**UNITED
      STATES**


**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, 2006**





**OR**


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





**For
      the transition period from to**





**Commission
      file number 000-** **50535**





**PHANTOM ENTERTAINMENT, 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.)**222
                Grace Church St., Suite 302**
              **Port
                Chester, NY 10573**
              (Address
                of principal executive offices) (Zip Code)(866)
                452-9883(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, $.001 par value per share****(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 o 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. o




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





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





At
      May
      15, 2007, 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 $1,799,433.





The
      number of shares issued and outstanding of our company’s common stock at May 15,
      2007 was 1,799,433,415




**DOCUMENTS
      INCORPORATED BY REFERENCE:** None





Transitional
      Small Business Disclosure Format (check one): o Yes x No

















**PHANTOM
      ENTERTAINMENT, INC.**




**2006
      FORM 10-KSB ANNUAL REPORT**




**TABLE
      OF CONTENTS**





**Page**
              **Number**PART
                I
            
            1Item
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            13Item
                3.
            Legal
                Proceedings
            13Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            15PART
                II
            
            16Item
                5.
            Market
                for Common Equity and Related Stockholder Matters
            16Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            20Item
                7.
            Financial
                Statements
            25Item
                8.
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            25Item
                8A.
            Controls
                and Procedures
            26Item
                8B.
            Other
                Information
            26PART
                III
            
            26Item
                9.
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(a) of the Exchange Act
            26Item
                10.
            Executive
                Compensation
            29Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            31Item
                12.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            33Item
                13.
            Exhibits
            36Item
                14.
            Principal
                Accountant Fees and Services
            38







**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" AND ITEM 6. MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION IN THIS FORM 10-KSB. THE COMPANY
      ASSUMES NO OBLIGATION 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 (the “Annual Report”), "we," "us," "our,"
      "Phantom" and "our Company" refer to Phantom Entertainment, Inc. and our
      subsidiaries, unless the context otherwise requires.





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




**General
      Overview**





Phantom
      Entertainment has developed and is manufacturing and marketing the Phantom
      Lapboard, a combination wireless keyboard, laser mouse and hard surface that
      enables users to work or play games from
      any
      comfortable setting. After
      establishing sales and distribution of the Phantom Wireless Lapboard, we may
      seek to develop and market the Phantom Game Service, a video game delivery
      system designed to allow consumers to search, preview and play a large selection
      of video games on demand via a broadband Internet connection.





We
      have
      not yet generated any revenue from operations. We have entered into major,
      multi-product licensing agreements with Ione
      Technology Inc., a worldwide leading manufacturer and marketer of input devices,
      to manufacture and distribute the Phantom® Wireless Lapboard and Phantom® Wireless
      Laser Mouse under Ione’s brand name throughout Asia and through Ione’s
      distributors in the US and Europe in return for royalty and design fees. We
      anticipate we will begin to receive revenue from these agreements in the
      4 th quarter
      of 2007.





The
      agreements allow Ione Technology to market an Ione wireless lapboard and Ione
      wireless laser mouse as a combo package and as stand-alone products through
      Ione’s distributors in the US, Europe in markets throughout Asia including:





·
            Taiwan


·
            China


·
            Hong
                Kong


·
            Japan


·
            South
                Korea


·
            Thailand


·
            Philippines


·
            Indonesia


·
            Viet
                Nam


·
            Laos


·
            Cambodia


·
            Burma


·
            Malaysia


·
            Singapore


·
            India


·
            Bangladesh


·
            Sri
                Lanka





We
      have
      received a purchase order from Alienware ® - the
      leading manufacturer of high-performance desktop, notebook, media
      center  and
      professional systems - to manufacture and supply the Phantom ® Wireless
      Lapboard and Phantom ® Wireless
      Laser Mouse for Alienware’s Media Center PCs and its PC gear product line. We
      anticipate we will begin to receive revenue from Alienware in the 4 th quarter
      of 2007.





We
      have
      entered a distribution and sales agreement with Global Marketing Partners to
      serve the E-Commerce and retail markets throughout the United States. The
      agreement will aggregate sales of the Phantom Wireless Lapboard through Global
      Marketing Partner’s distribution channel with Ingram
      Micro Inc. (NYSE: IM), the world's largest technology distributor and a leading
      technology sales, marketing and logistics company. We
      anticipate we will begin to receive revenue from this agreement in the
      4 th quarter
      of 2007.




1


We
      have
      entered a sales agreement with Westex Europe NV to serve the E-Commerce, retail
      and OEM industrial markets throughout Europe. Westex Europe NV, a sales
      organization for high technology products and solutions, will target original
      equipment manufacturers (OEMs), value-added resellers (VARS), systems builders
      and E- commerce retailers in Europe.





In
      August
      2006, we launched a new website and online store to support the marketing and
      sales of the Phantom Lapboard. The website can be found at www.phantom.net .
      We have
      a backlog of online orders for the Phantom Lapboard. Credit card payments will
      not be charged until the Phantom Lapboard ships. We anticipate we will begin
      to
      receive revenue from online orders in the 4 th quarter
      of 2007.





Our
      ability to generate revenue from the Phantom brand is dependent on our ability
      to successfully manufacture and market the Phantom Wireless Lapboard under
      Phantom’s brand name throughout North America and Europe. While we anticipate
      launching sales and distribution of the Phantom Wireless Lapboard in September
      2007, delays may occur and given our limited resources, we need immediate
      additional capital to manufacture the Phantom Wireless Lapboard as well as
      to
      fund general operations.





**Phantom
      Lapboard**





Currently
      our business activities are almost entirely dedicated to manufacturing and
      marketing of the Phantom Wireless Lapboard. The Phantom Wireless Lapboard
      includes wireless technology, ergonomic design, one-touch features, programmable
      keys and a wireless high performance 1200 dpi laser mouse. The Lapboard’s
      innovative design features a keyboard that rotates 360 degrees to accommodate
      left or right handed users and inclines on a 22 degree angle with a hard surface
      below for the Phantom Laser Mouse.




**Marketing
      Overview and Media coverage**





In
      October 2006, we hired Wiredset Digital Agency for online marketing and branding
      of its Phantom Lapboard and Game Service. The New York agency, best-known for
      creative online and mobile solutions, was selected for its expertise and success
      in the online marketing of entertainment and media companies. In 2006, online
      marketing efforts produced the following online coverage:




**Third
      Party & Blog Marketing**





Objective:
      News Items/Blog Posts - Discussing the Phantom Lapboard





•
      CrunchGear,


•
      Gamasutra


•
ESB
      Brain Wave


•
      Krunker


•
      Technophobic


•
PC
      Gamer Podcast


•
      TechBlog


•
      Engadget


•
Slash
      Gear


•
      Gizmodo


•
Gizmodo
      UK


•
Daily
      Tech


•
      I4U


•
Gaming
      Nexus


•
Tek
      News


•
Gadget
      Life


•
Tech
      lime


•
Game
      Zone


•
Tech
      Report


•
Firing
      Squad


•
      Overclockers Club


•
      Raptor’s Blog


•
Game
      Planet


•
      Kotaku


•
      Wired


•
      Ubergizmo


•
      Macworld


•
Gadgets
      Fosfor


•
      PGNX


•
      Untangled Life


•
New
      Launches


•
      2DayBlog


•
      Anything & Everything


•
GadMag
      (German)


•
      BizToolbelt


•
Mobile
      Mag


•
Free
      Load


•
Nerd
      Approved


•
Techno
      Toy


•
      Ichigo:Noterat (Not English)


•
Digital
      Drops





2


The
      Phantom Wireless Lapboard and Phantom Wireless Laser Mouse were featured
      products in the MTV, Digitallife and Daily Lounge 2006 online holiday gift
      guides.





**Online
      Video 2.0 Channels:**





Objective:
      Syndicate Phantom promo video across the online video channels.


•
YouTube


•
MySpace
      - http://www.myspace.com


•
Google
      - http://video.google.com


•
Yahoo!
      - http://video.yahoo.com


•
      Microsoft Soapbox - http://soapbox.msn.com


•
iFilm
      -
      http://www.ifilm.com


•
Daily
      Motion - http://www.dailymotion.com


•
Grouper
      - http://www.grouper.com


•
Bolt
      -
      http://www.bolt.com


•
Blip.tv
      - http://www.blip.tv


•
Vimeo
      -
      http://www.vimeo.com


•
Vsocial
      - http://www.vsocial.com


•
      Clipshack - http://www.clipshack.com


•
Eyespot
      - http://www.eyespot.com


•
      Metacafe - http://www.metacafe.com


•
      Castpost - http://www.castpost.com


•
Revver
      - http://www.revver.com


•
      Vidilife - http://www.vidilife.com





**Web
      2.0 Marketing:**





Objective:
      Make Phantom assets and web links accessible on Web 2.0 social networks to
      maximize visibility in Web. 2.0 search and their respective sites.




•
      OnlyWire - http://www.onlywire.com





**Tradeshow
      Marketing**




The
      Phantom® Wireless Lapboard was viewed by thousands of consumers, retailers,
      distributors and consumer electronic followers at tradeshows.





·
            the
                Games Convention (GC 2006) August 24-27, at the Leipzig Fair Exhibition
                Centre in Leipzig, Germany.





·
            the
                2006 DigitalLife, Ziff Davis Media's leading consumer electronics
                and
                entertainment event, October 12-15, at the Jacob Javits Center in
                New York
                City.





·
            the
                seventh annual Electronic House Expo November 15-17, at the Long
                Beach
                Convention Center in Long Beach, California.





**Marketing
      Objectives & Strategies**





Our
      objective is to increase awareness and build buzz for Phantom Lapboard launch.
      The Phantom Lapboard is designed with a gamer in mind, and is intended to
      transform the way gamers think about computer keyboards. To do this, we intend
      to intercept gamers virally by inhabiting their communities and informing them
      about the Phantom Lapboard in an informal and provocative manner and leveraging
      PR assets to create incremental industry and consumer buzz.





3


**Viral
      Marketing**





Viral
      marketing is sometimes used to describe a version of Internet-based stealth
      marketing campaigns, including the use of blogs, seemingly amateur web sites,
      to
      create word of mouth for a new product or service. Often the ultimate goal
      of
      viral marketing campaigns is to generate media coverage via "offbeat" stories
      worth many times more than the campaigning company's advertising budget. The
      term "viral advertising" refers to the idea that people will pass on and share
      appealing and entertaining content; this is often sponsored by a brand, which
      is
      looking to build awareness of a product or service. Viral marketing is popular
      due to the ease of executing the marketing campaign, relative low-cost (compared
      to direct mail), good targeting, and the high and rapid response rate. The
      main
      strength of viral marketing is its ability to obtain a large number of
      interested people at a low cost.





We
      intend
      to heavily rely on viral marketing and viral advertising to achieve our
      marketing objectives. Viral marketing and viral advertising refer to marketing
      techniques that seek to exploit pre-existing social networks to produce
      exponential increases in brand awareness, through viral processes similar to
      the
      spread of an epidemic. It is word-of-mouth delivered and enhanced online; it
      harnesses the network effect of the Internet and can be very useful in reaching
      a large number of people rapidly.





Tactics
      we intend to utilize are one-to-one and online/viral techniques to identify,
      communicate and drive hardcore gamers (who are the most likely early adopters)
      to the Phantom Internet website. We also intend to infiltrate best-in-class
      video game communities with simple, easy to understand message and seeding
      on
      tech blogs, gaming sites and on-line player forums with compelling imagery
      and
      links to lapboard eye candy.





We
      intend
      to utilize low cost guerilla events to demo the product, reward involvement
      and
      interest from core target groups and to draw media attention to the Phantom
      Lapboard introduction. We will schedule PR announcements and interviews at
      appropriate times and intend to introduce highly limited and targeted print
      and
      web advertising to support launch and key periods for advertising during the
      year such as the Game Developers Conference (GDC).





After
      initial launch, we intend to use database marketing and relationship marketing
      techniques to build loyalty and increase sales, roll out targeted advertising
      and promotions to grow initial interest/purchase of lapboard and to support
      new
      retailer partnerships, and leverage contract and content partnerships for
      presence at key industry events, such as E3 at Blizzard booth, gaming
      tournaments, etc. With respect to leveraging contract and content partnerships,
      we intend to utilize all of our pre-existing relationships and forge new
      relationships in order to increase sales of the Phantom Lapboard. Such
      relationships are likely to include vendors in the games industry.





**Distribution
      Strategy**





In
      August
      2006, we launched a new website and online store to support the marketing and
      sales of the Phantom Lapboard. The website can be found at www.phantom.net .
      We may
      establish other sales and marketing distribution channels through brick and
      mortar retailers. “Brick and mortar retail customers” typically refer to
      customers of companies that have a physical presence (for example, a building
      made of “bricks and mortar”) and offer face-to-face consumer experiences, as
      opposed to an Internet-only presence.





We
      have
      received a purchase order from Alienware ® - the
      leading manufacturer of high-performance desktop, notebook, media
      center  and
      professional systems - to manufacture and supply the Phantom ® Wireless
      Lapboard and Phantom ® Wireless
      Laser Mouse for Alienware’s Media Center PCs and its PC gear product
      line.





We
      have
      entered a distribution and sales agreement with Global Marketing Partners to
      serve the E-Commerce and retail markets throughout the United States. The
      agreement will aggregate sales of the Phantom Wireless Lapboard through Global
      Marketing Partner’s distribution channel with Ingram
      Micro Inc. (NYSE: IM), the world's largest technology distributor and a leading
      technology sales, marketing and logistics company.





We
      have
      entered a sales agreement with Westex Europe NV to serve the E-Commerce, retail
      and OEM industrial markets throughout Europe. Westex Europe NV, a sales
      organization for high technology products and solutions, will target original
      equipment manufacturers (OEMs), value-added resellers (VARS), systems builders
      and E- commerce retailers in Europe.





We
      may
      establish additional retail partner programs designed to generate recurring
      revenue streams for retailers from the sale of the Phantom Lapboard. Retailers
      may receive a percentage of the sales revenue.




4




**Competition**





While
      we
      are not aware of any direct competitors to our Phantom Lapboard, we will compete
      indirectly with a large number of hardware manufacturers, Internet sites, and
      other companies providing gaming and entertainment services. Our competitors
      may
      include hardware manufactures, Internet sites, and other companies providing
      gaming and entertainment accessories; 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
      accessories to which they would direct their customers.





**Intellectual
      Property**





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 aspects of technologies associated
      with
      the make and use of the Phantom Lapboard 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.





As
      of
      December 31, 2006, we had a total of 6 pending domestic patent
      applications with the
      US Patent and Trademark Office, entitled:




(1)
            Method
                And Apparatus For Backlighting Of A Keyboard For Use With A Game
 
                Device Application Filed August 2,
                2004




(2)
            Method
                For Automatic Patching Of A Sparsely Streamed Application
                Filed September 29, 2004




(3)
            Modified
                Keyboard And Systems Containing The Keyboard Application   Filed May
                6, 2005




(4)
            Multi-Mode
                Pointing Device And Systems And Methods Using The Pointing   Device
                Application Filed May 6, 2005




(5)
            Multiposition
                Multilevel User Interface System   Application Filed   May 6,
                2005




(6)
            System
                For Securely Booting A Computer Device   Application Filed  
                July 6, 2005




The
      Phantom Lapboard and Game Service that we hope to re-focus resources on if
      we
      are successful with the Phantom Lapboard, may also utilize proprietary firmware
      and/or software that we develop in order to enhance the gamer’s
      experience.





We
      are
      pursuing federal registration of our trademarks and service marks in the United
      States with the U.S. Patent and Trademark Office. As of December 31, 2006,
      we
      had 2 independent federal trademarks registered, the design of the Phantom
      logo
      which expires on December 21, 2014 and the word "Phantom" which expires on
      June
      14, 2015 and 6 applications pending.





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





**EMPLOYEES**





As
      of May
      14, 2007, we had 3 full-time employees, one who is in engineering and
      development and 2 of whom are general and administrative personnel. There is
      no
      collective bargaining agreement in place.




5




**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, but represent
      all of those risks deemed material to the Company. Additional risks not
      presently known to us may also impair our business operations.





**WE
      HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, REQUIRING US TO SEEK ADDITIONAL
      SOURCES OF CAPITAL WHICH MAY NOT BE AVAILABLE, REQUIRING US TO CURTAIL OR CEASE
      OPERATIONS.**





We
      incurred a loss from operations of $4,454,583 for the year ended
      December 31, 2006 and a loss from operations of $12,236,530 for the
      year ended December 31, 2005. Our monthly burn rate is approximately $200,000
      per month and, accordingly, we will need to raise approximately $2,400,000
      over
      the next 12 months in order to sustain our current operations. We reduced our
      staff during the first quarter of 2006 and adjusted associated payroll,
      benefits, and rent for our corporate headquarters accordingly. With these
      modifications, we made the aforementioned estimate of our monthly burn rate.
      We
      cannot assure you that we can achieve or sustain profitability on a quarterly
      or
      annual basis in the future. If revenues grow more slowly than we anticipate,
      or
      if operating expenses exceed our expectations or cannot be adjusted accordingly,
      we will continue to incur losses. Additionally, we will continue to incur losses
      until we are able to market and sell our products. Our possible success is
      dependent upon the successful development and marketing of our products, as
      to
      which there is no assurance. Any future success that we might enjoy will depend
      upon many factors, including factors out of our control or which cannot be
      predicted at this time. These factors may include changes in or increased levels
      of competition, including the entry of additional competitors and increased
      success by existing competitors, changes in general economic conditions,
      increases in operating costs, including costs of supplies, personnel and
      equipment, reduced margins caused by competitive pressures and other factors.
      These conditions may have a materially adverse effect upon us or may force
      us to
      reduce or curtail operations. In addition, we will require additional funds
      to
      sustain and expand our sales and marketing activities, particularly if a
      well-financed competitor emerges. We need additional financing and there can
      be
      no assurance that financing will be available in amounts or on terms acceptable
      to us, if at all. The inability to obtain sufficient funds from operations
      or
      external sources would require us to curtail or cease operations.





**OUR
      INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
      CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
      FINANCING.**





In
      their
      report dated May 15, 2007, our independent auditors stated that our financial
      statements for the year ended December 31, 2006 were prepared assuming that
      we
      would continue as a going concern. Our ability to continue as a going concern
      is
      an issue raised as a result of cash flow constraints, a working capital deficit
      of $18,344,236, an accumulated deficit of $73,550,242 at December 31, 2006,
      recurring losses from operations and the default on $2,242,276 of notes payable
      at December 31, 2006. We continue to experience net losses. Our ability to
      continue as a going concern is subject to our ability to generate a profit
      and/or obtain necessary funding from outside sources, including obtaining
      additional funding from the sale of our securities, increasing sales or
      obtaining loans and grants from various financial institutions where possible.
      Our continued net losses and stockholders’ deficit increases the difficulty in
      meeting such goals and there can be no assurances that such methods will prove
      successful.





**WE
      WILL REQUIRE ADDITIONAL FUNDING TO LAUNCH OUR PHANTOM LAPBOARD 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
                product development and launch of our Phantom
                Lapboard;





·
            finance
                additional growth and working capital
                requirements;




6




·
            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.





**BECAUSE
      WE HAVE A LIMITED OPERATING HISTORY SINCE OUR INCEPTION IN DECEMBER 9, 2002
      AND
      HAVE NOT GENERATED ANY REVENUE SINCE INCEPTION, AND SINCE THE PC ACCESSORY
      INDUSTRY IS RAPIDLY CHANGING, WE ARE UNABLE TO ACCURATELY FORECAST OUR REVENUES
      OR OUR ACTUAL COSTS OF OPERATIONS, AND A SHORT-FALL IN REVENUES OR INCREASED
      COSTS OF OPERATIONS COULD CAUSE A MATERIAL ADVERSE EFFECT IN OUR BUSINESS,
      RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.**





Because
      we have a limited operating history since our inception in December 9, 2002
      and
      have not generated an revenue since our inception, and because the PC accessory
      industry is 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 which causes us to be
      unable to accurately forecast our revenues. For example, in the event that
      the
      cost to manufacture the Phantom Lapboard 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.





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





·
            Expand
                our current operating activities;





·
            fund
                sales and marketing activities;





·
            manufacture
                inventory; and





·
            incur
                capital expenditures.





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.





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





As
      disclosed on Form 8-K filed with the SEC on April 19, 2006 and November 6,
      2006,
      we have an agreement with Itron Technology, Inc., a third-party manufacturer,
      for the production of the Phantom Lapboard. We expect to rely on sole suppliers
      for a number of key components for the Phantom Lapboard. 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 Lapboard. 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 Lapboard. This outcome would harm our ability
      to
      compete effectively and achieve increased market acceptance and brand
      recognition.





7


If
      our
      manufacturing relationships are not successful, we may be unable to satisfy
      demand for our Phantom Lapboard. The ability of our manufacturers to reach
      sufficient production volume of the Phantom Lapboard 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 Lapboard. 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
      EXPECT TO DISTRIBUTE THE PHANTOM LAPBOARD THROUGH RETAIL DISTRIBUTION CHANNELS;
      IF RETAILERS ARE NOT SUCCESSFUL OR ARE UNWILLING TO SELL OUR PRODUCTS, WE MAY
      BE
      UNABLE TO SELL TO SUCH BRICK AND MORTAR RETAIL CONSUMERS.**





We
      may
      depend on retail distribution to sell the Phantom Lapboard. In the event that
      retailers are reluctant to sell our products or in the event that their proposed
      financial terms are unacceptable to us, we may be unable to sell to traditional
      brick and mortar retail consumers, which are defined as consumers who prefer
      to
      make game, game related accessory and computer accessory purchases from
      retailers having a physical presence accessible to the consumer. If we are
      unable to sell to traditional brick and mortar retail consumers, we may go
      out
      of business.





**OUR
      PHANTOM LAPBOARD, WHILE COSTLY TO DEVELOP, MAY FAIL TO GAIN MARKET ACCEPTANCE,
      IN WHICH CASE WE MAY BE UNABLE TO OPERATE OUR BUSINESS.**





Subject
      to availability of financing, we plan to invest a considerable amount of money
      and resources in the launch of our Phantom Lapboard. However, our Phantom
      Lapboard is unproven and may fail to gain market acceptance. Because the market
      for our Phantom Lapboard is 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
      PC accessories will continue to develop or be sustainable. If the market for
      the
      Phantom Lapboard 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 THEREFORE WE MAY
      NOT MAKE SALES AND COULD POTENTIALLY GO OUT OF BUSINESS.**





We
      anticipate that the Phantom Lapboard will appeal 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.





If
      we
      misjudge the market for our Phantom Lapboard, we may not be successful in
      achieving meaningful revenue, which may lead us to go out of
      business.




8




**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 Lapboard, we will compete
      indirectly with a large number of hardware manufacturers, Internet sites, and
      other companies providing gaming and entertainment services. Our competitors
      may
      include hardware manufactures, Internet sites, and other companies providing
      gaming and entertainment accessories; 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
      accessories to which they would direct their customers.





Our
      competitors 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 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 acts by our competition may increase our customer acquisition
      costs, which is, generally, the cost associated with acquiring a new customer,
      is calculated by dividing total acquisition expenses by total new customers.
      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 technical personnel,
      particularly Greg Koler, our Chief Executive Officer and Interim Chief Financial
      Officer. The Company has an employment agreement with Mr. Koler, but such
      agreement does not mitigate the risk associated with the loss of Mr. Koler’s
      services. The loss of the services of Mr. Koler or other our senior management
      and technical personnel may cause us to go out of business. Our success also
      depends on our ability to attract and retain qualified technical, sales,
      marketing, customer support, financial and accounting, and managerial personnel.
      Competition for such personnel in the PC accessories industry can be 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.





**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.




9




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 is uncertain and still evolving .




**THE
      COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES AND ITS INTERNAL CONTROLS OVER
      FINANCIAL REPORTING WERE INEFFECTIVE THROUGH DECEMBER 2005 BECAUSE OF NOT
      PROPERLY ACCOUNTING FOR**  **SUFFICIENT
      LOSS CONTINGENCY ACCRUALS TO COVER POSSIBLE MONETARY PENALTIES AND INTEREST
      RELATING TO OUR FAILURE TO FILE CERTAIN PAYROLL AND WITHHOLDING TAX RETURNS
      AND
      TO SATISFY REQUIRED WITHHOLDING AND PAYROLL TAX OBLIGATIONS. ALTHOUGH WE
      RESTATED OUR FINANCIAL STATEMENTS IN DECEMBER 2005, IF WE ARE UNABLE TO
      GENERALLY MAINTAIN THE EFFECTIVENESS OF OUR DISCLOSURE CONTROLS AND PROCEDURES
      AND INTERNAL CONTROLS, WE WILL NOT BE ABLE TO**  **PROVIDE
      RELIABLE FINANCIAL STATEMENTS WHICH WOULD MAKE ANY INVESTMENT IN OUR COMPANY
      SPECULATIVE AND RISKY.**





As
      of
      December 31, 2006, our principal executive officer and interim principal
      financial officer evaluated the effectiveness of our disclosure controls and
      procedures and the effectiveness of our internal controls over financial
      reporting and concluded that our disclosure controls and procedures and our
      internal controls over financial reporting were ineffective, as of the end
      of
      the periods covered by such report, so as to insure that all of the information
      required to be reported in our periodic reports was recorded, processed,
      summarized, and reported, within the time periods specified in the Commission's
      rules and forms. This was concluded as we were unable to record and properly
      report sufficient loss contingency accruals to cover possible monetary penalties
      and interest relating to our failure to file certain payroll and withholding
      tax
      returns and to satisfy required withholding and payroll tax obligations. While
      management is focused on improving our company’s Disclosure Controls to ensure
      timely and proper reporting, there can be no assurance that other items do
      not
      currently exist, or will not occur in the future, that reflect ineffective
      Disclosure Controls as of the Evaluation Date. Management concluded that the
      failure to properly account for and disclose the sufficient loss contingency
      accruals to cover possible monetary penalties and interest relating to our
      failure to file certain payroll and withholding tax returns and to satisfy
      required withholding and payroll tax obligations, was a material weakness in
      our
      disclosure controls and procedures and our internal controls over financial
      reporting.





In
      connection with the evaluation referred to in the foregoing paragraph, we have
      identified no change in our internal control over financial reporting that
      occurred during the year ended December 31, 2006 that has materially affected,
      or is reasonably likely to materially affect, our internal control over
      financial reporting. Beginning in September 2005, the Company hired new staff
      to
      handle finance and legal matters as well as a new Chief Executive Officer but
      we
      are not able to confirm that the work performed by this staff improved any
      potential weaknesses in internal controls and the finance and legal employees
      were subsequently terminated in December 2006. The Company has not processed
      any
      payroll since December 2006 and intends to contract a company specializing
      in
      payroll processing to ensure any future payroll processed is fully and
      accurately reported and that all applicable payroll taxes are fully and
      accurately paid on a timely basis. The Company still maintains outside finance
      and legal consultants to assist where appropriate and when funding is available.
      With additional financing the Company will round out its staff in order to
      better comply with controls and procedures regulated under the Exchange Act.
      As
      a part of this process, the Company has reviewed its accounting treatment of
      certain convertible debt instruments under FAS 133 and EITF 00-19 and as a
      result has restated its financial statements from December 31, 2004 through
      March 31, 2006.





We
      cannot
      assure you that we will be able to maintain adequate controls over our financial
      processes and reporting. If we are unable to maintain the remedial actions
      we
      have undertaken and generally maintain the effectiveness of our disclosure
      controls and procedures and internal controls, so as to insure that all of
      the
      information required to be reported in our periodic reports was recorded,
      processed, summarized, and reported, within the time periods specified in the
      Commission's rules and forms, we will not be able to provide reliable financial
      reports, our results of operations could be misstated and our reputation may
      be
      harmed. Accordingly, any investment by you in our company under these conditions
      could be speculative and risky.




**RISKS
      RELATING TO OUR COMMON STOCK**





**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.





10


**THERE
      IS NO ASSURANCE OF AN ESTABLISHED PUBLIC TRADING MARKET IN OUR COMMON STOCK,
      WHICH WOULD ADVERSELY AFFECT THE ABILITY OF INVESTORS IN OUR COMPANY TO SELL
      THEIR SECURITIES IN THE PUBLIC MARKETS.**




Although
      our common stock trades on the Over-the-Counter Bulletin Board (the “OTCBB”), a
      regular trading market for the securities may not be sustained in the future.
      The NASD has enacted recent changes that limit quotations on the OTCBB to
      securities of issuers that are current in their reports filed with the
      Securities and Exchange Commission. The effect on the OTCBB of these rule
      changes and other proposed changes cannot be determined at this time. The OTCBB
      is an inter-dealer, Over-The-Counter market that provides significantly less
      liquidity than the NASD’s automated quotation system (the “NASDAQ Stock
      Market”). Quotes for stocks included on the OTCBB are not listed in the
      financial sections of newspapers as are those for The Nasdaq Stock Market.
      Therefore, prices for securities traded solely on the OTCBB may be difficult
      to
      obtain and holders of common stock may be unable to resell their securities
      at
      or near their original offering price or at any price. Market prices for our
      common stock will be influenced by a number of factors, including:




·   the issuance of new equity securities;




·   changes in interest rates;




·   competitive
      developments, including announcements by competitors of new products or services
      or significant contracts, acquisitions, strategic partnerships, joint ventures
      or capital commitments;




·   variations in quarterly operating results;




·   change in financial estimates by securities analysts;




·   the depth and liquidity of the market for our common stock;




·   investor perceptions of our company and the technologies industries generally;
      and




·   general economic and other national conditions.





**THE
      LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE VOLATILITY IN THE
      MARKET PRICE OF OUR COMMON STOCK.**





Our
      common stock is currently traded on a limited basis on the OTCBB under the
      symbol “PHEI.OB” The quotation of our common stock on the OTCBB does not assure
      that a meaningful, consistent and liquid trading market currently exists, and
      in
      recent years such market has experienced extreme price and volume fluctuations
      that have particularly affected the market prices of many smaller companies
      like
      us. Our common stock is thus subject to volatility. In the absence of an active
      trading market:




·   investors may have difficulty buying and selling or obtaining market
      quotations;




·   market visibility for our common stock may be limited; and




·   a lack of visibility for our common stock may have a depressive effect on the
      market for our common stock.





**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:




1.
            that
                a broker or dealer approve a person's account for transactions in
                penny
                stocks; and




2.
            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:




1.
            obtain
                financial information and investment experience objectives of the
                person;
                and




2.
            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.




11


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:




1.
            Sets
                forth the basis on which the broker or dealer made the suitability
                determination; and




2.
            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.




**IF
      WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE
      PRICE OF OUR**  **COMMON
      STOCK MAY BE ADVERSELY AFFECTED.**





Our
      internal controls over financial reporting may have weaknesses and conditions
      that need to be addressed, the disclosure of which may have an adverse impact
      on
      the price of our common stock. We are required to establish and maintain
      appropriate internal controls over financial reporting. Failure to establish
      those controls, or any failure of those controls once established, could
      adversely impact our public disclosures regarding our business, financial
      condition or results of operations. In addition, our management’s assessment of
      internal controls over financial reporting may identify weaknesses and
      conditions that need to be addressed in our internal controls over financial
      reporting or other matters that may raise concerns for investors. Any actual
      or
      perceived weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting, disclosure of our management’s assessment of
      our internal controls over financial reporting or disclosure of our public
      accounting firm’s attestation to or report on management’s assessment of the
      Company’s internal controls over financial reporting may have an adverse impact
      on the price of our common stock.





**UPON
      SUCH TIME AS OUR STOCK IS ACTIVELY TRADED, STANDARDS FOR COMPLIANCE WITH
      SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 ARE UNCERTAIN, AND IF WE FAIL
      TO COMPLY IN A TIMELY MANNER, OUR BUSINESS COULD BE HARMED AND OUR STOCK PRICE
      COULD DECLINE.**





Rules
      adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of
      2002 require annual assessment of our internal control over financial reporting,
      and attestation of the assessment by our independent registered public
      accountants. The requirement of an annual assessment of our internal control
      over financial reporting currently already applies to our company, and the
      attestation of the assessment by our independent registered public accountants
      will first apply to our annual report for fiscal year ended December 31, 2007.
      The standards that must be met for management to assess the internal control
      over financial reporting as effective are new and complex, and require
      significant documentation, testing and possible remediation to meet the detailed
      standards. We may encounter problems or delays in completing activities
      necessary to make an assessment of our internal control over financial
      reporting. In addition, the attestation process by our independent registered
      public accountants is new and we may encounter problems or delays in completing
      the implementation of any requested improvements and receiving an attestation
      of
      the assessment by our independent registered public accountants. If we cannot
      assess our internal control over financial reporting as effective, or our
      independent registered public accountants are unable to provide an unqualified
      attestation report on such assessment, investor confidence and share value
      may
      be negatively impacted.





**WE
      HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS
      IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR
      STOCK.**




We
      have
      never paid cash dividends on our stock and do not anticipate paying cash
      dividends on our stock in the foreseeable future. The payment of cash dividends
      on our stock will depend on our earnings, financial condition and other business
      and economic factors affecting us at such time as the board of directors may
      consider relevant. If we do not pay cash dividends, our stock may be less
      valuable because a return on your investment will only occur if our stock price
      appreciates





12


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





The
      company is currently in negotiations to secure new corporate headquarters due
      to
      the closing of the Seattle, WA office and relocating back to Florida. The
      company is currently using the following address as the address for its
      corporate headquarters” 222 Grace Church St. Suite 302 # 1000135, Port Chester,
      NY 10573, U.S.A




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


Beshara
        v. Infinium Labs Corporation,
        No.
        2005 CA 005103 NC. In May 2005, Beshara sued us in the Circuit Court for
        Sarasota County, Florida, alleging default of a promissory note and seeking
        damages of approximately $1,400,000.00. On October 25, 2005, we settled accrued
        interest through October 31, 2005, together with reasonable attorneys’ fees, in
        the amount of $384,192 through issuance of 7,114,667 shares of our stock.
        On
        March 17, 2006, we entered into a conversion agreement with Beshara in order
        to
        reduce a portion of the outstanding principal and interest with 40,000,000
        shares of common stock (as of May 22, 2006). In September 2006, the parties
        amended the promissory note to add for conversion of debt into equity. As
        of
        September 30, 2006, the remaining principal on the debt is approximately
        $986,449. So long as Beshara continues to convert debt into equity the foregoing
        action shall be abated.
 
 Black
        Rocket Euro RSCG, LLC v. Phantom Entertainment, Inc. ,
        No.
        2005 CA 5008 NC. In May 2005, Black Rocket sued us in the Circuit Court for
        Sarasota County, Florida, alleging breach of contract and seeking damages
        in the
        amount of $95,272.00. Due to an administrative error, our attorney neglected
        to
        file a notice of appearance and on January 25, 2006, Black Rocket obtained
        a
        default judgment in the amount of $104,629. We have recorded $104,629 as
        well as
        $4,977 in accrued interest, as of September 30, 2006, in accounts
        payable.
 
 CDW
        Corporation v. Infinium Labs Corporation ,
        No.
        05-M1-131484. In May 2005, CDW sued us in the Circuit Court of Cook County,
        Illinois, alleging that the Company placed orders for goods, failed to pay
        for
        such orders and thus breached the contract and seeking damages in the amount
        of
        $26,958. Due to financial constraints, we may not be able to replace local
        counsel. On February 7, 2006, the court entered judgment for $26,958 and
        we have
        recorded $27,932, including interest through September 30, 2006, in accounts
        payable.
 
 GMR
        Marketing, LLC, v. Phantom Entertainment, Inc., No.
        20050CA-10535NC. In January 2006, GMR sued us in the District Court of Florida,
        Sarasota County, alleging that it rendered advertising services and that
        the
        Company failed to pay for such services thereby breaching the contract. GMR
        sought damages in the amount of $107,544. Due to an error with our Florida
        counsel an answer to the complaint was not filed and on February 1, 2005
        GMR
        received a default judgment in the amount of $107,883. Through September
        30,
        2006, the Company has recorded a total of $114,284, including interest, in
        accounts payable. On October 25, 2006, the parties entered into a settlement
        agreement whereby the Company agreed to pay GMR $71,000 no later than December
        20, 2006 in exchange for a full release of all previous claims.
  Longview
        Special Finance, Inc. v. Phantom Entertainment, Inc. ,
        No. 06
        CV 1772. In March 2006, Longview sued us in United States District in the
        Southern District of New York alleging breach of contract and requesting,
        in
        part, issuance of all remaining shares requested in prior conversion notices.
        The March complaint contained various errors. The parties entered into a
        negotiated settlement related to a portion of Longview’s claims on April 7,
        2006. Under the terms of the agreement, the Company converted a portion of
        Longview’s requested conversion request and Longview agreed to dismiss the
        aforementioned matter in May 2006 and standstill on any further request for
        conversion or bring any additional claim on with respect to the Company’s
        failure to reserve adequate shares for Longview or deliver shares under a
        conversion. Although the Company has materially performed, Longview has not
        dismissed the action. In November 2006, Plaintiff submitted an amended complaint
        with similar claims and requested a hearing, currently scheduled for late
        November, on its request for an injunction.  The Company intends to respond
        vigorously to these claims and file counterclaims as well. On March 30, 2007,
        the Company and the Holders completed the settlement of the Action and entered
        into a Settlement Agreement (the “Agreement”) dated as of March 22, 2007 with
        the Holders pursuant to which the Company agreed to issue 425,000,000 shares
        of
        free-trading common stock to the Holders in exchange for the Holders agreeing
        to
        enter into general releases and to petition the Court to dismiss the Action
        with
        prejudice. On March 30, 2007, the Court so ordered the adoption of the Agreement
        and general releases were executed and delivered by the parties. See Current
        Report on Form 8-K filed with the SEC on April 3, 2007.
 
 Merrill
        Lynch, Pierce, Fenner & Smith v. Phantom Entertainment, Inc. ,
        No.
        06-2-05618-3 SEA. In February 2005, we entered into a Stipulation and Order
        for
        Entry of Judgment with Merrill Lynch pertaining to our default in rent of
        $127,312 due under our lease with Merrill Lynch (for our former corporate
        headquarters). The foregoing matter was adjudicated in the Superior Court
        for
        the State of Washington, in and for the County of King. In partial consideration
        of the entry of the judgment the lease, originally set to expire in August
        2006,
        terminated on February 28, 2006 with no further monetary obligations. Subsequent
        to the entry of the order the parties entered into a settlement agreement
        that
        provided for a payment schedule of $5,000 per month with a final balloon
        payment
        due in July 2006. The Company intended on using proceeds from an SB-2
        registration, but was unable to do so after the SB-2 was withdrawn on May
        23,
        2006. The Company was in default on the settlement agreement when it failed
        to
        make the balloon payment by July 31, 2006. In September 2006, Merrill Lynch
        assigned its rights to enforce the settlement agreement, and all other rights,
        to Fred Niedrich, a third party. On September 20, 2006, the parties entered
        into
        a new settlement agreement whereby the total debt due of $118,289 was settled
        for $100,000 pursuant to 3(a)(10) of the Securities Act of 1933.
  13
 
 Morley
        and Campbell v. Timothy Roberts and Phantom Entertainment, Inc .,
        No.
        D-1-GN-06-000851. In April 2006, Morley and Campbell sued Timothy Roberts
        individually and the Company in the District Court, 200 Judicial District,
        Travis County, Texas for breach of contract in failing to perform the remainder
        of an Asset Purchase Agreement and Assignment of Rights between plaintiffs
        and
        Roberts. The total claim is for $30,000. Phantom is defending itself vigorously
        in this suit and has retained local counsel in order to do so. No contingency
        has been accrued as of September 30, 2006. As of the date of this Annual
        Report,
        the plaintiff has not pursued any further remedies, and the Company believes
        that the action has been dropped.
 
 M.
        Tyler Boles v. Phantom Entertainment, Inc., No.
        V06-30. In January 2006, M. Tyler Boles sued us in the General District Court
        for Nelson County, Delaware, alleging a claim for money and seeking damages
        in
        the amount of $1,200. A judgment was entered in March 2006 for $1,254 and
        we
        have recorded $1,300, including interest through September 30, 2006, in accounts
        payable.
 
 Oracle
        USA, Inc. v. Phantom Entertainment, Inc. , No.
        C05-5049. In December 2005, Oracle USA sued us in the United States District
        Court, Northern District of California, San Francisco Division, alleging
        that
        the Company placed orders for software, failed to pay for such orders and
        thus
        breached the contract and seeking damages in the amount of $198,818. In March
        2006 judgment was entered against the Company in the aforementioned court
        for
        $199,068 and, as of September 30, 2006, this amount has been recorded in
        accounts payable.
 
 Ronald
        Westman v. Phantom Entertainment, Inc. , No.
        2006 CA 010711 NC. In November 2006, Ronald Westman filed an action in the
        Circuit Court for Sarasota County, Florida. The Company has not been served
        with
        the summons and complaint and, therefore, can not provide any further
        detail.
 
 SBI
        USA, LLC v. Phantom Entertainment, Inc., No.
        05CC10694. In November 2005, SBI USA, LLC, sued us in the Superior Court
        of
        California, Orange County, alleging breach of contract and seeking damages
        in
        the amount of $58,000. Judgment was entered against the Company in the
        aforementioned court in April 2006 for $55,000 and we have recorded $59,213,
        including interest through September 30, 2006, in accounts payable.
  Walter
        Dorwin Teague Associates v. Phantom Entertainment, Inc., No.
        05-9-35846-2. In December 2005, Teague Associates entered an arbitration
        award
        in the Superior Court for King County, Washington. The judgment is for $51,843
        and we have recorded $55,734, including interest through September 30, 2006,
        in
        accounts payable. Teague & Associates was retained in 2004 to assist and
        support various industrial design requirements associated with hardware for
        the
        Phantom Game Service. The Company defaulted on its payment obligations and
        this
        resulted in the associated arbitration award.
 
 In
        the
        Matter of Certain Fax Blasts, SF-2926.
        In approximately January 2005, we received subpoenas for documents from the
        Securities and Exchange Commission (“SEC”) in an investigation entitled In the
        Matter of Certain Fax Blasts. In compliance with other SEC issued subpoenas,
        several former employees, including our Chairman of the Board of Directors,
        have
        given testimony to the SEC’s staff while several current employees have
        participated in off-record interviews with the SEC staff.
 
 Timothy
        M. Roberts, the Company's Chairman of the Board of Directors, received a
“Wells
        Notice” from the SEC in 2005. The Wells Notice was received by Mr. Roberts in a
        personal capacity. This Wells Notice was issued in connection with the SEC’s
        investigation relating to “phony fax scams” in which several penny stocks,
        including ours, were promoted to potential investors and resulted in charges
        filed by the SEC against two stock promoters. Under the SEC's procedures,
        the
        Wells Notice indicates that the staff of the SEC intends to recommend that
        the
        SEC bring a civil enforcement action against Mr. Roberts alleging violations
        of
        federal securities laws. Recipients of Wells Notices have the opportunity
        to
        respond to the SEC staff before any formal recommendation is made.
  14
 In
        May
        2006, Mr. Roberts, in his personal capacity, was served with a complaint
        from
        the SEC in the matter entitled Securities
        and Exchange Commission vs. Timothy M. Roberts in the
        US District Court for the Middle District of Florida, Orlando Division, pursuant
        to which the SEC alleges that Mr. Roberts made false statements with regard
        to
        the Company’s prospects while at the same time selling his shares of the
        Company’s common stock for personal gain through his alleged participation in a
“phony fax scam”. The SEC seeks judgment against Mr. Roberts enjoining him from
        future violations of securities laws, requiring that he disgorge any gain
        or
        benefit he received from past violations, and imposing penalties for the
        violations. Further, the SEC seeks a judgment prohibiting Mr. Roberts from
        serving in the future as an officer or director of a public company and from
        participating in any offering of “penny stocks”. While the Board of Directors
        has currently agreed to indemnify Mr. Roberts’ legal expenses specifically
        related to this matter, no accrual has been made as of September 30, 2006.
        On
        May 9, 2007, the Board of Directors agreed to authorize and directed the
        Company
        to (i) fully indemnify Mr. Roberts against the nature of the action arising
        out
        of the SEC Complaint and (ii) enter into a settlement agreement whereby the
        total debt due of $2,062.50 was to be settled for the same amount pursuant
        to
        3(a)(10) of the Securities Act of 1933. On the same date, the Company entered
        into the aforementioned settlement agreement.
 
 John
        Fife v. Phantom Entertainment, Inc. , No.
        2006 CA 012309 NC. In December 2006, John Fife filed an action in the Circuit
        Court for Sarasota County, Florida.  Subsequently,
        the Board of Directors agreed to authorize and directed the Company to enter,
        and the Company entered, into a settlement agreement whereby the total debt
        due
        of $166,000.00 was settled for the same amount pursuant to 3(a)(10) of the
        Securities Act of 1933.
 
 Phantom
        Investors LLC v. Phantom Entertainment, Inc. , No.
        2005 CA 001211 NC. In February 2005, Phantom Investors LLC filed an action
        in
        the Circuit Court for Sarasota County, Florida. Subsequently, the Board of
        Directors agreed to authorize and directed the Company to enter, and the
        Company
        entered, into a settlement agreement whereby the amount agreed to by the
        parties
        was settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Federal
        Insurance Company v. Phantom Entertainment, Inc. , No.
        2006 CA 005201 NC. In June 2006, Federal Insurance Company filed an action
        in
        the Circuit Court for Sarasota County, Florida. The Company intends to
        vigorously defend itself in this action.
 
 The
        Motley Fool Inc. v. Phantom Entertainment, Inc. , No.
        2006 CA 002132 NC. In March 2006, The Motley Fool Inc., filed an action in
        the
        Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors
        agreed to authorize and directed the Company to enter, and the Company entered,
        into a settlement agreement whereby the amount agreed to by the parties was
        settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Centerpointe
        Property LLC v. Phantom Entertainment, Inc. ,
        No.
        2006 CA 001216 NC. In February 2006, Centerpointe Property LLC filed an action
        in the Circuit Court for Sarasota County, Florida. Subsequently, the Board
        of
        Directors agreed to authorize and directed the Company to enter, and the
        Company
        entered, into a settlement agreement whereby the amount agreed to by the
        parties
        was settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Beshara
        Edward C v. Phantom Entertainment, Inc. ,
        No.
        2006 CA 000206 NC. In January 2006, Edward Beshara filed an action in the
        Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors
        agreed to authorize and directed the Company to enter, and the Company entered,
        into a settlement agreement whereby the amount agreed to by the parties was
        settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Beshara
        James v. Phantom Entertainment, Inc. ,
        No.
        2005 CA 011388 NC. In November 2005, James Beshara filed an action in the
        Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors
        agreed to authorize and directed the Company to enter, and the Company entered,
        into a settlement agreement whereby the amount agreed to by the parties was
        settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Beshara
        Edward C and Beshara Sharon M v. Phantom Entertainment, Inc. ,
        No.
        2005 CA 010933 NC. In November 2005, Edward Beshara and Sharon Beshara filed
        an
        action in the Circuit Court for Sarasota County, Florida.  Subsequently,
        the Board of Directors agreed to authorize and directed the Company to enter,
        and the Company entered, into a settlement agreement whereby the amount agreed
        to by the parties was settled pursuant to 3(a)(10) of the Securities Act
        of
        1933.
 
 GMR
        Marketing, LLC, v. Phantom Entertainment, Inc., No.
        20050CA-010535 NC. In October 2005, GMR filed an action in the Circuit Court
        of
        Florida, Sarasota County.
 
 Tops
        Staffing Services v. Phantom Entertainment, Inc. ,
        No.
        2005 CC 5829 NC. In 2005, Tops Staffing Services filed an action in the Circuit
        Court for Sarasota County, Florida. On January 26, 2007, plaintiff obtained
        a
        Final Default Judgment against the Company.
 
 John
        W. Anderson and Adam Goldblatt v. Phantom Entertainment, Inc. In 2007,
        John W. Anderson and Adam Goldblatt filed an action in the Superior Court
        for
        Seattle County, Washington. On January 30, 2007, plaintiff obtained a Default
        Judgment against the Company for unpaid compensation and related damages
        in the
        aggregate amount of 106,109.19.
 
 From
        time
        to time, we may become party to litigation or other legal proceedings that
        we
        consider to be a part of the ordinary course of our business. We may become
        involved in material legal proceedings in the future.





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





Our
      Annual Meeting of Stockholders was held on March 15, 2007 beginning at 10:00
      a.m., local time, at Tampa Airport Marriott Hotel, Tampa International
      Airport, Tampa, FL.





There
      were present in person or by proxy 852,541,059 shares of common stock, of a
      total of 1,184,234,723 shares of common stock entitled to vote.





774,358,297
      shares were voted in favor to amend our Certificate of Incorporation to increase
      the number of authorized shares of common stock of the Company from
      1,200,000,000 shares to 2,400,000,000 shares.





828,300,885
      shares were voted in favor of the appointment of Kempisty & Company as our
      independent auditors for the fiscal year ending December 31, 2007.




15





**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
      "PHEI.OB".





The
      following quotations reflect the high and low 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**12/31/06
            
            $
            0.01
            
            $
            0.00309/30/06
            
            $
            0.01
            
            $
            0.00906/31/06
            
            $
            0.03
            
            $
            0.00903/31/06
            
            $
            0.46
            
            $
            0.01212/31/2005
            
            $
            0.04
            
            $
            0.00109/30/2005
            
            $
            0.12
            
            $
            0.0406/30/2005
            
            $
            0.28
            
            $
            0.0903/31/2005
            
            $
            1.60
            
            $
            0.24





**HOLDERS**





As
      of
      March 21, 2007, we had approximately 350 holders of our common stock. The number
      of record holders was determined from the records of our transfer agent and
      does
      not include beneficial owners of common stock whose shares are held in the
      names
      of various security brokers, dealers, and registered clearing agencies. The
      transfer agent of our common stock is Corporate Stock Transfer, Denver,
      Colorado, (303) 282-4800.





**COMMON
      STOCK**





We
      are
      authorized to issue up to 2,400,000,000 shares of common stock, par value $.0001
      per share. As of May 15, 2007, approximately 1,799,433,415 shares of our common
      stock are issued and outstanding.





Holders
      of the common stock are entitled to one vote per share on all matters to be
      voted upon by the stockholders. Holders of common stock are entitled to receive
      ratably such dividends, if any, as may be declared by the Board of Directors
      out
      of funds legally available therefore. Upon the liquidation, dissolution, or
      winding up of our company, the holders of common stock are entitled to share
      ratably in all of our assets which are legally available for distribution after
      payment of all debts and other liabilities and liquidation preference of any
      outstanding common stock. Holders of common stock have no preemptive,
      subscription, redemption or conversion rights. The outstanding shares of common
      stock are validly issued, fully paid and non-assessable.





**Dividend
      Policy**





We
      have
      never declared or paid any cash dividends on our common stock. We do not
      anticipate paying any cash dividends to stockholders in the foreseeable future.
      In addition, any future determination to pay cash dividends will be at the
      discretion of the Board of Directors and will be dependent upon our financial
      condition, results of operations, capital requirements, and such other factors
      as the Board of Directors deem relevant.





**Recent
      Unregistered Sales of Securities**





The
      following unregistered securities have been issued by us since January 1, 2006
      and have not been previously disclosed in our Quarterly Reports on Form 10-Q
      or
      in our Current Reports on Form 8-K:




16




On
      January 23, 2006, we issued 2,900,000 shares of common stock to a note payable
      holder for principal, accrued interest and related legal fees with a fair value
      of $41,760 ($0.0144 per share). We recognized a loss of $13,327on the
      settlement. The shares were issued under a court ordered settlement pursuant
      to
      3(a)(10) under the Securities Act of 1933.





On
      January 25, 2006, we completed a private placement pursuant to which we entered
      into a Securities Purchase Agreement with Golden Gate Investors, Inc. (“Golden
      Gate”) dated as of January 24, 2006, as amended by that certain Addendum to
      Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase
      Agreement dated as of January 24, 2006, for the sale of (i) a $50,000 principal
      amount convertible debenture and (ii) a warrant to purchase 5,000,000 shares
      of
      our common stock. Golden Gate provided us with an aggregate of $130,000 in
      gross
      proceeds upon the execution of final definitive agreements.





The
      debenture bears interest at 51⁄4%, mature three years from the date of issuance,
      is convertible into our common stock, at Golden Gate’s option. The convertible
      debenture is convertible into the number of our shares of common stock equal
      to
      the dollar amount of the debenture being converted multiplied by 110, less
      the
      product of the conversion price multiplied by 100 times the dollar amount of
      the
      debenture being converted, which is divided by the conversion price. The
      conversion price for the convertible debenture is the lesser of (i) $0.10,
      (ii)
      eighty percent of the average of the three lowest volume weighted average prices
      during the twenty (20) trading days prior to the conversion or (iii) eighty
      percent of the volume weighted average price on the trading day prior to the
      conversion. Beginning in the first full month that the registration statement
      covering the shares of common stock underlying the debenture and warrant is
      declared effective by the Securities and Exchange Commission, Golden Gate is
      obligated to convert at least 5%, but no more than 10%, of the face value of
      the
      debenture per calendar month into shares of our common stock, so long as the
      shares are available, registered and freely tradable. If Golden Gate converts
      more than 5% of the face value of the debenture in any calendar month, the
      excess over 5% shall be credited against the next month’s minimum conversion
      amount. In the event that Golden Gate does not convert at least 5% of the face
      value of the debenture in any calendar month, Golden Gate shall not be entitled
      to collect interest on the debenture for that month and shall not be entitled
      to
      receive shares of our common stock issuable upon conversion of the debenture,
      provided that we provide Golden Gate with written notice of such failure to
      convert the minimum monthly conversion amount. However, in the event that our
      volume weighted average price is less than $.01, we will have the option to
      prepay the debenture at 130% rather than have the debenture converted. If we
      elect to prepay the debenture, Golden Gate may withdraw its conversion notice.





In
      addition, beginning in the first full month that the registration statement
      covering the shares of common stock underlying the debenture and warrant is
      declared effective by the Securities and Exchange Commission, Golden Gate is
      obligated to exercise the warrant concurrently with the submission of a
      conversion notice by Golden Gate with respect to the debenture, in the same
      percentage of the debenture being converted. If Golden Gate exercises more
      than
      5% of the warrants in any calendar month, the excess over 5% shall be credited
      against the next month’s minimum exercise amount. In the event Golden Gate does
      not exercise the warrant concurrently with the conversion of the debenture,
      it
      shall not be entitled to receive shares of our common stock for the portion
      of
      the debenture being simultaneously converted. The warrant is exercisable into
      5,000,000 shares of common stock at an exercise price of $1.09 per share.
      Accordingly, if all warrants are exercised by Golden Gate, we will receive
      $5,450,000 in proceeds.





On
      February 15, 2006, we issued 372,414 shares of common stock to a consultant
      with
      a fair market value of $5,400 ($.0145 per share).





On
      March
      8, 2006, we issued an aggregate of 19,999,999 shares of common stock to certain
      of our debenture holders from our December 2004 Securities Purchase Agreement
      upon a partial conversion of their debentures. The fair market value was
      $153,080 ($0.07654 per share). We recognized a loss of $34,021 on these
      conversions.





On
      March
      9, 2006, we issued 10,000,000 shares of common stock with a fair value of
      $260,000 ($0.026 per share) to convert a portion of a note payable. On March
      31,
      2006, we issued 30,000,000 shares of common stock with a fair value of $600,000
      ($0.020 per share) to convert a portion of a note payable. On these transactions
      we recognized a combined loss of $223,174 on the conversions.





On
      March
      10, 2006, we issued 2,195,905 shares of common to a vendor for settlement of
      claims and associated legal fees with a fair market value of $52,702 ($.024
      per
      share). We recognized a gain of $2,673 on this settlement. The shares were
      issued under a court ordered settlement pursuant to 3(a)(10) under the
      Securities Act of 1933.





On
      March
      16, 2006, we issued 243,243 shares of common stock to a consultant with a fair
      market value of $4,500 ($.0185 per share).





On
      March
      29, 2006, we issued 1,636,330 shares of common stock to a note payable holder
      in
      settlement of claims with a fair market value of $31,090 ($0.019 per share).
      We
      recognized a gain of $3,229 on this settlement. The shares were issued under
      a
      court ordered settlement pursuant to 3(a)(10) under the Securities Act of
      1933.





17


On
      May
      10, 2006, we issued an aggregate of 15,000,000 shares of common stock to certain
      of our debenture holders from our December 2004 Securities Purchase Agreement
      upon a partial conversion of their debentures. The fair market value was
      $256,500 ($0.0171 per share) and no gain or loss was recognized on these
      conversions.





During
      October 2006, the Company issued 69,172,000 shares of common stock in partial
      settlement of principal and interest aggregating $315,535 ($0.0046 per share).
      Principal in the amount of $301,967 and interest in the amount of $13,568 was
      converted and no gain or loss was recognized.





During
      November 2006, the Company issued 49,728,000 shares of common stock in partial
      settlement of principal and interest aggregating $203,589 ($0.0041 per share).
      Principal in the amount of $199,751 and interest in the amount of $3,838 was
      converted and no gain or loss was recognized.





During
      November 2006, the Company issued 20,000,000 shares of common stock in full
      settlement of a note and accrued interest. The fair value was $102,000 ($0.0051
      per share). Principal and interest in the amount of $102,158 was converted
      and a
      $158 gain was recognized.





During
      November 2006, the Company issued 19,940,582 shares of common stock in full
      settlement of a note and accrued interest. The fair value was $97,709 ($0.0049
      per share) and no gain or loss was recognized.





During
      November 2006, the Company issued 1,849,568 shares of common stock in partial
      settlement of principal. Principal in the amount of $4,836 ($0.0026 per share)
      was converted and no gain or loss was recognized.





All
      of
      the above offerings and sales were deemed to be exempt under rule 506 of
      Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended.
      No
      advertising or general solicitation was employed in offering the securities.
      The
      offerings and sales were made to a limited number of persons, all of whom were
      accredited investors, business associates of Phantom Entertainment, Inc., or
      executive officers of Phantom Entertainment, Inc., and transfer was restricted
      by Phantom Entertainment, Inc., in accordance with the requirements of the
      Securities Act of 1933, as amended. In addition to representations by the
      above-referenced persons, we have made independent determinations that all
      of
      the above-referenced persons were accredited or sophisticated investors, and
      that they were capable of analyzing the merits and risks of their investment,
      and that they understood the speculative nature of their investment.
      Furthermore, all of the above-referenced persons were provided with access
      to
      our Securities and Exchange Commission filings.





**Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers**




None.





**Equity
      Compensation Plan Information**




The
      following table set forth the information as of December 31, 2006 with respect
      to compensation plans under which equity securities of the Company are
      authorized for issuance :




**Plan Category**
            
            **Number of Shares to**
              **Be Issued upon**
              **Exercise of**
              **Outstanding**
              **Options, Warrants**
              **and Rights**
              **(a)**
            
            **Weighted-Average**
              **Exercise Price of**
              **Outstanding Options,**
              **Warrants and Rights**
              **(b)**
            
            **Number of Shares**
              **Remaining Available**
              **for Future Issuance**
              **Under Equity**
              **Compensation Plans**
              **(Excluding Shares**
              **Reflected in**
              **Column (a))**
              **(c)**Equity
                Compensation plans approved by stockholders
            
            0
            
            N/a
            
            0Equity
                Compensation plans not approved by stockholders
            
            392,000,000
            
            N/a
            
            392,000,000Total
            
            392,000,000
            
            N/a
            
            392,000,000





**Our
      2006 and 2005 Stock Compensation Plans**




The
      purpose of each of our 2006 Stock Compensation Plans-A through -C and 2005
      Stock
      Compensation Plans-A through -D is to help us retain executive and non-executive
      employees, consultants, professionals, and service providers who provide
      services to the Company in connection with, among other things, the Company's
      obligations as a publicly-held reporting company. In addition, we expect to
      benefit from the added interest that the awardees will have in our welfare
      as a
      result of their ownership or increased ownership of our common stock. The Board
      of Directors will select who will receive awards and the amount and nature
      of
      such awards.





18


Over
      the
      last two years, we have been able to hire executive and non-executive employees
      and engage consultants, professionals, and service providers by compensating
      them through the issuance of shares of our common stock. This afforded us the
      ability to utilize our cash, at a time when we were seeking out financing and
      working with our creditors with respect to restructuring outstanding obligations
      We believe that, for the foreseeable future, it is in our best interests to
      be
      able to continue to engage and compensate such persons through the payment
      of
      our shares of common stock.





Awards
      authorized under the each of our 2006 Stock Compensation Plans-A through -C
      and
      2005 Stock Compensation Plans-A through -D consist of shares of our common
      stock. Such awards may be subject to forfeiture in the event of premature
      termination of engagement, failure to meet certain performance objectives,
      or
      other conditions, as may be determined by the Board of Directors.




Each
      of
      the 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation
      Plans-A through -D is administered by the Board of Directors. Subject to the
      express terms and conditions of the 2006 Stock Compensation Plans and 2005
      Stock
      Compensation Plans, the Board of Directors has full power to make Awards, to
      construe or interpret the 2006 Stock Compensation Plans and the 2005 Stock
      Compensation Plans, to prescribe, amend and rescind rules and regulations
      relating to it and to make all other determinations necessary or advisable
      for
      its administration. Except as otherwise provided in the 2006 Stock Compensation
      Plans and the 2005 Stock Compensation Plans, the Board of Directors may also
      determine which persons shall be granted Awards, the nature of the Awards
      granted, the number of shares subject to Awards and the time at which Awards
      shall be made. Such determinations will be final and binding.





The
      only
      class of stock subject to an Award is common stock. We have an aggregate of
      260,000,000 shares of common stock reserved for issuance under the 2006 Stock
      Compensation Plans of which an aggregate of 260,000,000 are issued an
      outstanding. We have an aggregate of 132,000,000 shares of common stock reserved
      for issuance under the 2005 Stock Compensation Plans of which an aggregate
      of
      132,000,000 are issued an outstanding.





In
      the
      event that our outstanding shares of Common Stock are increased, decreased
      or
      changed or converted into other securities by reason of merger, reorganization,
      consolidation, recapitalization, stock dividend, extraordinary cash dividend
      or
      other change in our corporate structure affecting the stock, the number of
      shares that may be delivered under the 2006 Stock Compensation Plans and the
      2005 Stock Compensation Plans and the number and/or the purchase price of shares
      subject to outstanding Awards under the 2005 Stock Compensation Plans may be
      adjusted at the sole discretion of the Board of Directors to the extent that
      the
      Board of Directors determines to be appropriate, provided, however, that the
      number of shares subject to any Awards will always be a whole
      number.





The
      2006
      Stock Compensation Plans and the 2005 Stock Compensation Plans will expire
      ten
      years after their approval by the Board, but the Board of Directors may
      terminate the 2006 Stock Compensation Plans and the 2005 Stock Compensation
      Plans at any time prior to that date and Awards granted prior to such
      termination may extend beyond such date. Termination of the 2006 Stock
      Compensation Plans and the 2005 Stock Compensation Plans will not alter or
      impair, without the consent of the Awardee, any of the rights or obligations
      of
      any Award made under the 2005 Stock Compensation Plans.





***Grant*** .
      The
      Board of Directors may, at its discretion, award shares of common stock to
      a
      recipient (the "Stock Awards"). The Stock Awards will be issued pursuant to
      an
      agreement between the Company and the Awardee. Each recipient of a Stock Award
      will be a stockholder and have all the rights of a stockholder with respect
      to
      such shares, including the right to vote and receive all dividends or other
      distributions made or paid with respect to such shares.





If
      the
      recipient of an Award ceases to be a consultant, professional or service
      provider for any reason, then the Award may be subject to forfeiture, as
      provided in the particular agreement, unless such forfeiture is waived by the
      Board of Directors when it, in its discretion, determines that such waiver
      is in
      our best interests.





In
      the
      event of a participant's retirement, permanent disability or death, or in cases
      of special circumstances, the Board of Directors may waive any or all of the
      remaining restrictions and limitations imposed under the 2006 Stock Compensation
      Plans and the 2005 Stock Compensation Plans with respect to any
      Awards.





***Restrictions
      on Transferability*** .
      These
      Shares of stock may not be sold, exchanged, transferred, pledged, hypothecated,
      or otherwise disposed of until such time as any stated restrictions lapse.
      The
      Board of Directors, in its absolute discretion, may impose such restrictions
      on
      the transferability of the Awards granted in the 2006 Stock Compensation Plans
      and the 2005 Stock Compensation Plans as it deems appropriate. Any such
      restrictions shall be set forth in the Agreement with respect to such Awards
      and
      may be referred to on the certificates evidencing shares issued pursuant to
      any
      such Award. Shares of restricted stock will be evidenced by a certificate that
      bears a restrictive legend.




19




**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





Some
      of
      the information in this Annual Report contains forward-looking statements that
      involve substantial risks and uncertainties. You can identify these statements
      by forward-looking words such as "may," "will," "expect," "anticipate,"
      "believe," "estimate" and "continue," or similar words. You should read
      statements that contain these words carefully because they:




·
            discuss
                our future expectations;·
            contain
                projections of our future results of operations or of our financial
                condition; and·
            state
                other "forward-looking"
                information.




We
      believe it is important to communicate our expectations. However, there may
      be
      events in the future that we are not able to accurately predict or over which
      we
      have no control. Our actual results and the timing of certain events could
      differ materially from those anticipated in these forward-looking statements
      as
      a result of certain factors, including those set forth under "Risk Factors,"
      "Business" and elsewhere in this prospectus. See "Risk Factors."





**Overview**





Phantom
      Entertainment has developed and is manufacturing and marketing the Phantom
      Lapboard, a combination wireless keyboard, laser mouse and hard surface that
      enables users to work or play games from
      any
      comfortable setting. After
      establishing sales and distribution of the Phantom Wireless Lapboard, we may
      seek to develop and market the Phantom Game Service, a video game delivery
      system designed to allow consumers to search, preview and play a large selection
      of video games on demand via a broadband Internet connection.





We
      have
      not yet generated any revenue from operations. We have entered into major,
      multi-product licensing agreements with Ione
      Technology Inc., a worldwide leading manufacturer and marketer of input devices,
      to manufacture and distribute the Phantom® Wireless Lapboard and Phantom® Wireless
      Laser Mouse under Ione’s brand name throughout Asia and through Ione’s
      distributors in the US and Europe in return for royalty and design fees. We
      anticipate we will begin to receive revenue from these agreements in the
      4 th quarter
      of 2007.





We
      have
      received a purchase order from Alienware ® - the
      leading manufacturer of high-performance desktop, notebook, media
      center  and
      professional systems - to manufacture and supply the Phantom ® Wireless
      Lapboard and Phantom ® Wireless
      Laser Mouse for Alienware’s Media Center PCs and its PC gear product line. We
      anticipate we will begin to receive revenue from Alienware in the 4 th quarter
      of 2007.





We
      have
      entered a distribution and sales agreement with Global Marketing Partners to
      serve the E-Commerce and retail markets throughout the United States. The
      agreement will aggregate sales of the Phantom Wireless Lapboard through Global
      Marketing Partner’s distribution channel with Ingram
      Micro Inc. (NYSE: IM), the world's largest technology distributor and a leading
      technology sales, marketing and logistics company. We
      anticipate we will begin to receive revenue from this agreement in the
      4 th quarter
      of 2007.





We
      have
      entered a sales agreement with Westex Europe NV to serve the E-Commerce, retail
      and OEM industrial markets throughout Europe. Westex Europe NV, a sales
      organization for high technology products and solutions, will target original
      equipment manufacturers (OEMs), value-added resellers (VARS), systems builders
      and E- commerce retailers in Europe.





In
      August
      2006, we launched a new website and online store to support the marketing and
      sales of the Phantom Lapboard. The website can be found at www.phantom.net .
      We have
      a backlog of online orders for the Phantom Lapboard. Credit card payments will
      not be charged until the Phantom Lapboard ships. We anticipate we will begin
      to
      receive revenue from online orders in the 4 th quarter
      of 2007.





Our
      ability to generate revenue from the Phantom brand is dependent on our ability
      to successfully manufacture and market the Phantom Wireless Lapboard under
      Phantom’s brand name throughout North America and Europe. While we anticipate to
      launch sales and distribution of the Phantom Wireless Lapboard in September
      2007, delays may occur and given our limited resources, we need immediate
      additional capital to manufacture the Phantom Wireless Lapboard as well as
      to
      fund general operations.





Currently
      our business activities are almost entirely dedicated to manufacturing and
      marketing of the Phantom Wireless Lapboard. The Phantom Wireless Lapboard
      includes wireless technology, ergonomic design, one-touch features, programmable
      keys and a wireless high performance 1200 dpi laser mouse. The Lapboard’s
      innovative design features a keyboard that rotates 360 degrees to accommodate
      left or right handed users and inclines on a 22 degree angle with a hard surface
      below for the Phantom Laser Mouse.





20


**Plan
      of Operations**





We
      have
      incurred recurring losses from operations since inception. Our loss from
      operations for the year ended December 31, 2006 was $4,454,583, as compared
      to
      our loss from operations for the year ended December 31, 2005 of $12,236,530.
      At
      December 31, 2006, we had a working capital deficit of $18,344,236 and
      accumulated net losses since inception of $73,550,242. In their report on our
      audited financial statements for the year ended December 31, 2006, our
      independent auditors expressed substantial doubt about our ability to continue
      as a going concern.





Our
      activities to date have been funded by equity and debt investments. As of
      December 31, 2006, we had received approximately $9,677,147 million in equity
      investments and $8,072,572 in debt and convertible debt financings. The
      following is an account of how these funds have been utilized:





Purchase
                of property and equipment
            
            $
            990,467Development
                costs (costs net applicable payables)
            
            
            2,336,375Advertising
                (expenses net applicable payables)
            
            
            1,294,778Salary
                expense (expense net shares issued for employee services and wages/taxes
                payable)
            
            
            5,925,926Consultants
                and professional fees (expenses net shares issued for services and
                applicable payables)
            
            
            1,781,164General
                and administrative (expenses net non cash expenses [i.e. depreciation]
                and
                applicable payables)
            
            
            3,811,916Cash
                repayments of notes payable
            
            
            1,075,000Cash
                interest payments
            
            
            534,093Total
                cash utilized
            
            $
            17,749,719




21




On
      June
      30, 2006, the Company borrowed $100,000 under an 8% promissory note. The note
      was funded in three tranches: $20,000 (due upon mutual execution of the note),
      $35,000 (due twenty-one days after mutual execution), and $45,000 (due forty-two
      days after mutual execution). The note is due no later than two months following
      the final traunche (estimated at one hundred and two days after mutual execution
      of the note). The obligation to issue the collateral was conditioned upon prior
      written request of the note holder prior to the associated funding and the
      execution of an escrow agreement with the note holder’s attorney. The Company
      agreed to grant the note holder three certificates to collateralize the note
      of
      4,000,000 shares, 7,000,000 shares, and 9,000,000 shares of common stock. The
      note holder has not made any requests to escrow the collateral and has not
      established the aforementioned escrow agreement and, accordingly, the collateral
      has not been presented. As additional consideration for the note, the Company
      agreed to (i) re-price certain pre-existing warrants, (ii) issue 1,357,800
      new
      warrants, with a fair value of $13,952 (which has been recorded as a derivative
      with the initial amount treated as a discount to the note and amortized over
      the
      term of the note), to parties designated by the note holder and (iii) issue,
      subject to full performance of the funding obligations by note holder, to note
      holder an additional 10,000,000 new warrants with a fair value of $86.048 (which
      has been recorded as a derivative with the initial amount treated as a discount
      to the note and amortized over the term of the note) . The new warrants
      described herein and expire in five years from the effective grant date and
      have
      an exercise price of $.015 per share. On November 30, 2006, the entire amount
      of
      the note and accrued interest was converted at a per share price of $0.0051.
      The
      Company recognized a $158 gain on the conversion.





On
      January 25, 2006, the Company borrowed $50,000 under a three year 5.25%
      unsecured promissory note with 5,000,000 warrants attached at an exercise price
      of $1.09. Pursuant to the SEC’s request, the associated registration statement
      was withdrawn on May 23, 2006. Accordingly, we were unable to obtain an
      effective registration and, as of June 23, 2006, were in default under the
      terms
      of the note. The note holder has accelerated the note, including a $15,000
      penalty, which are due immediately. The note holder has also requested repayment
      for prepaid warrants of $285,000, but the Company disputes the associated claims
      with respect to these funds. At September 30, 2006, the outstanding balance
      on
      the note including interest and the penalty is $66,526. The note, interest
      and
      penalty are in default.





On
      January 1, 2006, the Company converted to a promissory note $91,775, issued
      to
      Timothy Roberts, a Director, of related unpaid expense reimbursements incurred
      while Mr. Roberts was employed as a full-time employee. The note is unsecured
      and bears an 8% rate of interest. On October 24, 2006, the entire amount of
      the
      note and accrued interest was converted at a per share price of $0.0049. The
      Company recognized no gain or loss on the conversion.





At
      December 31, 2006, we were in default on payment of promissory notes with a
      principal amount of $2,242,276. Our outstanding debt for borrowed money has
      generally been provided on a short-term basis, bears interest at rates ranging
      from 8% to 17% and, in many cases, was accompanied by the grant of common stock
      or warrants to purchase common stock, which contributed to the costs of the
      financings. On December 7, 2006, the Company issued Original Issue Discount
      Secured Notes in the aggregate principal amount of $250,000 to John Fife, an
      accredited investor, in three equal denominations for an aggregate purchase
      price of $150,000. The Notes mature on January 6, 2007, March 7, 2007 and June
      7, 2007, respectively. The Notes do not bear interest; provided, however,
      default interest equal to 18% per annum is payable to the Mr. Fife upon an
      event
      of default, as defined in the Notes. Upon at least five, but no more than 10
      business days advanced written notice, the Company has the right to prepay
      all
      or part of any outstanding amounts under the Notes without penalty at any time
      prior to the respective maturity dates.  The
      Notes
      are secured by a Stock Pledge Agreement dated as of December 7, 2006 between
      the
      Company and the Mr. Fife, wherein the Company agreed to pledge 129,000,000
      shares of common stock (the “Collateral”) as security for (i) the performance of
      the Company of its obligations under the Notes, and (ii) the performance by
      Timothy Roberts, the Company’s Chairman of the Board of Directors, of his
      Guaranty delivered to the Holder on December 7, 2006. Pursuant to the Agreement,
      if on any weekly anniversary subsequent to the date of issuance of the Notes,
      the market value of the Collateral then held by in escrow does not equal or
      exceed 2.25 times the principal amount of the Notes, then the Pledgor shall
      deliver to the Holder, within 5 business days of such date, a certificate for
      additional Collateral equal to not less than 2.25 times the principal amount
      of
      the Notes. If the Company fails to deliver a certificate for additional
      Collateral to the Holder within 5 business days, the Company shall pay to the
      Holder, in cash, an amount equal to $250 per business day until such certificate
      is delivered.




As
      of
      December 31, 2006, we have recorded an aggregate of $5,924,900in debt discount,
      of which $5,924,900 was amortized as interest expense.




As
      of
      December 31, 2006, the Company currently owes an aggregate of $845,000 to these
      publishers pursuant to these agreements and, if we fail to pay these advances,
      these agreements may be terminated.





**Liquidity
      and Capital Resources**





We
      do not
      have sufficient cash to continue operations for the next 12 months and are
      in
      immediate need of additional capital to fund our plan of operation. Except
      as
      previously disclosed, we presently have no commitments for additional financing
      and may not be able to obtain such financing. To support our working capital
      needs pending receipt of sufficient financing, we are seeking to settle
      outstanding liabilities through issuance of equity, and anticipate continuing
      to
      grant common stock to fund payroll and certain other ongoing costs.





Unless
      and until we receive sufficient financing, we expect to continue to be forced
      to
      rely on issuances of common stock under similar arrangements in settlement
      of
      payroll and such other costs.




22


Issuances
      of equity will dilute existing stockholder’s ownership and will have a
      depressive effect on our stock price, which will result in greater dilution
      for
      subsequent equity issuances and further downward pressure on our stock
      price.





If
      we are
      unable to obtain additional financing as and when needed, we will need to scale
      back and/or reprioritize our planned operations, our assets may be foreclosed
      upon by secured lenders and we may be forced to cease operations
      completely.





Our
      development activities have been and continue to be constrained by shortages
      in
      working capital (see Plan of Operation for detailed use of equity investment
      and
      debt financing). As a result, we have experienced delays in bringing our Phantom
      Game Service to market, which in turn has triggered the need for additional
      efforts to address changing design and engineering standards, as well as the
      need for renegotiation of arrangements with game content providers as existing
      arrangements lapse in advance of commercial launch. Due to the foregoing
      factors, in the fourth quarter of 2005, we restructured our business and our
      resources to focus predominantly on the Phantom Lapboard. We have no agreements,
      or any formal plans, to bundle games or game subscriptions with the Phantom
      Lapboard.





Subject
      to obtaining sufficient financing, we anticipate focusing our efforts over
      the
      next 12 months on the following principal activities:





**Completing
      Development of the Phantom Lapboard** - The
      Phantom Lapboard was originally intended for retail launch in 2004 and its
      design was based upon that premise. We are currently in the process of revising
      and updating the hardware to take advantage of newer technology to ensure that
      the product is technically compelling and that we are able to have an adequate
      supply of components. This includes changes to the mouse optical subsystem
      to a
      newer laser mechanism allowing users to utilize the mouse on a wider variety
      of
      surfaces. Users may operate the Phantom Lapboard from a tabletop which often
      has
      a reflective surface. The laser mechanism provides much broader compatibility
      with this type of surface. The Company believes that utilizing more recent
      components allows it the opportunity to have an adequate supply, but in no
      way
“ensures” that it will have this supply. Prototypes of the Lapboard will be
      issued in the 2 nd quarter
      of 2007 to wholesale buyers in the North American and European markets to
      determine forecasts for manufacturing the Lapboard. Wholesale buyers will be
      utilized through the sales channels of Global Partners Inc. U.S. and Westex
      N.V
      for the European sales channels.





**Completing
      Development of the Lapboard Distribution Network** -
      Working with our partners, Integrated Network Cable of St. Louis, Missouri,
      to
      provide logistics, warehousing/distribution and fulfillment services to support
      the marketing of the Phantom Lapboard and ShowMeCables, the e-commerce marketing
      division of Integrated Network Cable, will provide its e-commerce shopping
      cart
      to support the marketing and sales of the Phantom Lapboard.





As
      a
      pre-cursor to the commercial launch of the Phantom Lapboard, we entered into
      a
      Product Development and Manufacturing Agreement and a Manufacturing and Supply
      Agreement with Itron Technology, Inc. In the event of the loss of Itron, it
      would require us to identify and contract with alternate sources of
      manufacturing, which we may be unable to do and which could prove time-consuming
      and expensive. The use of any third party manufacturer, entails investing in
      pre-manufacturing activities, including the purchase of tooling and components,
      as well as ancillary operations around the manufacturing and distribution of
      the
      Phantom Lapboard such as logistics, service and support.





The
      commercial launch of the Phantom Lapboard will require investment in marketing
      and sales activities. We expect to sell these units direct to consumer. We
      may
      also secure distribution agreements with retail partners as well as promoting
      consumer awareness of the Phantom Lapboard through typical marketing channels:
      advertising, public relations, and in-store promotions.




23




**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. We have 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 us alternative
      methods of adopting this standard. We have 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 our 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”), we review our 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, we compare 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,
      we 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,
      we write down goodwill to its implied fair value.





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.




DERIVATIVE
      LIABILITIES





Estimating
      gains and losses from derivatives is one of our most critical accounting
      policies. This includes the gain / loss recognition **** related
      to convertible debentures, which are convertible into the Company’s stock at the
      option of the note holders. **** These
      derivatives require a periodic valuation of their fair value and a corresponding
      recognition of gain / loss and liabilities associated with such derivatives.
      The
      recognition of derivative liabilities related to the issuance of debt
      convertible into shares of common stock is applied first to the proceeds of
      such
      issuance, at the date of issuance, and the excess of derivative liabilities
      over
      the proceeds is recognized as a loss on derivatives in the accompanying
      consolidated financial statements. Any subsequent increase or decrease in the
      fair value of the derivative liabilities is recognized as a gain / loss on
      derivatives.





24


Accounting
      for these instruments requires a determination of all of the embedded
      derivatives. Certain instruments may become derivatives once a Company is unable
      to assert it has enough authorized shares to satisfy conversion of all
      outstanding debt, warrants, options and all other stock obligations. Once
      identified, an estimate is made for the number of shares each derivative would
      convert into as of the date of valuation. Theses shares are then valued using
      a
      Black-Scholes model based on the assumptions around volatility along with the
      current stock price, conversion price, interest rate, dividend rate, and term
      to
      maturity. Once valued the amount is compared to the prior period with “gains /
      losses on derivatives” and related liability recorded in the current period.
      While we believe that the systems and procedures used by the Company do provide
      a sound basis for our estimates, actual results will differ from management’s
      estimates. The complexity of identifying and estimating derivative liabilities
      and corresponding gains / losses affects the amounts reported in our financial
      statements.




**Recent
      Accounting Pronouncements**





In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
      Uncertainty in Income Taxes,” which prescribes a comprehensive model for how a
      company should recognize, measure, present and disclose in its financial
      statements uncertain tax positions that the company has taken or expects to
      take
      on a tax return (including a decision whether to file or not to file a return
      in
      a particular jurisdiction). The accounting provisions of FIN No.48 are effective
      for fiscal years beginning after December 15, 2006. The Company is currently
      assessing whether adoption of this Interpretation will have an impact on our
      financial position or results of operations.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, “Fair Value Measurements”, which establishes a framework for
      reporting fair value and expands disclosures about fair value measurements.
      SFAS
      No. 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007 and interim periods within those fiscal years. The
      Company is currently assessing the impact of the adoption of this standard
      on
      its financial statement.





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





Our
      consolidated financial statements are included beginning on page F-1 immediately
      following the signature page to this Annual Report.




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





On
      January 2, 2007, Webb & Company, P.A. (the "Former Accountant") was
      dismissed as the auditors for the Company. On January 3, 2007, the Company
      engaged Kempisty & Company (the "New Accountant"), as its independent
      certified public accountant. The Company's decision to engage the New Accountant
      was approved by its Board of Directors on January 2, 2007.





The
      reports of the Former Accountant on the financial statements of the Company
      for
      each of the two most recent fiscal years, did not contain an adverse opinion
      or
      disclaimer of opinion and was not qualified or modified as to uncertainty,
      audit
      scope or accounting principles for the two most recent fiscal years and all
      subsequent interim periods, except that the Former Accountant's opinion in
      its
      report on the Company's financial statements expressed substantial doubt with
      respect to the Company's ability to continue as a going concern for the last
      two
      fiscal years.





During
      the Company's two most recent fiscal years and the subsequent interim period
      through the date of dismissal, there were no reportable events as the term
      described in Item 304(a)(1)(iv) of Regulation S-B.





During
      the Company's two most recent fiscal years and the subsequent interim period
      through the date of dismissal, there were no disagreements with the Former
      Accountant on any matters of accounting principles or practices, financial
      statement disclosure or auditing scope or procedure, which, if not resolved
      to
      the satisfaction of the Former Accountant, would have caused it to make
      reference to the subject matter of the disagreements in connection with its
      reports on these financial statements for those periods.





The
      Company did not consult with the New Accountant regarding the application of
      accounting principles to a specific transaction, either completed or proposed,
      or the type of audit opinion that might be rendered on the Company's financial
      statements, and no written or oral advice was provided by the New Accountant
      that was a factor considered by the Company in reaching a decision as to the
      accounting, auditing or financial reporting issues.





25


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




(a) ***Evaluation
      of Disclosure Controls and Procedures***




Based
      on
      an evaluation of our disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934, as amended) required by paragraph (b) of Rule 13a-15 or
      Rule 15d-15, as of December 31, 2006, our Chief Executive Officer and
      Interim Chief Financial Officer has concluded that our disclosure controls
      and
      procedures were not effective in ensuring 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. Our Chief Executive Officer and
      Interim Chief Financial Officer also concluded that, as of December 31, 2006,
      our disclosure controls and procedures were [not] effective in
      ensuring that information required to be disclosed by us in the reports that
      we
      file or submit under the Exchange Act is accumulated and communicated to our
      management, including our Chief Executive Officer and Interim Chief Financial
      Officer, to allow timely decisions regarding required disclosure.





Through
      the filing of our annual report on Form 10-KSB for the year ended 2006, our
      Disclosure Controls were not effective in enabling us to record and properly
      report embedded conversion features and freestanding warrants pursuant to SFAS
      No. 133, "Accounting for Derivative Instruments and Hedging Activities" and
      EITF
      00-19 “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company’s Own Stock.” As such, in September 2006, the
      Company restated its 10-KSB for the years ended 2004 and 2005, all quarterly
      periods in 2005, and for the period ending March 31, 2006. The unaudited
      financial statements included on Form 10-QSB for the period ended June 30,
      2006
      reflect the correct accounting treatment for transactions suggesting treatment
      under EITF 05-04 and 00-19.





In
      designing and evaluating our disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management necessarily is required to apply its judgment in
      evaluating the relationship between the benefit of desired controls and
      procedures and the cost of implementing new controls and
      procedures.





(b) ***Changes
      in Internal Controls***





During
      the year ended December 31, 2006, there were no changes in our internal control
      over financial reporting identified in connection with the evaluation required
      by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.





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





Not
      applicable.





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





None.





**PART
      III**





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





The
      following table sets forth the names and ages of our executive officers and
      directors as of December 31, 2006.




**Name**
            
            **Age**
            
            **Position**
            
            **Director
                Since**Greg
                Koler
            
            50
            
            Chief
                Executive Officer, Interim Chief Financial Officer and
                Director
            
            2006Richard
                Angelotti
            
            62
            
            Director
            
            2004Timothy
                Roberts
            
            36
            
            Chairman
                of the Board of Directors
            
            2004





The
      principal occupations for the past five years (and, in some instances, for
      prior
      years) of each of our directors and executive officers are as
      follows:





26


**Greg
      Koler, Chief Executive Officer and Interim Chief Financial Officer;
      Director.**





**GREG
      KOLER** was,
      from January 2000 to December 2003, general manager at Infomedia S.A.,
      Luxembourg, a European subsidiary of Gemstar TV Guide International, Inc.,
      where
      he was responsible for five sales business units in Europe of the US parent
      company. Prior to that, from April 1997 until he joined Infomedia, Mr. Koler
      served as strategic sales director for TDK Recording Media Europe, a global
      publisher of entertainment software for consoles and PCs. Prior to joining
      Infinium in June 2004, and since December 2003, Mr. Koler served as a consultant
      to a number of companies including Softbank Broadband, FTC Communication
      Technologies and Vox Mobile Communications.





**Richard
      Angelotti, Director.**





**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.





**Timothy
      Roberts, Chairman of the Board of Directors.**





**TIMOTHY
      M. ROBERTS** was the
      founder of our predecessor, Infinium Labs Operating Corporation, and has been
      our Chairman and a member of our board of directors since the merger of our
      subsidiary into Infinium Labs Operating Corporation. He was also the Chief
      Executive Officer and Chief Financial Officer from inception through August
      15,
      2005. Prior to founding Phantom Entertainment 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. 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
      its customers. 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.





***Key
      Employees***




**TERRANCE
      TAYLOR** From
      November 2003, to June 2004, Mr. Taylor served as Controller and Acting Chief
      Financial Officer of Phantom Entertainment, Inc., and as Controller of its
      predecessor, Infinium Labs Operating Corporation. From June 1999 to November
      2003, Mr. Taylor served as controller at Wireless One Network, a cellular
      telephone operator in southwest Florida that was acquired by AT&T. From
      April 1998 to May 1999, Mr. Taylor served as Chief Financial Officer of Abaris
      Care, Inc., which operated 18 assisted living communities.





**FAMILY
      RELATIONSHIPS**





There
      are
      no family relationships among our executive officers and directors.




**THE
      BOARD OF DIRECTORS AND CORPORATE GOVERNANCE**  ****





Our
      Board
      of Directors is responsible for establishing broad corporate policies and for
      overseeing our overall management. In addition to considering various matters
      which require Board approval, the Board provides advice and counsel to, and
      ultimately monitors the performance of, our senior management.





The
      Board
      and our management strive to perform and fulfill their respective duties and
      obligations in a responsible and ethical manner. The Board performs annual
      self-evaluations. We have adopted a comprehensive Code of Business Conduct
      and
      Ethics for all directors, officers and employees.





During
      2006, the Board of Directors met seven times. To the extent that a nominee
      was a
      member of the Board of Directors in 2006, each nominee for director attended
      100% of the Board of Directors meetings. While we do not have a formal policy
      requiring members of the Board to attend the Special Meeting of Stockholders,
      we
      strongly encourage all directors to attend.





**Committees
      of the Board**





As
      of the
      date of this Annual Report, we do not have any committees within our board
      of
      directors .
      To
      date, none of our Directors is an “audit committee financial expert” within the
      meaning of Item 401(e) of Regulation S-B. The Company lacks the financial
      resources to form audit and nominating committees. Notwithstanding, the Company
      is seeking to add new outside directors including a financial expert, as defined
      by Item 401(e) of Regulation S-B.





27


**Director
      Compensation**





Directors
      may receive, on an annual basis, 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.




Other
      than the management agreements and the advisory agreements 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.





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





Section
      16(a) of the Securities Exchange Act of 1934 requires our directors and
      executive officers and persons who beneficially own more than ten percent of
      a
      registered class of our equity securities to file with the SEC initial reports
      of ownership and reports of change in ownership of common stock and other equity
      securities of our company. Officers, directors and greater than ten percent
      stockholders are required by SEC regulations to furnish us with copies of all
      Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4
      and
      amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year
      ended December 31, 2006, and Forms 5 and amendments thereto furnished to us
      with
      respect to the fiscal year ended December 31, 2006, we believe that during
      the
      year ended December 31, 2006, our executive officers, directors and all persons
      who own more than ten percent of a registered class of our equity securities
      complied with all Section 16(a) filing requirements .




**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 and principal accounting officer, 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.




28




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.





Terms
      of Office





Our
      directors are appointed for a one year term to hold office until the next annual
      general meeting of the holders of our Common Stock or until removed from office
      in accordance with our by-laws. Our officers are appointed by our board of
      directors and hold office until removed by our board of directors.





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth the cash compensation (including cash bonuses) paid
      or accrued and equity awards granted by us for years ended December 31, 2006
      and
      2005 to our Chief Executive Officer and our most highly compensated officers
      other than the Chief Executive Officer.




**SUMMARY
      COMPENSATION TABLE**




Name
                & Principal
              Position
            Year
            Salary
                ($)
            Bonus
              ($)
            Stock
              Awards($)
            Option
                Awards
              ($)
            Non-Equity
              Incentive
                Plan Compensation
              ($)
            Change
                in
              Pension
                Value
              and
                Non-Qualified
              Deferred
              Compensation
              Earnings
                ($)
            All
                Other
              Compensation
              ($)
            Total
                ($)Timothy
                M. Roberts Chairman, Chief
            2006
            $327,000
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            $327,000Executive
                Officer and Director(1)
            2005
            $142,5942
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            $142,594Greg
                Koler Chief Executive Officer
            2006
            $250,0003
            Nil
            $45,716
                *
            Nil
            Nil
            Nil
            Nil
            $295,716and
                Interim Chief Financial Officer(5)
            2005
            $29,4876
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            $29,487Kevin
                Bachus Former President and
            2006
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            NilFormer
                Chief Operating Officer(7)
            2005
            $158,0508
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            $158,050Richard
                S. Skoba Former Executive (9)
            2006
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            NilVice
                President of Sales
            2005
            $136,89610
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            $136,896Tyrol
                Graham Former Vice President
            2006
            $34,732
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            $34,732Development
                (11)
            2005
            $217,33312
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            $217,333




29





*
      Amount
      represented stock-based compensation expense for fiscal year 2006 for awards
      of
      stock granted in 2006 under SFAS 123 R as discussed in
      Note 1(M),
      “Stock-Based Compensation” of the Notes to Consolidated Financial Statements
      included elsewhere in this Annual Report.


1
            Resigned
                as an officer of our company on August 15, 2005.2
            Includes
                1,382,298 shares of S-8 stock issued in lieu of cash
                compensation.3
            Includes
                30,000,000 shares of S-8 stock issued in lieu of cash compensation.
                $146,200 of this amount is currently payable but has been
                deferred.4
            Includes
                500,000 shares of S-8 stock issued in lieu of cash
                compensation.5
            Appointed
                as an officer and director of our company on November 18,
                2005.6
            For
                his role as a director and officer Mr. Koler was compensated solely
                in
                cash.7
            Resigned
                as an officer and director of our company on November 17,
                2005.8
            Includes
                1,212,960 shares of S-8 stock issued in lieu of cash
                compensation.9
            Resigned
                from our company on April 30, 2005.10
            includes
                1,722,598 shares of S-8 stock issued in lieu of cash
                compensation.11
            Resigned
                from our company on February 24, 2006.12
            includes
                4,719,739 shares of S-8 stock issued in lieu of cash
                compensation.





**Outstanding
      Equity Awards at Fiscal Year-End**





The
      following table sets forth information with respect to grants of options to
      purchase our common stock to the named executive officers during the fiscal
      year
      ended December 31, 2006.





Option
                Awards
            Stock
                AwardsName
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
              (#)
            Option
              Exercise
              Price
              ($)
            Option
              Expiration
              Date
            Number
              of
                Shares
              or
                Units
              of
                Stock
              That
                Have
              Not
              Vested
              (#)
            Market
              Value
                of
              Shares
                or
              Units
                of
              Stock
              That
                Have
              Not
              Vested
              ($)
            Equity
              Incentive
              Plan
                Awards:
              Number
              of
              Unearned
              Shares,
              Units
                or
              Other
                Rights
              That
                Have
              Not
              Vested
              (#)
            Equity
              Incentive
              Plan
                Awards:
              Market
                or
              Payout
              Value
              of
              Unearned
              Shares,
              Units
                or
              Other
              Rights
              That
                Have
              Not
              Vested
              ($)Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil




**Director
      Compensation**





The
      following table sets forth with respect to the named director, compensation
      information inclusive of equity awards and payments made in the year end
      December 31, 2006.




Name
            Fees
                Earned or
              Paid
                in Cash
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
                ($)
            Non-Equity
                Incentive
              Plan
                Compensation ($)
            Change
                in Pension Value and
              Nonqualified
                Deferred
              Compensation
                Earnings
            All
                Other
              Compensation
              ($)
            Total
              ($)Greg
                Koler
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            NilTimothy
                Roberts
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            NilRichard
                Angelotti
            $69,333
                (1)
            Nil
            Nil
            Nil
            Nil
            Nil
            $69,333





1
            The
                entire $69,333 is currently payable but has been
                deferred.





**Employment
      Agreements**





As
      disclosed on Form 8-K which was filed on August 19, 2005, the Company entered
      into a Separation and Release Agreement (the “Agreement”) with Timothy Roberts
      pursuant to which Mr. Roberts resigned as the Chief Executive Officer and Acting
      Chief Financial Officer of the Company, effective as of August 15, 2005. Mr.
      Roberts remained a Director of the Company.





Mr.
      Roberts agreed to release and forever discharge the Company from any and all
      claims, demands, causes of action, claims for relief, and damages, of whatever
      kind or nature, known or unknown, which Mr. Roberts had, now has or may
      hereinafter have from the beginning of the world to the date of the Agreement,
      including, without limitation, all claims and all rights which Mr. Roberts
      may
      have under any and all federal, state and local laws and statutes which regulate
      employment, and the laws of contracts, tort and other subjects.





30


The
      Agreement provided for vesting of options to purchase 10,000,000 shares of
      its
      common stock at an exercise price of $0.07 per share which were granted to
      Mr.
      Roberts pursuant to his employment agreement, partial cash severance payment
      to
      Mr. Roberts in an amount equal to $250,000 in 12 equal monthly installments,
      commencing September 1, 2005, and in lieu of the balance of the cash severance
      payment, the Company issued 10,000,000 shares of its restricted common stock
      (exempt pursuant to the provisions of Regulation D, as promulgated by the
      Securities and Exchange Commission under the Securities Act of 1933, as
      amended).





The
      Agreement was modified effective January 1, 2006 in which Mr. Roberts waived
      the
      aforementioned options as well as the $250,000 in cash severance.





On
      January 11, 2006, we entered into an Employment Agreement with Greg Koler,
      our
      Chief Executive Officer and Interim Chief Financial Officer. Pursuant to the
      Employment Agreement, we will employ Mr. Koler commencing January 11, 2006
      and
      his employment will be at-will. Mr. Koler will be paid an annual base salary
      of
      $250,000 (the “Base Salary”). In addition, on a quarterly basis, Mr. Koler will
      be eligible to earn a bonus of up to 35% of Base Salary based on meeting
      performance objectives and bonus criteria. In addition, Mr. Koler shall be
      entitled to receive the pro-rata amount of Base Salary due from November 18,
      2005 through the January 10, 2006, as compensation for Mr. Koler’s role as
      our Interim Chief Executive Officer and Interim Chief Financial Officer
      beginning on November 18, 2005.





Mr.
      Koler
      will be granted an aggregate of 5,000,000 restricted shares of our common stock,
      in accordance with the following vesting schedule: (i) 1,000,000 shares will
      be
      fully vested upon execution of the Employment Agreement, and the Stock Vesting
      Agreement dated as of January 11, 2006; and (ii) the remaining 4,000,000 shares
      of common stock shall vest quarterly over two years, 1/8 per quarter, to the
      extent Mr. Koler is employed with us at the pertinent vesting date and that
      our
      shareholders have authorized additional common stock. As of February 7, 2006,
      no
      shares under this agreement have been issued.





In
      addition, on January 11, 2006 we entered into a Confidential Information,
      Inventions, Non-Solicitation and Non-Competition Agreement with Mr. Koler.
      The
      non-competition and non-solicitation provisions shall remain in effect for
      two
      years following termination while the balance of this agreement survives any
      termination, subject to standard exceptions.





On
      December 6, 2006 the Company entered into an employment agreement with Terrance
      Taylor, its Controller. Pursuant to the Employment Agreement, the Company will
      employ Mr. Taylor as its Treasurer and Controller for a period of 1 year
      commencing December 6, 2006, which will be automatically renewed for successive
      1 year periods until written notice not to renew is delivered by either the
      Company or Mr. Taylor. Mr. Taylor will be paid an annual base salary of $150,000
      (“Base Salary”). In addition, Mr. Taylor will be eligible to earn an annual cash
      bonus of up to $37,500 based on meeting performance objectives and bonus
      criteria. On April 17, 2007 the Company’s Board of Directors removed Mr. Taylor
      from his role as the Company’s Treasurer and, since that time, Mr. Taylor only
      serves in the capacity of the Company’s Controller.





Other
      Compensation





There
      are
      no annuity, pension or retirement benefits proposed to be paid to officers,
      directors, or employees of our company in the event of retirement at normal
      retirement date as there was no existing plan as of December 31, 2006 provided
      for or contributed to by our company.




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





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





The
      following table sets forth information as to the shares of our common stock
      beneficially owned as of May 15, 2007 by (i) each person known to us to be
      the
      beneficial owner of more than 5% of our common stock; (ii) each director and
      nominee for director; (iii) each executive officer; and (iv) all of our
      directors and executive officers as a group. Unless otherwise indicated in
      the
      footnotes following the table, the persons as to whom the information is given
      had sole voting and investment power over the shares of common stock shown
      as
      beneficially owned by them. Unless otherwise indicated, the address of each
      person shown is c/o Phantom Entertainment, Inc., 222 Grace Church St., Suite
      302, Port Chester, NY 10573.





31


***Principal
      Stockholders***





**Name
                and Address of**
              **Beneficial
                Owner**
            
            **Amount
                Beneficially Owned (1)**
            
            **Percent
                of**
              **Class
                (1)**Timothy
                M. Roberts
            
            0
            
            *Greg
                Koler
            
            29,000,000
            
            1.61%Richard
                Angelotti
            
            28,291,182
            
            1.57%Golden
                Gate Investors, Inc. (2)
            
            179,763,398
            
            9.99%All
                Officers and Directors as a group (3 persons)
            
            57,291,182
            
            3.18%










*Less
      than one percent.





(1)
      Based
      on 1,799,433,415 shares of common stock issued and outstanding as of May 15,
      2007. 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.





(2)
      Includes shares underlying debentures and common stock purchase warrants. In
      accordance with rule 13d-3 under the Securities Exchange Act of 1934, Norman
      Lizt may be deemed a control person of the shares owned by Golden
      Gate.





**Equity
      Compensation Plan Information**




The
      following table set forth the information as of December 31, 2006 with respect
      to compensation plans under which equity securities of the Company are
      authorized for issuance :




**Plan Category**
            
            **Number of Shares to**
              **Be Issued upon**
              **Exercise of**
              **Outstanding**
              **Options, Warrants**
              **and Rights**
              **(a)**
            
            **Weighted-Average**
              **Exercise Price of**
              **Outstanding Options,**
              **Warrants and Rights**
              **(b)**
            
            **Number of Shares**
              **Remaining Available**
              **for Future Issuance**
              **Under Equity**
              **Compensation Plans**
              **(Excluding Shares**
              **Reflected in**
              **Column (a))**
              **(c)**Equity
                Compensation plans approved by stockholders
            
            0
            
            N/a
            
            0Equity
                Compensation plans not approved by stockholders
            
            392,000,000
            
            N/a
            
            392,000,000Total
            
            392,000,000
            
            N/a
            
            392,000,000





**Our
      2006 and 2005 Stock Compensation Plans**




The
      purpose of each of our 2006 Stock Compensation Plans-A through -C and 2005
      Stock
      Compensation Plans-A through -D is to help us retain executive and non-executive
      employees, consultants, professionals, and service providers who provide
      services to the Company in connection with, among other things, the Company's
      obligations as a publicly-held reporting company. In addition, we expect to
      benefit from the added interest that the awardees will have in our welfare
      as a
      result of their ownership or increased ownership of our common stock. The Board
      of Directors will select who will receive awards and the amount and nature
      of
      such awards.





Over
      the
      last two years, we have been able to hire executive and non-executive employees
      and engage consultants, professionals, and service providers by compensating
      them through the issuance of shares of our common stock. This afforded us the
      ability to utilize our cash, at a time when we were seeking out financing and
      working with our creditors with respect to restructuring outstanding obligations
      We believe that, for the foreseeable future, it is in our best interests to
      be
      able to continue to engage and compensate such persons through the payment
      of
      our shares of common stock.





Awards
      authorized under the each of our 2006 Stock Compensation Plans-A through -C
      and
      2005 Stock Compensation Plans-A through -D consist of shares of our common
      stock. Such awards may be subject to forfeiture in the event of premature
      termination of engagement, failure to meet certain performance objectives,
      or
      other conditions, as may be determined by the Board of Directors.




32


Each
      of
      the 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation
      Plans-A through -D is administered by the Board of Directors. Subject to the
      express terms and conditions of the 2006 Stock Compensation Plans and 2005
      Stock
      Compensation Plans, the Board of Directors has full power to make Awards, to
      construe or interpret the 2006 Stock Compensation Plans and the 2005 Stock
      Compensation Plans, to prescribe, amend and rescind rules and regulations
      relating to it and to make all other determinations necessary or advisable
      for
      its administration. Except as otherwise provided in the 2006 Stock Compensation
      Plans and the 2005 Stock Compensation Plans, the Board of Directors may also
      determine which persons shall be granted Awards, the nature of the Awards
      granted, the number of shares subject to Awards and the time at which Awards
      shall be made. Such determinations will be final and binding.





The
      only
      class of stock subject to an Award is common stock. We have an aggregate of
      260,000,000 shares of common stock reserved for issuance under the 2006 Stock
      Compensation Plans of which an aggregate of 260,000,000 are issued an
      outstanding. We have an aggregate of 132,000,000 shares of common stock reserved
      for issuance under the 2005 Stock Compensation Plans of which an aggregate
      of
      132,000,000 are issued an outstanding.





In
      the
      event that our outstanding shares of Common Stock are increased, decreased
      or
      changed or converted into other securities by reason of merger, reorganization,
      consolidation, recapitalization, stock dividend, extraordinary cash dividend
      or
      other change in our corporate structure affecting the stock, the number of
      shares that may be delivered under the 2006 Stock Compensation Plans and the
      2005 Stock Compensation Plans and the number and/or the purchase price of shares
      subject to outstanding Awards under the 2005 Stock Compensation Plans may be
      adjusted at the sole discretion of the Board of Directors to the extent that
      the
      Board of Directors determines to be appropriate, provided, however, that the
      number of shares subject to any Awards will always be a whole
      number.





The
      2006
      Stock Compensation Plans and the 2005 Stock Compensation Plans will expire
      ten
      years after their approval by the Board, but the Board of Directors may
      terminate the 2006 Stock Compensation Plans and the 2005 Stock Compensation
      Plans at any time prior to that date and Awards granted prior to such
      termination may extend beyond such date. Termination of the 2006 Stock
      Compensation Plans and the 2005 Stock Compensation Plans will not alter or
      impair, without the consent of the Awardee, any of the rights or obligations
      of
      any Award made under the 2005 Stock Compensation Plans.





***Grant*** .
      The
      Board of Directors may, at its discretion, award shares of common stock to
      a
      recipient (the "Stock Awards"). The Stock Awards will be issued pursuant to
      an
      agreement between the Company and the Awardee. Each recipient of a Stock Award
      will be a stockholder and have all the rights of a stockholder with respect
      to
      such shares, including the right to vote and receive all dividends or other
      distributions made or paid with respect to such shares.





If
      the
      recipient of an Award ceases to be a consultant, professional or service
      provider for any reason, then the Award may be subject to forfeiture, as
      provided in the particular agreement, unless such forfeiture is waived by the
      Board of Directors when it, in its discretion, determines that such waiver
      is in
      our best interests.





In
      the
      event of a participant's retirement, permanent disability or death, or in cases
      of special circumstances, the Board of Directors may waive any or all of the
      remaining restrictions and limitations imposed under the 2006 Stock Compensation
      Plans and the 2005 Stock Compensation Plans with respect to any
      Awards.





***Restrictions
      on Transferability*** .
      These
      Shares of stock may not be sold, exchanged, transferred, pledged, hypothecated,
      or otherwise disposed of until such time as any stated restrictions lapse.
      The
      Board of Directors, in its absolute discretion, may impose such restrictions
      on
      the transferability of the Awards granted in the 2006 Stock Compensation Plans
      and the 2005 Stock Compensation Plans as it deems appropriate. Any such
      restrictions shall be set forth in the Agreement with respect to such Awards
      and
      may be referred to on the certificates evidencing shares issued pursuant to
      any
      such Award. Shares of restricted stock will be evidenced by a certificate that
      bears a restrictive legend.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE******





**Transactions
      with Related Persons, Promoters and Certain Control Persons**





Other
      than as set forth below, during the last two fiscal years there have not been
      any relationships, transactions, or proposed transactions to which we were
      or
      are to be a party, in which any of the directors, officers, or 5% or greater
      shareholders (or any immediate family thereof) had or is to have a direct or
      indirect material interest.





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
      former 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.





33


On
      June
      21, 2004, we compensated Timothy M. Roberts, our former Chief Executive Officer
      $50,000 as consideration for his personal guaranty at that time of a commercial
      promissory note payable secured by a real estate mortgage encumbering the his
      residence. The note is for $1,500,000 with interest calculated at fifteen
      percent (15%) per annum up to the maximum amount allowed by law in the event
      of
      default. The note also permits a late charge in the amount of five percent
      (5%).





On
      July
      28, 2004, we issued Richard Angelotti, a director, 800,000 shares of common
      stock as consideration for his personal guaranty of a promissory note payable
      secured by a real estate mortgage encumbering the director's residence. The
      note, effective on July 28, 2004 and expiring on July 27, 2005, was payable
      to
      Stephen A. Witzer, Trustee U/A dated February 7, 1985. The principal is for
      $500,000 with interest calculated at fifteen percent (15%) per annum, plus
      a
      five percent (5%) penalty, if applicable, for any late payment. In the event
      of
      an uncured default, the interest increases to eighteen percent (18%) per annum.
      On December 9, 2005, this promissory note was assigned by Witzer to Richard
      Angelotti. The terms of the promissory note were subsequently amended to provide
      that as of November 1, 2005, principal and accrued interest totaled $560,437.
      With respect to the revised principal, commencing November 2, 2005, simple
      interest at a rate of fifteen percent (15%) per annum will accrue on a monthly
      basis until December 31, 2006 (maturity date), at which time the entire
      remaining principal and all accrued and unpaid interest are due in full. On
      August 4, 2006, the Company issued 41,659,182 shares of common stock with a
      fair
      value of $624,887.73 ($.015 per share) to convert a promissory note held by
      Richard Angelotti, a Director, and accrued interest. No gain or loss was
      recognized on the conversion.





On
      November 2, 2004, we issued 200,000 shares of common stock with a fair value
      of
      $43,735 ($0.2187 per share) in lieu of cash compensation to Kevin Bachus as
      our
      President and Chief Operating Officer.





On
      November 2, 2004, we issued 300,000 shares of common stock with a fair value
      of
      $65,603 ($0.2187 per share) in lieu of cash compensation to Timothy Roberts,
      as
      CEO (Mr. Roberts was also the CFO and Chairman).





On
      December 8, 2004, we issued 300,000 shares of common stock with a fair value
      of
      $65,603 ($0. 2187 per share) in lieu of cash compensation to Kevin Bachus as
      our
      President and Chief Operating Officer.




On
      December 8, 2004, we issued 200,000 shares of common stock with a fair value
      of
      $43,735 ($0. 2187 per share) in lieu of cash compensation to Timothy Roberts,
      as
      CEO (Mr. Roberts was also the CFO and Chairman).





On
      December 8, 2004, we issued 100,000 shares of common stock with a fair market
      value of $21,866 ($0. 2187 per share) in lieu of cash compensation to Richard
      Angelotti, Director.





On
      January 27, 2005, we borrowed $300,000 from Timothy Roberts, our former CEO
      and
      a director of our company, under a 15% promissory note, which was payable no
      later than April 27, 2005. The note was subsequently transferred by Mr. Roberts
      to parties unaffiliated with us. On or about May 10 through 12, 2005, this
      note
      was assigned by Mr. Roberts to the following individuals with corresponding
      amounts: (1) Gerard D'Ariano, $100,000; (2) Fred Niedrich, $50,000; (3) Gary
      Fears, $50,000; and (4) John Landino, $100,000.In June 2005, the full principal
      and interest was settled in consideration for our issuance of 3,187,206 shares
      of common stock to the holders, valued at $318,721.




On
      March
      11, 2005, we issued 800,000 shares of common stock with a fair value of $272,000
      ($.34 per share) in lieu of cash compensation to Richard Angelotti,
      Director.




On
      May
      10, 2005, we issued 250,000 shares of common stock with a fair value of $37,500
      ($0.15 per share) in lieu of cash compensation to Kevin Bachus as our President
      and Chief Operating Officer.





On
      June
      3, 2005, we issued 250,000 shares of common stock with a fair value of $25,000
      ($0.10 per share) in lieu of cash compensation to Kevin Bachus as our President
      and Chief Operating Officer.





On
      June
      13, 2005, we issued 1,700,000 shares of common stock with a fair value of
      $221,000 ($0.13 per share) to Timothy Roberts. These shares were an
      indemnification to Mr. Roberts as the guarantor on a $400,000, 6% promissory
      note between the Company and Nite Capital. The note was collateralized with
      Mr.
      Roberts’ personal holdings of Company stock.





On
      June
      22, 2005, we issued 500,000 shares of common stock with a fair value of $50,000
      ($0.10 per share) in lieu of cash compensation to Timothy Roberts, as our CEO
      (Mr. Roberts was also the CFO and Chairman).





On
      August
      11, 2005, we issued 882,398 shares of common stock with a fair value of $61,768
      ($0.07 per share) in lieu of cash compensation to Timothy Roberts, as our CEO
      (Mr. Roberts was also the CFO and Chairman).





On
      August
      11, 2005, we issued 712,960 shares of common stock with a fair value of $49,907
      ($0.07 per share) in lieu of cash compensation to Kevin Bachus as our President
      and Chief Operating Officer. Mr. Bachus became CEO, CFO and a Director on August
      15, 2005.





34


On
      August
      11, 2005, we issued 296,297 shares of common stock with a fair value of $20,741
      ($0.07 per share) to Richard Angelotti, Director.





On
      August
      18, 2005, we issued 5,000,000 shares of common stock to Richard Angelotti,
      with
      a fair value of $350,000 ($0.07 per share).





On
      August
      18, 2005, we issued 10,000,000 shares of common stock to Timothy M. Roberts,
      our
      former Chief Executive Officer, with a fair value of $700,000 ($0.07 per
      share).





On
      January 1, 2006, the Company converted $91,775 owed under employee expense
      reimbursements into a promissory note to Timothy Roberts, a former employee,
      and
      the current Chairman and a Director. The note is unsecured and bears an 8%
      rate
      of interest. During November 2006, the Company issued 19,940,582 shares of
      common stock in full settlement of the promissory note and accrued interest.
      The
      fair value was $97,709 ($0.0049 per share) and no gain or loss was
      recognized.





On
      January 11, 2006, Greg Koler, our Chief Executive Officer, was granted 1,000,000
      shares of common stock under the terms of his employment agreement. As of
      December 31, 2006, such shares have not been issued.




On
      February 14, 2006, the company issued Greg Koler, our Chief Executive Officer,
      1,021,239 of common stock with a fair market value of $18,382 ($.018 per share)
      for services performed by Mr. Koler, prior to November 18, 2005, in his capacity
      as an independent contractor prior to becoming the CEO.





On
      July
      26, 2006, the Company issued 20,000,000 shares of common stock with a fair
      value
      of $330,000 ($.0165 per share) to Timothy Roberts, Chairman, for consulting
      services rendered in 2006 and to be rendered for the balance of
      2006.





On
      November 9, 2006, we issued 20,000,000 shares of common stock with a fair value
      of $66,000 ($0.0033 per share) in lieu of cash compensation to Greg Koler,
      our
      Chief Executive Officer.





On
      November 17, 2006, we issued 9,000,000 shares of common stock with a fair value
      of $34,200 ($0.0038 per share) in lieu of cash compensation to Greg Koler,
      our
      Chief Executive Officer.





On
      November 21, 2006, we issued 1,000,000 shares of common stock with a fair value
      of $3,600 ($0.0036 per share) in lieu of cash compensation to Greg Koler, our
      Chief Executive Officer.





*Transactions
      with Promoter*





Immediately
      prior to the merger described above, Peter Goldstein, the promoter of Global
      Business Resources, Inc., surrendered to us 10,000,000 shares of our common
      stock in exchange for all of the issued and outstanding shares 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 .





**Review,
      Approval or Ratification of Transactions with Related
      Persons**




We
      believe that the terms of all of the above transactions are commercially
      reasonable and no less favorable to us than we could have obtained from an
      unaffiliated third party on an arm’s length basis. Our policy requires that all
      related parties recuse themselves from negotiating and voting on behalf of
      our
      company in connection with related party transactions .





**Parents**





Not
      applicable





35




**ITEM
      13. EXHIBITS**




Exhibit
                #
            Exhibit
                Name3.1
            Certificate
                of Incorporation ( Incorporated by Reference to Exhibit 3.0 to Form
                SB-2
                (Registration No. 333-67990) filed with the SEC on August 20, 2001
                ).3.2
            Certificate
                of Amendment to Certificate of Incorporation (Incorporated by reference
                to
                Exhibit 3.2 to the Company's Form 10-KSB for the year ended December
                31,
                2003 ).3.3
            Certificate
                of Amendment to Certificate of Incorporation ( Incorporated by reference
                to Exhibit 3.3 to the Company's Form 10-KSB for the year ended December
                31, 2003 ).3.4
            Certificate
                of Amendment to Certificate of Incorporation of the Company (Incorporated
                by reference to Exhibit 1 to Definitive 14-A filed with the SEC on
                June 6,
                2006)3.5
            Bylaws
                (Incorporated by reference to Exhibit 3.4 to the Company's Form 10-KSB
                for
                the year ended December 31, 2003 ).4.1
            Company’s
                2006 Executive Compensation Plan - A (Incorporated by reference to
                Exhibit
                4.1 to Form S-8 filed with the SEC on November 9,
                2006).4.2
            Company’s
                2006 Employee Compensation Plan C (Incorporated by reference to Exhibit
                4.2 to Form S-8 filed with the SEC on November 9,
                2006).




36





10.1+
            Employment
                agreement between the Company and Greg Koler dated January 11, 2006
                (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed
                with the
                SEC on January 13, 2006).10.2
            Stockholder
                vesting agreement between the Company and Greg Koler dated January
                11,
                2006 (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed
                with
                the SEC on January 13, 2006).10.3
            Securities
                Purchase Agreement dated as of January 24, 2006 by and between Infinium
                Labs, Inc. and Golden Gate Investors, Inc. (Incorporated by reference
                to
                Exhibit 10.1 to the Form 8-K filed with the SEC on January 31,
                2006).10.4
            Registration
                Rights Agreement dated as of January 24, 2006 by and between Infinium
                Labs, Inc. and Golden Gate Investors, Inc. (Incorporated by reference
                to
                Exhibit 10.2 to the Form 8-K filed with the SEC on January 31,
                2006).10.5
            51⁄4%
                Convertible Debenture of Infinium Labs, Inc. dated as of January
                24, 2006.
                (Incorporated by reference to Exhibit 10.3 to the Form 8-K filed
                with the
                SEC on January 31, 2006 ).10.6
            Warrant
                to Purchase Common Stock of Infinium Labs, Inc. dated as of January
                24,
                2006 (Incorporated by reference to Exhibit 10.4 to the Form 8-K filed
                with
                the SEC on January 31, 2006).10.7
            Addendum
                to Convertible Debenture, Warrant to Purchase Common Stock and Securities
                Purchase Agreement dated as of January 24, 2006 by and between Infinium
                Labs, Inc. and Golden Gate Investors, Inc. (Incorporated by reference
                to
                Exhibit 10.5 to the Form 8-K filed with the SEC on January 31, 2006
                ).10.8
            8% Promissory
                Note between the Company and Timothy Roberts, dated January 1, 2006
                (filed
                herewith).10.9
            Securities
                Purchase Agreement dated January 24, 2006 between the Company and
                Golden
                Gate Investors, Inc. (Incorporated by reference to Exhibit 10.1 to
                the
                Form 8-K filed with the SEC on January 31, 2006).10.10
            Registration
                Rights Agreement dated January 24, 2006 between the Company and Golden
                Gates Investors, Inc. (Incorporated by reference to Exhibit 10.2
                to the
                Form 8-K filed with the SEC on January 31, 2006).10.11
            5
1⁄4
                % Convertible Debentures (Incorporated by reference to Exhibit 10.3
                to the
                Form 8-K filed with the SEC on January 31, 2006).10.12
            Warrant
                to Purchase Common Stock issued by the Company to Golden Gate Investors,
                Inc. (Incorporated by reference to Exhibit 10.4 to the Form 8-K filed
                with
                the SEC on January 31, 2006).10.13
            Addendum
                to Convertible Debenture, Warrant to Purchase Common Stock and Securities
                Purchase Agreement dated January 24, 2006 between the Company and
                Golden
                Gate Investors, Inc.10.14
            Stockholder
                Vesting Agreement dated January 11, 2006 between the Company and
                Greg
                Koler (Incorporated by reference to Exhibit 10.2 to the Form 8-K
                filed
                with the SEC on January 13, 2006).10.15
            Conversion
                Agreement dated August 4, 2006 between Phantom Entertainment, Inc.
                and
                Richard Angelotti (Incorporated by reference to Exhibit 10.3 to 10-QSB
                filed with the SEC on August 21, 2006).10.15
            Stock
                Purchase Warrant dated June 30, 2006 (Incorporated by reference to
                Exhibit
                10.2 to Form 10-QSB filed with the SEC on August 21,
                2006).10.16
            Non-negotiable
                Promissory Note between the Company and Ronald Westman in the amount
                of
                $100,000 (Incorporated by reference to Exhibit 10.1 to Form 10-QSB
                filed
                with the SEC on August 21, 2006).10.17
            Manufacturing
                and Supply Agreement, dated November 6, 2006 between the Company
                and Itron
                Technology, Inc. (Incorporated by reference to Exhibit 10.1 to Form
                8-K
                filed with the SEC on November 8, 2006).10.18
            Amendment
                to Secured Debentures between the Company and James Beshara dated
                September 22, 2006 (Incorporated by reference to Exhibit 10.1 to
                Form
                10-QSB filed with the SEC on November 20, 2006).10.19
            Conversion
                Agreement dated October 23, 2006 by the Company and Timothy Roberts
                (Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed with
                the
                SEC on November 20, 2006).10.20
            Original
                Issue Discount Secured Note dated December 7, 2006 in the aggregate
                face
                amount of $83,333 between Phantom Entertainment, Inc. and John Fife
                (Incorporated by reference to Exhibit 10.1 to Form 8-K filed with
                the SEC
                on December 8, 2006).




37




10.21
            Original
                Issue Discount Secured Note dated December 7, 2006 in the aggregate
                face
                amount of $83,333 between Phantom Entertainment, Inc. and John Fife
                (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with
                the SEC
                on December 8, 2006).10.22
            Original
                Issue Discount Secured Note dated December 7, 2006 in the aggregate
                face
                amount of $83,333 between Phantom Entertainment, Inc. and John Fife
                (Incorporated by reference to Exhibit 10.3 to Form 8-K filed with
                the SEC
                on December 8, 2006).10.23
            Stock
                Pledge Agreement between the Company and John Fife, dated December
                7, 2006
                (Incorporated by reference to Exhibit 10.4 to Form 8-K filed with
                the SEC
                on December 8, 2006).10.24
            Guaranty
                dated December 7, 2006 by Timothy Roberts in favor of John Fife
                (Incorporated by reference to Exhibit 10.5 to Form 8-K filed with
                the SEC
                on December 8, 2006).10.25
            Employment
                Agreement between Phantom Entertainment, Inc. and Terrance Taylor
                dated
                December 4, 2006 (Incorporated by reference to Exhibit 10.6 to Form
                8-K
                filed with the SEC on December 8, 2006).10.26
            Settlement
                Agreement dated March 22, 2007 between the Company and Longview Special
                Finance, Inc. (Incorporated by reference to Exhibit 10.1 to Form
                8-K filed
                with the SEC on April 3, 2007).10.27
            Product
                Licensing Agreements with Ione Technology Inc. with the effective
                date of
                the Agreements being July 1, 2007 (Incorporated by reference to Exhibits
                10.1 and 10.2 to Form 8-K filed with the SEC on May 1,
                2007).21.1
            List
                of Subsidiaries. (Filed herewith)31.1
            Certification
                by Chief Executive Officer and Interim Chief Financial Officer pursuant
                to
                Sarbanes-Oxley Section 302 (Filed herewith).32.1
            Certification
                by Chief Executive Officer and Interim Chief Financial Officer pursuant
                to
                18 U.S.C. Section 1350 (Filed
                herewith).





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





The
      following table sets forth the aggregate fees billed or to be billed to us
      by
      Webb & Company, P.A., our former independent auditors for the fiscal year
      ended December 31, 2005 and the aggregate estimate fees to be billed to us
      by
      Kempisty & Company, our current independent auditors, for the fiscal year
      ended December 31, 2006:





**2006**
            
            **2005**Audit
                Fees
            
            $
            55,000
            
            $
            63,758Audit-Related
                Fees
            
            $
            0
            
            $
            0All
                Other Fees
            
            
            —
            
            
            —





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.




38




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this Annual Report on Form 10-KSB for the year ended December 31, 2006 to be
      signed on its behalf by the undersigned, thereunto duly authorized.




**PHANTOM
                ENTERTAINMENT, INC.**Date: 
                May 18, 2007
            By:
            /s/ Greg
                KolerName:  
                Greg KolerTitle:     Chief
                Executive Officer (Principal Executive Officer) and Interim Chief
                Financial Officer (Principal Accounting and Financial
                Officer)




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this Annual Report on Form 10-KSB for the year ended December 31, 2006 to be
      signed on its behalf by the undersigned, thereunto duly authorized.





**SIGNATURE**
            
            **TITLE**
            
            **DATE****/s/*****Greg
                Koler***
            
            Chief
                Executive Officer and
            
            May
                18, 2007Greg
                Koler
            
            Interim
                Chief Financial Officer**/s/*****Timothy
                Roberts***
            
            Chairman
                of the Board of Directors
            
            May
                18, 2007Timothy
                Roberts**/s/*****Richard
                Angelotti*****
            
            Director
            
            May
                18, 2007Richard
                Angelotti







39







**PHANTOM
      ENTERTAINMENT, INC.**





**(A
      DEVELOPMENT STAGE COMPANY)**





**FINANCIAL
      STATEMENTS**





**AS
      OF DECEMBER 31, 2006 CONSOLIDATED AND 2005 (RESTATED)**






















**PHANTOM
      ENTERTAINMENT, INC.**


**AND
      SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**CONTENTS**





PAGE
            F-1
                - F-2
            Reports
                of Independent Registered Public Accounting FirmsPAGE
            F-3
            Balance
                Sheet as of December 31, 2006PAGE
            F-4
            Consolidated
                Statements of Operations for the Year Ended December 31, 2006 and
                2005
                (Restated) and for the Period from December 9, 2002 (Inception) to
                December 31, 2006PAGES
            F-5
                - F-21
            Consolidated
                Statement of Changes in Stockholders’ Deficiency for the Period from
                December 9, 2002 (Inception) Through December 31, 2006PAGE
            F-22
            Consolidated
                Statements of Cash Flows for the Year Ended December 31, 2006 and
                2005
                (Restated) and for the Period from December 9, 2002 (Inception) to
                December 31, 2006PAGES
            F-23-
                F-68
            Notes
                to Consolidated Financial
                Statements











REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board
        of
        Directors
 Phantom
        Entertainment, Inc.
 (A
        Development Stage Company)
 
 We
        have
        audited the accompanying consolidated balance sheet of Phantom Entertainment,
        Inc. and Subsidiaries (A Development Stage Company) as of December 31, 2006
        and
        the related statements of operations, changes in stockholders' deficiency
        and
        cash flows for the year then ended. These financial statements are the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements based on our audit. The cumulative
        statements of operations, cash flows, and changes in stockholders' deficiency
        for the period December 9, 2002 (inception) to December 31, 2005 which were
        audited by other auditors whose reports have been furnished to us, and our
        opinion, insofar as it relates to the amounts included for the period December
        9, 2002 (inception) to December 31, 2005 is based solely on the reports of
        the
        other auditors.
 
 We
        conducted our audit 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. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audit included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company's internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, 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, and based on the reports of other auditors, the consolidated financial
        statements referred to above present fairly, in all material respects, the
        financial position of Phantom Entertainment, Inc. and Subsidiaries (A
        Development Stage Company) as of December 31, 2006, and the results of its
        operations and cash flows for the year ended December 31, 2006, and for the
        period December 9, 2002 (inception) to December 31, 2006 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 10 to
        the
        financial statements, the Company has had recurring losses from inception
        of
        $73,550,242, has a working capital deficiency of $18,344,236, a stockholders'
        deficiency of $18,627,236, notes in default of $2,242,276 and used cash in
        operations from inceptionof $15,654,926. These conditions raise substantial
        doubt about its ability to continue as a going concern. Management's plans
        regarding those matters are also described in Note 10. The financial statements
        do not include any adjustments that might result from the outcome of this
        uncertainty.
 
 /s/
        Kempisty & Company CPA's PC
 
 Kempisty
        & Company
 Certified
        Public Accountants PC
 New
        York,
        New York
 May
        18,
        2007


F-1
 
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
          the
          Board of Directors of:
 Phantom
          Entertainment, Inc. f/k/a Infinium Labs, Inc.
 (A
          Development Stage Company)
 
 We
          have
          audited the consolidated statements of operations, changes in stockholders’
deficiency and cash flows of Phantom Entertainment, Inc. f/k/a Infinium
          Labs,
          Inc. and subsidiary (a development stage company) for the year ended December
          31, 2005 and for the period from December 9, 2002 (inception) to December
          31,
          2005. These consolidated 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 consolidated 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 F 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 consolidated financial statements referred to above present
          fairly
          in all material respects, the results of Phantom Entertainment, Inc. f/k/a
          Infinium Labs, Inc. and subsidiary (a development stage company) operations and
          its cash flows for the year ended December 31, 2005 and for the period
          from
          December 9, 2002 (inception) to December 31, 2005, 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 10 to
          the
          consolidated financial statements, the Company has had recurring losses
          from
          inception of $64,025,296, has a working capital deficiency of $16,144,960,
          a
          stockholders deficiency of $16,144,960, notes in default of $3,486,759
          and used
          cash in operations from inception of $15,339,599. This raises substantial
          doubt
          about its ability to continue as a going concern. Management’s plans concerning
          this matter are also described in Note 10. 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
 May
          16,
          2006, except for Notes 1(P), 2(C), 5, 7, 8(A), 8(D), 9(B), 10, 11 and 12(C)
          as
          to which the date is August 18, 2006
  F-2


**PHANTOM
        ENTERTATNMENT INC. AND SUBSIDARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Consolidated
        Balance Sheet**
 
 
 December
                  31, 2006
                (Consolidated)**ASSETS****Current
                  Assets:**Cash
              
              $
              57,051Prepaid
                  Expenses
              
              
              1,000Total
                  Current Assets
              
              
              58,051**Property
                  and Equipment, Net**
              
              
              2,000**Total
                  Assets**
              
              $
              60,051**LIABILITIES
                  AND STOCKHOLDERS' DEFICIENCY****Current
                  Liabilities:**Accounts
                  payable
              
              $
              4,233,387Due
                  to developers
              
              
              845,000Accrued
                  interest expense
              
              
              1,435,569Other
                  accrued expense
              
              
              220,994Accrued
                  payroll and payroll taxes(Note
                  8(F))
              
              
              2,478,206Derivatives(Note 5(B))
              
              
              6,946,855Promissory
                  notes(Note
                  5(A))
              
              
              2,242,276Total
                  Current Liabilities
              
              
              18,402,287**Long
                  Term Liabilities:**Deposits
              
              
              285,000Total
                  Long Term Liabilities
              
              
              285,000**Total
                  Liabilities**
              
              
              18,687,287**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, 1,200,000,000 shares authorized, 1,052,576,151
                  shares issued and outstanding(Note
                  6)
              
              
              105,258Additional
                  paid-in capital(Note
                  6)
              
              
              54,840,265Subscription
                  receivable
              
              
              (22,517
              )Accumulated
                  deficit during development stage
              
              
              (73,550,242
              )Total
                  Stockholders’ Deficiency
              
              
              (18,627,236
              )**Total
                  Liabilities and Stockholders’ Deficiency**
              
              $
              60,051
 
 See
      accompanying notes to consolidated financial statements





F-3




**PHANTOM
        ENTERTATNMENT INC. AND SUBSIDARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Consolidated
        Statements of Operations**
 
 
 For
                  the Year Ended
                December
                  31, 2006
                Consolidated
              
              For
                  the Year Ended
                December
                  31, 2005
                Consolidated
              
              For
                  the Period from
                December
                  9, 2002
                (Inception
                  to
                December
                  31, 2006)
                ConsolidatedRestated
                  - Note 2**Operating
                  Expenses:**Development
                  costs
              
              $
              311,052
              
              $
              (13,927
              )
              $
              3,833,329Advertising
              
              
              141,893
              
              
              404,331
              
              
              2,134,780Salary
                  expense
              
              
              1,433,205
              
              
              5,677,365
              
              
              14,268,476Professional
                  fees
              
              
              607,738
              
              
              1,265,317
              
              
              5,577,658Consultants
              
              
              957,800
              
              
              3,111,392
              
              
              14,011,213Impairment
                  of assets
              
              
              18,000
              
              
              502,090
              
              
              872,389General
                  and administrative
              
              
              984,895
              
              
              1,289,962
              
              
              6,505,763Total
                  Operating Expenses
              
              
              4,454,583
              
              
              12,236,530
              
              
              47,203,608**Net
                  Loss from Operations**
              
              
              (4,454,583
              )
              
              (12,236,530
              )
              
              (47,203,608
              )**Other
                  Income (Expense):**Other
                  income / (expense)
              
              
              (670
              )
              
              383
              
              
              1,647Gain
                  / (Loss) on sale of equipment
              
              
              22,126
              
              
              (5,011
              )
              
              16,667Gain
                  / (Loss) on conversion of notes
              
              
              (330,872
              )
              
              (10,671,647
              )
              
              (11,002,519
              )Gain
                  / (Loss) on vendor settlement
              
              
              (1,235
              )
              
              -
              
              
              (1,235
              )Gain
                  / (Loss) on stock issued for payroll taxes
              
              
              (79,983
              )
              
              (62,269
              )
              
              (142,252
              )Interest
                  expense
              
              
              (1,259,226
              )
              
              (5,900,848
              )
              
              (12,866,112
              )Derivatives
                  income (expense)
              
              
              (3,257,349
              )
              
              38,730,224
              
              
              (1,433,540
              )Payroll
                  Tax Penalties & Interest
              
              
              (163,154
              )
              
              (208,322
              )
              
              (919,290
              )Total
                  Other Income (Expense)
              
              
              (5,070,363
              )
              
              21,882,510
              
              
              (26,346,634
              )**Income
                  (Loss) before Income Taxes**
              
              
              (9,524,946
              )
              
              9,645,980
              
              
              (73,550,242
              )**Income
                  Taxes**
              
              
              -
              
              
              -
              
              
              -**Net
                  Income (Loss)**
              
              $
              (9,524,946
              )
              $
              9,645,980
              
              $
              (73,550,242
              )**Per
                  Common Share**Income
                  (Loss) per common share - basic and diluted
              
              $
              (0.02
              )
              $
              0.04
              
              $
              (0.29
              )Income
                  (Loss) per common share - basic and diluted
              
              $
              (0.02
              )
              $
              0.03
              
              $
              (0.29
              )Weighted
                  average - basic
              
              
              633,186,446
              
              
              219,727,249
              
              
              256,783,699Weighted
                  average - diluted
              
              
              633,186,446
              
              
              405,579,272
              
              
              256,783,699
 See
        accompanying notes to consolidated financial statements


F-4




**PHANTOM
      ENTERTAINMENT INC. AND SUBSIDARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Consolidated
      Statement of Stockholders' Deficiency**


**For
      the Period December 9, 2002 (Inception) to December 31,
      2006**








Preferred
                Stock
            
            Common
                Stock
            
            Additional
                Paid-In
            
            Accumulated
              Deficit
                During Development
            
            Stock
              Subscriptions
            
            DeferredShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stage
            
            Receivable
            
            Compensation
            
            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
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (674,945
            )
            
            -
            
            
            -
            
            
            (674,945
            )$
            $
            
            
            
            
            $
            $
            
            
            
            
            $
            $
            
            $Balance,
                December 31, 2003 (Restated - Note 2)
            
            
            -
            
            
            -
            
            
            69,115,900
            
            
            6,911
            
            
            2,702,348
            
            
            (2,945,074
            )
            
            (163,517
            )
            
            -
            
            
            (399,332
            )Recapitalization
                of Global Business Resources
            
            
            -
            
            
            -
            
            
            16,156,000
            
            
            1,615
            
            
            (1,615
            )
            
            -
            
            
            -
            
            
            -
            
            
            -






F-5




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued for cash ($0.25 per share)
              
              
              -
              
              
              -
              
              
              6,650,000
              
              
              665
              
              
              1,661,835
              
              
              -
              
              
              -
              
              
              -
              
              
              1,662,500Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              11,025Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              753,725Shares
                  issued for loan default penalty
                  ($1.475 per share)
              
              
              -
              
              
              -
              
              
              74,999
              
              
              8
              
              
              110,616
              
              
              -
              
              
              -
              
              
              -
              
              
              110,624Shares
                  issued for loan default penalty
                  ($1.13 per share)
              
              
              -
              
              
              -
              
              
              75,000
              
              
              8
              
              
              84,742
              
              
              -
              
              
              -
              
              
              -
              
              
              84,750


F-6




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued for loan default penalty
                  ($1.475 per share)
              
              
              -
              
              
              -
              
              
              80,000
              
              
              8
              
              
              117,992
              
              
              -
              
              
              -
              
              
              -
              
              
              118,000Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              200,000Shares
                  issued to consultants for services
                  ($1.44 per share)
              
              
              -
              
              
              -
              
              
              830,000
              
              
              83
              
              
              1,195,117
              
              
              -
              
              
              -
              
              
              -
              
              
              1,195,200Shares
                  issued to consultants for services ($1.475 per share)
              
              
              -
              
              
              -
              
              
              100,000
              
              
              10
              
              
              147,490
              
              
              -
              
              
              -
              
              
              -
              
              
              147,500Shares
                  issued to consultants for services
                  ($1.60 per share)
              
              
              -
              
              
              -
              
              
              279,260
              
              
              28
              
              
              446,788
              
              
              -
              
              
              -
              
              
              -
              
              
              446,816Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              1,130,000


F-7




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to consultants for services
                  ($0.64 per share)
              
              
              -
              
              
              -
              
              
              21,460
              
              
              2
              
              
              13,732
              
              
              -
              
              
              -
              
              
              -
              
              
              13,734Shares
                  issued to consultants for services
                  ($0.61 per share)
              
              
              -
              
              
              -
              
              
              200,000
              
              
              20
              
              
              121,980
              
              
              -
              
              
              -
              
              
              -
              
              
              122,000Shares
                  issued to consultants for services
                  ($0.60 per share)
              
              
              -
              
              
              -
              
              
              36,000
              
              
              4
              
              
              21,416
              
              
              -
              
              
              -
              
              
              -
              
              
              21,420Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              475,100Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              240,542Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              735,000Shares
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              264,075


F-8




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalBeneficial
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              295,000
              
              
              -
              
              
              -
              
              
              -
              
              
              295,000Shares
                  contributed in kind
              
              
              -
              
              
              -
              
              
              (1,191,450
              )
              
              (119
              )
              
              119
              
              
              -
              
              
              -
              
              
              -
              
              
              -Fair
                  value of derivatives unrelated to convertible notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,353,617
              )
              
              -
              
              
              -
              
              
              -
              
              
              (4,353,617
              )Net
                  loss, December 31, 2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (70,726,202
              )
              
              -
              
              
              -
              
              
              (70,726,202
              )Balance,
                  December 31, 2004 (Restated - Note 2)
              
              
              -
              
              $
              -
              
              
              121,090,655
              
              $
              12,109
              
              $
              18,440,300
              
              $
              (73,671,276
              )
              $
              (22,517
              )
              $
              -
              
              $
              (55,241,384
              )Shares
                  issued to Director for services
                  ($1.59 per share)
              
              
              -
              
              
              -
              
              
              40,000
              
              
              4
              
              
              63,596
              
              
              -
              
              
              -
              
              
              -
              
              
              63,600Shares
                  issued to consultants for services
                  ($0.87 per share)
              
              
              -
              
              
              -
              
              
              125,179
              
              
              13
              
              
              108,916
              
              
              -
              
              
              -
              
              
              -
              
              
              108,929Shares
                  issued to convert note payable ($1.18 per share)
              
              
              -
              
              
              -
              
              
              7,043,750
              
              
              704
              
              
              8,310,921
              
              
              -
              
              
              -
              
              
              -
              
              
              8,311,625Shares
                  issued to consultants for services
                  ($0.54 per share)
              
              
              -
              
              
              -
              
              
              1,200,000
              
              
              120
              
              
              647,880
              
              
              -
              
              
              -
              
              
              -
              
              
              648,000Shares
                  issued to convert note payable ($0.365 per share)
              
              
              -
              
              
              -
              
              
              4,925,291
              
              
              493
              
              
              1,797,238
              
              
              -
              
              
              -
              
              
              -
              
              
              1,797,731Shares
                  issued to consultants for services
                  ($0.32 per share)
              
              
              -
              
              
              -
              
              
              1,722,453
              
              
              172
              
              
              558,675
              
              
              -
              
              
              -
              
              
              (19,665
              )
              
              539,182Shares
                  issued to employees ($0.25 per share)
              
              
              -
              
              
              -
              
              
              225,000
              
              
              22
              
              
              56,228
              
              
              -
              
              
              -
              
              
              -
              
              
              56,250


F-9


Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to convert note payable ($0.122 per share)
              
              
              -
              
              
              -
              
              
              5,815,069
              
              
              582
              
              
              711,336
              
              
              -
              
              
              -
              
              
              -
              
              
              711,918Shares
                  issued to consultant for services
                  ($0.32 per share)
              
              
              -
              
              
              -
              
              
              100,000
              
              
              10
              
              
              31,990
              
              
              -
              
              
              -
              
              
              -
              
              
              32,000Shares
                  issued to Director for services
                  ($0.34 per share)
              
              
              -
              
              
              -
              
              
              800,000
              
              
              80
              
              
              271,920
              
              
              -
              
              
              -
              
              
              -
              
              
              272,000Beneficial
                  conversion of promissory notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              375,000
              
              
              -
              
              
              -
              
              
              -
              
              
              375,000Shares
                  issued to consultants for services
                  ($0.32 per share)
              
              
              -
              
              
              -
              
              
              1,423,734
              
              
              143
              
              
              319,812
              
              
              -
              
              
              -
              
              
              -
              
              
              319,955Shares
                  issued to convert note payable ($0.17 per share)
              
              
              -
              
              
              -
              
              
              13,325,000
              
              
              1,333
              
              
              2,280,600
              
              
              -
              
              
              -
              
              
              -
              
              
              2,281,933Shares
                  issued to consultant for services
                  ($0.18 per share)
              
              
              -
              
              
              -
              
              
              250,000
              
              
              25
              
              
              44,975
              
              
              -
              
              
              -
              
              
              -
              
              
              45,000Shares
                  issued to employee ($0.23 per share)
              
              
              -
              
              
              -
              
              
              100,000
              
              
              10
              
              
              22,990
              
              
              -
              
              
              -
              
              
              -
              
              
              23,000Shares
                  issued to employees ($0.15 per share)
              
              
              -
              
              
              -
              
              
              601,725
              
              
              60
              
              
              90,199
              
              
              -
              
              
              -
              
              
              -
              
              
              90,259Shares
                  issued to convert note payable ($0.10 per share)
              
              
              -
              
              
              -
              
              
              2,936,644
              
              
              294
              
              
              293,370
              
              
              -
              
              
              -
              
              
              -
              
              
              293,664Loss
                  on conversion of note payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              69,863
              
              
              -
              
              
              -
              
              
              -
              
              
              69,863Shares
                  issued to employees ($0.15 per share)
              
              
              -
              
              
              -
              
              
              678,067
              
              
              68
              
              
              101,242
              
              
              -
              
              
              -
              
              
              -
              
              
              101,310Shares
                  issued to consultants for services
                  ($0.15 per share)
              
              
              -
              
              
              -
              
              
              2,255,097
              
              
              225
              
              
              338,550
              
              
              -
              
              
              -
              
              
              -
              
              
              338,775Shares
                  issued to employees ($0.15 per share)
              
              
              -
              
              
              -
              
              
              962,324
              
              
              96
              
              
              143,244
              
              
              -
              
              
              -
              
              
              -
              
              
              143,340


F-10




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to employees ($0.12 per share)
              
              
              -
              
              
              -
              
              
              1,162,720
              
              
              116
              
              
              139,410
              
              
              -
              
              
              -
              
              
              -
              
              
              139,526Shares
                  issued to executive ($0.15 per share)
              
              
              -
              
              
              -
              
              
              250,000
              
              
              25
              
              
              37,475
              
              
              -
              
              
              -
              
              
              -
              
              
              37,500Shares
                  issued to convert note payable ($0.16 per share)
              
              
              -
              
              
              -
              
              
              3,961,170
              
              
              396
              
              
              633,391
              
              
              -
              
              
              -
              
              
              -
              
              
              633,787Shares
                  issued to convert note payable ($0.16 per share)
              
              
              -
              
              
              -
              
              
              3,700,000
              
              
              370
              
              
              591,630
              
              
              -
              
              
              -
              
              
              -
              
              
              592,000Shares
                  issued to convert note payable ($0.14 per share)
              
              
              -
              
              
              -
              
              
              5,900,000
              
              
              590
              
              
              825,828
              
              
              -
              
              
              -
              
              
              -
              
              
              826,418Shares
                  issued to convert note payable ($0.14 per share)
              
              
              -
              
              
              -
              
              
              12,000,000
              
              
              1,200
              
              
              1,685,636
              
              
              -
              
              
              -
              
              
              -
              
              
              1,686,836Shares
                  issued to satisfy vendor payable ($0.16 per share)
              
              
              -
              
              
              -
              
              
              1,976,021
              
              
              198
              
              
              315,965
              
              
              -
              
              
              -
              
              
              -
              
              
              316,163Shares
                  issued to executive ($0.10 per share)
              
              
              -
              
              
              -
              
              
              250,000
              
              
              25
              
              
              24,975
              
              
              -
              
              
              -
              
              
              -
              
              
              25,000Shares
                  issued to executive ($0.10 per share)
              
              
              -
              
              
              -
              
              
              500,000
              
              
              50
              
              
              49,950
              
              
              -
              
              
              -
              
              
              -
              
              
              50,000Shares
                  issued to consultants for services
                  ($0.11 per share)
              
              
              -
              
              
              -
              
              
              2,934,536
              
              
              293
              
              
              322,342
              
              
              -
              
              
              -
              
              
              -
              
              
              322,635Shares
                  issued to employees ($0.08 per share)
              
              
              -
              
              
              -
              
              
              2,122,675
              
              
              212
              
              
              178,188
              
              
              -
              
              
              -
              
              
              -
              
              
              178,400Shares
                  issued to convert note payable ($0.11 per share)
              
              
              -
              
              
              -
              
              
              3,695,339
              
              
              369
              
              
              403,642
              
              
              -
              
              
              -
              
              
              -
              
              
              404,011Shares
                  returned to Treasury per legal settlement
                  ($1.47 per share)
              
              
              -
              
              
              -
              
              
              (120,000
              )
              
              (12
              )
              
              (175,888
              )
              
              -
              
              
              -
              
              
              -
              
              
              (175,900
              )


F-11




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to convert note payable ($0.10 per share)
              
              
              -
              
              
              -
              
              
              2,075,453
              
              
              208
              
              
              207,337
              
              
              -
              
              
              -
              
              
              -
              
              
              207,545Loss
                  on conversion of note payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              62,263
              
              
              -
              
              
              -
              
              
              -
              
              
              62,263Shares
                  issued to convert note payable ($0.10 per share)
              
              
              -
              
              
              -
              
              
              3,187,206
              
              
              319
              
              
              318,402
              
              
              -
              
              
              -
              
              
              -
              
              
              318,721Loss
                  on conversion of note payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              95,616
              
              
              -
              
              
              -
              
              
              -
              
              
              95,616Shares
                  issued to convert note payable ($0.10 per share)
              
              
              -
              
              
              -
              
              
              1,110,298
              
              
              111
              
              
              110,919
              
              
              -
              
              
              -
              
              
              -
              
              
              111,030Loss
                  on conversion of note payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,309
              
              
              -
              
              
              -
              
              
              -
              
              
              3,309Shares
                  issued to convert note payable ($0.10 per share)
              
              
              -
              
              
              -
              
              
              1,109,069
              
              
              111
              
              
              110,796
              
              
              -
              
              
              -
              
              
              -
              
              
              110,907Loss
                  on conversion of note payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,272
              
              
              -
              
              
              -
              
              
              -
              
              
              3,272Shares
                  issued to convert note payable ($0.10 per share)
              
              
              -
              
              
              -
              
              
              1,863,852
              
              
              186
              
              
              186,199
              
              
              -
              
              
              -
              
              
              -
              
              
              186,385Loss
                  on conversion of note payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,416
              
              
              -
              
              
              -
              
              
              -
              
              
              3,416Beneficial
                  conversion of promissory notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              220,400
              
              
              -
              
              
              -
              
              
              -
              
              
              220,400Deferred
                  Compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              9,941
              
              
              9,941Shares
                  issued to consultants for services
                  ($0.10 per share)
              
              
              -
              
              
              -
              
              
              500,000
              
              
              50
              
              
              49,950
              
              
              -
              
              
              -
              
              
              (10,000
              )
              
              40,000Shares
                  issued to consultants for services
                  ($0.096 per share)
              
              
              -
              
              
              -
              
              
              32,000
              
              
              3
              
              
              3,069
              
              
              -
              
              
              -
              
              
              -
              
              
              3,072


F-12


Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to consultants for services
                  ($0.084 per share)
              
              
              -
              
              
              -
              
              
              22,000
              
              
              2
              
              
              1,849
              
              
              -
              
              
              -
              
              
              -
              
              
              1,851Shares
                  issued to consultants for services
                  ($0.09 per share)
              
              
              -
              
              
              -
              
              
              72,223
              
              
              7
              
              
              6,493
              
              
              -
              
              
              -
              
              
              -
              
              
              6,500Shares
                  issued to consultants for services
                  ($0.086 per share)
              
              
              -
              
              
              -
              
              
              50,000
              
              
              5
              
              
              4,297
              
              
              -
              
              
              -
              
              
              -
              
              
              4,302Shares
                  issued to satisfy vendor payable ($0.09 per share)
              
              
              -
              
              
              -
              
              
              2,549,075
              
              
              255
              
              
              229,162
              
              
              -
              
              
              -
              
              
              (52,631
              )
              
              176,786Shares
                  issued to employees ($0.10 per share)
              
              
              -
              
              
              -
              
              
              50,000
              
              
              5
              
              
              4,995
              
              
              -
              
              
              -
              
              
              -
              
              
              5,000Shares
                  issued to employees ($0.07 per share)
              
              
              -
              
              
              -
              
              
              2,767,036
              
              
              277
              
              
              195,015
              
              
              -
              
              
              -
              
              
              -
              
              
              195,292Shares
                  issued to employees ($0.07 per share)
              
              
              -
              
              
              -
              
              
              182,799
              
              
              18
              
              
              12,778
              
              
              -
              
              
              -
              
              
              -
              
              
              12,796Shares
                  issued to employees ($0.065 per share)
              
              
              -
              
              
              -
              
              
              100,000
              
              
              10
              
              
              6,490
              
              
              -
              
              
              -
              
              
              -
              
              
              6,500Shares
                  issued to executives and director ($0.07 per share)
              
              
              -
              
              
              -
              
              
              1,891,655
              
              
              189
              
              
              132,227
              
              
              -
              
              
              -
              
              
              -
              
              
              132,416Shares
                  issued to satisfy vendor payable ($0.08 per share)
              
              
              -
              
              
              -
              
              
              368,375
              
              
              37
              
              
              29,433
              
              
              -
              
              
              -
              
              
              -
              
              
              29,470Shares
                  issued to consultants for services
                  ($0.07 per share)
              
              
              -
              
              
              -
              
              
              150,000
              
              
              15
              
              
              10,485
              
              
              -
              
              
              -
              
              
              -
              
              
              10,500Shares
                  issued to consultants for services
                  ($0.08 per share)
              
              
              -
              
              
              -
              
              
              492,940
              
              
              49
              
              
              39,386
              
              
              -
              
              
              -
              
              
              -
              
              
              39,435Shares
                  issued to consultants for services
                  ($0.09 per share)
              
              
              -
              
              
              -
              
              
              333,340
              
              
              33
              
              
              29,967
              
              
              -
              
              
              -
              
              
              -
              
              
              30,000


F-13




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to consultants for services
                  ($0.075 per share)
              
              
              -
              
              
              -
              
              
              86,667
              
              
              9
              
              
              6,491
              
              
              -
              
              
              -
              
              
              -
              
              
              6,500Shares
                  issued to consultants for services
                  ($0.06 per share)
              
              
              -
              
              
              -
              
              
              250,000
              
              
              25
              
              
              14,975
              
              
              -
              
              
              -
              
              
              -
              
              
              15,000Shares
                  issued to employee ($0.07 per share)
              
              
              -
              
              
              -
              
              
              100,000
              
              
              10
              
              
              6,990
              
              
              -
              
              
              -
              
              
              -
              
              
              7,000Shares
                  issued to convert note payable ($0.05 per share)
              
              
              -
              
              
              -
              
              
              2,096,623
              
              
              210
              
              
              104,621
              
              
              -
              
              
              -
              
              
              -
              
              
              104,831Shares
                  issued to consultants for services
                  ($0.07 per share)
              
              
              -
              
              
              -
              
              
              2,399,879
              
              
              240
              
              
              167,752
              
              
              -
              
              
              -
              
              
              (140,000
              )
              
              27,992Shares
                  issued to consultants for services
                  ($0.09 per share)
              
              
              -
              
              
              -
              
              
              62,500
              
              
              6
              
              
              5,619
              
              
              -
              
              
              -
              
              
              -
              
              
              5,625Shares
                  issued to consultants for services
                  ($0.06 per share)
              
              
              -
              
              
              -
              
              
              53,571
              
              
              5
              
              
              3,209
              
              
              -
              
              
              -
              
              
              -
              
              
              3,214Shares
                  issued to consultants for services
                  ($0.07 per share)
              
              
              -
              
              
              -
              
              
              750,000
              
              
              75
              
              
              52,425
              
              
              -
              
              
              -
              
              
              -
              
              
              52,500Shares
                  issued to employees ($0.07 per share)
              
              
              -
              
              
              -
              
              
              2,600,000
              
              
              260
              
              
              181,740
              
              
              -
              
              
              -
              
              
              -
              
              
              182,000Shares
                  issued to director ($0.07 per share)
              
              
              -
              
              
              -
              
              
              5,000,000
              
              
              500
              
              
              349,500
              
              
              -
              
              
              -
              
              
              -
              
              
              350,000Shares
                  issued to executive ($0.07 per share)
              
              
              -
              
              
              -
              
              
              10,000,000
              
              
              1,000
              
              
              699,000
              
              
              -
              
              
              -
              
              
              -
              
              
              700,000Shares
                  issued to convert accrued interest on note payable ($0.054 per
                  share)
              
              
              -
              
              
              -
              
              
              7,114,667
              
              
              711
              
              
              383,481
              
              
              -
              
              
              -
              
              
              -
              
              
              384,192Shares
                  issued to consultants for services
                  ($0.06 per share)
              
              
              -
              
              
              -
              
              
              250,000
              
              
              25
              
              
              14,975
              
              
              -
              
              
              -
              
              
              -
              
              
              15,000


F-14


Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to consultants for services
                  ($0.05 per share)
              
              
              -
              
              
              -
              
              
              1,629,027
              
              
              163
              
              
              81,288
              
              
              -
              
              
              -
              
              
              (27,505
              )
              
              53,946Shares
                  issued to satisfy vendor payable ($0.049 per share)
              
              
              -
              
              
              -
              
              
              6,361,113
              
              
              636
              
              
              311,059
              
              
              -
              
              
              -
              
              
              -
              
              
              311,695Shares
                  issued to convert notes payable ($0.0472 per share)
              
              
              -
              
              
              -
              
              
              12,882,049
              
              
              1,288
              
              
              617,479
              
              
              -
              
              
              -
              
              
              -
              
              
              618,767Loss
                  on conversion of notes payable
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              14,169
              
              
              -
              
              
              -
              
              
              -
              
              
              14,169Shares
                  issued to convert note payable ($0.045 per share)
              
              
              -
              
              
              -
              
              
              3,385,259
              
              
              339
              
              
              151,998
              
              
              -
              
              
              -
              
              
              -
              
              
              152,337Loss
                  on conversion of note payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              16,926
              
              
              -
              
              
              -
              
              
              -
              
              
              16,926Shares
                  issued to employees ($0.055 per share)
              
              
              -
              
              
              -
              
              
              5,415,729
              
              
              542
              
              
              297,323
              
              
              -
              
              
              -
              
              
              (85,758
              )
              
              212,107Shares
                  issued to employees ($0.05 per share)
              
              
              -
              
              
              -
              
              
              3,045,708
              
              
              305
              
              
              151,981
              
              
              -
              
              
              -
              
              
              (44,648
              )
              
              107,638Shares
                  issued to employees ($0.045 per share)
              
              
              -
              
              
              -
              
              
              3,977,894
              
              
              398
              
              
              178,607
              
              
              -
              
              
              -
              
              
              (50,058
              )
              
              128,947Deferred
                  Compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,724
              
              
              9,724Shares
                  issued to consultants for services
                  ($0.032 per share)
              
              
              -
              
              
              -
              
              
              264,822
              
              
              26
              
              
              8,448
              
              
              -
              
              
              -
              
              
              -
              
              
              8,474Shares
                  issued to consultants for services
                  ($0.029 per share)
              
              
              -
              
              
              -
              
              
              500,000
              
              
              50
              
              
              14,450
              
              
              -
              
              
              -
              
              
              -
              
              
              14,500Shares
                  issued to consultants for services
                  ($0.020 per share)
              
              
              -
              
              
              -
              
              
              1,536,850
              
              
              154
              
              
              30,583
              
              
              -
              
              
              -
              
              
              -
              
              
              30,737Shares
                  issued to convert note payable ($.029 per share)
              
              
              -
              
              
              -
              
              
              7,246,455
              
              
              725
              
              
              199,459
              
              
              -
              
              
              -
              
              
              -
              
              
              200,184


F-15


Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalLoss
                  on conversion of note
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,964
              
              
              -
              
              
              -
              
              
              -
              
              
              9,964Shares
                  issued to employees ($0.025 per share)
              
              
              -
              
              
              -
              
              
              15,299,873
              
              
              1,530
              
              
              380,967
              
              
              -
              
              
              -
              
              
              (112,695
              )
              
              269,802Shares
                  issued to employees ($0.028 per share)
              
              
              -
              
              
              -
              
              
              699,780
              
              
              70
              
              
              19,524
              
              
              -
              
              
              -
              
              
              -
              
              
              19,594Shares
                  issued to consultants for services
                  ($0.022 per share)
              
              
              -
              
              
              -
              
              
              2,247,956
              
              
              225
              
              
              49,230
              
              
              -
              
              
              -
              
              
              -
              
              
              49,455Shares
                  issued to consultants for services
                  ($0.024 per share)
              
              
              -
              
              
              -
              
              
              1,000,000
              
              
              100
              
              
              23,900
              
              
              -
              
              
              -
              
              
              -
              
              
              24,000Shares
                  issued to consultants for services ($0.021 per share)
              
              
              -
              
              
              -
              
              
              6,380,900
              
              
              638
              
              
              133,361
              
              
              -
              
              
              -
              
              
              (91,165
              )
              
              42,834Shares
                  issued to consultants for services ($0.015 per share)
              
              
              -
              
              
              -
              
              
              2,000,000
              
              
              200
              
              
              29,800
              
              
              -
              
              
              -
              
              
              -
              
              
              30,000Shares
                  issued to employees ($0.022 per share)
              
              
              -
              
              
              -
              
              
              1,134,261
              
              
              113
              
              
              24,840
              
              
              -
              
              
              -
              
              
              (5,328
              )
              
              19,625Shares
                  issued to satisfy vendor payable ($0.022 per share)
              
              
              -
              
              
              -
              
              
              5,071,175
              
              
              507
              
              
              111,059
              
              
              -
              
              
              -
              
              
              -
              
              
              111,566Shares
                  issued to satisfy vendor payable ($0.022 per share)
              
              
              -
              
              
              -
              
              
              1,134,775
              
              
              114
              
              
              24,851
              
              
              -
              
              
              -
              
              
              -
              
              
              24,965Shares
                  issued to convert notes payable & accrued interest ($0.015 per
                  share)
              
              
              -
              
              
              -
              
              
              7,948,856
              
              
              795
              
              
              104,925
              
              
              -
              
              
              -
              
              
              -
              
              
              105,720Loss
                  on conversion of notes payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,513
              
              
              -
              
              
              -
              
              
              -
              
              
              13,513Shares
                  issued to consultants for services ($0.02 per share)
              
              
              -
              
              
              -
              
              
              10,694,577
              
              
              1,069
              
              
              212,823
              
              
              -
              
              
              -
              
              
              (188,510
              )
              
              25,382


F-16




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to employees ($0.02 per share)
              
              
              -
              
              
              -
              
              
              30,342,931
              
              
              3,034
              
              
              592,570
              
              
              -
              
              
              -
              
              
              (176,513
              )
              
              419,091Shares
                  issued to convert notes payable ($0.017)
              
              
              -
              
              
              -
              
              
              16,000,000
              
              
              1,600
              
              
              79,141
              
              
              -
              
              
              -
              
              
              -
              
              
              80,741Deferred
                  compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              503,260
              
              
              503,260Fair
                  value adjustment of derivatives for note conversions
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              280,492
              
              
              -
              
              
              -
              
              
              -
              
              
              280,492Net
                  loss, December 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,645,980
              
              
              -
              
              
              -
              
              
              9,645,980**BALANCE,
                  December 31, 2005 (Restated - Note 2)**
              
              
              -
              
              $
              -
              
              
              399,823,667
              
              $
              39,982
              
              $
              48,344,422
              
              $
              (64,025,296
              )
              $
              (22,517
              )
              $
              (481,551
              )
              $
              (16,144,960
              )Shares
                  issued to consultants for services
                  ($0.0167 per share)
              
              
              -
              
              
              -
              
              
              510,992
              
              
              51
              
              
              8,482
              
              
              -
              
              
              -
              
              
              -
              
              
              8,533Shares
                  issued to consultants for services
                  ($0.021 per share)
              
              
              -
              
              
              -
              
              
              2,789,474
              
              
              279
              
              
              58,299
              
              
              -
              
              
              -
              
              
              -
              
              
              58,578Shares
                  issued to convert note payable & accrued interest ($0.015 per
                  share)
              
              
              -
              
              
              -
              
              
              2,900,000
              
              
              290
              
              
              28,229
              
              
              -
              
              
              -
              
              
              -
              
              
              28,519Loss
                  on conversion of notes payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,241
              
              
              -
              
              
              -
              
              
              -
              
              
              13,241Shares
                  issued to employees ($0.019 per share)
              
              
              -
              
              
              -
              
              
              7,030,932
              
              
              703
              
              
              132,885
              
              
              -
              
              
              -
              
              
              -
              
              
              133,588Shares
                  issued to consultants for services
                  ($0.018 per share)
              
              
              -
              
              
              -
              
              
              6,327,718
              
              
              633
              
              
              113,265
              
              
              -
              
              
              -
              
              
              -
              
              
              113,898Shares
                  issued to employees ($0.018 per share)
              
              
              -
              
              
              -
              
              
              5,862,640
              
              
              586
              
              
              104,638
              
              
              -
              
              
              -
              
              
              -
              
              
              105,224Shares
                  issued for services ($0.0145 per share)
              
              
              -
              
              
              -
              
              
              372,414
              
              
              37
              
              
              5,363
              
              
              -
              
              
              -
              
              
              -
              
              
              5,400


F-17


Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                Deficit
                  During Development
              
              Stock
                Subscriptions
              
              DeferredShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              Compensation
              
              TotalShares
                  issued to consultants for services
                  ($0.0235 per share)
              
              
              -
              
              
              -
              
              
              255,319
              
              
              26
              
              
              5,974
              
              
              -
              
              
              -
              
              
              -
              
              
              6,000Shares
                  issued to consultants for services
                  ($0.02 per share)
              
              
              -
              
              
              -
              
              
              646,552
              
              
              65
              
              
              12,866
              
              
              -
              
              
              -
              
              
              -
              
              
              12,931Shares
                  issued to consultants for services
                  ($0.0197 per share)
              
              
              -
              
              
              -
              
              
              4,060,913
              
              
              406
              
              
              79,594
              
              
              -
              
              
              -
              
              
              -
              
              
              80,000Shares
                  issued to consultants for services
                  ($0.0203 per share)
              
              
              -
              
              
              -
              
              
              1,724,138
              
              
              172
              
              
              34,828
              
              
              -
              
              
              -
              
              
              -
              
              
              35,000Shares
                  issued to satisfy vendor payable ($0.024 per share)
              
              
              -
              
              
              -
              
              
              2,195,905
              
              
              220
              
              
              52,482
              
              
              -
              
              
              -
              
              
              -
              
              
              52,702Shares
                  issued to convert note payable ($.019 per share)
              
              
              -
              
              
              -
              
              
              1,636,330
              
              
              164
              
              
              34,155
              
              
              -
              
              
              -
              
              
              -
              
              
              34,319Gain
                  on conversion of note
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,229
              )
              
              -
              
              
              -
              
              
              -
              
              
              (3,229
              )Shares
                  issued for services ($0.0185 per share)
              
              
              -
              
              
              -
              
              
              243,243
              
              
              24
              
              
              4,476
              
              
              -
              
              
              -
              
              
              -
              
              
              4,500Shares
                  issued to employees ($0.0235 per share)
              
              
              -
              
              
              -
              
              
              9,600,625
              
              
              960
              
              
              224,829
              
              
              -
              
              
              -
              
              
              -
              
              
              225,789Shares
                  issued to employees ($0.0197 per share)
              
              
              -
              
              
              -
              
              
              5,219,112
              
              
              522
              
              
              102,295
              
              
              -
              
              
              -
              
              
              -
              
              
              102,817Shares
                  issued to convert notes payable & accrued interest ($0.0215 per
                  share)
              
              
              -
              
              
              -
              
              
              40,000,000
              
              
              4,000
              
              
              570,502
              
              
              -
              
              
              -
              
              
              -
              
              
              574,502Loss
                  on conversion of notes payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              285,498
              
              
              -
              
              
              -
              
              
              -
              
              
              285,498Shares
                  issued to convert notes payable & accrued interest ($0.07654 per
                  share)
              
              
              -
              
              
              -
              
              
              19,999,999
              
              
              2,000
              
              
              117,059
              
              
              -
              
              
              -
              
              
              -
              
              
              119,059


F-18
 Preferred
                    Stock
                
                Common
                    Stock
                
                Additional
                    Paid-In
                
                Accumulated
                  Deficit
                    During Development
                
                Stock
                  Subscriptions
                
                DeferredShares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Stage
                
                Receivable
                
                Compensation
                
                TotalFair
                    value adjustment of derivatives for note conversions
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                326,627
                
                
                -
                
                
                -
                
                
                -
                
                
                326,627Shares
                    issued to consultants for services
                    ($0.0196 per share)
                
                
                -
                
                
                -
                
                
                589,051
                
                
                59
                
                
                11,474
                
                
                -
                
                
                -
                
                
                -
                
                
                11,533Shares
                    issued to convert note payable & accrued interest ($0.0085 per
                    share)
                
                
                -
                
                
                -
                
                
                15,000,000
                
                
                1,500
                
                
                125,554
                
                
                -
                
                
                -
                
                
                -
                
                
                127,054Fair
                    value adjustment of derivatives for note conversions
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                145,833
                
                
                -
                
                
                -
                
                
                -
                
                
                145,833Shares
                    issued to convert note payable & accrued interest ($0.0085 per
                    share)
                
                
                -
                
                
                -
                
                
                15,000,000
                
                
                1,500
                
                
                129,803
                
                
                -
                
                
                -
                
                
                -
                
                
                131,303Fair
                    value adjustment of derivatives for note conversions
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                138,480
                
                
                -
                
                
                -
                
                
                -
                
                
                138,480Shares
                    issued to consultants for services
                    ($0.0120 per share)
                
                
                -
                
                
                -
                
                
                1,853,497
                
                
                185
                
                
                21,965
                
                
                -
                
                
                -
                
                
                -
                
                
                22,150Shares
                    issued to satisfy vendor payable ($0.0125 per share)
                
                
                -
                
                
                -
                
                
                30,000,000
                
                
                3,000
                
                
                372,000
                
                
                -
                
                
                -
                
                
                -
                
                
                375,000Shares
                    issued to employees ($0.0140 per share)
                
                
                -
                
                
                -
                
                
                6,830,929
                
                
                683
                
                
                94,950
                
                
                -
                
                
                -
                
                
                -
                
                
                95,633Shares
                    issued to consultants for services
                    ($0.0165 per share)
                
                
                -
                
                
                -
                
                
                20,000,000
                
                
                2,000
                
                
                328,000
                
                
                -
                
                
                -
                
                
                -
                
                
                330,000Shares
                    issued to satisfy payroll liability in a legal settlement ($0.0165
                    per
                    share)
                
                
                -
                
                
                -
                
                
                4,242,820
                
                
                424
                
                
                51,312
                
                
                -
                
                
                -
                
                
                -
                
                
                51,736Loss
                    on payroll related legal settlement
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                18,270
                
                
                -
                
                
                -
                
                
                -
                
                
                18,270
 F-19
 
 Preferred
                      Stock
                  
                  Common
                      Stock
                  
                  Additional
                      Paid-In
                  
                  Accumulated
                    Deficit
                      During Development
                  
                  Stock
                    Subscriptions
                  
                  DeferredShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Capital
                  
                  Stage
                  
                  Receivable
                  
                  Compensation
                  
                  TotalShares
                      issued to satisfy vendor payable ($0.015 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,663,536
                  
                  
                  166
                  
                  
                  24,787
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  24,953Shares
                      issued to convert note payable ($0.0145 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  10,027,731
                  
                  
                  1,003
                  
                  
                  133,288
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  134,291Loss
                      on note conversion
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  11,111
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  11,111Shares
                      issued to convert note payable ($0.015 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  42,393,246
                  
                  
                  4,239
                  
                  
                  631,659
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  635,898Shares
                      issued to consultants for services
                      ($0.013 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,000,000
                  
                  
                  200
                  
                  
                  25,800
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  26,000Shares
                      issued to consultants for services
                      ($0.0098 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  18,382,249
                  
                  
                  1,838
                  
                  
                  178,308
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  180,146Shares
                      issued to employees ($0.0098 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,318,009
                  
                  
                  432
                  
                  
                  41,885
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  42,317Shares
                      issued to satisfy vendor payable ($0.01 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  9,396,064
                  
                  
                  940
                  
                  
                  99,060
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  100,000Gain
                      on vendor settlement
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (6,039
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (6,039
                  )Shares
                      issued to convert note payable ($0.012 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  10,000,000
                  
                  
                  1,000
                  
                  
                  88,551
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  89,551Loss
                      on note conversion
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  30,449
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  30,449Shares
                      issued to convert note payable ($0.0073 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,100,000
                  
                  
                  110
                  
                  
                  7,946
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  8,056Fair
                      value of derivatives upon note conversion
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  21,473
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  21,473Shares
                      issued to consultants for services
                      ($0.0037 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  19,758,376
                  
                  
                  1,976
                  
                  
                  70,887
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  72,863
 F-20
 Preferred
                      Stock
                  
                  Common
                      Stock
                  
                  Additional
                      Paid-In
                  
                  Accumulated
                    Deficit
                      During Development
                  
                  Stock
                    Subscriptions
                  
                  DeferredShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Capital
                  
                  Stage
                  
                  Receivable
                  
                  Compensation
                  
                  TotalShares
                      issued to employees ($0.0053 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  51,479,252
                  
                  
                  5,148
                  
                  
                  268,320
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  273,468Shares
                      issued to convert note payable ($0.0046 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  69,172,000
                  
                  
                  6,917
                  
                  
                  308,618
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  315,535Shares
                      issued to convert note payable ($0.0041 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  49,728,000
                  
                  
                  4,973
                  
                  
                  198,616
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  203,589Shares
                      issued to convert note payable ($0.0051 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  20,000,000
                  
                  
                  2,000
                  
                  
                  100,158
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  102,158Gain
                      on note conversion
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (158
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (158
                  )Shares
                      issued to convert note payable ($0.0049 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  19,940,582
                  
                  
                  1,994
                  
                  
                  95,715
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  97,709Shares
                      issued to consultants for services
                      ($0.004 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  29,197,010
                  
                  
                  2,920
                  
                  
                  112,599
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  115,519Shares
                      issued to employees ($0.0033 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,454,258
                  
                  
                  146
                  
                  
                  4,653
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,799Shares
                      issued to executive ($0.0033 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  20,000,000
                  
                  
                  2,000
                  
                  
                  64,000
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  66,000Unauthorized
                      shares issued ($0.0035 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  56,000,000
                  
                  
                  5,600
                  
                  
                  189,200
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  194,800Shares
                      issued to executive ($0.0038 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  9,000,000
                  
                  
                  900
                  
                  
                  33,300
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  34,200Shares
                      issued to executive ($0.0036 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,000,000
                  
                  
                  100
                  
                  
                  3,500
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,600Shares
                      issued to convert note payable ($0.0026 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,849,568
                  
                  
                  185
                  
                  
                  4,651
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,836Fair
                      value adjustment of derivatives for note conversion
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,507
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,507Deferred
                      compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  481,551
                  
                  
                  481,551Net
                      loss for the Year Ended December 31, 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (9,524,946
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (9,524,946
                  )**BALANCE,
                      December 31, 2006**
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  1,052,576,151
                  
                  $
                  105,258
                  
                  $
                  54,840,265
                  
                  $
                  (73,550,242
                  )
                  $
                  (22,517
                  )
                  
                  -
                  
                  $
                  (18,627,236
                  )
 See
      accompanying notes to consolidated financial statements


F-21


**PHANTOM
        ENTERTAINMENT INC. AND SUBSIDARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Consolidated
        Statement of Cash Flows**
 
 
 For
                  the Year Ended
                December
                  31, 2006
                (Consolidated)
              
              For
                  the Year Ended
                December
                  31, 2005
                (Consolidated)
              
              For
                  the Period from
                December
                  9, 2002
                (Inception)
                  to
                December
                  31, 2006Restated
                  - Note 2**Cash
                  Flows from Operating Activities:**Net
                  loss
              
              $
              (9,524,946
              )
              $
              9,645,980
              
              $
              (73,550,242
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Depreciation
                  and amortization
              
              
              -
              
              
              208,547
              
              
              382,895Impairment
                  of assets
              
              
              18,000
              
              
              502,090
              
              
              872,389Loss
                  on disposal of assets
              
              
              -
              
              
              5,011
              
              
              5,459Common
                  stock issued for services
              
              
              1,564,606
              
              
              4,493,531
              
              
              15,762,127Common
                  Stock issued to employees
              
              
              1,087,432
              
              
              2,821,858
              
              
              5,951,431Common
                  Stock embezzled
              
              
              194,800
              
              
              -
              
              
              194,800Common
                  stock issued for legal settlements
              
              
              -
              
              
              (175,900
              )
              
              -Common
                  stock issued for interest
              
              
              379,328
              
              
              1,243,314
              
              
              4,350,373Common
                  stock issued for loan guarantee
              
              
              -
              
              
              -
              
              
              832,000Common
                  stock issued for vendor settlement
              
              
              622,662
              
              
              1,020,353
              
              
              1,643,015(Gain)/Loss
                  on vendor settlement
              
              
              -
              
              
              (27,367
              )
              
              (27,367
              )Loss
                  on conversion of notes payable
              
              
              330,872
              
              
              10,671,647
              
              
              11,002,519Legal
                  fees on conversion of notes payable
              
              
              13,465
              
              
              40,131
              
              
              53,596Legal
                  fees on vendor settlement
              
              
              -
              
              
              28,483
              
              
              28,483Amortization
                  of interest expense
              
              
              150,000
              
              
              3,599,312
              
              
              5,924,900Derivatives
                  (income) expense
              
              
              3,257,349
              
              
              (38,730,224
              )
              
              1,433,540Changes
                  in operating assets and liabilities:Decrease
                  (increase) in current assets:Prepaid
                  expenses and other receivables
              
              
              6,071
              
              
              59,925
              
              
              (1,000
              )Deferred
                  costs
              
              
              -
              
              
              -
              
              
              -Deposits
              
              
              -
              
              
              5,440
              
              
              -Increase
                  (decrease) in current liabilities:Accounts
                  payable
              
              
              382,113
              
              
              240,389
              
              
              4,221,387Due
                  to developers
              
              
              -
              
              
              (140,000
              )
              
              845,000Deposits-prepaid
                  warrants
              
              
              285,000
              
              
              -
              
              
              285,000Accrued
                  interest
              
              
              589,432
              
              
              544,722
              
              
              1,435,569Other
                  accrued expense
              
              
              214,488
              
              
              (98,494
              )
              
              220,994Accrued
                  payroll and payroll taxes
              
              
              114,001
              
              
              698,436
              
              
              2,478,206Net
                  Cash Used in Operating Activities
              
              
              (315,327
              )
              
              (3,342,816
              )
              
              (15,654,926
              )**Cash
                  Flows from Investing Activities:**Purchase
                  of property and equipment
              
              
              (20,000
              )
              
              10,310
              
              
              (980,157
              )Sale
                  of property and equipment
              
              
              -
              
              
              5,660
              
              
              17,415Increase
                  in restricted cash
              
              
              -
              
              
              894,910
              
              
              -Net
                  Cash Used in Investing Activities
              
              
              (20,000
              )
              
              910,880
              
              
              (962,742
              )**Cash
                  Flows from Financing Activities:**Repayments
                  of notes payable
              
              
              -
              
              
              -
              
              
              (1,075,000
              )Proceeds
                  from stockholder
              
              
              -
              
              
              -
              
              
              4,940Payments
                  to stockholder
              
              
              -
              
              
              -
              
              
              (4,940
              )Proceeds
                  from sale of common stock, net
              
              
              150,000
              
              
              795,400
              
              
              9,677,147Promissory
                  note
              
              
              241,775
              
              
              1,633,037
              
              
              8,072,572Net
                  Cash Provided by Financing Activities
              
              
              391,775
              
              
              2,428,437
              
              
              16,674,719NET
                  INCREASE (DECREASE) IN CASH
              
              
              56,448
              
              
              (3,499
              )
              
              57,051CASH
                  AT BEGINNING OF PERIOD
              
              
              603
              
              
              4,102
              
              
              -CASH
                  AT END OF PERIOD
              
              $
              57,051
              
              $
              603
              
              $
              57,051**Supplemental
                  Disclosure of Cash Flow Information:**Cash
                  paid for interest
              
              $
              255
              
              $
              18,750
              
              $
              534,093


See
      accompanying notes to consolidated financial statements


F-22




PHANTOM
        ENTERTAINMENT INC. AND SUBSIDARY
 (A
        DEVELOPMENT STAGE COMPANY)
 Notes
        to
        Consolidated Financial Statements
 
  **NOTE
        1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
        ORGANIZATION**
 
 ***(A)
        Organization and Basis of Presentation***
 
 Infinium
        Labs Operating Corporation, a Delaware corporation, formed on December 9,
        2002
        seeking to develop and commercialize an innovative broadband video game delivery
        system designed to allow consumers to purchase and play games directly over
        the
        internet. Infinium Labs Operating Corporation became a wholly-owned subsidiary
        of Infinium Labs, Inc. (“Infinium”) as part of a merger with Global Business
        Resources, Inc., a Delaware corporation, on January 5, 2004. Subsequent to
        the
        merger, Global Business Resources, Inc. changed its name to Infinium Labs,
        Inc.
 
 In
        January 2006 we adjusted our business plan to primarily focus on developing
        and
        seeking to commercialize the Phantom Lapboard, a wireless, rotating custom
        keyboard/turntable with integrated mousepad. With adequate financing, we
        intend
        to launch the Phantom Lapboard in 2007 for sale directly through our Internet
        website. The Phantom Lapboard is designed with a pc gamer in mind, and is
        intended to transform the way gamers think about computer keyboards. Depending
        on the success rate for sales and associated revenue of the Phantom Lapboard
        during the introductory period of three to six months, we may seek to develop
        and commercialize the Phantom Game Service. We still retain assets with respect
        to the Phantom Game Service and when various milestones for the manufacturing
        of
        the Phantom Lapboard are completed we may shift more of our focus to the
        Phantom
        Game Service.
 
 On
        July
        13, 2006, we held a Special Meeting of Stockholders wherein the Infinium
        Labs,
        Inc. changed its name to Phantom Entertainment, Inc. Due to the change in
        the
        Company’s name, its CUSIP number, as assigned by the CUSIP Service Bureau,
        changed as did its trading symbol, as assigned by NASDAQ.
  ***(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.
  ***(C)
        Consolidation***
  The
        accompanying December 31, 2006 and 2005 consolidated financial statements
        include the accounts of Phantom Entertainment, Inc. and its wholly owned
        subsidiary, Infinium Labs Operating Corporation. Inter company 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. In December 2005, all remaining assets were impaired. In December
        2006,
        the company purchased $20,000 of additional assets of which $18,000 was impaired
        as of December 31, 2006.
  F-23
 ***(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)
        Income / (Loss) Per Share**
 
 Basic
        and
        diluted net income / (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 year ended
        December 31, 2005 both basic and diluted EPS are:
 
 Income
                (Numerator)
              
              Shares
                (Denominator)
              
              Price
                  per
                ShareNet
                  Income
              
              $
              9,645,980**Basic
                  Income per common share**Income
                  available to common shareholders
              
              
              9,645,980
              
              
              219,727,249
              
              
              0.04Warrants
              
              
              
              
              
              13,653,121Convertible
                  debentures (net of tax)
              
              
              866,892
              
              
              172,198,902**Diluted
                  Income per common share**Income
                  available to common stockholders + assumed conversions
              
              $
              10,512,872
              
              
              405,579,272
              
              $
              0.03
 
 For
        the
        year ended December 31, 2006 and the period from December 9, 2002 (Inception)
        through December 31, 2006, the effect of common share equivalents was
        anti-dilutive and not included in the calculation of diluted net loss per
        common
        share. Warrants to purchase 14,329,874 shares of common stock at prices of
        $0.25, $0.50, $0.75 and $1.00 were outstanding at December 31, 2005 and were
        not
        included in the computation of diluted EPS because the warrants’ exercise prices
        were greater than the average market price of the common shares. These warrants
        expire between October 31, 2009 and December 31, 2009.
 
 ***(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,
        2006
        the year ended December 31, 2005 and the period from December 9, 2002
        (Inception) to December 31, 2006, the Company incurred advertising costs
        of
        $141,893, $404,331, $2,134,780 respectively.
 
 F-24
  ***(I)
        Business Segments***
  The
        Company operates in one segment and therefore segment information is not
        presented.
  ***(J)
        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.
  ***(K)
        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 2006, the Company had no cash in excess of FDIC insurance
        limits.
  ***(L)
        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.
  ***(M)
        Stock Based Compensation***
  In
        December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
        replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
        companies are required to measure the compensation costs of share-based
        compensation arrangements based on the grant-date fair value and recognize
        the
        costs in the financial statements over the period during which employees
        are
        required to provide services. Share-based compensation arrangements include
        stock options, restricted share plans, performance-based awards, share
        appreciation rights and employee share purchase plans. In March 2005 the
        SEC
        issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses
        views
        of the staff regarding the interaction between SFAS No. 123(R) and certain
        SEC
        rules and regulations and provides the staff's views regarding the valuation
        of
        share-based payment arrangements for public companies. SFAS No. 123(R) permits
        public companies to adopt its requirements using one of two methods. On April
        14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
        123R. Companies may elect to apply this statement either prospectively, or
        on a
        modified version of retrospective application under which financial statements
        for prior periods are adjusted on a basis consistent with the pro forma
        disclosures required for those periods under SFAS 123. Effective January
        1,
        2006, the Company has fully adopted the provisions of SFAS No. 123R and related
        interpretations as provided by SAB 107. As such, compensation cost is measured
        on the date of grant at the fair value. Such compensation amounts, if any,
        are
        amortized over the respective vesting periods of the option grant. The Company
        applies this statement prospectively.
  ***(N)
        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.
  ***(O)
        Recent Accounting Pronouncements***
  In
        July
        2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
        Uncertainty in Income Taxes,” which prescribes a comprehensive model for how a
        company should recognize, measure, present and disclose in its financial
        statements uncertain tax positions that the company has taken or expects
        to take
        on a tax return (including a decision whether to file or not to file a return
        in
        a particular jurisdiction). The accounting provisions of FIN No.48 are effective
        for fiscal years beginning after December 15, 2006. The Company is currently
        assessing whether adoption of this Interpretation will have an impact on
        our
        financial position or results of operations.
  F-25
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        (“SFAS”) No. 157, “Fair Value Measurements”, which establishes a framework for
        reporting fair value and expands disclosures about fair value measurements.
        SFAS
        No. 157 is effective for financial statements issued for fiscal years beginning
        after November 15, 2007 and interim periods within those fiscal years. The
        Company is currently assessing the impact of the adoption of this standard
        on
        its financial statement.
  ***(P)
        Derivative Liabilities***
  The
        Company accounts for its embedded conversion features and freestanding warrants
        pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
        Activities" and EITF 00-19 “Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled in, a Company’s Own Stock”, which require a
        periodic valuation of their fair value and a corresponding recognition of
        liabilities associated with such derivatives. The recognition of derivative
        liabilities related to the issuance of shares of common stock is applied
        first
        to the proceeds of such issuance, at the date of issuance, and the excess
        of
        derivative liabilities over the proceeds is recognized as other expense in
        the
        accompanying consolidated financial statements. The recognition of derivative
        liabilities related to the issuance of convertible debt is applied first
        to the
        proceeds of such issuance as a debt discount, at the date of issuance, and
        the
        excess of derivative liabilities over the proceeds is recognized as other
        expense in the accompanying consolidated financial statements. Any subsequent
        increase or decrease in the fair value of the derivative liabilities is
        recognized as other expense or other income, respectively.
  **NOTE
        2**  **RESTATEMENT
        OF FINANCIAL STATEMENTS**
 
 ***Derivatives
        and Corresponding Liability***
 
 The
        Company determined that it failed to account for its embedded conversion
        features and freestanding warrants pursuant to: SFAS No. 133, "Accounting
        for
        Derivative Instruments and Hedging Activities" and EITF 00-19 “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock”, which require a periodic valuation of their fair value and
        a corresponding recognition of liabilities associated with such derivatives.
        This failure occurred for the year ended December 31, 2004 and the year ended
        December 31, 2005. These restated amounts are reflected in the financial
        statements at December 31, 2005.
 
 A
        summary
        of significant effects of the restatement is as follows:
 
 Year
                  Ended
                December
                  31, 2005
                (As
                  Previously
                Reported)
              
              Amount
                  of
                Change
              
              Year
                  Ended
                December
                  31, 2005
                Ended
                (As
                  Restated)Statement
                  of OperationsGeneral
                  and administrative
              
              $
              2,220,324
              
              
              (930,362
              )
              $
              1,289,962Total
                  Operating Expenses
              
              
              13,166,892
              
              
              (930,362
              )
              
              12,236,530Net
                  loss from operations
              
              
              (13,166,892
              )
              
              930,262
              
              
              (12,236,530
              )Interest
                  expense
              
              
              (5,700,848
              )
              
              (200,000
              )
              
              (5,900,848
              )Derivative
                  income
              
              
              0
              
              
              38,730,224
              
              
              38,730,224Total
                  Other Income (Expense)
              
              
              (16,647,714
              )
              
              38,530,224
              
              
              21,882,510Net
                  income (loss)
              
              
              (29,814,606
              )
              
              39,460,586
              
              
              9,645,980Income
                  (Loss) per common share - basic
              
              $
              (0.14
              )
              $
              0.18
              
              $
              0.04Income
                  (Loss) per common share - diluted
              
              $
              (0.14
              )
              $
              0.17
              
              $
              0.03
  F-26
 **NOTE
        3 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 amortized the cost over the life
        of the
        agreement. As of December 31, 2005, the Company had amortized $96,651 of
        expense
        of the signage rights. The remaining value of $203,049 was impaired in December
        2005 as a result of the Company’s decision to close the Sarasota, Florida
        office. On June 30, 2006, the Company relinquished its signage rights, if
        any,
        as part of a settlement agreement with the landlord.
 
 **NOTE
        4 PROPERTY AND EQUIPMENT**
 
 Property
        and equipment consisted of the following as of:
 
 December
                  31,
                2006Office
                  equipment
              
              $
              97,190Computer
                  equipment
              
              
              340,170Computer
                  software
              
              
              357,922Office
                  furniture
              
              
              110,686Leasehold
                  improvements
              
              
              36,914Property & Equipment, Total
              
              
              942,882Less
                  accumulated depreciation
              
              
              (278,295
              )Less
                  impairment
              
              
              (662,587
              )Property & Equipment, Net
              
              $
              2,000
 
 Depreciation
        expense during the twelve months ended December 31, 2006, the twelve months
        ended December 31, 2005, and the period from December 9, 2002 (Inception)
        to
        December 31, 2006 was $0, $155,400and $286,765, respectively. During 2006
        and
        2005, the Company recognized impairment of property and equipment of $18,000
        and
        298,741 respectively due to the restructuring of the offices in Seattle,
        Washington and Sarasota, Florida.
 
 **NOTE
        5**    **NOTES
        PAYABLE**
 
 **(A)
        Notes Issued**
  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. 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, 2006, the outstanding balance on the convertible debenture was
        $0.
  F-27
 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,
        2006, 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.
        $1,000,000 of these notes were settled on May 16, 2005 via a Settlement
        Agreement which converted the entire amount of the note into common stock
        at a
        per share price of $0.14. The Company recognized a loss on the conversion
        of
        $540,000. At September 30, 2005, the balance on theses notes payable was
        $1,400,000 which is currently in default. Accrued interest of $364,192 was
        paid
        on the $1,400,000 note in August 2005 via a Settlement Agreement which converted
        the accrued interest on the note to common stock at a per share price of
        $.054.
        On March 17, 2006 40,000,000 shares were issued to convert $130,411 of accrued
        interest, $49,108 of future interest and $389,528 of principal into common
        stock
        with a fair value of $0.0215 per share per a conversion agreement. The Company
        recognized a $285,498 loss on the conversion. On September 6, 2006 10,000,000
        shares were issued to convert $73,584 of accrued interest and $15,966 of
        principal into common stock with a fair value of $0.012 per share per terms
        of a
        conversion agreement. The Company recognized a $30,449 loss on the conversion.
        On September 22, 2006 the debenture was amended to give the noteholder the
        right
        to convert all principal and unpaid interest into common stock. The interest
        rate was amended to 17%. Under the terms of the agreement, the first $310,000
        of
        market value would be discounted by 22.5% and a 15% discount would apply
        thereafter. On September 29, 2006 1,100,000 shares were issued to convert
        $8,056
        of principal into common stock per terms of the conversion agreement. No
        gain or
        loss was recognized on the conversion. On October 4, 2006 3,000,000 shares
        were
        issued to convert $18,130 of principal and $2,297 of accrued interest into
        common stock per terms of the conversion agreement. No gain or loss was
        recognized on the conversion. On October 11, 2006 4,550,000 shares were issued
        to convert $20,756 of principal and $3,157 of accrued interest into common
        stock
        per terms of the conversion agreement. No gain or loss was recognized on
        the
        conversion. On October 18, 2006 13,050,000 shares were issued to convert
        $52,031
        of principal and $2,648 of accrued interest into common stock per terms of
        the
        conversion agreement. No gain or loss was recognized on the conversion. On
        October 20, 2006 11,090,000 shares were issued to convert $46,281 of principal
        and $1,251 of accrued interest into common stock per terms of the conversion
        agreement. No gain or loss was recognized on the conversion. On October 25,
        2006
        11,482,000 shares were issued to convert $48,660 of principal and $1,978
        of
        accrued interest into common stock per terms of the conversion agreement.
        On
        October 31, 2006 26,000,000 shares were issued to convert $116,109 of principal
        and $2,237 of accrued interest into common stock per terms of the conversion
        agreement. No gain or loss was recognized on the conversion. On November
        2, 2006
        14,000,000 shares were issued to convert $69,169 of principal and $638 of
        accrued interest into common stock per terms of the conversion agreement.
        No
        gain or loss was recognized on the conversion. On November 8, 2006 12,000,000
        shares were issued to convert $50,209 of principal and $1,720 of accrued
        interest into common stock per terms of the conversion agreement. No gain
        or
        loss was recognized on the conversion. On November 10, 2006 14,000,000 shares
        were issued to convert $53,061 of principal and $526 of accrued interest
        into
        common stock per terms of the conversion agreement. No gain or loss was
        recognized on the conversion. On November 14, 2006 9,728,000 shares were
        issued
        to convert $27,313 of principal and $954 of accrued interest into common
        stock
        per terms of the conversion agreement. No gain or loss was recognized on
        the
        conversion. The terms of the revised conversion agreement make the note a
        derivative liability as the entire amount of the note is convertible into
        an
        undetermined number of shares. At December 31, 2006 the principal balance
        was
        $484,731 and accrued interest outstanding was $10,862. These notes are secured
        with the assets of the Company and are currently in default.
  F-28
 On
        February 27, 2004, the Company borrowed $500,000 under a 12% secured
        subordinated debenture for a maximum term of 12 months This note was settled
        on
        May 16, 2005 via a Settlement Agreement which converted the entire amount
        of the
        note into common stock at a per share price of $0.14. The Company recognized
        a
        loss on the conversion of $265,500.
  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; the conversion option was treated as a $216,000 discount
        to the debenture and the discount was amortized over the life of the conversion
        option agreement. 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 200,000 shares of common stock having a fair value of $284,000. 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 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. The Company recognized a loss on the conversion of interest
        for
        $130,411.
  On
        May 7,
        2004, the Company borrowed $100,000 under a 15% promissory note. As additional
        consideration, the Company issued the holder 40,000 shares of common stock
        having a fair value of $55,200. The shares were treated as a discount to
        the
        note and the discount is being amortized over the life of the note. The note
        was
        fully paid off as of December 31, 2006.
  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; the conversion option was treated as a $102,500 discount
        to the
        debenture and the discount was amortized over the life of the conversion
        option
        agreement. 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 was secured with the assets
        of the
        Company. On May 7, 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. The Company recognized a loss on the conversion of $69,863
        as
        related to the conversion of interest.
 
 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
        was amortized over the life of the amendment. This note was settled on May
        10,
        2005 via a Settlement Agreement which converted the entire amount of the
        note
        into common stock at a per share price of $0.16. The Company recognized a
        loss
        on the conversion of $158,447.
  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 was amortized
        over the life of the note. The note is secured with the assets of the Company.
        This note was 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. The Company recognized a loss on the conversion of
        $3,803,625.
  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 was amortized
        over the life of the amendment. 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 was amortized
        over the life of the note. This note was settled on May 10, 2005 via a
        Settlement Agreement which converted the entire amount of the note into common
        stock at a per share price of $0.16. The Company recognized a loss on the
        conversion of $222,000.
  F-29
 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 to be 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 entire
        amount of the note was convertible into shares of common stock at a price
        of
        $0.75 per share and 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 settled via a Settlement Agreement which converted the entire amount
        of the
        note into common stock at a per share price of $0.215. The Company recognized
        a
        loss on the settlement of $738,794.
  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 Chairman’s
        personal guaranty of note, the Company compensated the Chairman $50,000.
        This
        note was settled on April 11, 2005 via a Settlement Agreement which converted
        the entire amount of the note into common stock at a per share price of $0.17.
        The Company recognized a loss on the conversion of $716,933.
  On
        July
        28, 2004, the Company borrowed $500,000 under a 15% promissory note which
        is
        payable on July 28, 2005. As consideration for the personal guaranty of note
        by
        Richard Angelotti, a Director, the Company issued the Director 800,000 shares
        of
        common stock having a fair value of $832,000. On November 1, 2005 the note
        and
        unpaid interest was assigned to a Director. On December 9, 2005 the note
        was
        amended to include accrued interest of $60,437 with simple interest due December
        31, 2006. The principal and accrued interest on this note as of June 30, 2006
        was $616,949. On August 4, 2006, the entire amount of the note ($560,437)
        plus
        accrued interest of $64,450 was converted at a per share price of $0.015.
        On
        August 4, 2006 the Company issued 41,659,182 shares of common stock with
        a fair
        value of $624,888 ($0.015 per share) to convert the note and accrued interest.
        The Company recognized no gain or loss on the conversion. Accrued interest
        in
        the amount of $17,500 remains outstanding at December 31, 2006.
  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. The Company recognized a loss on the conversion
        of
        $3,803,625.
 
 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,
        2006, 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, 2006, the outstanding
        balance on the convertible debenture was $0.
 
 F-30
 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 debentures are convertible into
        shares
        of common stock. The conversion price of the debentures is 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 more than $0.10. On October 10, 2005 $20,000 of the note and $1,183
        of
        accrued interest was converted through a settlement at a per share price
        of
        $0.029. The Company recognized a loss on the conversion of $1,300. On December
        30, 2005 $59,074 of the note was converted per the conversion terms of the
        note
        at a per share price of $0.004875 and $0.005650. No gain or loss was recognized
        by the Company on the conversion. On March 8, 2006 $84,021 of the note and
        $8,232 of accrued interest was converted per the conversion terms of the
        note at
        per share prices of $0.004875, $0.00565, $0.0114825, and $0.013022. No gain
        or
        loss was recognized on the conversion. On April 10, 2006 $89,648 of the note
        and
        $1,646 of accrued interest was converted per the conversion terms of the
        note at
        per share prices of $0.004875, $0.00565, $0.0114825, and $0.013022. No gain
        or
        loss was recognized on the conversion. On May 10, 2006 $90,338 of the note
        and
        $4,269 of interest was converted per the conversion terms of the note at
        per
        share prices of $0.004875, $0.0114825, and $0.013022. No gain or loss was
        recognized by the Company on the conversion. On November 29, 2006 $4,836
        of the
        note was converted per the conversion terms of the note at per share price
        of
        $0.0026145. No gain or loss was recognized by the Company on the conversion.
        The
        note was due December 16, 2005 and is currently in default and accruing default
        interest at the rate of 18%. At December 31, the outstanding balance on the
        convertible note was $812,084 plus $761,768 of accrued interest and
        penalties.
  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 debentures are convertible into shares of common stock. The conversion
        price of the debentures is 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 more than $0.10.
        On
        October 10, 2005 $137,500 of the note and $8,875 of accrued interest was
        converted through a settlement at a per share price of $0.029. The Company
        recognized a loss on the conversion of $8,664. On December 30, 2005 $21,667
        of
        the note was converted per the conversion terms of the note at a per share
        price
        of $0.004875. No gain or loss was recognized by the Company on the conversion.
        On March 8, 2006 $26,806 of the note was converted per the conversion terms
        of
        the note at per share prices of $0.004875, $0.00565, $0.0114825, and $0.013022.
        No gain or loss was recognized on the conversion. On April 10, 2006 $31,870
        of
        the note was converted per the conversion terms of the note at per share
        prices
        of $0.004875, $0.00565, $0.0114825, and $0.013022. No gain or loss was
        recognized on the conversion. On May 10, 2006 $36,396 of the note was converted
        per the conversion terms of the note at per share prices of $0.004875,
        $0.0114825, and $0.013022 . No gain or loss was recognized by the Company
        on the
        conversion. The note was due December 28, 2005 and is currently in default
        and
        accruing default interest at the rate of 18%.. At December 31, 2006, the
        outstanding balance on the convertible note was $745,461 plus $628,913 of
        accrued interest and penalties.
 
 F-31
 On
        January 27, 2005, the Company borrowed $300,000 from Timothy Roberts, the
        Company’s Chairman, under a 15% promissory note, which was payable no later than
        April 27, 2005. This note was settled on June 13, 2005 via a Settlement
        Agreement which converted the entire amount of the note into common stock
        at a
        per share price of $0.10. The Company recognized a loss on the conversion
        of
        $95,616.
  On
        January 28, 2005, the Company borrowed $135,000 under a 17% promissory note,
        which was payable no later than March 29, 2005. On September 15, 2005, the
        entire amount of the note was converted at a per share price of $0.05. The
        Company recognized a loss on the conversion of $16,926.
  On
        January 31, 2005, the Company borrowed $175,000 under a 15% convertible
        promissory note, which is payable no later than May 10, 2005. The note is
        convertible into 1,000,000 million shares of common stock and the Company
        recognized beneficial conversion on the promissory note of $175,000. The
        beneficial conversion was treated as a discount to the note and the discount
        is
        being amortized over the life of the note. In addition, the note holder is
        entitled to a Stock Purchase Warrant for 200,000 shares of common stock at
        a
        warrant exercise price of $0.10 per share. On June 10, 2005, the entire amount
        of the note was converted at a per share price of $0.10. The Company recognized
        a loss on the conversion of $3,416 as related to the conversion of
        interest.
  On
        January 31, 2005, the Company borrowed $100,000 under a 15% convertible
        promissory note, which is payable no later than May 10, 2005. The note is
        convertible into 1,000,000 million shares of common stock and the Company
        recognized beneficial conversion on the promissory note of $100,000. The
        beneficial conversion was treated as a discount to the note and the discount
        was
        amortized over the life of the note. In addition, the note holder is entitled
        to
        a Stock Purchase Warrant for 200,000 shares of common stock at a warrant
        exercise price of $0.10 per share. On June 10, 2005, the entire amount of
        the
        note was converted at a per share price of $0.10. The Company recognized
        a loss
        on the conversion of $3,309 as related to the conversion of
        interest.
  On
        February 3, 2005, the Company borrowed $100,000 under a 15% convertible
        promissory note, which is payable no later than May 10, 2005. The note is
        convertible into 1,000,000 million shares of common stock and the Company
        recognized beneficial conversion on the promissory note of $100,000. The
        beneficial conversion was treated as a discount to the note and the discount
        was
        amortized over the life of the note. In addition, the note holder is entitled
        to
        a Stock Purchase Warrant for 100,000 shares of common stock at a warrant
        exercise price of $0.10 per share. On June 10, 2005, the entire amount of
        the
        note was converted at a per share price of $0.10. The Company recognized
        a loss
        on the conversion of $3,272 as related to the conversion of
        interest.
  On
        March
        9, 2005, the Company borrowed $400,000 under a 10% promissory note, which
        was
        payable no later than May 9, 2005. This note was settled on June 13, 2005
        via a
        Settlement Agreement which converted the entire amount of the note into common
        stock at a per share price of $0.11. The Company recognized no gain or loss
        on
        the conversion.
  On
        March
        21, 2005, the Company borrowed $200,000 under a 17% promissory note, which
        was
        payable no later than May 20, 2005. As additional consideration, the note
        holder
        is entitled to an increase in the note holder’s previously existing Stock
        Purchase Warrant coverage from 150% to 200% of the number of shares obtained
        in
        the conversion at a warrant exercise price of $0.10 related to the note holder’s
        notes dated April 7, 2005 and May 7, 2005. The increased warrant coverage
        was
        treated as a $200,000 discount to the debenture and the discount is being
        amortized over the life of the note. This note was settled on June 10, 2005
        via
        a Conversion Agreement which converted the entire amount of the note into
        common
        stock at a per share price of $0.10. The Company recognized a loss on the
        conversion of $62,263 as related to the conversion of interest.  In
        conjunction with the conversion, the Company issued 6,226,359 warrants at
        an
        exercise price of $0.10 per share.
  F-32
 On
        April
        7, 2005, the Company borrowed $300,000 under a 12% promissory note, which
        was
        payable no later than August 5, 2005. On September 15, 2005, the entire amount
        of the note was settled pursuant to 3(a)(10) of the Securities Act of 1933
        at a
        per share price of $0.05. The Company recognized a loss on the conversion
        of
        $13,277.
  On
        April
        29, 2005, the Company borrowed $200,000 under a 17% convertible promissory
        note,
        which was payable no later than July 28, 2005. The entire amount of the note
        was
        convertible into shares of common stock at a price of $0.10 per share. The
        beneficial conversion was treated as a $200,000 discount to the note and
        the
        discount was amortized over the life of the note. On September 15, 2005,
        the
        entire amount of the note was settled pursuant to 3(a)(10) of the Securities
        Act
        of 1933 at a per share price of $0.05. The Company recognized a loss on the
        conversion of $12,693.
  On
        June
        13, 2005, the Company borrowed $68,000 under a 17% convertible promissory
        note,
        which was payable no later than August 12, 2005. The entire amount of the
        note
        was convertible into shares of common stock at a price of $0.10 per share.
        The
        beneficial conversion was treated as a $20,400 discount to the note and the
        discount was amortized over the life of the note. On September 15, 2005,
        the
        entire amount of the note was settled pursuant to 3(a)(10) of the Securities
        Act
        of 1933 at a per share price of $0.05. The Company recognized a loss on the
        conversion of $4,315.
 
 On
        June
        30, 2005, the Company borrowed $100,000 under a 17% promissory note, which
        is
        unsecured and was payable no later than September 28, 2005. On August 11,
        2005,
        the entire amount of the note was settled pursuant to 3(a)(10) of the Securities
        Act of 1933 at a per share price of $0.05. The Company recognized no gain
        or
        loss on the conversion.
 
 On
        September 7, 2005, the Company borrowed $50,000 under a 15% promissory note,
        which is unsecured and was payable no later than November 7, 2005. On November
        16, 2005, the entire amount of the note was settled pursuant to 3(a)(10)
        of the
        Securities Act of 1933 at a per share price of $0.015. The Company recognized
        a
        loss on the conversion of $6,757.
 
 On
        September 7, 2005, the Company borrowed $50,000 under a 15% promissory note,
        which is unsecured and was payable no later than November 7, 2005. On November
        16, 2005, the entire amount of the note was settled pursuant to 3(a)(10)
        of the
        Securities Act of 1933 at a per share price of $0.015. The Company recognized
        a
        loss on the conversion of $6,757.
 
 On
        September 13, 2005, the Company borrowed $40,000 under a 15% promissory note,
        which is unsecured and was payable no later than November 13, 2005. On March
        29,
        2006, the entire amount of the note was settled pursuant to 3(a)(10) of the
        Securities Act of 1933 at a per share price of $0.019. The Company recognized
        a
        gain on the conversion of $3,229.
 
 On
        September 19, 2005, the Company borrowed $100,000 under a 15% promissory
        note,
        which is unsecured and is payable no later than November 19, 2005. The note
        and
        interest are currently in default. On July 28, 2006, the entire amount of
        the
        note and accrued interest was settled pursuant to 3(a)(10) of the Securities
        Act
        of 1933 at a per share price of $0.0145. A loss of $9,662 was
        recognized.
 
 On
        November 1, 2005, the Company borrowed $15,000 under a 15% promissory note,
        which is unsecured and is payable no later than January 1, 2006. The interest
        is
        currently in default. On July 28, 2006, the entire amount of the note and
        accrued interest was settled pursuant to 3(a)(10) of the Securities Act of
        1933
        at a per share price of $0.0145. A loss of $1,449 was recognized.
 
 On
        November 7, 2005, the Company borrowed $25,000 under a 15% promissory note,
        which is unsecured and is payable no later than December 6, 2005. On January
        23,
        2006, the entire amount of the note was settled pursuant to 3(a)(10) of the
        Securities Act of 1933 at a per share price of $0.0144. The Company recognized
        a
        loss on the conversion of $13,327.
  F-33
 On
        December 1, 2005, the Company borrowed $10,000 under a 15% promissory note,
        which is unsecured and is payable no later than December 1, 2006. Interest
        is
        payable upon maturity. At June 30, 2006, the outstanding balance on the note
        was
        $10,871. On August 4, 2006, the entire amount of the note and accrued interest
        was converted at a per share price of $0.015. The Company recognized no gain
        or
        loss on the conversion.
 
 On
        January 1, 2006, the Company converted to a promissory note $91,775, issued
        to
        Timothy Roberts, a Director, of related unpaid expense reimbursements incurred
        while Mr. Roberts was employed as a full-time employee. The note is unsecured
        and bears an 8% rate of interest. On October 24, 2006, the entire amount
        of the
        note and accrued interest was converted at a per share price of $0.0049.
        The
        Company recognized no gain or loss on the conversion.
 
 On
        January 25, 2006, the Company borrowed $50,000 under a three year 5.25%
        unsecured promissory note with 5,000,000 warrants attached at an exercise
        price
        of $1.09. Pursuant to the SEC’s request, the associated registration statement
        was withdrawn on May 23, 2006. Accordingly, we were unable to obtain an
        effective registration and, as of June 23, 2006, were in default under the
        terms
        of the note. The note holder has accelerated the note, including a $15,000
        penalty, which are due immediately. The note holder has also requested repayment
        for prepaid warrants of $285,000, but the Company disputes the associated
        claims
        with respect to these funds. At December 31, 2006, the outstanding balance
        on
        the note including interest and the penalty is $66,526. The note, interest
        and
        penalty are in default.
 
 On
        June
        30, 2006, the Company borrowed $100,000 under an 8% promissory note. The
        note
        was funded in three tranches: $20,000 (due upon mutual execution of the note),
        $35,000 (due twenty-one days after mutual execution), and $45,000 (due forty-two
        days after mutual execution). The note is due no later than two months following
        the final tranche (estimated at one hundred and two days after mutual execution
        of the note). The obligation to issue the collateral was conditioned upon
        prior
        written request of the note holder prior to the associated funding and the
        execution of an escrow agreement with the note holder’s attorney. The Company
        agreed to grant the note holder three certificates to collateralize the note
        of
        4,000,000 shares, 7,000,000 shares, and 9,000,000 shares of common stock.
        The
        note holder has not made any requests to escrow the collateral and has not
        established the aforementioned escrow agreement and, accordingly, the collateral
        has not been presented. As additional consideration for the note, the Company
        agreed to (i) re-price certain pre-existing warrants, (ii) issue 1,357,800
        new
        warrants, with a fair value of $13,952 (which has been recorded as a derivative
        with the initial amount treated as a discount to the note and amortized over
        the
        term of the note), to parties designated by the note holder and (iii) issue,
        subject to full performance of the funding obligations by note holder, to
        note
        holder an additional 10,000,000 new warrants with a fair value of $86,048
        (which
        has been recorded as a derivative with the initial amount treated as a discount
        to the note and amortized over the term of the note) . The new warrants
        described herein and expire in five years from the effective grant date and
        have
        an exercise price of $.015 per share. On November 30, 2006, the entire amount
        of
        the note and accrued interest was converted at a per share price of $0.0051.
        The
        Company recognized a $158 gain on the conversion.
 
 On
        December 7, 2006, the Company borrowed $50,000 under a 0% promissory note,
        but
        upon an event of default the maturity amount shall bear interest at the rate
        of
        18% per annum, which is secured with a Stock Pledge Agreement and is payable
        no
        later than January 7, 2007.
 
 On
        December 7, 2006, the Company borrowed $50,000 under a 0% promissory note,
        but
        upon an event of default the maturity amount shall bear interest at the rate
        of
        18% per annum, which is secured with a Stock Pledge Agreement and is payable
        no
        later than March 7, 2007.
 
 On
        December 7, 2006, the Company borrowed $50,000 under a 0% promissory note,
        but
        upon an event of default the maturity amount shall bear interest at the rate
        of
        18% per annum, which is secured with a Stock Pledge Agreement and is payable
        no
        later than June 7, 2007.
  Notes
                  payable - face value
              
              $
              2,242,276Notes
                  payable - discount
              
              
              0Notes
                  payable, net
              
              $
              2,242,276
 
 F-34
 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, 2006, the twelve month period ended December
        31,
        2005 and the period from December 9, 2002 (Inception) to December 31, 2006,
        the
        Company has recorded interest expense from the discounts of $150,000, $3,599,312
        and $5,924,900, 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.
  **(B)**  **Derivative
        Liabilities**
  In
        connection with the December 2004 Financings aggregating $2.16 million, we
        committed to pay penalties of 2% per month for each month after an agreed
        upon
        period (approximately three months) during which we fail to cause a resale
        registration statement covering the underlying shares to be declared effective
        by the Securities and Exchange Commission.   On December 16,
        2004, we closed a transaction pursuant to a Securities Purchase Agreement,
        dated
        as of December 13, 2004, with several accredited investors pursuant to which
        those accredited investors lent an aggregate principal amount of $1,160,000
        to
        us in exchange for (i) 8% convertible debentures Series 04-02 in that aggregate
        principal amount, and (ii) Class 2004-A warrants to purchase 5,437,487 shares
        of
        our common stock, Class 2004-B warrants to purchase 5,437,487 shares of our
        common stock and Class 2004-C warrants to purchase 5,437,487 shares of our
        common stock.   The debentures bear interest at 8% per annum and
        mature on December 16, 2005. 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.  Each of the
        warrants is exercisable until December 31, 2009, except that after the effective
        date of the registration statement which we have agreed to file for the resale
        of the lenders' shares, we may accelerate the expiration date of the Class
        B and
        Class C warrants to a date at least 3 trading days after the lender's receipt
        of
        that notice. The initial per share exercise prices of the warrants are: Class
        A
        - $.10; Class B - $0.75; and Class C - $1.00.   The timely and full
        fulfillment of our obligations pursuant to the debentures have been personally
        guaranteed by Timothy M. Roberts, our Chairman and a director.   In
        connection with this financing, we paid a finder's fee to West Hastings Limited
        in the amount of $92,800 and issued 232,000 warrants at an exercise price
        of
        $0.50.
  On
        December 28, 2004, the Securities Purchase Agreement dated December 13, 2004
        and
        related Class A warrants, Registration Rights Agreement and debentures were
        amended. The material provisions are as follows:   Securities Purchase
        Agreement - 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. In addition, the investors received an aggregate of 250,000
        shares of common stock.
 
 On
        December 28, 2004, we closed a transaction pursuant to a Securities Purchase
        Agreement, dated as of December 23, 2004, with several accredited investors
        pursuant to which those accredited investors lent an aggregate principal
        amount
        of $1,000,000 to us in exchange for (i) 8% convertible debentures Series
        04-03
        in that aggregate principal amount, and (ii) Class 2004-A-2 warrants to purchase
        4,687,485 shares of our common stock. The debentures bear interest at 8%
        per
        annum and mature one year from issuance. 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.
  The
        warrants are exercisable until December 31, 2009. The per share exercise
        price
        of the warrants is $0.10.   The timely and full fulfillment of our
        obligations pursuant to the debentures have been personally guaranteed by
        Timothy M. Roberts, our Chairman and a director.   In connection with
        this financing, we will pay a finder's fee to West Hastings Limited in the
        amount of $80,000 and issued 200,000 warrants at an exercise price of
        $0.50.
  F-35
 On
        December 28, 2004, the Securities Purchase Agreement dated December 23, 2004
        and
        related warrants, Registration Rights Agreement and debentures were amended.
        The
        material provisions are as follows:
  Securities
        Purchase Agreement - 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.In addition, the investors received an
        aggregate of 500,000 shares of common stock.
 
 The
        debentures include certain features that are considered embedded derivative
        financial instruments, such as the conversion feature, events of default
        and a
        variable liquidated damages clause. These features are described below, as
        follows:
 
 The
        debentures’ conversion feature is identified as an embedded derivative and has
        been bifurcated and recorded on the Company's balance sheet at its fair
        value;
 
 The
        SPA
        contains certain events of default including not having 150% of the number
        of
        shares of Common Stock issuable as may be required to satisfy the conversion
        rights of the Holders of principal on all Unconverted Debentures outstanding
        at
        any time plus the number of shares issuable upon exercise of all outstanding
        Warrants held by all Holders as of such date, which is identified as an embedded
        derivative and has been bifurcated and recorded on the Company's balance
        sheet
        at its fair value;
 
 In
        conjunction with the debentures, the Company issued warrants to purchase
        21,431,946 shares of common stock. The accounting treatment of the derivatives
        and warrants requires that the Company record the warrants at their fair
        values
        as of the inception date of the agreement, which totaled
        $9,280,565.
 
 The
        initial fair value assigned to the embedded derivatives and warrants was
        $14,463,615. The Company recorded the first $1,730,000 of fair value of the
        derivatives and warrants to debt discount which will be amortized to interest
        expense over the term of the debenture. The Company recorded an amortization
        expense for the year ended December 31, 2006, the year ended December 31,
        2005
        and from December 9, 2002 (Inception) through December 31, 2006 of $0,
        $2,104,110and $2,160,000, respectively.
  The
        market price of the Company's common stock significantly impacts the extent
        to
        which the Company may be required or may be permitted to convert the
        unrestricted and restricted portions of the debenture into shares of the
        Company's common stock. The lower the market price of the Company's common
        stock
        at the respective times of conversion, the more shares the Company will need
        to
        issue to convert the principal and interest payments then due on the debenture.
        If the market price of the Company's common stock falls below certain
        thresholds, the Company will be unable to convert any such repayments of
        principal and interest into equity, and the Company will be forced to make
        such
        repayments in cash. The Company's operations could be materially adversely
        impacted if the Company is forced to make repeated cash payments on the
        debenture.
 
 In
        summary, the year ended December 31, 2006, the year ended December 31, 2005
        and
        from December 9, 2002 (Inception) through December 31, 2006, the Company
        recorded a gain/(loss) on derivatives of $(695,584), $20,282,457and
        $(2,912,528), respectively, as a result of the financing described above
        in
        accordance with guidance provided in EITF 00-19:
  Promissory
                  notes, original face amount
              
              $
              2,160,000Conversions
              
              
              602,455Promissory
                  notes at 12/31/06
              
              
              1,557,545Unamortized
                  discount on Promissory notes, at 12/31/06
              
              
              0Promissory
                  notes, at 12/31/06
              
              
              1,557,545
 
 F-36
 On
        January 25, 2006, we completed a private placement pursuant to which we entered
        into a Securities Purchase Agreement with Golden Gate Investors, Inc. (“Golden
        Gate”) dated as of January 24, 2006, as amended by that certain Addendum to
        Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase
        Agreement dated as of January 24, 2006, for the sale of (i) a $50,000 principal
        amount convertible debenture and (ii) a warrant to purchase 5,000,000 shares
        of
        our common stock. Golden Gate provided us with an aggregate of $130,000 in
        gross
        proceeds upon the execution of final definitive agreements. Upon notification
        that the registration statement (as described below) has been filed with
        the SEC
        by February 14, 2006, Golden Gate shall wire us $150,000. If the registration
        statement is filed later than February 14, 2006, Golden Gate shall wire us
        $50,000. These amounts shall represent a prepayment towards the exercise
        of the
        warrant.
 
 The
        debenture bears interest at 51⁄4%, mature three years from the date of issuance,
        is convertible into our common stock, at Golden Gate’s option. The convertible
        debenture is convertible into the number of our shares of common stock equal
        to
        the dollar amount of the debenture being converted multiplied by 110, less
        the
        product of the conversion price multiplied by 100 times the dollar amount
        of the
        debenture being converted, which is divided by the conversion price. The
        conversion price for the convertible debenture is the lesser of (i) $0.10,
        (ii)
        eighty percent of the average of the three lowest volume weighted average
        prices
        during the twenty (20) trading days prior to the conversion or (iii) eighty
        percent of the volume weighted average price on the trading day prior to
        the
        conversion. Beginning in the first full month that the registration statement
        covering the shares of common stock underlying the debenture and warrant
        is
        declared effective by the Securities and Exchange Commission, Golden Gate
        is
        obligated to convert at least 5%, but no more than 10%, of the face value
        of the
        debenture per calendar month into shares of our common stock, so long as
        the
        shares are available, registered and freely tradable. If Golden Gate converts
        more than 5% of the face value of the debenture in any calendar month, the
        excess over 5% shall be credited against the next month’s minimum conversion
        amount. In the event that Golden Gate does not convert at least 5% of the
        face
        value of the debenture in any calendar month, Golden Gate shall not be entitled
        to collect interest on the debenture for that month and shall not be entitled
        to
        receive shares of our common stock issuable upon conversion of the debenture,
        provided that we provide Golden Gate with written notice of such failure
        to
        convert the minimum monthly conversion amount. However, in the event that
        our
        volume weighted average price is less than $.01, we will have the option
        to
        prepay the debenture at 130% rather than have the debenture converted. If
        we
        elect to prepay the debenture, Golden Gate may withdraw its conversion
        notice.
 
 In
        addition, beginning in the first full month that the registration statement
        covering the shares of common stock underlying the debenture and warrant
        is
        declared effective by the Securities and Exchange Commission, Golden Gate
        is
        obligated to exercise the warrant concurrently with the submission of a
        conversion notice by Golden Gate with respect to the debenture, in the same
        percentage of the debenture being converted. If Golden Gate exercises more
        than
        5% of the warrants in any calendar month, the excess over 5% shall be credited
        against the next month’s minimum exercise amount. In the event Golden Gate does
        not exercise the warrant concurrently with the conversion of the debenture,
        it
        shall not be entitled to receive shares of our common stock for the portion
        of
        the debenture being simultaneously converted. The warrant is exercisable
        into
        5,000,000 shares of common stock at an exercise price of $1.09 per share.
        Accordingly, if all warrants are exercised by Golden Gate, we will receive
        $5,450,000 in proceeds.
  Golden
        Gate has contractually agreed to restrict its ability to convert its debenture
        or exercise its warrants and receive shares of our common stock such that
        the
        number of shares of common stock held by them and their affiliates after
        such
        conversion or exercise does not exceed 9.99% of the then issued and outstanding
        shares of common stock.
 
 The
        debenture includes certain features that are considered embedded derivative
        financial instruments, such as the conversion feature, events of default
        and a
        variable liquidated damages clause. These features are described below, as
        follows:
  F-37
 -
        The
        debenture’s' conversion feature is identified as an embedded derivative and has
        been bifurcated and recorded on the Company's balance sheet at its fair
        value;
  -
        The SPA
        includes a penalty provision based on any failure to meet registration
        requirements for shares issuable under the conversion of the debenture or
        exercise of the warrants, which represents an embedded derivative, but such
        derivative has a de minimus value and has not been recorded in the accompanying
        financial statements; and
  -
        The SPA
        contains certain events of default including not having adequate shares
        registered to effectuate allowable conversions; in that event, the Company
        is
        required to pay a conversion default payment at 130% of the then outstanding
        principal balance on the debenture, which is identified as an embedded
        derivative, but such derivative has a de minimus value and has not been recorded
        in the accompanying consolidated financial statements.
  In
        conjunction with the debenture, the Company issued warrants to purchase
        5,000,000 shares of common stock. The accounting treatment of the derivatives
        and warrants requires that the Company record the warrants at their fair
        values
        as of the inception date of the agreement, which totaled $4,026.
  The
        initial fair value assigned to the embedded derivatives and warrants was
        $473,873. The Company recorded the first $50,000 of fair value of the
        derivatives and warrants to debt discount which will be amortized to interest
        expense over the term of the debenture. The Company recorded an amortization
        expense for the year ended December 31, 2006, the year ended December 31,
        2005
        and from December 9, 2002 (Inception) through December 31, 2006 of $50,000,
        $0
        and $50,000, respectively.
  The
        market price of the Company's common stock significantly impacts the extent
        to
        which the Company may be required or may be permitted to convert the
        unrestricted and restricted portions of the debenture into shares of the
        Company's common stock. The lower the market price of the Company's common
        stock
        at the respective times of conversion, the more shares the Company will need
        to
        issue to convert the principal and interest payments then due on the debenture.
        If the market price of the Company's common stock falls below certain
        thresholds, the Company will be unable to convert any such repayments of
        principal and interest into equity, and the Company will be forced to make
        such
        repayments in cash. The Company's operations could be materially adversely
        impacted if the Company is forced to make repeated cash payments on the
        debenture.
 
 In
        summary, the year ended December 31, 2006, the year ended December 31, 2005
        and
        from December 9, 2002 (Inception) through December 31, 2006, the Company
        recorded a gain/(loss) on derivatives of $(2,358,048), $0 and $(2,358,048),
        respectively, as a result of the financing described above in accordance
        with
        guidance provided in EITF 00-19:
 
 Promissory
                  notes - short term, original face amount
              
              $
              50,000Conversions
              
              
              -Promissory
                  notes - short term, at 12/31/06
              
              
              50,000Unamortized
                  discount on Promissory notes - short term, at 12/31/06
              
              
              -Promissory
                  notes, net - short term, at 12/31/06
              
              
              50,000
  Additionally,
        as a result of the issuance of the debenture with such terms, there is no
        explicit number of shares that are to be delivered upon satisfaction of
        conversion, the Company is unable to assert that it had sufficient authorized
        and unissued shares to settle such note. Accordingly, all of the Company's
        previously issued and outstanding instruments, such as warrants and options
        as
        well as those issued in the future, would be classified as liabilities as
        well,
        effective with the issuance of the convertible promissory note. Absent other
        transactions which would warrant the same accounting treatment, the Company
        will
        discontinue the recognition of derivative liabilities once it can assert
        that it
        has a sufficient amount of authorized and unissued shares to settle its
        obligations which can be settled in shares . Pursuant to the Securities Purchase
        Agreement with Golden Gate, until such time as the Company receives shareholder
        approval to increase its authorized shares of common stock, it’s obligation to
        reserve and deliver, if requested, common stock from a conversion of the
        debenture or warrants shall not exceed 50,000,000 shares. Pursuant to the
        SEC’s
        request, the associated registration statement was withdrawn on May 23, 2006.
        Accordingly, we were unable to obtain an effective registration and, as of
        June
        23, 2006, were in default under the terms of the note. The note holder has
        accelerated the note, including a $15,000 penalty, which were due upon notice
        in
        July 2006. At December 31, 2006, the outstanding balance on the note including
        interest and the penalty is $66,526.
 
 F-38
 On
        September 22, 2006 an amendment to a February 2004 $1,400,000 debenture was
        effected allowing the noteholder the right to convert principal and accrued
        interest into common stock. The conversion feature allows for conversion
        at a
        22.5% discount to market for the first $310,000 of market value and a 15%
        discount to market thereafter. The interest rate was amended to
        17%.
 
 The
        initial fair value assigned to the embedded derivatives was $464,393.
 
 The
        market price of the Company's common stock significantly impacts the extent
        to
        which the Company may be required or may be permitted to convert the debenture
        into shares of the Company's common stock. The lower the market price of
        the
        Company's common stock at the respective times of conversion, the more shares
        the Company will need to issue to convert the principal and interest payments
        then due on the debenture. If the market price of the Company's common stock
        falls below certain thresholds, the Company will be unable to convert any
        such
        repayments of principal and interest into equity. The debenture is secured
        with
        the assets of the Company. The Company's operations could be materially
        adversely impacted if the assets are encumbered due to the default on the
        debenture.
 
 In
        summary, the year ended December 31, 2006, the year ended December 31, 2005
        and
        from December 9, 2002 (Inception) through December 31, 2006, the Company
        recorded a gain/(loss) on derivatives of $(443,138), $0 and $(443,138),
        respectively, as a result of the financing described above in accordance
        with
        guidance provided in EITF 00-19:
  Promissory
                  notes, original face amount
              
              $
              1,400,000Conversions
              
              
              915,269Promissory
                  notes at 12/31/06
              
              
              484,731Unamortized
                  discount on Promissory notes, at 12/31/06
              
              
              -Promissory
                  notes, at 12/31/06
              
              
              484,731
  As
        of
        December 31, 2006 and December 31, 2005 the fair value of all other outstanding
        warrants was $73,442 and $312,863, respectively. The difference of $239,421
        was
        recorded as a gain on derivatives as provided for in EITF 00-19.  In
        summary, the year ended December 31, 2006, the year ended December 31, 2005
        and
        from December 9, 2002 (Inception) through December 31, 2006, the Company
        recorded a gain/(loss) on derivatives of $239,421, $18,447,767 and $4,280,176,
        respectively, as a result of all other outstanding warrants in accordance
        with
        guidance in EITF 00-19.
  In
        summary the gain or (loss) on derivatives is as follows:
 
 Date
                  of Note
              
              For the Year
                Ended
                December
                  31,
                2006
              
              For
                  the Year
                Ended
                December
                  31,
                2005
              
              For
                  the Period
                from
                December
                  9, 2002
                (Inception)
                  to
                December
                  31,
                2006December
                  2004
              
              $
              (695,584
              )
              $
              20,282,457
              
              
              ($2,912,530
              )January
                  2006
              
              
              (2,358,048
              )
              
              -
              
              
              (2,358,048
              )February
                  2004 as amended September 2006
              
              
              (443,138
              )
              
              -
              
              
              (443,138
              )All
                  other warrants
              
              
              239,421
              
              
              18,447,767
              
              
              4,280,176Total
              
              $
              (3,257,349
              )
              $
              38,730,224
              
              $
              (1,433,540
              )
 
 F-39
 
 In
        summary the notes outstanding at December 31, 2006 were:
  Conversion
                  Feature
              
              Face
                  Amount Of Note
              
              Unamortized
                  Discount
              
              Conversions
              
              Notes,
                  netYes
              
              
              2,160,000
              
              
              
              
              
              602,455
              
              
              1,557,545Yes
              
              
              50,000
              
              
              
              
              
              
              
              
              50,000Yes
              
              
              1,400,000
              
              
              
              
              
              915,269
              
              
              484,731No
              
              
              50,000
              
              
              
              
              
              
              
              
              50,000No
              
              
              50,000
              
              
              
              
              
              
              
              
              50,000No
              
              
              50,000
              
              
              
              
              
              
              
              
              50,000Promissory
                  notes, net - short term, at 12/31/06
              
              
              3,760,000
              
              
              
              
              
              1,517,724
              
              
              2,242,276
 
  **NOTE
        6**    **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
        2005. Therefore, all 2,022,900 warrants were outstanding and exercisable
        as of
        June 30, 2005.
  F-40
 On
        August
        26, 2004, the Company issued 100,000 shares of common stock for $200,000
        ($2.00
        per share).
 
 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 personal guaranty of a note payable by
        Richard Angelotti, a director,, the Company issued the Director 800,000 shares
        of common stock having a fair value of $832,000 ($1.04 per share). The shares
        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).
  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).
 
 F-41
 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 shares of restricted common
        stock
        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.
  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.
 
 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.
 
 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).
  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).
 
 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).
 
 On
        January 4, 2005, the Company issued 40,000 shares of common stock to Richard
        Angelotti, a Director, for services with a fair value of $63,600 ($1.59 per
        share).
  During
        January 2005, the Company issued 125,179 shares of common stock for consulting
        services with a fair value of $108,929 ($0.87 per share).
 
 On
        January 28, 2005, the Company issued 1,200,000 shares of common stock for
        consulting services with a fair value of $648,000 ($0.54 per
        share).
 
 On
        March
        10, 2005, the Company issued 100,000 shares of common stock for consulting
        services with a fair value of $32,000 ($0.32 per share).
 
 On
        March
        11, 2005, the Company issued 800,000 shares of common stock to Richard
        Angelotti, a Director, for services with a fair value of $272,000 ($0.34
        per
        share).
 
 During
        March 2005, the Company issued 1,722,453 shares of common stock for consulting
        services with a fair value of $558,847 ($0.32 per share) of which $19,665
        was
        considered deferred compensation.
 
 On
        March
        28, 2005, the Company issued 225,000 shares of common stock to employees
        with a
        fair value of $56,250 ($0.25 per share) as compensation.
 
 During
        April 2005, the Company issued 1,423,734 shares of common stock for consulting
        services with a fair value of $319,955 ($0.22 per share).
  During
        April 2005, the Company issued 100,000 shares of restricted common stock
        to
        employees as a bonus with a fair value of $23,000 ($0.23 per
        share).
 
 F-42
 On
        April
        18, 2005, the Company issued 250,000 shares of restricted common stock for
        consulting services with a fair value of $45,000 ($0.18 per share).
 
 During
        April 2005, the Company issued 601,725 shares of common stock to employees
        with
        a fair value of $90,259 ($0.15 per share) as regular compensation.
  During
        April 2005, the Company issued 678,067 shares of common stock to employees
        with
        a fair value of $101,310 ($0.15 per share) as regular compensation.
 
 During
        May 2005, the Company issued 2,255,097 shares of common stock for consulting
        services with a fair value of $338,775 ($0.15 per share).
 
 During
        May 2005, the Company issued 962,324 shares of common stock to employees
        with a
        fair value of $143,340 ($0.15 per share) as regular compensation.
 
 During
        May 2005, the Company issued 250,000 shares of common stock to an executive
        with
        a fair value of $37,500 ($0.15 per share) as compensation.
  During
        May 2005, the Company issued 250,000 shares of common stock to an executive
        with
        a fair value of $37,500 ($0.15 per share) as compensation.
 
 During
        May 2005, the Company issued 1,162,720 shares of common stock to employees
        with
        a fair value of $139,526 ($0.12 per share) as regular compensation.
 
 During
        June 2005, the Company issued 2,122,675 shares of common stock to employees
        with
        a fair value of $178,400 ($0.08 per share) as regular compensation.
 
 During
        June 2005, the Company issued 250,000 shares of common stock to an executive
        with a fair value of $25,000 ($0.10 per share) as compensation.
  During
        June 2005, the Company issued 500,000 shares of common stock to an executive
        with a fair value of $50,000 ($0.10 per share) as compensation.
 
 During
        June 2005, the Company issued 2,934,536 shares of common stock for consulting
        services with a fair value of $322,635 ($0.11 per share).
 
 During
        July 2005, the Company issued 500,000 shares of common stock for consulting
        services with a fair value of $50,000 ($0.10 per share) of which $10,000
        was
        considered deferred compensation.
 
 During
        July 2005, the Company issued 32,000 shares of common stock for consulting
        services with a fair value of $3,072 ($0.096 per share).
 
 During
        July 2005, the Company issued 22,000 shares of common stock for consulting
        services with a fair value of $1,851 ($0.084 per share).
 
 During
        July 2005, the Company issued 72,223 shares of common stock for consulting
        services with a fair value of $6,500 ($0.09 per share).
 
 During
        July 2005, the Company issued 50,000 shares of common stock for consulting
        services with a fair value of $4,302 ($0.086 per share).
  F-43
 During
        July 2005, the Company issued 50,000 shares of common stock to employees
        with a
        fair value of $5,000 ($0.10 per share).
 
 During
        July 2005, the Company issued 2,767,036 shares of common stock to employees
        with
        a fair value of $195,292 ($0.07 per share).
 
 During
        August 2005, the Company issued 182,799 shares of common stock to employees
        with
        a fair value of $12,796 ($0.07 per share).
 
 During
        August 2005, the Company issued 100,000 shares of common stock to employees
        with
        a fair value of $6,500 ($0.65 per share).
 
 During
        August 2005, the Company issued 1,891,655 shares of common stock to executives
        with a fair value of $132,416 ($0.07 per share) as compensation.
 
 During
        August 2005, the Company issued 150,000 shares of common stock for consulting
        services with a fair value of $10,500 ($0.07 per share) as
        compensation.
 
 During
        August 2005, the Company issued 492,940 shares of common stock for consulting
        services with a fair value of $39,435 ($0.08 per share) as
        compensation.
 
 During
        August 2005, the Company issued 333,340 shares of common stock for consulting
        services with a fair value of $30,000 ($0.09 per share) as
        compensation.
 
 During
        August 2005, the Company issued 86,667 shares of common stock for consulting
        services with a fair value of $6,500 ($0.075 per share) as
        compensation.
 
 During
        August 2005, the Company issued 250,000 shares of common stock for consulting
        services with a fair value of $15,000 ($0.06 per share).
 
 During
        August 2005, the Company issued 100,000 shares of common stock to an employee
        with a fair value of $7,000 ($0.07 per share).
 
 During
        August 2005, the Company issued 2,399,879 shares of common stock for consulting
        services with a fair value of $167,992 ($0.07 per share) of which $140,000
        was
        considered deferred compensation.
 
 During
        August 2005, the Company issued 62,500 shares of common stock for consulting
        services with a fair value of $5,625 ($0.09 per share).
  During
        August 2005, the Company issued 53,571 shares of common stock for consulting
        services with a fair value of $3,214 ($0.06 per share).
 
 During
        August 2005, the Company issued 750,000 shares of common stock for consulting
        services with a fair value of $52,500 ($0.07 per share).
 
 During
        August 2005, the Company issued 2,600,000 shares of common stock to employees
        with a fair value of $182,000 ($0.07 per share).
 
 During
        August 2005, the Company issued 5,000,000 shares of common stock to Richard
        Angelotti, a Director, with a fair value of $350,000 ($0.07 per
        share).
 
 F-44
 During
        August 2005, the Company issued 10,000,000 shares of common stock to Timothy
        Roberts, then the CEO and currently the Chairman and a Director, with a fair
        value of $700,000 ($0.07 per share).
  During
        September 2005, the Company issued 250,000 shares of common stock for consulting
        services with a fair value of $15,000 ($0.06 per share).
 
 During
        September 2005, the Company issued 1,629,027 shares of common stock for
        consulting services with a fair value of $81,451 ($0.05 per share) of which
        $27,505 was considered deferred compensation.
 
 During
        September 2005, the Company issued 5,415,729 shares of common stock to employees
        with a fair value of $297,865 ($0.055 per share) of which $85,758 was considered
        deferred compensation.
 
 During
        September 2005, the Company issued 3,045,708 shares of common stock to employees
        with a fair value of $152,286 ($0.05 per share) of which $44,648 was considered
        deferred compensation.
 
 During
        September 2005, the Company issued 3,977,894 shares of common stock to employees
        with a fair value of $179,005 ($0.045 per share) of which $50,058 was considered
        deferred compensation.
 
 During
        October 2005, the Company issued 264,822 shares of common stock for consulting
        services with a fair value of $8,474 ($0.032 per share).
 
 During
        October 2005, the Company issued 500,000 shares of common stock for consulting
        services with a fair value of $14,500 ($0.029 per share).
 
 During
        October 2005, the Company issued 1,536,850 shares of common stock for consulting
        services with a fair value of $30,737 ($0.02 per share).
 
 During
        October 2005, the Company issued 15,299,873 shares of common stock to employees
        with a fair value of $382,497 ($0.025 per share) of which $112,695 was
        considered deferred compensation.
 
 During
        October 2005, the Company issued 699,780 shares of common stock to employees
        with a fair value of $19,594 ($0.028 per share).
 
 During
        November 2005, the Company issued 2,247,956 shares of common stock for
        consulting services with a fair value of $49,455 ($0.022 per
        share).
 
 During
        November 2005, the Company issued 1,000,000 shares of common stock for
        consulting services with a fair value of $24,000 ($0.024 per
        share).
 
 During
        November 2005, the Company issued 6,380,900 shares of common stock for
        consulting services with a fair value of $133,999 ($0.021 per share) of which
        $91,165 was considered deferred compensation.
 
 During
        November 2005, the Company issued 2,000,000 shares of common stock for
        consulting services with a fair value of $30,000 ($0.015 per
        share).
  During
        November 2005, the Company issued 1,134,261 shares of common stock to employees
        with a fair value of $24,953 ($0.022 per share) of which $5,328 was considered
        deferred compensation.
 
 During
        December 2005, the Company issued 10,694,577 shares of common stock for
        consulting services with a fair value of $213,892 ($0.02 per share) of which
        $188,510 was considered deferred compensation.
 
 F-45
 During
        December 2005, the Company issued 30,342,931 shares of common stock to employees
        with a fair value of $595,604 ($0.02 per share) of which $176,513 was considered
        deferred compensation.
  During
        January 2006, the Company issued 510,992 shares of common stock for consulting
        services with a fair value of $8,533 ($0.0167 per share).
 
 During
        January 2006, the Company issued 2,789,474 shares of common stock for consulting
        services with a fair value of $58,578 ($0.021 per share).
 
 During
        January 2006, the Company issued 7,030,932 shares of common stock to employees
        with a fair value of $133,588 ($.019 per share).
 
 During
        February 2006, the Company issued 6,327,718 shares of common stock for
        consulting services with a fair value of $113,899 ($0.018 per
        share).
 
 During
        February 2006, the Company issued 5,862,640 shares of common stock to employees
        with a fair value of $105,224 ($.018 per share).
 
 During
        February 2006, the Company issued restricted common stock for 372,414 shares
        as
        a fee for obtaining financing. The fair value was $5,400 ($0.0145 per
        share).
 
 During
        February 2006, the Company issued 6,327,718 shares of common stock for
        consulting services with a fair value of $113,898 ($0.018 per
        share).
 
 During
        March 2006, the Company issued 255,319 shares of common stock for consulting
        services with a fair value of $6,000 ($0.0235 per share).
 
 During
        March 2006, the Company issued 646,552 shares of common stock for consulting
        services with a fair value of $12,931 ($0.02 per share).
 
 During
        March 2006, the Company issued 4,060,913 shares of common stock for consulting
        services with a fair value of $80,000 ($0.0197 per share).
 
 During
        March 2006, the Company issued 1,724,138 shares of common stock for consulting
        services with a fair value of $35,000 ($0.0203 per share).
 
 During
        March 2006, the Company issued restricted common stock for 243,243 shares
        as a
        fee for obtaining financing. The fair value was $4,500 ($0.0185 per
        share).
 
 During
        March 2006, the Company issued 9,650,377 shares of common stock to employees
        with a fair value of $226,784 ($.0235 per share).
 
 During
        March 2006, the Company returned to the Treasury 49,752 shares of common
        stock
        previously issued to employees with a fair value of $995 ($.02 per
        share).
 
 During
        March 2006, the Company issued 5,219,112 shares of common stock to employees
        with a fair value of $102,817 ($.0197 per share).
 
 During
        April 2006, the Company issued 589,051 shares of common stock for consulting
        services with a fair value of $11,533 ($0.0196 per share).
 
 F-46
 During
        June 2006, the Company issued 1,853,497 shares of common stock for consulting
        services with a fair value of $22,150 ($0.012 per share).
 
 During
        June 2006, the Company issued 6,830,929 shares of common stock to employees
        with
        a fair value of $95,633 ($.014 per share).
 
 During
        July 2006, the Company issued 20,000,000 shares of common stock for consulting
        services with a fair value of $330,000 ($0.0165 per share).
 
 During
        August 2006, the Company issued 2,000,000 shares of common stock for consulting
        services with a fair value of $26,000 ($0.013 per share).
 
 During
        September 2006, the Company issued 18,382,249 shares of common stock for
        consulting services with a fair value of $180,146 ($0.0098 per
        share).
 
 During
        September 2006, the Company issued 4,318,009 shares of common stock to employees
        with a fair value of $42,317 ($0.0098 per share).
 
 During
        October 2006, the Company issued 19,758,376 shares of common stock for
        consulting services with a fair value of $72,863 ($0.0037 per
        share).
 
 During
        October 2006, the Company issued 51,479,252 shares of common stock to employees
        with a fair value of $273,468 ($0.0053 per share).
 
 During
        November 2006, the Company issued 29,197,010 shares of common stock for
        consulting services with a fair value of $115,560 ($0.0040 per
        share).
  During
        November 2006, the Company issued 1,454,258 shares of common stock to employees
        with a fair value of $4,799 ($0.0033 per share).
 
 During
        November 2006, the Company issued 20,000,000 shares of common stock to Greg
        Koler, the CEO, with a fair value of $66,000 ($0.0033 per share).
 
 During
        November 2006, the Company issued 9,000,000 shares of common stock to Greg
        Koler, the CEO, with a fair value of $34,200 ($0.0038 per share).
 
 During
        November 2006, the Company issued 1,000,000 shares of common stock to Greg
        Koler, the CEO, with a fair value of $3,600 ($0.0036 per share).
 
 ***(C)
        Unauthorized Stock Issued***
 
 During
        November 2006 and without the requisite approval of the Board of Directors,
        56,000,000 shares of common stock were issued with a fair value of $194,800
        ($0.0035 per share).
 
 ***(D)
        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).
 
 F-47
 During
        June 2005, the Company returned 120,000 shares of common stock with a fair
value
        of $175,900 ($1.475 per share) were returned to Treasury in settlement of
        a
        lawsuit.
 
 On
        July
        26, 2006, the Company issued 4,242,820 shares of common stock with a fair
        value
        of $70,006 ($0.0165 per share) in final settlement of a lawsuit. A loss of
        $18,270 was recognized on the settlement. The shares were issued under a
        court
        ordered settlement pursuant to 3(a)(10) under the Securities Act of
        1933.
 
 ***(E)
        Stock Issued for Vendor Settlement***
 
 During
        May 2005, the Company issued 1,976,021 shares of common stock with a fair
        value
        of $316,163 ($0.16 per share) in settlement of a vendor payable.
 
 During
        August 2005, the Company issued 2,549,075 shares of common stock with a fair
        value of $229,417 ($0.09 per share) in settlement of the 2005 rent for the
        Sarasota office. Of this amount $52,631 was considered deferred
        compensation.
 
 During
        August 2005, the Company issued 368,375 shares of common stock with a fair
        value
        of $29,470 ($0.08 per share) in settlement of a vendor payable.
 
 During
        September 2005, the Company settled the outstanding amounts plus related
        legal
        fees with a vendor by issuing 6,361,113 shares of common stock with a fair
        value
        of $311,695 ($0.049 per share) on the date of settlement. The shares were
        issued under a court ordered settlement pursuant to 3(a)(10) under the
        Securities Act of 1933.
 
 During
        November 2005, the Company settled the outstanding amounts plus legal fees
        with
        a vendor by issuing 5,071,175 shares of common stock with a fair value of
        $111,566 ($0.022 per share). The shares were issued under a court ordered
        settlement pursuant to 3(a)(10) under the Securities Act of 1933.
 
 During
        November 2005, the Company settled the outstanding amounts plus legal fees
        with
        a vendor by issuing 1,134,775 shares of common stock with a fair value of
        $24,965 ($0.022 per share). The shares were issued under a court ordered
        settlement pursuant to 3(a)(10) under the Securities Act of 1933.
 
 During
        March 2006, the Company issued 2,195,905 shares of common stock in full
        settlement of amounts due to a vendor. The fair value was $52,702 ($0.024
        per
        share) and a gain of $2,673 was recognized on the settlement. The shares
        were
        issued under a court ordered settlement pursuant to 3(a)(10) under the
        Securities Act of 1933.
 
 During
        June 2006, the Company issued 30,000,000 shares of common stock with a fair
        value of $375,000 ($0..0125 per share) in settlement of the 2006 rent for
        the
        Sarasota office. Of this amount $94,670 was considered deferred compensation
        and
        $191,245 was an early termination fee. The shares were issued under a court
        ordered settlement pursuant to 3(a)(10) under the Securities Act of 1933.
        The
        party holding a majority interest in the landlord is also, on a personal
        basis,
        a past and current investor in the Company.
 
 On
        August
        4, 2006, the Company issued 1,663,536 shares of common stock with a fair
        value
        of $24,953 ($0.015 per share) in settlement of unreimbursed employee expenses
        owed to a terminated employee. No gain or loss was recognized on the
        conversion.
 
 On
        September 25, 2006 the Company issued 9,396,064 shares of common stock with
        a
        fair value of $93,961 ($0.01 per share) in settlement of unpaid rent. A gain
        of
        $6,039 was recognized on the settlement. The shares were issued under a court
        ordered settlement pursuant to 3(a)(10) under the Securities Act of
        1933.
 
 F-48
 ***(F)
        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).
 
 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).
 
 ***(G)
        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).
 
 During
        August 2005, the Company issued 7,114,667 shares to a note payable holder
        for
        accrued interest on the note with a fair value of $384,192 ($0.054 per share).
        The Company recognized no gain or loss on this transaction.
  F-49
 ***(H)
        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).
  ***(I)
        Stock Issued for Conversion of Notes Payable***
 
 On
        January 6, 2005, the Company issued 7,043,750 shares of common stock to convert
        a note payable with a fair value of $8,311,625 ($1.18 per share). The note
        and
        accrued interest totaled $704,375 which was converted into equity at $0.10
        per
        share. The Company recognized a loss of $7,607,250 ($1.08 per share) on the
        conversion of this note.
 
 On
        February 11, 2005, the Company issued 4,925,291 shares of common stock with
        a
        fair value of $1,797,731 to convert a note payable with a fair value of
        $1,058,938 ($0.215 per share). The Company recognized a loss of $738,794
        ($0.15
        per share) on the conversion of this note.
 
 On
        March
        22, 2005, the Company issued 5,815,069 shares of common stock with a fair
        value
        of $711,918 to convert a note payable with a fair value of $581,507 ($0.10
        per
        share). The Company recognized a loss of $130,411 ($0.022 per share) on the
        conversion of this note.
 
 On
        April
        11, 2005, the Company issued 13,325,000 shares of common stock with a fair
        value
        of $2,281,933 to convert a note payable with a fair value of $1,565,000 ($0.12
        per share). The Company recognized a loss of $716,933 ($0.05 per share) on
        the
        conversion of this note.
 
 During
        April 2005, the Company issued 2,936,644 shares of common stock to convert
        a
        note payable with a fair value of $293,664 ($0.10 per share).
 
 On
        May
        10, 2005, the Company issued 3,961,170 shares of common stock with a fair
        value
        of $633,787 to convert a note payable with a fair value of $475,340 ($0.12
        per
        share). The Company recognized a loss of $158,447 ($0.04 per share) on the
        conversion of this note.
 
 On
        May
        10, 2005, the Company issued 3,700,000 shares of common stock with a fair
        value
        of $592,000 to convert a note payable with a fair value of $370,000 ($0.10
        per
        share). The Company recognized a loss of $222,000 ($0.06 per share) on the
        conversion of this note.
 
 On
        May
        16, 2005, the Company issued 5,900,000 shares of common stock with a fair
        value
        of $826,418 to convert a note payable with a fair value of $560,918 ($0.095
        per
        share). The Company recognized a loss of $265,500 ($0.045 per share) on the
        conversion of this note.
  On
        May
        16, 2005, the Company issued 12,000,000 shares of common stock with a fair
        value
        of $1,686,836 to convert a note payable with a fair value of $1,146,836 ($0.095
        per share). The Company recognized a loss of $540,000 ($0.045 per share)
        on the
        conversion of this note.
 
 F-50
 During
        June 2005, the Company issued 3,695,339 shares of common stock to convert
        a note
        payable with a fair value of $404,011 ($0.11 per share).
 
 On
        June
        10, 2005, the Company issued 2,075,453 shares of common stock to convert
        a note
        payable with a fair value of $207,545 ($0.10 per share). The Company recognized
        a loss of $62,263 on the conversion of this note.
 
 On
        June
        10, 2005, the Company issued 3,187,206 shares of common stock to convert
        a note
        payable with a fair value of $318,721 ($0.10 per share). The Company recognized
        a loss of $95,616 on the conversion of this note.
 
 On
        June
        10, 2005, the Company issued 1,110,298 shares of common stock to convert
        a note
        payable with a fair value of $111,030 ($0.10 per share). The Company recognized
        a loss of $3,309 on the conversion of this note.
 
 On
        June
        10, 2005, the Company issued 1,109,069 shares of common stock to convert
        a note
        payable with a fair value of $110,907 ($0.10 per share). The Company recognized
        a loss of $3,272 on the conversion of this note.
  On
        June
        10, 2005, the Company issued 1,863,852 shares of common stock to convert
        a note
        payable with a fair value of $186,385 ($0.10 per share). The Company recognized
        a loss of $3,416 on the conversion of this note.
 
 On
        August
        11, 2005, the Company issued 2,096,623 shares of common stock to convert
        a note
        payable with a fair value of $104,831 ($0.05 per share). The Company recognized
        no gain or loss on the conversion of this note.
 
 On
        September 15, 2005, the Company issued 12,882,049 shares of common stock
        to
        convert three notes payable with a fair value of $608,054 ($0.0472 per share).
        The Company recognized a loss of $36,048 on the conversion of these
        notes.
 
 On
        September 15, 2005, the Company issued 3,385,259 shares of common stock to
        convert a note payable with a fair value of $152,337 ($0.045 per share).
        The
        Company recognized a loss of $16,926 on the conversion of this
        note.
 
 On
        October 10, 2005, the Company issued 7,246,455 shares of common stock to
        convert
        notes payable with a fair value of $210,148 ($0.029). The Company recognized
        a
        loss of $9,964 on the partial conversion of the notes.
 
 On
        November 16, 2005, the Company issued 7,948,856 shares of common stock to
        convert notes payable with a fair value of $119,233 ($0.015 per share). The
        Company recognized a loss of $13,513 on the conversion of the
        notes.
  On
        December 30, 2005, the Company issued 16,000,000 shares of common stock to
        convert notes payable in the amount of $80,741 as per the conversion terms
        of
        the note. No gain or loss was recognized on the conversion.
 
 On
        January 23, 2006, the Company issued 2,900,000 shares of common stock with
        a
        fair value of $41,760 ($.0144 per share) in settlement of a note and accrued
        interest.  The shares were issued under a court ordered settlement pursuant
        to 3(a)(10) under the Securities Act of 1933.
 
 On
        March
        29, 2006, the Company issued 1,636,330 shares of common stock in full settlement
        of a note and accrued interest. The fair value was $31,090 ($0.019 per share)
        and a gain of $3,229 was recognized on the settlement. The shares were issued
        under a court ordered settlement pursuant to 3(a)(10) under the Securities
        Act
        of 1933.
 
 F-51
 On
        March
        9, 2006, the Company issued 10,000,000 shares of common stock and on March
        21,
        2006 an additional 30,000,000 shares of common stock in partial conversion
        of a
        note and accrued interest. The fair value was $860,000 (10,000,000 shares
        at
        $0.026 and 30,000,000 shares at $0.02 per share) and a loss of $285,498 was
        recognized on the conversion.
 
 On
        March
        8, 2006, the Company issued 19,999,999 shares of common stock in partial
        conversion of notes and accrued interest. Principal and interest in the amount
        of $119,059 was converted per the conversion terms of the note (the various
        conversion prices were $0.004875, $0.00565, $0.0114825 and $0.013022 per
        share).
        No gain or loss was recognized on the conversion.
 
 On
        April
        10, 2006, the Company issued 15,000,000 shares of common stock in partial
        conversion of notes and accrued interest. Principal and interest in the amount
        of $123,164 was converted per the conversion terms of the note (the various
        conversion prices were $0.004875, $0.00565, $0.0114825 and $0.013022 per
        share).
        No gain or loss was recognized on the conversion.
 
 On
        May
        10, 2006, the Company issued 15,000,000 shares of common stock in partial
        conversion of notes and accrued interest. Principal and interest in the amount
        of $131,302 was converted per the conversion terms of the note (the various
        conversion prices were $0.004875, $0.0114825 and $0.013022 per share). No
        gain
        or loss was recognized on the conversion.
 
 On
        August
        3, 2006, the Company issued 10,027,731 shares of common stock in full settlement
        of notes and accrued interest. The fair value was $145,402 ($0.0145 per share).
        Principal and interest in the amount of $131,791 were converted. A loss of
        $11,111 was recognized on the conversion. The shares were issued under a
        court
        ordered settlement pursuant to 3(a)(10) under the Securities Act of
        1933.
 
 On
        August
        4, 2006, the Company issued 42,393,246 shares of common stock in full settlement
        of notes and accrued interest. The fair value was $635,898 ($0.015 per share).
        Principal and interest in the amount of $635,898 were converted and no gain
        or
        loss was recognized.
 
 On
        September 6, 2006, the Company issued 10,000,000 shares of common stock in
        partial settlement of a note and accrued interest. The fair value was $120,000
        ($0.012 per share). Principal and interest in the amount of $89,551 were
        converted and a loss of $30,449 was recognized on the conversion.
 
 On
        September 29, 2006, the Company issued 1,100,000 shares of common stock in
        partial settlement of principal. Principal in the amount of $8,056 was converted
        and no gain or loss was recognized.
 
 During
        October 2006, the Company issued 69,172,000 shares of common stock in partial
        settlement of principal and interest aggregating $315,535 ($0.0046 per share).
        Principal in the amount of $301,967 and interest in the amount of $13,568
        was
        converted and no gain or loss was recognized.
 
 During
        November 2006, the Company issued 49,728,000 shares of common stock in partial
        settlement of principal and interest aggregating $203,589 ($0.0041 per share).
        Principal in the amount of $199,751 and interest in the amount of $3,838
        was
        converted and no gain or loss was recognized.
 
 During
        November 2006, the Company issued 20,000,000 shares of common stock in full
        settlement of a note and accrued interest. The fair value was $102,000 ($0.0051
        per share). Principal and interest in the amount of $102,158 was converted
        and a
        $158 gain was recognized.
 
 During
        November 2006, the Company issued 19,940,582 shares of common stock in full
        settlement of a note and accrued interest. The fair value was $97,709 ($0.0049
        per share) and no gain or loss was recognized.
 
 F-52
 During
        November 2006, the Company issued 1,849,568 shares of common stock in partial
        settlement of principal. Principal in the amount of $4,836 ($0.0026 per share)
        was converted and no gain or loss was recognized.
 
 ***(J)
        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.
  ***(K)
        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.
  ***(L)
        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 dividend.
  ***(M)
        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.
 
 ***(N)
        Obligation to Reserve Stock***
 
 As
        of
        December 31, 2006, the Company had an obligation to reserve 3,362,020,967
        shares
        of common stock issuable upon conversion of debentures. In addition, as of
        December 31, 2006, the Company had outstanding warrants totaling 76,686,612
        shares of common stock.
  ***(O)
        Amendment to Articles of Incorporation***
  On
        February 24, 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.
 
 On
        July
        13, 2006, the Company amended its Articles of Incorporation to provide for
        an
        increase in its authorized share capital. The authorized capital stock increased
        from 600,000,000 to 1,200,000,000 common shares at a par value of $0.0001
        per
        share.
  **NOTE
          7****INCOME
          TAXES**
 
 Income
          tax expense (benefit) is summarized as follows:
 
 F-53
 **Year
                  Ended**
                **December
                  31, 2006**
              
              **Year
                  Ended**
                **December
                  31, 2005**
              
              **December
                  9, 2002**
                **(Inception)
                  through**
                **December
                  31, 2006**Current: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, 2006**
              
              **Year
                  Ended**
                **December
                  31, 2005**
              
              **December
                  9, 2002**
                **(Inception)
                  through**
                **December
                  31, 2006**U.S.
                  Federal income tax expense (benefit)
              
              $
              (2,233,989
              )
              $
              (6,515,075
              )
              $
              (22,400,407
              )Effect
                  on net operating loss carryforward
              
              
              2,233,989
              
              
              6,515,075
              
              
              22,400,407$
              -
              
              $
              -
              
              $
              -
  The
        tax
        effects of temporary differences that give rise to significant portions of
        deferred tax assets and liabilities are as follows:
 
 **December
                  31,**
                **2006**
              
              **December
                  31,**
                **2005**Deferred
                  tax assets:Net
                  operating loss carry forward
              
              $
              22,400,407
              
              $
              20,166,418Total
                  gross deferred tax assets
              
              
              22,400,407
              
              
              20,166,418Less
                  valuation allowance
              
              
              (22,400,407
              )
              
              (20,166,418
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
 
 At
        December 31, 2006, the Company had a net operating loss carry forward of
        $59,528,055 for U.S. Federal income tax purposes available to offset future
        taxable income expiring through 2026. The net change in the valuation allowance
        during the year ended December 31, 2006 was an increase of
        $2,233,989.
 
 **NOTE
        8 COMMITMENTS AND CONTINGENCIES**
 
 ***(A)
        Distribution Agreements***
 
 **Riverdeep,
        Inc** .
  Infinium
        signed a distribution agreement with Riverdeep, Inc. ("Riverdeep") dated
        October
        23, 2003 that was intended to allow Infinium to market Riverdeep's
        catalog of award-winning video games and edutainment software on the Phantom
        Game System. The agreement expired on March 30, 2006 and when in place
        authorized Infinium to distribute Riverdeep's products, via the Phantom Game
        Service or pre-load, onto the Phantom Game Receiver. The titles were
        intended to be available to subscribers of the Phantom Game Service on both
        a pay-per-play and pay-to-own basis.
 
 F-54
 The
        agreement with Riverdeep required Infinium to make the following guaranteed,
        non-refundable, irrevocable, non-transferable license fees as
        follows:
  March
                  30, 2004
              
              $
              50,000September
                  30, 2004
              
              
              50,000September
                  30, 2004
              
              
              125,000Total
              
              $
              225,000
 
 In
        addition, Infinium would have incurred license fees with respect to
        each unit of product distributed. These per unit license fees would
        have applied against the aforementioned guaranteed license fees. If
        the guaranteed license fees would have been earned down and recouped by
        Infinium, then Infinium would have paid 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.
 
 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,
        2006,
        $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 were to 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”) dated December 3, 2004 that will allow Infinium to market
        Codemasters’ catalog of video games software on the Phantom Game System. The
        agreement expired on December 31, 2005 and authorized Infinium to distribute
        Codemasters’ products, via the Phantom Game Service or pre-load, onto the
        Phantom Game Receiver. The titles were to be available to subscribers
        of the Phantom Game Service on both a pay-per-play and pay-to-own
        basis.
 
 The
        agreement with Codemasters required Infinium to make the following advance
        royalty payments as follows:
  November
                  21, 2004
              
              $
              25,000Upon
                  receipt of the Licensor Deliverables
              
              
              25,000Total
              
              $
              50,000
 
 F-55
 In
        addition, Infinium would have incurred royalty fees with respect to
        each unit of product distributed. These per unit royalty fees shall be applied
        against the aforementioned advance royalty payments. If the advance royalty
        payments have been earned down and recouped by Infinium, then
        Infinium would have been required to pay directly to Codemasters the
        per unit royalty fees for every unit of product it distributes. The per unit
        royalty fee ranged 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, 2006, $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 were to 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.
  **Atari,
        Inc.**
  Infinium
        signed a distribution agreement with Atari, Inc. (“Atari”) dated September 14,
        2004 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, 2006, $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”) dated September 21,
        2004 that would have allowed Infinium to market Eidos’s catalog of
        video games software on the Phantom Game System. The agreement expired 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 would have been available to subscribers of the Phantom Game
        Service on both a pay-per-play and pay-to-own basis.
 
 F-56
 The
        agreement with Eidos required 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 would have incurred royalty fees with respect to
        each unit of product distributed. These per unit royalty fees shall be applied
        against the aforementioned advance royalty payments. If the advance royalty
        payments would have been earned down and recouped by Infinium, then
        Infinium would have been required to 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, 2006, $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 were to 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”) dated
        September 21, 2004 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
 
 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, 2006, $10,000 of
        guaranteed license fees had been accrued and reported on the accompanying
        financial statements.
  F-57
 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.
  **Vivendi
        International**
  Infinium
        signed a letter of intent with Vivendi Universal Games, Inc. (“Vivendi”) dated
        September 20, 2004 that will allow Infinium to market and distribute certain
        games on the Phantom Game Service to future end-users, if any, through a
        sale,
        license, subscription or on a time basis.  The agreement expires two years
        from delivery of the gold master for each Vivendi Game although Vivendi has
        the
        right to terminate the agreement as of September 5, 2005 as Infinium did
        not
        commercially release the Phantom Game Service.  For such right, Infinium
        was to pay Vivendi $125,000 within five (5) days after execution of the letter
        of intent, $125,000 after a definitive agreement was signed and $250,000
        upon
        delivery of a master CD with Vivendi Games.  Infinium did not remit the
        initial $125,000 due to Vivendi and no definitive agreement was ever
        negotiated.   Infinium is currently in default under the letter of
        intent.
  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, 2006, $175,000 of
        guaranteed license fees had been accrued and reported on the accompanying
        financial statements.
 
 The
        letter of intent with Vivendi requires Infinium to make the following
        non-refundable payments:
  September
                  25, 2004
              
              $
              125,000Total
              
              $
              125,000
 
 ***(B)
        Development Agreement***
 
 The
        company has a development agreement dated October 11, 2004 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. From December 9, 2002 (inception) through
        December 31, 2006, $337,139 of expenses have been accrued and reported on
        the
        accompanying financial statements. During September 2005, the Company settled
        the outstanding amounts plus related legal fees with Biostar by issuing
        6,361,113 shares of common stock with a fair value of $311,695 on the date
        of
        settlement. The shares were issued under a court ordered settlement pursuant
        to
        3(a)(10) under the Securities Act of 1933.
 
 ***(C)
        Lease***
 
 Phantom
        Entertainment, Inc. leases office space in Luxembourg (starting May 1, 2006)
        under an operating lease that expired on December 31, 2006 but also requires
        a
        three month notice to terminate the lease. Minimum future rental payments
        under
        this lease are as follows:
 
 Year
                  Ending December 31,2007
              
              
              6,2082008
              
              
              -2009
              
              
              -2010
              
              
              -Thereafter
              
              
              -Total
              
              $
              6,208
 
 
 F-58
 
  Rent
            expense for the year ended December 31, 2006, the year ended December
            31, 2005,
            and the period from December 9, 2002 (Inception) to December 31, 2006
            was
            $460,600, $572,107and $1,410,157, respectively.
 ***(D)
        Litigation***
 Beshara
          v. Infinium Labs Corporation,
          No.
          2005 CA 005103 NC. In May 2005, Beshara sued us in the Circuit Court for
          Sarasota County, Florida, alleging default of a promissory note and seeking
          damages of approximately $1,400,000.00. On October 25, 2005, we settled
          accrued
          interest through October 31, 2005, together with reasonable attorneys’ fees, in
          the amount of $384,192 through issuance of 7,114,667 shares of our stock.
          On
          March 17, 2006, we entered into a conversion agreement with Beshara in
          order to
          reduce a portion of the outstanding principal and interest with 40,000,000
          shares of common stock (as of May 22, 2006). In September 2006, the parties
          amended the promissory note to add for conversion of debt into equity.
          As of
          September 30, 2006, the remaining principal on the debt is approximately
          $986,449. So long as Beshara continues to convert debt into equity the
          foregoing
          action shall be abated.
 
 Black
          Rocket Euro RSCG, LLC v. Phantom Entertainment, Inc. ,
          No.
          2005 CA 5008 NC. In May 2005, Black Rocket sued us in the Circuit Court
          for
          Sarasota County, Florida, alleging breach of contract and seeking damages
          in the
          amount of $95,272.00. Due to an administrative error, our attorney neglected
          to
          file a notice of appearance and on January 25, 2006, Black Rocket obtained
          a
          default judgment in the amount of $104,629. We have recorded $104,629 as
          well as
          $4,977 in accrued interest, as of September 30, 2006, in accounts
          payable.
 
 CDW
          Corporation v. Infinium Labs Corporation ,
          No.
          05-M1-131484. In May 2005, CDW sued us in the Circuit Court of Cook County,
          Illinois, alleging that the Company placed orders for goods, failed to
          pay for
          such orders and thus breached the contract and seeking damages in the amount
          of
          $26,958. Due to financial constraints, we may not be able to replace local
          counsel. On February 7, 2006, the court entered judgment for $26,958 and
          we have
          recorded $27,932, including interest through September 30, 2006, in accounts
          payable.
 
 GMR
          Marketing, LLC, v. Phantom Entertainment, Inc., No.
          20050CA-10535NC. In January 2006, GMR sued us in the District Court of
          Florida,
          Sarasota County, alleging that it rendered advertising services and that
          the
          Company failed to pay for such services thereby breaching the contract.
          GMR
          sought damages in the amount of $107,544. Due to an error with our Florida
          counsel an answer to the complaint was not filed and on February 1, 2005
          GMR
          received a default judgment in the amount of $107,883. Through September
          30,
          2006, the Company has recorded a total of $114,284, including interest,
          in
          accounts payable. On October 25, 2006, the parties entered into a settlement
          agreement whereby the Company agreed to pay GMR $71,000 no later than December
          20, 2006 in exchange for a full release of all previous claims.
  Longview
          Special Finance, Inc. v. Phantom Entertainment, Inc. ,
          No. 06
          CV 1772. In March 2006, Longview sued us in United States District in the
          Southern District of New York alleging breach of contract and requesting,
          in
          part, issuance of all remaining shares requested in prior conversion notices.
          The March complaint contained various errors. The parties entered into
          a
          negotiated settlement related to a portion of Longview’s claims on April 7,
          2006. Under the terms of the agreement, the Company converted a portion
          of
          Longview’s requested conversion request and Longview agreed to dismiss the
          aforementioned matter in May 2006 and standstill on any further request
          for
          conversion or bring any additional claim on with respect to the Company’s
          failure to reserve adequate shares for Longview or deliver shares under
          a
          conversion. Although the Company has materially performed, Longview has
          not
          dismissed the action. In November 2006, Plaintiff submitted an amended
          complaint
          with similar claims and requested a hearing, currently scheduled for late
          November, on its request for an injunction.  The Company intends to respond
          vigorously to these claims and file counterclaims as well. On March 30,
          2007,
          the Company and the Holders completed the settlement of the Action and
          entered
          into a Settlement Agreement (the “Agreement”) dated as of March 22, 2007 with
          the Holders pursuant to which the Company agreed to issue 425,000,000 shares
          of
          free-trading common stock to the Holders in exchange for the Holders agreeing
          to
          enter into general releases and to petition the Court to dismiss the Action
          with
          prejudice. On March 30, 2007, the Court so ordered the adoption of the
          Agreement
          and general releases were executed and delivered by the parties. See Current
          Report on Form 8-K filed with the SEC on April 3, 2007.
  F-59
 
 Merrill
          Lynch, Pierce, Fenner & Smith v. Phantom Entertainment, Inc. ,
          No.
          06-2-05618-3 SEA. In February 2005, we entered into a Stipulation and Order
          for
          Entry of Judgment with Merrill Lynch pertaining to our default in rent
          of
          $127,312 due under our lease with Merrill Lynch (for our former corporate
          headquarters). The foregoing matter was adjudicated in the Superior Court
          for
          the State of Washington, in and for the County of King. In partial consideration
          of the entry of the judgment the lease, originally set to expire in August
          2006,
          terminated on February 28, 2006 with no further monetary obligations. Subsequent
          to the entry of the order the parties entered into a settlement agreement
          that
          provided for a payment schedule of $5,000 per month with a final balloon
          payment
          due in July 2006. The Company intended on using proceeds from an SB-2
          registration, but was unable to do so after the SB-2 was withdrawn on May
          23,
          2006. The Company was in default on the settlement agreement when it failed
          to
          make the balloon payment by July 31, 2006. In September 2006, Merrill Lynch
          assigned its rights to enforce the settlement agreement, and all other
          rights,
          to Fred Niedrich, a third party. On September 20, 2006, the parties entered
          into
          a new settlement agreement whereby the total debt due of $118,289 was settled
          for $100,000 pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Morley
          and Campbell v. Timothy Roberts and Phantom Entertainment, Inc .,
          No.
          D-1-GN-06-000851. In April 2006, Morley and Campbell sued Timothy Roberts
          individually and the Company in the District Court, 200 Judicial District,
          Travis County, Texas for breach of contract in failing to perform the remainder
          of an Asset Purchase Agreement and Assignment of Rights between plaintiffs
          and
          Roberts. The total claim is for $30,000. Phantom is defending itself vigorously
          in this suit and has retained local counsel in order to do so. No contingency
          has been accrued as of September 30, 2006. As of the date of this Annual
          Report,
          the plaintiff has not pursued any further remedies, and the Company believes
          that the action has been dropped.
 
 M.
          Tyler Boles v. Phantom Entertainment, Inc., No.
          V06-30. In January 2006, M. Tyler Boles sued us in the General District
          Court
          for Nelson County, Delaware, alleging a claim for money and seeking damages
          in
          the amount of $1,200. A judgment was entered in March 2006 for $1,254 and
          we
          have recorded $1,300, including interest through September 30, 2006, in
          accounts
          payable.
 
 Oracle
          USA, Inc. v. Phantom Entertainment, Inc. , No.
          C05-5049. In December 2005, Oracle USA sued us in the United States District
          Court, Northern District of California, San Francisco Division, alleging
          that
          the Company placed orders for software, failed to pay for such orders and
          thus
          breached the contract and seeking damages in the amount of $198,818. In
          March
          2006 judgment was entered against the Company in the aforementioned court
          for
          $199,068 and, as of September 30, 2006, this amount has been recorded in
          accounts payable.
 
 Ronald
          Westman v. Phantom Entertainment, Inc. , No.
          2006 CA 010711 NC. In November 2006, Ronald Westman filed an action in
          the
          Circuit Court for Sarasota County, Florida. The Company has not been served
          with
          the summons and complaint and, therefore, can not provide any further
          detail.
 
 SBI
          USA, LLC v. Phantom Entertainment, Inc., No.
          05CC10694. In November 2005, SBI USA, LLC, sued us in the Superior Court
          of
          California, Orange County, alleging breach of contract and seeking damages
          in
          the amount of $58,000. Judgment was entered against the Company in the
          aforementioned court in April 2006 for $55,000 and we have recorded $59,213,
          including interest through September 30, 2006, in accounts payable.
  F-60
  Walter
          Dorwin Teague Associates v. Phantom Entertainment, Inc., No.
          05-9-35846-2. In December 2005, Teague Associates entered an arbitration
          award
          in the Superior Court for King County, Washington. The judgment is for
          $51,843
          and we have recorded $55,734, including interest through September 30,
          2006, in
          accounts payable. Teague & Associates was retained in 2004 to assist and
          support various industrial design requirements associated with hardware
          for the
          Phantom Game Service. The Company defaulted on its payment obligations
          and this
          resulted in the associated arbitration award.
 
 In
          the
          Matter of Certain Fax Blasts, SF-2926.
          In approximately January 2005, we received subpoenas for documents from
          the
          Securities and Exchange Commission (“SEC”) in an investigation entitled In the
          Matter of Certain Fax Blasts. In compliance with other SEC issued subpoenas,
          several former employees, including our Chairman of the Board of Directors,
          have
          given testimony to the SEC’s staff while several current employees have
          participated in off-record interviews with the SEC staff.
 
 Timothy
          M. Roberts, the Company's Chairman of the Board of Directors, received
          a “Wells
          Notice” from the SEC in 2005. The Wells Notice was received by Mr. Roberts in a
          personal capacity. This Wells Notice was issued in connection with the
          SEC’s
          investigation relating to “phony fax scams” in which several penny stocks,
          including ours, were promoted to potential investors and resulted in charges
          filed by the SEC against two stock promoters. Under the SEC's procedures,
          the
          Wells Notice indicates that the staff of the SEC intends to recommend that
          the
          SEC bring a civil enforcement action against Mr. Roberts alleging violations
          of
          federal securities laws. Recipients of Wells Notices have the opportunity
          to
          respond to the SEC staff before any formal recommendation is made.
  In
          May
          2006, Mr. Roberts, in his personal capacity, was served with a complaint
          from
          the SEC in the matter entitled Securities
          and Exchange Commission vs. Timothy M. Roberts in the
          US District Court for the Middle District of Florida, Orlando Division,
          pursuant
          to which the SEC alleges that Mr. Roberts made false statements with regard
          to
          the Company’s prospects while at the same time selling his shares of the
          Company’s common stock for personal gain through his alleged participation in a
          “phony fax scam”. The SEC seeks judgment against Mr. Roberts enjoining him from
          future violations of securities laws, requiring that he disgorge any gain
          or
          benefit he received from past violations, and imposing penalties for the
          violations. Further, the SEC seeks a judgment prohibiting Mr. Roberts from
          serving in the future as an officer or director of a public company and
          from
          participating in any offering of “penny stocks”. While the Board of Directors
          has currently agreed to indemnify Mr. Roberts’ legal expenses specifically
          related to this matter, no accrual has been made as of September 30, 2006.
          On
          May 9, 2007, the Board of Directors agreed to authorize and directed the
          Company
          to (i) fully indemnify Mr. Roberts against the nature of the action arising
          out
          of the SEC Complaint and (ii) enter into a settlement agreement whereby
          the
          total debt due of $2,062.50 was to be settled for the same amount pursuant
          to
          3(a)(10) of the Securities Act of 1933. On the same date, the Company entered
          into the aforementioned settlement agreement.
 
 John
          Fife v. Phantom Entertainment, Inc. , No.
          2006 CA 012309 NC. In December 2006, John Fife filed an action in the Circuit
          Court for Sarasota County, Florida.  Subsequently,
          the Board of Directors agreed to authorize and directed the Company to
          enter,
          and the Company entered, into a settlement agreement whereby the total
          debt due
          of $166,000.00 was settled for the same amount pursuant to 3(a)(10) of
          the
          Securities Act of 1933.
 
 Phantom
          Investors LLC v. Phantom Entertainment, Inc. , No.
          2005 CA 001211 NC. In February 2005, Phantom Investors LLC filed an action
          in
          the Circuit Court for Sarasota County, Florida. Subsequently, the Board
          of
          Directors agreed to authorize and directed the Company to enter, and the
          Company
          entered, into a settlement agreement whereby the amount agreed to by the
          parties
          was settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Federal
          Insurance Company v. Phantom Entertainment, Inc. , No.
          2006 CA 005201 NC. In June 2006, Federal Insurance Company filed an action
          in
          the Circuit Court for Sarasota County, Florida. The Company intends to
          vigorously defend itself in this action.
 
 The
          Motley Fool Inc. v. Phantom Entertainment, Inc. , No.
          2006 CA 002132 NC. In March 2006, The Motley Fool Inc., filed an action
          in the
          Circuit Court for Sarasota County, Florida. Subsequently, the Board of
          Directors
          agreed to authorize and directed the Company to enter, and the Company
          entered,
          into a settlement agreement whereby the amount agreed to by the parties
          was
          settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Centerpointe
          Property LLC v. Phantom Entertainment, Inc. ,
          No.
          2006 CA 001216 NC. In February 2006, Centerpointe Property LLC filed an
          action
          in the Circuit Court for Sarasota County, Florida. Subsequently, the Board
          of
          Directors agreed to authorize and directed the Company to enter, and the
          Company
          entered, into a settlement agreement whereby the amount agreed to by the
          parties
          was settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Beshara
          Edward C v. Phantom Entertainment, Inc. ,
          No.
          2006 CA 000206 NC. In January 2006, Edward Beshara filed an action in the
          Circuit Court for Sarasota County, Florida. Subsequently, the Board of
          Directors
          agreed to authorize and directed the Company to enter, and the Company
          entered,
          into a settlement agreement whereby the amount agreed to by the parties
          was
          settled pursuant to 3(a)(10) of the Securities Act of 1933.
  F-61
 
 Beshara
          James v. Phantom Entertainment, Inc. ,
          No.
          2005 CA 011388 NC. In November 2005, James Beshara filed an action in the
          Circuit Court for Sarasota County, Florida. Subsequently, the Board of
          Directors
          agreed to authorize and directed the Company to enter, and the Company
          entered,
          into a settlement agreement whereby the amount agreed to by the parties
          was
          settled pursuant to 3(a)(10) of the Securities Act of 1933.
 
 Beshara
          Edward C and Beshara Sharon M v. Phantom Entertainment, Inc. ,
          No.
          2005 CA 010933 NC. In November 2005, Edward Beshara and Sharon Beshara
          filed an
          action in the Circuit Court for Sarasota County, Florida.  Subsequently,
          the Board of Directors agreed to authorize and directed the Company to
          enter,
          and the Company entered, into a settlement agreement whereby the amount
          agreed
          to by the parties was settled pursuant to 3(a)(10) of the Securities Act
          of
          1933.
 
 GMR
          Marketing, LLC, v. Phantom Entertainment, Inc., No.
          20050CA-010535 NC. In October 2005, GMR filed an action in the Circuit
          Court of
          Florida, Sarasota County.
 
 Tops
          Staffing Services v. Phantom Entertainment, Inc. ,
          No.
          2005 CC 5829 NC. In 2005, Tops Staffing Services filed an action in the
          Circuit
          Court for Sarasota County, Florida. On January 26, 2007, plaintiff obtained
          a
          Final Default Judgment against the Company.
 
 John
          W. Anderson and Adam Goldblatt v. Phantom Entertainment, Inc. In 2007,
          John W. Anderson and Adam Goldblatt filed an action in the Superior Court
          for
          Seattle County, Washington. On January 30, 2007, plaintiff obtained a Default
          Judgment against the Company for unpaid compensation and related damages
          in the
          aggregate amount of 106,109.19.
 
 From
          time
          to time, we may become party to litigation or other legal proceedings that
          we
          consider to be a part of the ordinary course of our business. We may become
          involved in material legal proceedings in the future.
 
 ***(E)
        Licenses***
 
 As
        detailed above in Note 8 (A), the Company has 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. As of December 31, 2006, the Company currently owes
        an
        aggregate of $845,000 to these publishers pursuant to these agreements and,
        if
        we fail to pay these advances, these agreements may be terminated.
 
 ***(F)
        Payroll Taxes***
 
 The
        Company has accrued applicable employment taxes for individuals that were
        initially deemed and paid as independent contractors during the twelve months
        ended December 31, 2003 and the three months ended March 31, 2004 but,
        subsequently, reclassified as employees by the Company. In addition, the
        Company
        has recorded an estimate for interest and penalties that are due for the
        Company’s failure to timely file and pay taxes for these individuals as well as
        for the Company’s failure to timely file and/or pay payroll taxes for the third
        quarter of 2004 and the first, second, third and fourth quarters of 2005.
        The
        amount recorded in accrued payroll and payroll taxes consists of the
        following:
  **As
                  of****December
                  31,**
                **2006**Payroll
              
              $
              238,627Payroll
                  taxes
              
              
              1,365,162Penalties
                  and interest
              
              
              874,417Accrued
                  payroll and payroll taxes
              
              $
              2,478,206
 
 F-62
 ***(G)
        Employment Agreements***
 
 On
        January 11, 2006, we entered into an Employment Agreement with Greg Koler,
        our
        Chief Executive Officer and Interim Chief Financial Officer. Pursuant to
        the
        Employment Agreement, we will employ Mr. Koler commencing January 11, 2006
        and
        his employment will be at-will. Mr. Koler will be paid an annual base salary
        of
        $250,000 (the “Base Salary”). In addition, on a quarterly basis, Mr. Koler will
        be eligible to earn a bonus of up to 35% of Base Salary based on meeting
        performance objectives and bonus criteria. In addition, Mr. Koler shall be
        entitled to receive the pro-rata amount of Base Salary due from November
        18,
        2005 through the January 10, 2006, as compensation for Mr. Koler’s role as
        our Interim Chief Executive Officer and Interim Chief Financial Officer
        beginning on November 18, 2005.
 
 Mr.
        Koler
        will be granted an aggregate of 5,000,000 restricted shares of our common
        stock,
        in accordance with the following vesting schedule: (i) 1,000,000 shares will
        be
        fully vested upon execution of the Employment Agreement, and the Stock Vesting
        Agreement dated as of January 11, 2006; and (ii) the remaining 4,000,000
        shares
        of common stock shall vest quarterly over two years, 1/8 per quarter, to
        the
        extent Mr. Koler is employed with us at the pertinent vesting date and that
        our
        shareholders have authorized additional common stock. As of August 18,
        2006, the related expense has been accrued under this agreement but no
        shares have been issued.
 
 In
        addition, on January 11, 2006 we entered into a Confidential Information,
        Inventions, Non-Solicitation and Non-Competition Agreement with Mr. Koler.
        The
        non-competition and non-solicitation provisions shall remain in effect for
        two
        years following termination while the balance of this agreement survives
        any
        termination, subject to standard exceptions.
  **NOTE
        9 STOCK OPTIONS AND WARRANTS**
 
 ***(A)
        Stock Options Issued Under Qualified Stock Option
        Plan***
 
 The
        Company's 2004 Omnibus Incentive Compensation Plan required shareholder consent
        which has not been obtained and will not be requested.  As such, any
        options granted under the Plan are not effective.
 
 ***(B)
        Warrants Issued and Outstanding***
  Stock
        Purchase Warrants
 
 For
        the
        year ended December 31, 2006, the Company granted warrants to purchase
        16,357,800 shares of common stock in conjunction with two notes payable which
        were treated as a discount to the notes payable.
  **December
                  31,**
                **2006**
              
              **December
                  31,**
                **2005**Warrants
                  for common stock issued to a note holder. The term of the warrants
                  are
                  five years expiring November 10, 2009. The warrants are exercisable
                  at
                  $0.10 per share
              
              
              5,873,288
              
              
              5,873,288Warrants
                  for common stock issued to a note holder. The term of the warrants
                  are
                  five years expiring November 10, 2009. The warrants are exercisable
                  at
                  $0.10 per share.
              
              
              11,630,138
              
              
              11,630,138Warrants
                  issued with subscription agreements. The term of the warrants are
                  five
                  years expiring November 10, 2009 and are exercisable at $0.10 per
                  share.
              
              
              678,900
              
              
              678,900Warrants
                  issued with subscription agreements. The term of the warrants are
                  five
                  years expiring November 10, 2009 and are exercisable at $0.25 per
                  share.
              
              
              1,344,000
              
              
              1,344,000
  F-63
  Warrants
                  issued with subscription agreements. The term of the warrants are
                  five
                  years expiring November 10, 2009 and are exercisable at $0.10 per
                  share.
              
              
              3,084,181
              
              
              3,084,181Warrants
                  issued in conjunction with convertible notes. The term of the warrants
                  are
                  five years expiring December 31, 2009 and are exercisable at $0.50
                  per
                  share.
              
              
              232,000
              
              
              232,000Warrants
                  issued in conjunction with convertible notes. The term of the warrants
                  are
                  five years expiring December 31, 2009 and are exercisable at $0.50
                  per
                  share.
              
              
              200,000
              
              
              200,000Warrants
                  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
              
              
              500,000Warrants
                  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
              
              
              500,000Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              5,437,487
              
              
              5,437,487Warrants
                  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
              
              
              5,437,487Warrants
                  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
              
              
              5,437,487Warrants
                  for common stock issued to note holder. The term of the warrants
                  is three
                  years expiring February 4, 2008. The warrants are exercisable at
                  $0.10 per
                  share.
              
              
              200,000
              
              
              200,000Warrants
                  for common stock issued to note holder. The term of the warrants
                  is three
                  years expiring February 4, 2008. The warrants are exercisable at
                  $0.10 per
                  share.
              
              
              200,000
              
              
              200,000Warrants
                  for common stock issued to note holder. The term of the warrants
                  is three
                  years expiring February 4, 2008. The warrants are exercisable at
                  $0.10 per
                  share.
              
              
              100,000
              
              
              100,000Warrants
                  for common stock granted to note holder. The terms of the warrants
                  are
                  three years expiring April 29, 2008. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              400,000
              
              
              400,000Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              4,687,485
              
              
              4,687,485
  F-64
  Warrants
                  for common stock issued to an investor. The term of the warrants
                  are five
                  years expiring June 10, 2010. The warrants are exercisable at $0.10
                  per share.
              
              
              6,226,359
              
              
              6,226,359Warrants
                  for common stock issued to an investor. The term of the warrants
                  is three
                  years expiring September 19, 2008. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              8,160,000
              
              
              8,160,000Warrants
                  for common stock issued to a note holder. The term of the warrants
                  are
                  three years expiring January 25, 2009. The warrants are exercisable
                  at
                  $1.09 per share.
              
              
              5,000,000
              
              
              -Warrants
                  for common stock issued parties identified by noteholder as additional
                  consideration for a note. The term of the warrants is five years
                  expiring
                  June 30, 2011. The warrants are exercisable at $0.015 per
                  share.
              
              
              1,357,800
              
              
              -Warrants
                  for common stock issued parties identified by noteholder as additional
                  consideration for a note. The term of the warrants is five years
                  expiring
                  August 18, 2011. The warrants are exercisable at $0.015 per
                  share.
              
              
              10,000,000Total
              
              
              76,686,612
              
              
              60,328,812
  **NOTE
        10**    **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
        $73,550,242, has a working capital deficiency of $18,344,236, a stockholders’
deficiency of $18,627,236, has a negative cash flow from operations of
        $15,654,926 from inception and notes payable in default of $2,242,276. 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,
        settle
        notes payable currently in default and implement its business plan provide
        the opportunity for the Company to continue as a going concern.
 
 **NOTE
        11**    **RELATED
        PARTY TRANSACTIONS**
 
 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
        former 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.
 
 On
        June
        21, 2004, the Company compensated Timothy M. Roberts, our former Chief Executive
        Officer $50,000 as consideration for his personal guaranty at that time of
        a
        commercial promissory note payable secured by a real estate mortgage encumbering
        the his residence. The note is for $1,500,000 with interest calculated at
        fifteen percent (15%) per annum up to the maximum amount allowed by law in
        the
        event of default. The note also permits a late charge in the amount of five
        percent (5%).
 
 F-65
 On
        July
        28, 2004, the Company issued Richard Angelotti, a director, 800,000 shares
        of
        common stock as consideration for his personal guaranty of a promissory note
        payable secured by a real estate mortgage encumbering the director's residence.
        The note, effective on July 28, 2004 and expiring on July 27, 2005, was payable
        to Stephen A. Witzer, Trustee U/A dated February 7, 1985. The principal is
        for
        $500,000 with interest calculated at fifteen percent (15%) per annum, plus
        a
        five percent (5%) penalty, if applicable, for any late payment. In the event
        of
        an uncured default, the interest increases to eighteen percent (18%) per
        annum.
        On December 9, 2005, this promissory note was assigned by Witzer to Richard
        Angelotti. The terms of the promissory note were subsequently amended to
        provide
        that as of November 1, 2005, principal and accrued interest totaled $560,437.
        With respect to the revised principal, commencing November 2, 2005, simple
        interest at a rate of fifteen percent (15%) per annum will accrue on a monthly
        basis until December 31, 2006 (maturity date), at which time the entire
        remaining principal and all accrued and unpaid interest are due in
        full.
 
 On
        November 2, 2004, the Company issued 200,000 shares of common stock with
        a fair
        value of $43,735 ($0.2187 per share) in lieu of cash compensation to Kevin
        Bachus as our President and Chief Operating Officer.
 
 On
        November 2, 2004, the Company issued 300,000 shares of common stock with
        a fair
        value of $65,603 ($0.2187 per share) in lieu of cash compensation to Timothy
        Roberts, as CEO (Mr. Roberts was also the CFO and Chairman).
 
 On
        December 8, 2004, the Company issued 300,000 shares of common stock with
        a fair
        value of $65,603 ($0. 2187 per share) in lieu of cash compensation to Kevin
        Bachus as our President and Chief Operating Officer.
 
 On
        December 8, 2004, the Company issued 200,000 shares of common stock with
        a fair
        value of $43,735 ($0. 2187 per share) in lieu of cash compensation to Timothy
        Roberts, as CEO (Mr. Roberts was also the CFO and Chairman).
 
 On
        December 8, 2004, the Company issued 100,000 shares of common stock with
        a fair
        market value of $21,866 ($0. 2187 per share) in lieu of cash compensation
        to
        Richard Angelotti, Director.
  On
        January 27, 2005, the Company borrowed $300,000 from Timothy Roberts, our
        former
        CEO and the Chairman and a Director of our company, under a 15% promissory
        note,
        which was payable no later than April 27, 2005. The note was subsequently
        transferred by Mr. Roberts to parties unaffiliated with us. On or about May
        10
        through 12, 2005, this note was assigned by Mr. Roberts to the following
        individuals with corresponding amounts: (1) Gerard Dariano, $100,000; (2)
        Fred
        Niedrich, $50,000; (3) Gary Fears, $50,000; and (4) John Landino, $100,000.On
        June 13, 2005, the full principal and interest was settled at $0.10 per share
        in
        consideration for our issuance of 3,187,206 shares of common stock to the
        holders, valued at $318,721. The Company recognized a loss on the conversion
        of
        $95,616.
  On
        March
        11, 2005, the Company issued 800,000 shares of common stock with a fair value
        of
        $272,000 ($.34 per share) in lieu of cash compensation to Richard Angelotti,
        Director.
 
 On
        May
        10, 2005, the Company issued 250,000 shares of common stock with a fair value
        of
        $37,500 ($0.15 per share) in lieu of cash compensation to Kevin Bachus as
        our
        President and Chief Operating Officer.
 
 On
        June
        3, 2005, the Company issued 250,000 shares of common stock with a fair value
        of
        $25,000 ($0.10 per share) in lieu of cash compensation to Kevin Bachus as
        our
        President and Chief Operating Officer.
 
 F-66
 On
        June
        13, 2005, the Company issued 1,700,000 shares of common stock with a fair
        value
        of $221,000 ($0.13 per share) to Timothy Roberts. These shares were an
        indemnification to Mr. Roberts as the guarantor on a $400,000, 6% promissory
        note between the Company and Nite Capital. The note was collateralized with
        Mr.
        Roberts’ personal holdings of Company stock.
 
 On
        June
        22, 2005, the Company issued 500,000 shares of common stock with a fair value
        of
        $50,000 ($0.10 per share) in lieu of cash compensation to Timothy Roberts,
        as
        our CEO (Mr. Roberts was also the CFO and Chairman).
 
 On
        August
        11, 2005, the Company issued 882,398 shares of common stock with a fair value
        of
        $61,768 ($0.07 per share) in lieu of cash compensation to Timothy Roberts,
        as
        our CEO (Mr. Roberts was also the CFO and Chairman).
 
 On
        August
        11, 2005, the Company issued 712,960 shares of common stock with a fair value
        of
        $49,907 ($0.07 per share) in lieu of cash compensation to Kevin Bachus as
        our
        President and Chief Operating Officer. Mr. Bachus became CEO, CFO and a Director
        on August 15, 2005.
 
 On
        August
        11, 2005, the Company issued 296,297 shares of common stock with a fair value
        of
        $20,741 ($0.07 per share) to Richard Angelotti, Director.
 
 On
        August
        18, 2005, the Company issued 5,000,000 shares of common stock to Richard
        Angelotti, with a fair value of $350,000 ($0.07 per share).
 
 On
        August
        18, 2005, the Company issued 10,000,000 shares of common stock to Timothy
        M.
        Roberts, our former Chief Executive Officer, with a fair value of $700,000
        ($0.07 per share).
 
 On
        December 9, 2005, this the July 28, 2004 promissory note for $500,000 was
        assigned by Mr. Witzer to a Dick Angelotti, a Director.  The terms of the
        promissory note were subsequently amended to provide that as of November
        1,
        2005, principal and accrued interest totaled $560,437.43.  With respect to
        the revised principal, commencing November 2, 2005, simple interest at a
        rate of
        fifteen percent (15%) per annum will accrue on a monthly basis until December
        31, 2006 (maturity date), at which time the entire remaining principal and
        all
        accrued and unpaid interest are due in full.
 
 On
        January 1, 2006, the Company converted $91,775 owed under employee expense
        reimbursements into a promissory note to Timothy Roberts, a former employee,
        and
        the current Chairman and a Director. The note is unsecured and bears an 8%
        rate
        of interest. During November 2006, the Company issued 19,940,582 shares of
        common stock in full settlement of the promissory note and accrued interest.
        The
        fair value was $97,709 ($0.0049 per share) and no gain or loss was
        recognized.
 
 On
        January 11, 2006, Greg Koler, our Chief Executive Officer, was granted 1,000,000
        shares of common stock under the terms of his employment agreement. As of
        June
        30, 2006, such shares have not been issued.
 
 On
        February 14, 2006, the company issued Greg Koler, our Chief Executive Officer,
        1,021,239 of common stock with a fair market value of $18,382 ($.018 per
        share)
        for services performed by Mr. Koler, prior to November 18, 2005, in his capacity
        as an independent contractor prior to becoming the CEO.
 
 On
        July
        26, 2006, the Company issued 20,000,000 shares of common stock with a fair
        value
        of $325,814.02 ($.01629 per share) to Timothy Roberts, Chairman, for consulting
        services rendered in 2006 and to be rendered for the balance of
        2006.
 
 On
        August
        4, 2006, the Company issued 41,659,182 shares of common stock with a fair
        value
        of $624,887.73 ($.015 per share) to convert a promissory note held by Richard
        Angelotti, a Director, and accrued interest. No gain or loss was recognized
        on
        the conversion.
 
 F-67
 During
        November 2006, the Company issued 20,000,000 shares of common stock to Greg
        Koler, the CEO, with a fair value of $66,000 ($0.0033 per share).
 
 During
        November 2006, the Company issued 9,000,000 shares of common stock to Greg
        Koler, the CEO, with a fair value of $34,200 ($0.0038 per share).
  During
        November 2006, the Company issued 1,000,000 shares of common stock to Greg
        Koler, the CEO, with a fair value of $3,600 ($0.0036 per share).
 
 During
        November 2006, the Company issued 19,940,582 shares of common stock in full
        settlement of a promissory note held by Timothy Roberts, Chairman, and accrued
        interest. The fair value was $97,709 ($0.0049 per share) and no gain or loss
        was
        recognized.
 
 **NOTE
        12**    **SUBSEQUENT
        EVENTS**
 
 ***(A)
        Common Stock Issuances***
  During
          March 2007, the Company issued 425,000,000 shares of common stock in full
          settlement of notes and accrued interest. Principal and interest in the
          amount
          of $3,103,895 was converted ($0.0073 per share).
  During
          March 2007, the Company issued 179,800,000 shares of common stock in full
          settlement of notes and accrued interest. Principal and interest in the
          amount
          of $152,400 was converted ($0.00085 per share).
  During
          March 2007, the Company issued 9,990,909 shares of common stock in partial
          conversion of a note. Principal in the amount of $91 was converted ($0.0000091
          per share).
  During
          March 2007, the Company issued 9,091 shares of common stock for warrants
          exercised. Warrants in the amount of $9,909 were exercised ($1.09 per
          share).
  During
          March 2007, the Company issued 116,057,264 shares of common stock for consulting
          services with a fair value of $145,072 ($0.00125 per share).
  During
          March 2007, the Company issued 5,000,000 shares of common stock for consulting
          services with a fair value of $5,625 ($0.001125 per share).
  During
          April 2007, the Company issued 11,000,000 shares of common stock for consulting
          services with a fair value of $12,375 ($0.001125 per share).
 ***(B)
        Amendment to Articles of Incorporation***
 
 On
        March
        16, 2007, the Company amended its Articles of Incorporation to provide for
        an
        increase in its authorized share capital. The authorized capital stock increased
        from 1,200,000,000 to 2,400,000,000 common shares at a par value of $0.0001
        per
        share.
 
 F-68