is being
amortized over the life of the amendment as of December 31, 2004. As additional
consideration, the Company issued the holder 7,500 shares of common stock having
a fair value of $11,025. The shares were treated as a discount to the note and
the discount is being amortized over the life of the note. This note is
currently in default.
 
 On June
4, 2004, the Company borrowed $825,000 under a 15% secured convertible
promissory note, which was initially due no later than June 3, 2005 but the note
was amended and is now payable no later than January 15, 2005. As additional
consideration, the Company issued the holder 511,000 shares of common stock
having a fair value of $753,725. The shares were treated as a discount to the
note and the discount is being amortized over the life of the note. The Company
recognized beneficial conversion on the promissory note of $71,275. The
beneficial conversion was treated as a discount to the note and the discount is
being amortized over the life of the note. The note is secured with the assets
of the Company. On February 11, 2005, the note was paid in full via a Conversion
Agreement which converted the entire amount of the note into common stock at a
per share price of $0.215.
 
 On June
21, 2004, the Company borrowed $1,500,000 under a 15% promissory note, which was
payable no later than June 22, 2005. As additional consideration, the Company
issued the holder 60,000 shares of common stock having a fair value of $67,800.
The shares were treated as a discount to the note and the discount is being
amortized over the life of the note. As consideration for the Chief Executive
Officer’s personal guaranty of note, the Company compensated the Chief Executive
Officer $50,000. On April 11, 2005, the note was paid in full via a Conversion
Agreement which converted the entire amount of the note into common stock at a
per share price of $0.15.
 
 On July
28, 2004, the Company borrowed $500,000 under a 15% promissory note which is
payable on July 28, 2005. As consideration for a Director's personal guaranty of
note, the Company issued the Director 800,000 shares of common stock having a
fair value of $832,000.
 
 On
September 13, 2004, the Company borrowed $350,000 under a 15% secured promissory
note, which is payable September 13, 2005. The note is secured with the assets
of the Company. On January 6, 2005, the note was paid in full via a Conversion
Agreement which converted the entire amount of the note into common stock at a
per share price of $0.10.
   15
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 On
October 20, 2004, the Company entered into a Bridge Loan Agreement with Hazinu
Ltd. pursuant to which the Lender advanced the principal amount of $300,000 to
the Company on October 21, 2004 in exchange for (i) a 10% secured promissory
note in such principal amount, (ii) 500,000 shares of our common stock, and
(iii) warrants to purchase 500,000 shares of our common stock at an exercise
price of $0.50 per share. The value
of the shares and warrants of $152,500 and $147,500, respectively were treated
as a discount to the note and the discount is being amortized over the life of
the note. The note was due December 31, 2004 and during December 2004, the
entire note was repaid with cash. At December 31, 2004, the outstanding balance
on the convertible debenture was $0.
 
 On
October 27, 2004, the Company entered into a Bridge Loan Agreement with JM
Investors, LLC, Fenmore Holdings, LLC, Viscount Investments Limited and
Congregation Mishkan Sholom pursuant to which the Lenders advanced an aggregate
principal amount of $300,000 to the Company on October 28, 2004 in exchange for
(i) 10% secured promissory notes in such aggregate principal amount, (ii)
500,000 shares of our common stock and (iii) warrants to purchase an aggregate
of 500,000 shares of our common stock at an exercise price of $0.50 per share. The value
of the shares and warrants of $152,500 and $147,500, respectively were treated
as a discount to the note and the discount is being amortized over the life of
the note. The note was due December 31, 2004 and during December 2004, the
entire note was repaid with cash. At December 31, 2004, the outstanding balance
on the convertible debenture was $0.
 
 On
December 13, 2004, the Company entered into a Bridge Loan Agreement with 15
various entities pursuant to which the Lenders advanced an aggregate principal
amount of $1,160,000 to the Company on December 16, 2004 in exchange for (i) 8%
secured promissory notes in such aggregate principal amount, (ii) 250,000 shares
of our common stock and (iii) warrants to purchase an aggregate of 16,312,461
shares of our common stock at exercise prices ranging from $0.10 to $1.00 per
share. The value
of the shares and warrants of $60,000 and $1,100,000, respectively were treated
as a discount to the note and the discount is being amortized over the life of
the note. The note is due December 16, 2005.
 
 On
December 28, 2004, the Company entered into a Bridge Loan Agreement with 14
various entities pursuant to which the Lenders advanced an aggregate principal
amount of $1,000,000 to the Company on January 6, 2005 in exchange for (i) 8%
secured promissory notes in such aggregate principal amount, (ii) 500,000 shares
of our common stock and (iii) warrants to purchase an aggregate of 4,4687,485
shares of our common stock at an exercise price of $0.10 per share. The value
of the shares and warrants of $370,000 and $630,000, respectively were treated
as a discount to the note and the discount is being amortized over the life of
the note . The note
is due December 28, 2005.
 
 Note
      payable - face value
    
    $
    10,102,260Note
      payable - discount
    
    
    2,803,912$
    7,298,348
 
 
 16
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 
 The
discount from the face value of the promissory notes is being amortized over the
life of the promissory notes as additional interest expense. During the twelve
month period ended December 31, 2004, the two month period ended December 31,
2003, the period from December 9, 2002 (Inception) to October 31, 2003 and the
period from December 9, 2002 (Inception) to December 31, 2004, the Company has
recorded interest expense from the discounts of $2,150,588, $25,000, $0 and
$2,175,588, respectively.
 
 All of
these transactions were exempt from the registration requirements of Section
4(2) of the Securities Act as transactions not involving a public
offering.
 
 **NOTE****5****STOCKHOLDERS’
DEFICIENCY**
 
 ***(A)
Stock Issued for Cash***
 
 During
2002, the Company issued 58,189,728 shares of common stock to its founder for
$18,522 ($0.0004 per share).
 
 During
2003, the Company issued 4,423,012 shares of common stock for cash of $526,703
($0.12 per share).
 
 During
2003, the Company issued 1,748,380 shares of common stock for $545,717 ($0.28
per share), net of offering costs of $11,239.
 
 During
2003, the Company issued 420,768 shares of common stock for $66,672 ($0.16 per
share).
 
 During
2004, the Company issued 6,650,000 shares of common stock for $1,662,500 ($0.25
per share).
 
 During
2004, the Company issued 40,000 shares of common stock for cash of $100,000
($2.50 per share).
 
 During
2004, the Company issued 1,900,400 shares of common stock for $475,100 ($0.25
per share). In connection with this transaction, the Company issued 2,022,900
warrants to purchase common stock exercisable at a price of $0.25. The warrants
are fully exercisable at any time for a period of five years after the closing
date of the sale. None of the warrants were executed, forfeited or expired in
2004. Therefore, all 2,022,900 warrants were outstanding and exercisable as of
December 31, 2004.
 
 On August
26, 2004, the Company issued 100,000 shares of common stock for $200,000 ($2.00
per share).
   17
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 During
2004, the Company issued 1,649,635 shares of common stock for $264,075 ($0.16
per share).
 
 ***(B)
Stock Issued for Services***
 
 During
2002, the Company issued 2,957,376 shares of common stock for software
development services valued for financial accounting purposes at $1,113,005
($0.3775 per share) based upon recent cash offering prices.
 
 During
2003, the Company issued 434,036 shares of common stock for software development
services valued for financial accounting purposes at $138,640 ($0.3175 per
share) based upon recent cash offering prices.
 
 During
2003, the Company issued 942,600 shares of common stock for signature rights
valued for financial accounting purposes at $300,000 ($0.3175 per share) based
upon recent cash offering prices.
 
 During
2004, the Company issued 1,750,000 shares of common stock for software
development and consulting services with a fair value of $2,581,250 ($1.475 per
share).
 
 During
2004, the Company issued 279,260 shares of common stock for services with a fair
value of $446,816 ($1.60 per share).
 
 During
2004, the Company issued 830,000 shares of restricted common stock for services
to three consultants having a fair value of $1,195,200 ($1.44 per
share).
 
 During
2004, the Company issued 440,000 shares of restricted common stock for services
with a fair value of $404,800 ($.92 per share).
 
 During
2004, the Company issued 100,000 shares of our restricted common stock for
services with a fair value of $147,500 ($1.475 per share).
 
 During
2004, the Company issued 1,933,224 shares to consultants for services with a
fair value of $1,162,444 ($0.60 per share).
 
 On July
28, 2004, as consideration for the Director's personal guaranty of a note
payable (see Note 4), the Company issued the Director 800,000 shares of common
stock having a fair value of $832,000 ($1.04 per share). These shares issued to
the Director were restricted shares of common stock and, therefore, were not
tradable at the time of issuance. These shares of common stock issued to the
Director may become unrestricted on July 28, 2005.
 
 During
August 2004, the Company issued 1,000,000 shares to consultants for real estate
service with a fair value of $1,130,000 ($1.13 per share).
   18
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 During
August 2004, the Company issued 21,460 shares to a consultant for services with
a fair value of $13,734 ($0.64 per share).
 
 During
August, 2004, the Company issued 200,000 shares to a consultant for financial
services with a fair value of $122,000 ($0.61 per share).
 
 During
August 2004, the Company issued 36,000 shares to a consultant for engineering
services with a fair value of $21,420 ($0.60 per share).
 
 On
September 30, 2004, the Company issued 300,000 to employees as a bonus with a
fair value of $99,000 ($0.33 per share).
 
 During
2004, the Company issued 1,790,000 shares of common stock to employees with a
fair value of $565,500 ($0.32 per share) for bonuses. This transaction was
exempt from registration under Section 4(2) of the Securities Act because it did
not involve a public offering.
 
 During
2004, the Company issued 5,199,967 shares of common stock to employees with a
fair value of $1,137,099 ($0.22 per share) as regular compensation. This
transaction was exempt from registration under Section 4(2) of the Securities
Act because it did not involve a public offering.
 
 During
2004, the Company issued 1,100,000 shares of common stock to executives with a
fair value of $240,542 ($0.22 per share) as compensation. This transaction was
exempt from registration under Section 4(2) of the Securities Act because it did
not involve a public offering.
 
 During
2004, the Company issued 3,885,410 shares of common stock for consulting
services with a fair value of $812,141 ($0.21 per share). This transaction was
exempt from registration under Section 4(2) of the Securities Act because it did
not involve a public offering.
 
 During
2004, the Company issued 1,350,000 shares of common stock for consulting
services with a fair value of $377,500 ($0.28 per share). This transaction was
exempt from registration under Section 4(2) of the Securities Act because it did
not involve a public offering.
 
 During
2004, the Company issued 150,000 shares of common stock for advisory services
with a fair value of $37,500 ($0.25 per share). This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.
   19
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 ***(C)
Stock Issued for Legal Settlement***
 
 During
February 2004, the Company issued 66,668 shares of common stock with a fair
value of $98,335 ($1.475 per share) in partial settlement of a
lawsuit.
 
 On June
4, 2004, the Company issued 53,332 shares of common stock with a fair value of
$77,565 in final settlement of a lawsuit ($1.455 per share).
 
 ***(D)
Stock Issued for Cash with Notes Payable***
 
 During
2004, the Company issued 560,000 shares of common stock with a fair value of
$434,000 as additional consideration for a note payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
note ($0.78 per share).
 
 During
2004, the Company issued 200,000 shares of common stock with a fair value of
$284,000 as additional consideration for a note payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
note ($1.42 per share).
 
 During
2004, the Company issued 100,000 shares of common stock with a fair value of
$147,500 as additional consideration for a note payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
note ($1.475 per share).
 
 During
2004, the Company issued 60,000 shares of common stock with a fair value of
$67,800 as additional consideration for a note payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
note ($1.13 per share).
 
 During
2004, the Company issued 33,000 shares of common stock with a fair value of
$47,190 as additional consideration for a note payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
note ($1.43 per share).
 
 During
2004, the Company issued 511,000 shares of common stock with a fair value of
$753,725 as additional consideration for a note payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
note ($1.475 per share).
 
 During
2004, the Company issued 7,500 shares of common stock with a fair value of
$11,025 as additional consideration for a note payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
note ($1.47 per share).
   20
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 During
2004, the Company issued 1,750,000 shares of common stock with a fair value of
$735,000 as additional consideration for notes payable. The fair value of the
stock was allocated from the total proceeds received on the note payable and the
resulting discount on the note payable will be amortized over the life of the
notes ($0.42 per share).
 
 ***(E)
Stock Issued for Cash as Interest on Notes
Payable***
 
 During
2004, the Company issued 375,000 shares to note payable holders for accrued
interest on the notes with a fair value of $67,500 ($0.18 per
share).
 ******
 ***(F)
Stock Issued Under Loan Default Provisions***
 
 During
2004, the Company issued 74,999 shares to a note payable holder under a loan
default provision with a fair value of $110,624 ($1.475 per share).
 
 During
2004, the Company issued 75,000 shares to a note payable holder under a loan
default provision with a fair value of $84,750 ($1.13 per share).
 
 During
2004, the Company issued 80,000 shares to a note payable holder under a loan
default provision with a fair value of $118,000 ($1.475 per share).
 
 During
2004, the Company issued 603,038 shares to a note payable holder under a loan
default provision with a fair value of $942,548 ($1.56 per share).
 
 During
2004, the Company issued 955,312 shares to a note payable holder under a loan
default provision with a fair value of $1,404,309 ($1.47 per
share).
 
 ***(G)
In Kind Contribution***
 
 During
2004, 1,191,450 shares of common stock were returned to the Company by a
stockholder and recorded as an In Kind Contribution.
 
 ***(H)
Stock Dividend***
 
 During
January 2004, the Company declared a 4 for 1 common stock dividend effected to
stockholders of record on January 19, 2004. Per share and weighted average share
amounts have been retroactively restated in the accompanying financial
statements and related notes to reflect this dividend.
 
 ***(I)
Stock Split***
 
 During
May 2004, the Company declared a 4 for 1 common stock split effected to
stockholders of record on May 5, 2004. Per share and weighted average share
amounts have been retroactively restated in the accompanying financial
statements and related notes to reflect this split.
 
  21
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 ***(J)
Stock Issued in Reverse Merger***
 
 On
January 5, 2004, the Company issued 16,156,000 shares of common stock for all
the outstanding shares of Global Business Resources.
 
 All of
these transactions were exempt from registration requirements of Section 4(2) of
the Securities Act as transactions not involving a public offering.
 
 ***(K)
Obligation to Reserve Stock***
 
 As of
December 31, 2004, the Company had an obligation to reserve 46,656,000 shares of
common stock issuable upon conversion of debentures. In addition, as of December
31, 2004, the Company had outstanding options and warrants totaling 41,014,493
shares of common stock.
 
 **NOTE****6****INCOME
TAXES**
 
 Income
tax expense (benefit) is summarized as follows:
 
 Year
      Ended
      December
      31, 2004
    
    
    Two
      Months Ended December 31, 2003
    
    
    December
      9, 2002 (Inception) through October 31, 2003
    
    
    December
      9, 2002 (Inception) through December 31, 2004Current:Federal
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -State
    
    
    -
    
    
    -
    
    
    -
    
    
    -Deferred
      - Federal and State
    
    
    -
    
    
    -
    
    
    -
    
    
    -Income
      tax expense (benefit)
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
 
 The
Company's tax expense differs from the "expected" tax expense as
follows:
 
 Year
      Ended December 31, 2004
    
    
    Two
      Months Ended December 31, 2003
    
    
    December
      9, 2002 (Inception) through October 31, 2003
    
    
    December
      9, 2002 (Inception) through December 31, 2004U.S.
      Federal income tax expense (benefit)
    
    $
    (11,264,637
    )
    $
    (203,642
    )
    $
    (771,844
    )
    $
    (12,240,123
    )Effect
      on net operating loss carryforward
    
    
    11,264,637
    
    
    203,642
    
    
    771,844
    
    
    12,240,123$
    -
    
    $
    -
    
    $
    -
    
    $
    -
 
 
 22
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 
 The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities are as follows:
 
 December
      31, 2004
    
    
    December
      31,
      2003
    
    
    October
      31,
      2003Deferred
      tax assets:Net
      operating loss carryforward
    
    $
    12,240,123
    
    $
    975,486
    
    $
    771,844Total
      gross deferred tax assets
    
    
    12,240,123
    
    
    975,486
    
    
    771,844Less
      valuation allowance
    
    
    (12,240,123
    )
    
    (975,486
    )
    
    (771,884
    )Net
      deferred tax assets
    
    $
    -
    
    $
    -
    
    $
    -
 
 At
December 31, 2004, the Company had a net operating loss carryforward of
approximately $36,000,363 for U.S. Federal income tax purposes available to
offset future taxable income expiring through 2025. The net change in the
valuation allowance during the year ended December 31, 2004 was an increase of
$11,264,637.
 
 **NOTE****7****COMMITMENTS
AND CONTINGENCIES**
 
 ***(A)
Distribution Agreements***
 
 **Riverdeep,
Inc** .
 
 Infinium
signed a distribution agreement with Riverdeep, Inc. ("Riverdeep") that will
allow Infinium to market Riverdeep's catalog of award-winning video games and
edutainment software on the Phantom Game System. The agreement expires on March
30, 2006 and authorizes Infinium to distribute Riverdeep's products, via the
Phantom Game Service or pre-load, onto the Phantom Game Receiver. The titles
will be available to subscribers of the Phantom Game Service on both a
pay-per-play and pay-to-own basis.
 
 The
agreement with Riverdeep requires Infinium to make the following guaranteed,
non-refundable, irrevocable, non-transferable license fees as follows:
 
 March 30, 2004
    
    $
    50,000June
      30, 2004
    
    
    50,000September 30, 2004
    
    
    125,000Total
    
    $
    225,000
 
 In
addition, Infinium incurs license fees with respect to each unit of product
distributed. These per unit license fees shall be applied against the
aforementioned guaranteed license fees. Once the guaranteed license fees have
been earned down and recouped by Infinium, then Infinium shall pay directly to
Riverdeep the per unit license fees for every unit of product it distributes.
The per unit unlimited license (pay-to-own) fee ranges from $6.50 to $28.00 per
title. The per unit limited license (pay-per-play) fee equals fifty percent
(50%) of Infinium's revenue realized from the limited licenses granted to end
users.
   23
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial
Statements**
 
 As the
Company has not commenced sales of the game system and there is no definitive
way to determine the future economic benefit associated with the payments for
the guaranteed license fees, the company has expensed the guaranteed license
fees as incurred. From December 9, 2002 (inception) through December 31, 2004,
$225,000 of guaranteed license fees had been accrued and reported on the
accompanying financial statements.
 
 In the
event that the per unit license fees exceed the guaranteed license fees, those
per unit license fees will be expensed as incurred. Accordingly, the
corresponding revenue related to the product distribution will be recognized as
earned.
 
 The
Company is currently in default of this agreement.
 
 **Codemasters
Software Company Ltd.**
 
 Infinium
signed a distribution agreement with The Codemasters Software Company Ltd.
(“Codemasters”) that will allow Infinium to market Codemasters’ catalog of video
games software on the Phantom Game System. The agreement expires on December 31,
2005 and authorizes Infinium to distribute Codemasters’ products, via the
Phantom Game Service or pre-load, onto the Phantom Game Receiver. The titles
will be available to subscribers of the Phantom Game Service on both a
pay-per-play and pay-to-own basis.
 
 The
agreement with Codemasters requires Infinium to make the following advance
royalty payments as follows:
 
 November
      21, 2004
    
    $
    25,000Upon receipt of the Licensor Deliverables
    
    
    25,000Total
    
    $
    50,000
 
 In
addition, Infinium incurs royalty fees with respect to each unit of product
distributed. These per unit royalty fees shall be applied against the
aforementioned advance royalty payments. Once the advance royalty payments have
been earned down and recouped by Infinium, then Infinium shall pay directly to
Codemasters the per unit royalty fees for every unit of product it distributes.
The per unit royalty fee ranges from 25% to 50% of Infinium’s net receipts with
a minimum per unit royalty fee ranging from $1.25 to $7.16 per title.
 
 As the
company has not commenced sales of the game system and there is no definitive
way to determine the future economic benefit associated with the advance
payments, the company has expensed the advance royalty payments as incurred.
From December 9, 2002 (inception) through December 31, 2004, $50,000 of
guaranteed license fees had been accrued and reported on the accompanying
financial statements.
 
 In the
event that the per unit royalty fees exceed the advance royalty payments, those
per unit royalty fees will be expensed as incurred. Accordingly, the
corresponding revenue related to the product distribution will be recognized as
earned. The Company is currently in default of this agreement.
 
 24
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 ****
 
 **Atari,
Inc.**
 
 Infinium
signed a distribution agreement with Atari, Inc. (“Atari”) that will allow
Infinium to market Atari’s catalog of video games software on the Phantom Game
System. The agreement expires on September 14, 2007 and authorizes Infinium to
distribute Atari’s products, via the Phantom Game Service or pre-load, onto the
Phantom Game Receiver. The titles will be available to subscribers of the
Phantom Game Service on both a pay-per-play and pay-to-own basis.
 
 The
agreement with Atari requires Infinium to make the following non-refundable
advance royalty payments as follows:
 
 September
      19, 2004
    
    $
    300,000September 29, 2004
    
    
    200,000Total
    
    $
    500,000
 
 In
addition, Infinium incurs royalty fees with respect to each unit of product
distributed. These per unit royalty fees shall be applied against the
aforementioned advance royalty payments. Once the advance royalty payments have
been earned down and recouped by Infinium, then Infinium shall pay directly to
Atari the per unit royalty fees for every unit of product it distributes. The
per unit royalty fee ranges from $5.00 to $15.00 per title.
 
 As the
company has not commenced sales of the game system and there is no definitive
way to determine the future economic benefit associated with the advance
payments, the company has expensed the advance royalty payments as incurred.
From December 9, 2002 (inception) through December 31, 2004, $500,000 of
guaranteed license fees had been accrued and reported on the accompanying
financial statements.
 
 In the
event that the per unit royalty fees exceed the advance royalty payments, those
per unit royalty fees will be expensed as incurred. Accordingly, the
corresponding revenue related to the product distribution will be recognized as
earned. The Company is currently in default of this agreement.
 
 **Eidos
Inc.**
 
 Infinium
signed a distribution agreement with Eidos Inc. (“Eidos”) that will allow
Infinium to market Eidos’s catalog of video games software on the Phantom Game
System. The agreement expires on December 31, 2005 and authorizes Infinium to
distribute Eidos’s products, via the Phantom Game Service or pre-load, onto the
Phantom Game Receiver. The titles will be available to subscribers of the
Phantom Game Service on both a pay-per-play and pay-to-own basis.
  
 25
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 
 The
agreement with Eidos requires Infinium to make the following non-refundable
advance royalty payments as follows:
 
 September 25, 2004
    
    $
    62,500Upon
      receipt of the Licensor Deliverables
    
    
    62,500Total
    
    $
    125,000
 
 In
addition, Infinium incurs royalty fees with respect to each unit of product
distributed. These per unit royalty fees shall be applied against the
aforementioned advance royalty payments. Once the advance royalty payments have
been earned down and recouped by Infinium, then Infinium shall pay directly to
Eidos the per unit royalty fees for every unit of product it distributes. The
per unit royalty fee ranges from 25% to 50% of Infinium’s net
receipts
 
 As the
company has not commenced sales of the game system and there is no definitive
way to determine the future economic benefit associated with the advance
payments, the company has expensed the advance royalty payments as incurred.
From December 9, 2002 (inception) through December 31, 2004, $125,000 of
guaranteed license fees had been accrued and reported on the accompanying
financial statements.
 
 In the
event that the per unit royalty fees exceed the advance royalty payments, those
per unit royalty fees will be expensed as incurred. Accordingly, the
corresponding revenue related to the product distribution will be recognized as
earned. The Company is currently in default of this agreement.
 
 **Enlight
Inc.**
 
 Infinium
signed a distribution agreement with Enlight Interactive Inc. (“Enlight”) that
will allow Infinium to market Enlight’s catalog of video games software on the
Phantom Game System. The agreement expires on September 2, 2009 and authorizes
Infinium to distribute Enlight’s products, via the Phantom Game Service or
pre-load, onto the Phantom Game Receiver. The titles will be available to
subscribers of the Phantom Game Service on both a pay-per-play and pay-to-own
basis.
 
 The
agreement with Enlight requires Infinium to make the following non-refundable
advance royalty payments as follows:
 
 October 2, 2004
    
    $
    5,000Upon receipt of the Licensor Deliverables
    
    
    5,000Total
    
    $
    10,000
   26
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 In
addition, Infinium incurs royalty fees with respect to each unit of product
distributed. These per unit royalty fees shall be applied against the
aforementioned advance royalty payments. Once the advance royalty payments have
been earned down and recouped by Infinium, then Infinium shall pay directly to
Enlight the per unit royalty fees for every unit of product it distributes. The
per unit royalty fee ranges from 30% to 50% of Infinium’s net
receipts
 
 As the
company has not commenced sales of the game system and there is no definitive
way to determine the future economic benefit associated with the advance
payments, the company has expensed the advance royalty payments as incurred.
From December 9, 2002 (inception) through December 31, 2004, $10,000 of
guaranteed license fees had been accrued and reported on the accompanying
financial statements.
 
 In the
event that the per unit royalty fees exceed the advance royalty payments, those
per unit royalty fees will be expensed as incurred. Accordingly, the
corresponding revenue related to the product distribution will be recognized as
earned. The Company is currently in default of this agreement.
 
 ***(B)
Development Agreement***
 
 The
company has a development agreement in place with BIOSTAR for the Phantom Game
Receiver mainboard and graphics adapter. Terms are: $156,000 due at signing;
$78,000 due before ship of pilot production units from Biostar; $78,000 due on
acceptance of pilot units. The end design product will be wholly owned by the
company. This work is ongoing. From December 9, 2002 (inception) through
December 31, 2004, $312,000 of expenses have been accrued and reported on the
accompanying financial statements. No payments have been made to Biostar.
 
 ***(C)
Leases***
 
 Infinium
leases office space in Sarasota, Florida (starting September 18, 2003) and
Seattle, Washington (starting August 1, 2004) under operating leases that expire
in 2009 and 2006, respectively. Minimum future rental payments under these
leases are as follows:
 
 Year
      Ending December 31,
    
    $2005
    
    
    571,8932006
    
    
    491,0552007
    
    
    309,9382008
    
    
    329,3782009
    
    
    309,355Thereafter
    
    
    -$
    2,011,619
 
 27
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 
 The
Florida lease provides for a renewal option of 5 years at a rental rate equal to
the last year of the initial term with an increase equal to the Consumer Price
Index not to exceed 5%. Rent expense for the year ended December 31, 2004, the
two months ended December 31, 2003, the period from December 9, 2002 (Inception)
to October 31, 2003 and the period from December 9, 2002 (Inception) to December
31, 2004 was $373,590, $3,859, $0 and $377,449, respectively.
 
 ***(D)
Litigation***
 
 On
October 27, 2003, SensAble Technologies, Inc. filed a complaint against Infinium
in the U.S. District Court for the District of Delaware, alleging federal
trademark infringement, federal trademark dilution, federal unfair competition,
and Delaware common law unfair competition regarding the trademark "Phantom".
The complaint sought damages, injunctive relief against Infinium's use of the
name "Phantom", surrender of the Company's website www.phantom.com withdrawal of
trademark applications for the "Phantom" mark and other unspecified damages. The
complaint was settled in full via a $150,000 payment to SensAble Technologies on
January 10, 2005 per the Second Amendment to Concurrent Use and Settlement
Agreement dated May 28, 2004. As a condition of the Second Amendment to
Concurrent Use and Settlement Agreement dated May 28, 2004, Sensable
Technologies returned their 120,000 shares of common stock after receipt of the
$150,000 payment in 2005.
 
 On or
around November 24, 2004, SBI-USA, LLC, filed suit against us and our chief
executive officer, Timothy M. Roberts, in United States District Court, Central
District of California. The suit alleges breach of contract and fraud and seeks
to recover damages of approximately $600,000 under a contract that we terminated
with plaintiff, as well as punitive damages and attorney's fees. In connection
with the breach of contract claim, the plaintiff alleges that, since March 6,
2004, we raised more than $30 million in financing and owe plaintiff 2% of all
amounts received. In connection with the fraud claim, plaintiff claims that we
represented that plaintiff would be our exclusive investment banker during the
term of the agreement with plaintiff, and that we hired a competing firm. Prior
to filing suit, plaintiff demanded that we pay approximately $66,000 in unpaid
expenses as full compensation for amounts due under the agreement. Shortly
following our refusal to do so absent documentation of the claimed expenses,
plaintiff initiated this suit. Our counsel has advised us that this suit is
completely meritless and we intend to vigorously defend it.
 
 A default
to the suit was entered against Timothy Roberts on January 5, 2005, but no
default judgment has been entered. A motion to set aside the default was filed
on February 7, 2005 and set to be heard on March 21, 2005. The motion seeks to
set aside the default based on both lack of personal jurisdiction against Mr.
Roberts as well as for good cause to set aside the default. The complaint was
settled in full via a $55,000 payment to SBI-USA, LLC on April 4, 2005. As of
December 31, 2004, the Company has accrued expenses of $55,000 for this
settlement.
   28
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 KB
Networks, Inc., Kyle Bennett and Steve Lynch v. Infinium Labs, Inc. and Timothy
Roberts was
filed on February 27, 2004 in the United States District Court for the Northern
District of Texas, Dallas Division. The case bore the Cause Number
3:04-CV-423-D.
 
 The
parties to the proceeding are identified in the style set forth above. The
Complaint asserted only claims for declaratory relief. In this regard, the
Complaint did not seek any compensatory damages whatsoever. The subject matter
of the Complaint arose out of the publication by the Plaintiffs of an article
about the Defendants on a website maintained by the Plaintiffs. That publication
took place on September 17, 2003. Defendants sent the Plaintiffs cease and
desist letters asserting that the article was defamatory in a number of
respects. Defendants also asserted that the use of Infinium Labs, Inc.’s
registered marks constituted a violation of the Lanham Act and otherwise
constituted trademark infringement. The Original Declaratory Judgment Complaint
was filed in order to obtain a declaratory judgment that the publication of the
article was not defamatory and that the Plaintiffs’ use of Infinium Labs, Inc.’s
trademarks in connection with the article did not constitute infringement and
was an act of fair use.
 
 Rather
than respond to the Complaint, Defendants filed a Motion to Dismiss the
Complaint asserting that the Court lacked both subject matter and personal
jurisdiction. However, rather than provide a timely ruling on the Motion to
Dismiss, the Court allowed the Plaintiffs to engage in discovery related to the
question of personal jurisdiction. However, the Plaintiffs’ tactics during this
discovery phase of the action were extremely burdensome and expensive.
Accordingly, the decision was made to terminate the litigation by consenting to
the exercise of personal jurisdiction and responding to the Complaint in such a
way as to concede that the article did not give rise to any liability for the
Plaintiffs as a result of its publication. As a result, the District Court
entered a declaratory judgment declaring that the Plaintiffs were not liable to
the Defendants as a result of the publication of the article.
 
 During
the dismissal process, the Plaintiffs asserted a right to recover sanctions
against the Defendants for their conduct during the discovery phase of the
litigation. The Plaintiffs asserted a sanction claim in the approximate amount
of $100,000. Rather than continue to litigate the question of sanctions, the
company agreed to pay the Plaintiffs the sum of $50,000 to completely terminate
the litigation. As a result, the final declaratory judgment was ultimately
entered terminating the litigation with prejudice. In this regard, the Agreed
Declaratory Judgment terminating the litigation in all respects was entered by
the Court on February 16, 2005. As of December 31, 2004, the Company has accrued
expenses of $50,000 for this settlement.
 
 A
confidential, non-public SEC investigation entitled “ *In re
Certain Fax Blasts* ” is
ongoing. The Company has provided documents in response to SEC subpoenas, and
two Company employees, including the CEO, have testified in the investigation
concerning, among other things, events at the Company. The Company’s response to
the SEC subpoenas is continuing.
   29
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 Except as
described above and as of December 31, 2004, we are not a party to any
litigation other than litigation arising in the ordinary course of its business,
which is not expected to have a material adverse effect on its financial
condition or results of operations and has not accrued any amounts relating to
any litigation.
 
 ***(E)
Employment Agreements***
 
 On
September 17, 2004, Infinium Labs, Inc. entered into an employment agreement
with Timothy M. Roberts, Chief Executive Officer. The agreement is for a one
year term and sets Mr. Roberts’ salary at $150,000 per year, automatically
increasing to $250,000 per year when the Company’s stockholders’ equity equals
or exceeds $5,000,000.
 
 On
November 1, 2003, Infinium Labs, Inc. entered into an employment agreement with
Kevin Bachus, President and Chief Operating Officer. Per the agreement, Mr.
Bachus’ salary is $200,000 per year from November 1, 2003 through April 30, 2004
and, thereafter, increased to $250,000 per year.
 
 On June
1, 2004, Infinium Labs, Inc. entered into a revised employment agreement with
Richard S. Skoba, Executive Vice President of Sales and Business Development,
that supersedes in its entirety an original employment agreement with Infinium
Labs Corporation dated January 3, 2003. The revised agreement sets January 3,
2004 as the effective date of hire and the initial salary is $125,000 per year.
Effective February 4, 2004, Mr. Skoba's salary automatically increased to
$175,000 per year. Effective June 1, 2004, Mr. Skoba received monthly increases
to his salary for five months, in equal installments, until reaching $225,000
per year. Upon termination by us without cause, Mr. Skoba will be entitled to
six months' salary and benefits.
 
 On
January 15, 2004, Infinium Labs, Inc. entered into an employment agreement with
Tyrol Graham, Vice President of Product Development. Per the agreement, Mr.
Graham’s salary is $150,000 per year and grants Mr. Graham the option to
purchase 150,000 shares of the Company’s common stock pursuant to the Company’s
stock option plan and the eligibility to participate in the Company’s MBO Plan
for a maximum of 400,000 additional shares of common stock to be awarded
pursuant to the Company’s Incentive Stock Option Plan.
 
 On May
24, 2004, Infinium Labs, Inc. entered into an employment agreement with Andrew
Schneider, Senior Vice President of Marketing. Per the agreement, Mr.
Schneider’s salary is $190,000 per year and grants Mr. Schneider the option to
purchase 300,000 shares of the Company’s common stock, of which, 20% vested on
Mr. Schneider’s first day of employment.
   30
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 ***(F)
Licenses***
 
 We have
entered into agreements with a number of publishers to provide content for our *Phantom
Game Service* . These
agreements provide that we pay an advance to each publisher, which is recoupable
by us against future royalties payable to these publishers under their
respective agreements. We currently owe an aggregate of $885,000 to these
publishers pursuant to these agreements and if we fail to pay these advances,
these agreements may be terminated.
 
 **NOTE
8**  **STOCK
OPTIONS AND WARRANTS**
 ******
 ***(A)
Stock Options Issued Under Qualified Stock Option
Plan***
 
 Under the
2004 Incentive Stock Option Plan, the Company may grant incentive stock options
to its employees, officers, directors, and consultants of the Company to
purchase up to 25,000,000 shares of common stock. Under the plan, the exercise
price of each option equals or exceeds the market price of the Company’s stock
on the date of grant, and the options’ maximum term is five years. Options are
granted at various times and are exercisable per a 36 month vesting
period.
 
 During
2004, the Company granted 18,505,000 stock options to certain employees during
the year ended December 31, 2004. The Company applies APB Opinion No. 25 and
related interpretations in accounting for stock options issued to employees.
Accordingly, no compensation cost has been recognized for options issued to
employees. Had compensation cost been determined based on the fair market value
at the grant date, consistent with SFAS 123, the Company’s net income (loss)
would have changed to the pro-forma amounts indicated below.
 
 Year
      Ended December 31, 2004
    
    
    Two
      Months Ended December 31, 2003
    
    
    December
      9, 2002 (Inception) through October 31, 2003
    
    
    December
      9, 2002 (Inception) through December 31, 2004Net
      loss available to common shareholders
    
    
    As
      Reported
    
    $
    (33,131,286
    )
    $
    (598,948
    )
    $
    (2,270,129
    )
    $
    (36,000,363
    )Pro
      Forma
    
    $
    (40,250,036
    )
    $
    (598,948
    )
    $
    (2,270,129
    )
    $
    (43,119,113
    )Basic
      and diluted loss per share
    
    
    As
      Reported
    
    $
    (0.33
    )
    $
    (0.01
    )
    $
    (0.04
    )
    $
    (0.45
    )Pro
      Forma
    
    $
    (0.40
    )
    $
    (0.01
    )
    $
    (0.04
    )
    $
    (0.54
    )
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2004: dividend yield of zero; expected volatility
of 187%, risk-free interest rate of 3.86%; expected life of five years for the
plan. The cost of the options was calculated based on the amount of vested
shares as the vesting period is the same as the service period of the options (3
years). Based on the common stock share price, the weighted average shares equal
the primary EPS on the income statement for the year ended December 31, 2004,
the two months ended December 31, 2003, from December 9, 2002 (Inception)
through October 31, 2003 and from December 9, 2002 (Inception) through December
31, 2004 of $(0.33), $(0.01), $(0.04) and $(0.45), respectively.
   31
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 A summary
of the status of Company’s fixed stock option plan as of
December 31, 2004 and 2003, and the changes during the years then
ended is presented below:
 
 December 31, 2004
    
    December 31, 2003Fixed
      Options
    
    Shares
    
    Weighted
      Average Exercise Price
    
    Shares
    
    Weighted
      Average Exercise PriceOutstanding
      at beginning of period
    
    
    -
    
    $
    -
    
    
    -
    
    $
    -Cancelled
    
    
    -
    
    $
    -
    
    
    -
    
    $
    -Granted
    
    
    18,505,000
    
    $
    1.43
    
    
    -
    
    $
    -Forfeited
    
    
    3,355,000
    
    $
    1.43
    
    
    -
    
    $
    -Expired
    
    
    -
    
    $
    -
    
    
    -
    
    $
    -Exercised
    
    
    -
    
    $
    -
    
    
    -
    
    $
    -Outstanding at end of period
    
    
    15,150,000
    
    $
    1.43
    
    
    -
    
    $
    -Options exercisable at period end
    
    
    5,184,862
    
    
    
    
    
    -Weighted
      average fair value of options granted to employees during the
      year
    
    $
    1.43
    
    
    
    
    $
    -
 
 
 Options
      Outstanding
    
    Options
      ExercisableRange
      of Exercise Price
    
    Number
      Outstanding at December 31, 2004
    
    WeightedAverage
      RemainingContractual
      Life
    
    Weighted
      Average Exercise Price
    
    Number Exercisable at
      December 31, 2004
    
    Weighted
      Average Exercise Price$
    0.00
      - 0.99
    
    -
    
    -
    $
    -
    
    -
    $
    -1.00
      - 1.99
    
    15,150,000
    
    4.5
    
    1.43
    
    5,184,862
    
    1.4315,150,000
    
    4.5
    $
    1.43
    
    5,184,862
    $
    1.43
 
 Options
      Outstanding
    
    Options
      ExercisableRange
      of Exercise Price
    
    Number
      Outstanding at December 31, 2003
    
    Weighted
      Average Remaining Contractual Life
    
    Weighted
      Average Exercise Price
    
    Number
      Exercisable at December 31, 2003
    
    Weighted
      Average Exercise Price$
    0.00
      - 0.99
    
    -
    
    -
    $
    -
    
    -
    $
    -1.00
      - 1.99
    
    -
    
    -
    
    -
    
    -
    
    --
    
    -
    $
    -
    
    -
    $
    -
 
 During
the period ended October 31, 2003, the Company had no Stock Option Plan in
place.
 
 ***(B)
Warrants Issued and Outstanding***
 
 December
      31, 2004
    
    December
      31, 2003
    
    October
      31, 2003Warrants
      for common stock issued to investors. The term of the warrants are five
      years expiring November 10, 2009.The
      warrants are exercisable at $0.25 per share
    
    5,107,081
    
    -
    
    -Warrants
      for common stock issued to an investor. The term of the warrants are five
      years expiring November 10, 2009. The warrants are exercisable at $0.10
      per share.
    
    8,722,604
    
    -
    
    -Warrants
      for common stock issued to note holders. The term of the warrants are five
      years expiring October 22, 2009. The warrants are exercisable at $0.50 per
      share.
    
    500,000
    
    -
    
    -Warrants
      for common stock issued to note holders. The term of the warrants are five
      years expiring October 27, 2009. The warrants are exercisable at $0.50 per
      share.
    
    500,000
    
    -
    
    -Warrants
      for common stock issued to note holders. The term of the warrants are five
      years expiring December 31, 2009. The warrants are exercisable at $0.26667
      per share.
    
    5,437,487
    
    -
    
    -Warrants
      for common stock issued to note holders. The term of the warrants are five
      years expiring December 31, 2009. The warrants are exercisable at $0.75
      per share.
    
    5,437,487
    
    -
    
    -Warrants
      for common stock issued to note holders. The term of the warrants are five
      years expiring December 31, 2009. The warrants are exercisable at $1.00
      per share.
    
    5,437,487
    
    -
    
    -Warrants
      for common stock issued to note holders. The termof
      the warrants are five years expiring December 31, 2009.The
      warrants are exercisable at $0.10 per share.
    
    4,687,485
    
    -
    
    -Total
    
    35,829,631
    
    -
    
    -
   32
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 **NOTE
9****GOING
CONCERN**
 
 As
reflected in the accompanying financial statements, the Company is in the
development stage with no sales and has recurring losses from inception of
$36,000,363, has a working capital deficiency of $12,223,911, a stockholders
deficiency of $11,468,854 and has a
negative cash flow from operations of $11,996,783 . This
raises substantial doubt about its ability to continue as a going concern. The
ability of the Company to continue as a going concern is dependent on the
Company’s ability to raise additional capital and implement its business plan.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
 
 Management
believes that actions presently being taken to obtain additional funding and
implement its business plan provide the opportunity for the Company to continue
as a going concern.
 
 **NOTE****10****RELATED
PARTY TRANSACTIONS**
 
 The
Company issued a director 800,000 shares of common stock as consideration for
the director's personal guaranty of a $500,000 note payable secured by a real
estate mortgage encumbering the director's residence.
 
 The
Company compensated the Chief Executive Officer $50,000 as consideration for the
Chief Executive Officer's personal guaranty of a $1,500,000 note payable secured
by a real estate mortgage encumbering the Chief Executive Officer's residence.
 
 **NOTE****11****SUBSEQUENT
EVENTS**
 
 ***(A)
Notes Payable***
 
 On
January 27, 2005, the Company borrowed $300,000 Timothy Roberts, the Company’s
Chief Executive Officer, under a 15% promissory note, which is payable no later
than April 27, 2005.
 
 On
January 28, 2005, the Company borrowed $118,000 under a 15% promissory note,
which is payable no later than April 30, 2005.
   33
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 On
January 31, 2005, the Company borrowed $175,000 under a 15% promissory note,
which is payable no later than May 10, 2005.
 
 On
January 31, 2005, the Company borrowed $100,000 under a 15% promissory note,
which is payable no later than May 10, 2005.
 
 On
February 3, 2005, the Company borrowed $100,000 under a 15% promissory note,
which is payable no later than May 10, 2005.
 
 On March
9, 2005, the Company borrowed $400,000 under a 10% promissory note, which is
payable no later than April 15, 2005.
 
 On March
21, 2005, the Company borrowed $200,000 under a 17% promissory note, which is
payable no later than May 10, 2005.
 
 ***(B)
Common Stock Issuances***
 
 During
2005, the Company issued 2,747,632 shares of common stock for consulting
services with a fair value of $931,805 ($0.34 per share). These transactions
were exempt from registration under Section 4(2) of the Securities Act because
it did not involve a public offering.
 
 During
2005, the Company issued 1,465,000 shares of common stock to employees with a
fair value of $767,850 ($0.52 per share). These transactions were exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.
 
 On
January 6, 2005, the Company issued 7,043,750 shares of common stock to convert
a note payable with a fair value of $704,375 ($0.10 per share). There was no
gain or loss on the conversion of this note. This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.
 
 On
February 11, 2005, the Company issued 4,925,291 shares of common stock to
convert a note payable with a fair value of $1,058,938 ($0.215 per share). There
was no gain or loss on the conversion of this note. This transaction was exempt
from registration under Section 4(2) of the Securities Act because it did not
involve a public offering.
 
 On March
22, 2005, the Company issued 5,815,069 shares of common stock to convert a note
payable with a fair value of $581,507 ($0.10 per share). There was no gain or
loss on the conversion of this note. This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.
 
 On April
11, 2005, the Company issued 7,825,000 shares of common stock to convert a note
payable with a fair value of $1,565,000 ($0.15 per share). There was no gain or
loss on the conversion of this note. This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.
 
 
 34
 **INFINIUM
LABS, INC. AND SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**Notes
to Financial Statements**
 
 During
April 2005, the Company issued 816,952 shares of common stock for consulting
services with a fair value of $200,323 ($0.25 per share). These transactions
were exempt from registration under Section 4(2) of the Securities Act because
it did not involve a public offering.
 
 During
April 2005, the Company issued 100,000 shares of common stock to an employee
with a fair value of $26,000 ($0.26 per share). This transaction was exempt from
registration under Section 4(2) of the Securities Act because it did not involve
a public offering.
 
 ***(C)
Stock Returned per Legal Settlement***
 
 During
2005, Sensable Technologies returned their 120,000 shares of common stock after
the Company’s receipt of the $150,000 payment from Sensable Technologies as a
specified in the Second Amendment to Concurrent Use and Settlement Agreement
dated May 28, 2004.
 
 ***(D)
Amendment to Articles of Incorporation***
 
 During
2005, the Company amended its Articles of Incorporation to provide for an
increase in its authorized share capital. The authorized capital stock increased
to 600,000,000 common shares at a par value of $0.0001 per share.
 
  
 35