**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-KSB/A**





**(Amendment
        No.3)**


**(Mark
      One)**


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





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


**OR**


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 0-24269**


PHANTOM
        ENTERTAINMENT, INC.


**(f/k/a
        Infinium Labs, Inc.)**


(Name
      of
      small business issuer in its charter)





**Delaware**
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              **65-1048794**
                (I.R.S.
                  Employer
                Identification
                  No.)**800
                  Fifth Avenue, Suite 4100**
                **Seattle,
                  WA 98104**
                (Address
                  of principal executive offices) (Zip Code)**206-447-1443**
                (Issuer’s
                  telephone number)




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





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




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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. x Yes 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
      April
      12, 2005, the aggregate market value of the voting and non-voting common equity
      held by non-affiliates computed by reference to the average bid and asked price
      of such common equity, was $30,108,984.67.





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





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













**INDEX**




Page
              NumberPART
                IItem
                1.
            
            Description
                of Business
            
            4Item
                2.
            
            Description
                of Property
            
            16Item
                3.
            
            Legal
                Proceedings
            
            17Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            18PART
                IIItem
                5.
            
            Market
                for Common Equity and Related Stockholder Matters
            
            18Item
                6.
            
            Management’s
                Discussion and Analysis or Plan of Operation
            
            19Item
                7.
            
            Financial
                Statements
            
            21Item
                8.
            
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            
            21Item
                8A.
            
            Controls
                and Procedures
            
            22PART
                IIIItem
                9.
            
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act
            
            23Item
                10.
            
            Executive
                Compensation
            
            25Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management
            
            27Item
                12.
            
            Certain
                Relationships and Related Transactions
            
            28Item
                13.
            
            Exhibits
            
            29




-2-


**EXPLANATORY
      NOTE**




This
        Amendment No. 3 on Form 10-KSB/A (“Form 10-KSB/A”) to Infinium Labs, Inc.’s
        Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004,
        initially filed with the Securities and Exchange Commission (“SEC”) on April 20,
        2005 (the “Original Filing”) and amended by amendments filed on December 20,
        2005 ("Amendment No. 1") and February 10, 2006 (“Amendment No. 2”), is being
        filed to (i) reflect our review of comments received from the Securities
        and Exchange Commission (“SEC”) relating to its revised interpretation with
        respect to FAS 133*“Accounting
        for Derivative Instruments and Hedging Activities,”*and
        in
        accordance with EITF 00-19*“Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        in a
        Company’s Own Stock,”*(ii)
        respond to comments received from the SEC in connection with a review of
        our
        filings, and (iii) provide additional disclosure revisions deemed appropriate
        by
        current management. Amendment No. 1 and No. 2 each have Explanatory Notes
        highlighting the changes to that particular filing.





For
        a
        further discussion of the restatement and its impact on the Company’s financial
        statements, see Note 2 to the Consolidated Financial Statements of Infinium
        Labs, Inc. and Subsidiary in Item 7, as well as its more recent filings.




Except
        as
        otherwise expressly stated by reference to a specific later date, the disclosure
        in this Form 10-KSB/A has not been updated to reflect events occurring after
        the
        Original Filing, to modify or update those disclosures affected by
        subsequent events. We have, however, updated the facing page of this report
        to reflect the name, address and telephone number of the Company’s current
        principal executive offices.




In
        addition, pursuant to the rules of the SEC, Item 15 of Part IV of the
        Original Filing has been amended to include a currently dated consent of
        our
        independent registered public accounting firm and currently dated certifications
        from our Chief Executive Officer and Interim Chief Financial Officer, as
        required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The consent
        of the independent registered public accounting firm and the certifications
        of
        our Chief Executive Officer, who is also our Interim Chief Financial Officer,
        are attached to this Form 10-KSB/A as exhibits 23, 31.1and 32.1, respectively.




-3-




**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, "we," "us," "our," "Infinium " and "our
      Company" refer to Infinium Labs, Inc. and our subsidiaries, unless the context
      otherwise requires.





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




**General
      Overview**





We
      are
      developing and seeking to commercialize 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. Our ability to generate revenue
      in the future is dependent on our ability to successfully develop and
      commercialize the Phantom Game Service.





Since
        inception through December 31, 2004, we have incurred aggregate net losses
        of
        $73,671,276. Our loss from operations for year ended December 31, 2004 was
        $27,604,817; our loss from operations for the two months ended December 31,
        2003
        was $637,549. In addition, as of December 31, 2004, we had an accumulated
        deficit of $73,671,276 and we need immediate additional capital to continue
        operations. Given our limited resources, and the delays experienced thusfar,
        we
        are not in a position to anticipate a completion date for development of
        our
        product or a launch date for the Phantom Game Service.





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





**Corporate
      History**





On
      January 5, 2004, the Company’s wholly owned subsidiary merged with and into
      Infinium Labs Operating Corporation, with Infinium Labs Operating Corporation
      surviving as its wholly owned subsidiary. Infinium Labs Operating Corporation
      was incorporated in the State of Delaware on December 9, 2002 for the purpose
      of
      developing a video game service and system. In connection with the merger and
      related transactions, the Company changed its name from Global Business
      Resources, Inc. to Infinium Labs, Inc. Infinium Labs Operating Corporation’s
      stockholders acquired 82.35% of the Company’s outstanding common stock and its
      directors and officers became the Company’s directors and officers. Since the
      completion of the merger, the Company’s business has consisted of the business
      and operations of Infinium Labs Operating Corporation. When used in this report,
      references to Phantom and Infinium Labs are references to its trademarks or
      service marks with respect to which the Company has filed applications for
      registration with the U.S. Patent and Trademark Office.


-4-


**Phantom
      Game Service**





The
      Phantom Game Service is comprised of the following key components:


·
            Phantom
                Game Receiver - The Phantom Game Receiver is a game console designed
                to
                integrate easily into a family’s home entertainment system. It connects to
                any standard television, as well as A/V receivers. The Phantom Game
                Receiver accesses the Phantom Game Service by connecting to a broadband
                Internet connection, such as a cable or DSL line or through existing
                home
                networks, including wireless home networks. Its primary components
                consist
                of a central processing unit, high-end video processor, high-speed
                memory,
                computer motherboard and large hard disk drive. The Phantom Game
                Receiver
                is equipped with a “lapboard,” which consists of a custom keyboard and
                mouse, and can also be used with a console-style game controller.
                The
                Phantom Game Receiver features multiple controller ports to enable
                multi-player gaming and provide flexibility for specialized peripherals.
                It is derived from existing PC technologies, but differs from PCs
                in that
                it is designed for game play, not to perform other functions such
                as data
                processing. This dedicated functionality enables the Phantom Game
                Receiver
                to simplify the user’s experience. The Phantom Game Receiver is only
                designed to play content downloaded through the Phantom Game Service.
                The
                Phantom Game Receiver does not use discs, cartridges or other external
                media that can be easily lost, damaged or copied. Instead, content
                is
                downloaded in real time over the Internet to the internal hard drive
                of
                the Phantom Game Receiver to enable game play. The primary technical
                characteristics of the Receiver are expected to include:




*  Display:
      Any TV


*  HDTV
      Compatible


*  Connectivity:
      Any broadband connection


*  Processor:
      Advanced Micro Devices (AMD) Sempron family


*  Graphics
      Processor: NVIDIA 3D graphics accelerator


*  System
      Memory: 256 Megabyte


*  Dolby
      digital 5.1 Channel Audio


*  Operating
      System: Microsoft Windows XP Embedded


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


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


*  Wide
      variety of input and output connectors


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


*  Transparent
      patches and upgrades


*  Client
      updates add new features to the service


*  Content
      management keeps games fresh and reliable




·
            Streaming
                Game Technology - The Phantom Game Receiver and the Phantom Game
                Service
                are designed to work in concert to deliver retail quality video games
                to
                consumers over standard home broadband Internet connections. A technique
                has been developed and is continuing to be refined by our company
                which
                allows us to take games, traditionally delivered on CD-ROM or DVD
                media,
                and convert them into digital streams of data. This technology is
                designed
                to allow consumers to start playing most games in less time than
                it would
                take to install the game from a CD-ROM or DVD.





·
            Game
                Content - We anticipate offering consumers a wide range of commercial
                video games. Because the games will be stored digitally on hosted
                servers
                there is no investment in warehouse space or physical inventory,
                either by
                the game publishers or by our company. We anticipate being able to
                offer
                many of the same games that would be found in a typical game retailer.
                In
                addition we intend to offer games no longer available at retail and
                specialty games that can be difficult to locate. Because the Phantom
                Game
                Receiver is intended to run the Windows XP Embedded operating system,
                it
                should be capable of distributing an extremely wide range of games
                originally designed for use on personal computers.




We
      anticipate that the Phantom Game Service will be offered to users on a monthly
      subscription fee basis. Subscribers would have access to a number of free games
      and would be able to purchase or demo games from a library of titles. We
      anticipate that the Service will offer access to community features and will
      enable subscribers to learn about the latest games and try new release titles.
      If subscribers purchase a game, we anticipate that they will have full access
      to
      the title for the life of their subscription, as well as access to any
      modifications, updates or additional content made available for the game.





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




-5-





Currently
      the Company's business activities are solely dedicated to the development of
      the
      Phantom Game Receiver and the Phantom Game Service. At April 2005 the Phantom
      receiver and hardware were developed to an engineering prototype level. 
The Phantom software and service were functionally complete with limited units
      in the field for user testing.  End to end functionality of the service was
      shown at 2005 Consumer Electronics Show.




**Product
      Benefits**





Our
      Phantom Game Service is designed to provide the following benefits to
      publishers, retailers and consumers:





*Windows-Based
      Platform*





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





*Unlimited
      Space For Game Software*





The
      Phantom Game Service is designed to deliver games into customers' living rooms
      securely over broadband Internet access networks. We anticipate that our content
      servers will store all of the games and provide for all e-commerce transactions.
      We believe that this will enable us to potentially store an unlimited number
      of
      games for use by our customers. As a result, we intend to offer a robust catalog
      of both new releases and previously released games.





*Increased
      Profitability*





The
      Phantom Game Service will offer both publishers and developers a content
      distribution platform that eliminates production, packaging, and retail
      merchandising costs (including open box returns). In addition, both publishers
      and developers can continue to earn revenues on games that are no longer on
      retail shelves, potentially increasing the revenue lifespan for their PC games.





*Closed
      System Prevents Piracy*





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





**Content
      Strategy**





To
      populate the Phantom Game Service with game content, we have entered into and
      plan to continue to enter into agreements with game publishers, developers
      and
      distributors under which we would have the right to offer the games on a
      commercial basis through our Service. Our agreements generally provide us with
      the right on a non-exclusive basis to distribute games through our Phantom
      Game
      Service in exchange for royalties on net sales. In some cases, we are required
      to make upfront payments, which in some cases, can be applied against future
      royalties. At December 31, 2004, we were party to agreements with a number
      of
      distributors, of which six required upfront payments, the amount of which
      totaled $1,085,000. As of that date, we had made a total of $100,000 in upfront
      payments and the balance was in default. As a result, these agreements may
      be
      terminated by the distributors, although we have not been notified by any
      distributors of intent to revoke distribution rights. The agreements generally
      have a duration of a few years, with the earliest expiring in December 2005,
      and
      require renegotiation to extend the term beyond the initial expiration date.
      Unless and until we receive additional financing, we are not planning to seek
      to
      enter into additional agreements of this nature. Our past defaults may adversely
      affect the willingness of these parties to renew the agreements if and when
      needed. Our inability to secure rights to a sufficient variety of games
      preferred by consumers, will negatively impact the viability of the Phantom
      Game
      Service.





We
      believe that this arrangement represents an extremely attractive proposition
      for
      game publishers because no additional development work or out-of-pocket costs
      are required of the publishers to distribute a game developed for PCs to our
      subscriber base via the Phantom Game Service. The Phantom Game Service will
      offer publishers access a new distribution channel for past, current and future
      PC games and an opportunity to receive incremental revenues from existing
      investments.




-6-





**Distribution
      Strategy**





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





We
      anticipate establishing a retail partner program designed to generate new
      recurring revenue streams for retailers from the sale of the Phantom Game
      Service. Retailers would receive a percentage of the subscription revenue and
      games purchased over the life of the subscription in addition to their profit
      margin from sales of the Phantom Game Receiver. In today’s model there is no
      commitment from the consumer to return to the same retailer for additional
      purchases nor is there a monthly service fee for the retailer to share revenue
      from. Under our model the original selling retailer would receive a recurring
      revenue stream in two forms in respect of Receivers and Service subscriptions
      sold by them: 1) they would receive a percentage of the monthly service fee
      and
      2) they would receive a percentage of each additional title purchased through
      the Service.





We
      do not
      have a direct sales force. As such, we intend to rely, to a large extent, on
      third parties to identify and help us secure retail channel distribution for
      the
      Phantom Game Service. We anticipate that these third party arrangements will
      require us to pay commissions in respect of any revenue generated through retail
      partners identified and covered thereby. In January 2005, we entered into such
      arrangements with a third party group covering specifically identified retail
      chains. The agreements are terminable on 45 days’ notice by either party and do
      not materially obligate either party unless and until sales are generated.
      As we
      are not in a position to commercially launch the Phantom Game Service, this
      relationship is inactive and we are not seeking to enter into similar third
      party marketing arrangements at this time.





**Competition**





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





***Gaming
      Platforms***





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





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


-7-




***Game
      Developers and Distributors***





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





***PC
      Game Services***





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





**Intellectual
      Property Strategy**





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





With
      respect to patents, we intend to protect aspects of technologies associated
      with
      the make and use of the Phantom Game Service and Phantom Game Receiver through
      both design and utility patent applications in the United States and potentially
      in other countries in which we intend to market our products and services. 
As of March 31, 2005, we had a total of 2 pending domestic patent applications,
      entitled:




(1)
            **METHOD
                AND APPARATUS FOR BACKLIGHTING OF A KEYBOARD FOR USE WITH A GAME
                DEVICE**




(2)
            **METHOD
                FOR AUTOMATIC PATCHING OF A SPARSELY STREAMED
                APPLICATION**





The
      Phantom Game Service and Phantom Game Receiver will also utilize proprietary
      software that we develop.





We
      are
      pursuing federal registration of our trademarks and service marks in the United
      States with the U.S. Patent and Trademark Office. As of March 31, 2005, we
      had 2
      independent federal trademarks registered and 3 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.





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





At
      December 31, 2004, we had 41 full-time employees, three of whom are in
      marketing, 24 of whom are in research and development and 17 of whom are
      administrative, marketing and executive personnel. There is no collective
      bargaining agreement in place.




-8-





**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 by the Company. Additional risks not
        presently known to us may also impair our business
        operations.




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





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





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





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





Since
        inception through December 31, 2004, we have incurred aggregate net losses
        of
        $73,671,276. Our loss from operations for the fiscal year ended December
        31,
        2004 was $27,604,817. There is no assurance that we will operate profitably
        or
        will generate positive cash flow in the future. In addition, our operating
        results in the future may be subject to significant fluctuations due to many
        factors not within our control, such as the unpredictability of when, if
        ever,
        our product will be launched, when customers will order products, the size
        of
        customers' orders, the demand for our products, and the level of competition
        and
        general economic conditions.





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




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





We
      will
      need to obtain additional funding in order to:





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





·
            finance
                additional growth and working capital requirements;





·
            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.




-9-




**BECAUSE
        WE HAVE A LIMITED OPERATING HISTORY** **SINCE
        OUR INCEPTION IN DECEMBER 2002 AND HAVE NOT GENERATED ANY REVENUE SINCE
        INCEPTION,** **AND THE VIDEO GAME INDUSTRY IS RAPIDLY CHANGING, WE ARE UNABLE TO ACCURATELY
        FORECAST OUR REVENUES OR OUR ACTUAL COSTS OF OPERATIONS, AND A SHORTFALL
        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 2002
        and
        have not generated an revenue since our inception, and because the video
        game
        and online gaming markets are characterized by rapidly changing technologies,
        evolving industry standards, frequent new product and service introductions,
        and
        changing customer demands, our costs may change dramatically over time which
        causes us to be unable to accurately forecast our revenues. For example,
        in the
        event that the cost to manufacture our product 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 expenses;





·
            fund
                sales and marketing activities;





·
            manufacture
                inventory; and





·
            incur
                capital expenditures.





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




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





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





As
      of
      December 31, 2004, the Company currently had outstanding balances in the sum
      of
      $985,000 owed to publishers and developers. Due to the outstanding balances,
      these content providers may elect to terminate their agreements with the Company
      and not provide content now or in the future. This would add risk to the success
      of the Phantom Game Service and to viability of the Company.





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





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





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




-10-





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




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





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





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





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





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





We
      anticipate that the Phantom Game Service 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.





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





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





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




-11-





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





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





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





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





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





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





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





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





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




-12-


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





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





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





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





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





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





**THE
        COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES AND ITS INTERNAL CONTROLS OVER
        FINANCIAL REPORTING WERE INEFFECTIVE RESULTING IN THE INABILITY TO PROPERLY
        ACCOUNT 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** **.
        IF WE ARE UNABLE TO EFFECTUATE REMEDIAL ACTIONS, SUCH AS HIRING NEW STAFF
        TO
        BETTER MAINTAIN RECORDS, AND 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, 2004, our interim 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, because we were not able 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.
        As
        noted in the Explanatory Note at the beginning of this report, this amended
        report is being filed to, among other things, correctly reflect these events
        in
        the financial statements contained herein. While new 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 quarter ended December 31, 2004 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting. Prospectively, the Company has retained new general
        and administrative staff to more closely monitor and record corporate
        transactions which are intended to strengthen our internal
        controls





We
        cannot
        assure you that we will be able to maintain adequate controls over our financial
        processes and reporting. If
        we are
        unable to effectuate remedial actions 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.




-13-





**RISKS
      RELATED TO OUR FINANCING AGREEMENTS**





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





As
        of
        December 31, 2004, we had 121,090,655 shares of common stock issued and
        outstanding and an obligation to reserve (i) 1,100,000 shares issuable upon
        conversion of a debenture of $825,000 and (ii) 21,610,521 shares issuable
        upon
        conversion of debentures in the aggregate principal amount of $2,160,000.
        In
        addition, with respect to subsection (ii) above, at that date we had outstanding
        options and warrants to purchase 55,816,597 shares of common stock. Under
        certain circumstances described in the next risk factor, the number of shares
        of
        common stock issuable upon conversion of the outstanding debentures may increase
        if the market price of our stock declines. The sale or potential sale of
        these
        shares may adversely affect the market price of our common stock.





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





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





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





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





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





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




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





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





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




-14-





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





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





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





The
        debentures are due and payable, with 8% interest, one year from the date
        of
        issuance, unless sooner converted into shares of our common stock. In addition,
        any event of default as described in the debentures could require the early
        repayment of the debentures, including a default interest rate of 18% on
        the
        outstanding principal balance of the debentures if the default is not cured
        with
        the specified grace period. We also will incur penalties of 2% of the principal
        amount of the debentures for each month beyond an initial agreed upon period
        during which we fail to cause a registration statement covering resale of
        the
        underlying shares to be declared effective. If the debentures are not converted
        into common stock and we are required to repay the debentures, we would be
        required to use our limited working capital and raise additional funds. If
        we
        were unable to repay the debentures when required, the debenture holders
        could
        commence legal action against us and foreclose on all of our assets to recover
        the amounts due. Any such action would require us to curtail or cease
        operations.





FUTURE
      SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.





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





Some
      of
      our outstanding restricted shares of common stock are eligible for sale pursuant
      to Rule 144. In addition, our working capital shortages have caused us to rely
      to a greater extent than we otherwise would on the issuance of common stock
      to
      employees and others as compensation for services. We have and expect to
      continue to rely on the use of Form S-8 for the issuance of these shares in
      registered transactions, resulting in the . shares being freely tradable without
      restriction unless held by an “affiliate” of the Company. We are unable to
      estimate the amount, timing, or nature of future sales of outstanding common
      stock. Sales of substantial amounts of our common stock in the public market
      may
      cause the stock's market price to decline. See "Description of
      Securities."





OUR
      STOCK
      PRICE CAN BE EXTREMELY VOLATILE.





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




-15-





WE
      DO NOT
      EXPECT TO PAY DIVIDENDS.





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





IF
      WE
      FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM
      THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL
      OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
      THE
      SECONDARY MARKET.





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





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





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





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





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





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





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





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





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





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





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





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.





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.





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





Our
      corporate headquarters are located in Sarasota, Florida in a 12,112 square
      foot
      office. Our lease for this office space expires on November 30, 2009 and our
      monthly rent expense for this office space is $21,644. In addition, we have
      leased 22,284 square feet of office in Seattle, Washington from which we oversee
      product development. Our lease for this space expires on August 30, 2006 and
      our
      monthly rent expense for this office space is $25,070. Due to shortages in
      working capital, we have from time to time defaulted in our obligation to make
      timely monthly rental payments. At December 31, 2004, we were current in our
      Sarasota rental payments and were approximately three months in arrears on
      our
      Seattle rental payments.





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




-16-





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





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





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




The
        parties entered into a settlement agreement whereby we agreed to pay SBI
        $55,000. The Company accrued this as a contingent liability in December 2004.
        To
        date this amount has not been made and as a result SBI has brought a new
        action
        in the Superior Court of California, Orange County, for breach of the settlement
        agreement and seeking damages of $58,000.00. The action was filed in November
        2005 and served in February 2006. The Company accrued an additional $3,000
        as a
        contingent liability in September 2005 upon notice from SBI.




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





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





Defendants
        filed a Motion to Dismiss the Complaint asserting that the Court lacked both
        subject matter and personal jurisdiction. Defendants consented to the
        question of personal jurisdiction. Consented to the exercise of personal
        jurisdiction and answered the Complaint. The District Court entered a
        declaratory judgment declaring that the Plaintiffs were not liable to the
        Defendants as a result of the publication of the article.





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





Infinium
      Labs, Inc., Timothy M. Roberts and Robert Shambro v. Digital Interactive
      Streams, Inc. and Royal O'Brien ,
      No. 2004 CA 8193 NC. Plaintiffs have sued Defendants alleging breach of a
      settlement agreement ("Settlement Agreement") and conversion, and are seeking
      damages in an amount to be determined by the Court. Defendants have
      counterclaimed alleging breach of the Settlement Agreement and are seeking
      $500,000, warrants to purchase Infinium common stock and a declaratory judgment
      that they materially complied with the Settlement Agreement. The parties
      currently are conducting discovery and no amounts have been accrued as of
      December 31, 2004.





Sue
      Bohle & Associates d/b/a The Bohle Company v. Infinium Labs, Inc. ,
      No.
      2005 CA 003604 NC. The Bohle Company has sued Infinium in the Circuit Court
      for
      Sarasota County, Florida, alleging breach of contract and seeking damages in
      the
      amount of $262,151.63 plus interest. Infinium expects to enter into a negotiated
      settlement with The Bohle Company. The Company has recorded $285,939.12 in
      accounts payable related to vendor payments due The Bohle Company as of December
      31, 2004.




-17-





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





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





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





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





NONE




**PART
      II**





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





**Market
      for Common Stock**





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





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





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




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





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





**Dividend
      Policy**





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





**Recent
      Unregistered Sales of Securities**





Unless
      otherwise stated all of the below-referenced securities were issued in a
      transaction exempt from the Securities Act of 1933, as amended (the "Securities
      Act"), pursuant to Section 4(2) of the Securities Act and/or Rule 506 of
      Regulation D promulgated thereunder (“Rule 506 Conditions”).   With
      respect to Rule 506 Conditions:   (i) the securities were sold only to
      accredited investors; (ii) the securities were not offered by any form of
      general solicitation or general advertising; (iii) each investor had represented
      that such investor was acquiring the securities for such investor's own account
      for investment; and (iv) the securities were issued with restrictive
      legends.




-18-





On
        October 8 2004, the Company issued 40,000 shares of common stock to an employee
        with a fair value of $20,000 ($.050 per share).





On
        October 18, 2004, the Company issued 100,000 shares of common stock to an
        employee with a fair value of $38,000 ($.38 per share).





On
          October 21 and 27, 2004, the Company issued 1,000,000 shares of common
          stock to
          our debenture holders from our October 2004 Bridge Loan Agreements with
          a fair
          value of $305,000 ($.305 per share) together with 1,000,000 warrants to
          purchase
          shares of common stock with a fair value of $295,000 ($.295 per share).
          The
          exercise price of the warrants is $.50 per share.
 
 On
          October 21, 2004, the Company issued 50,000 shares of common stock to a
          consultant for financial services with a fair value of $15,500 ($.31 per
          share).
 
 On
          October 22, 2004, the Company issued 800,000 shares of common stock to
          a
          consultant for marketing services with a fair value of $232,000 ($.29 per
          share).
 
 On
          November 16, 2004, the Company issued 750,000 shares of common stock to
          an
          employee with a fair value of $217,500 ($.29 per share).
 
 On
          November 17, 2004, the Company issued 700,000 shares of common stock to
          an
          employee with a fair value of $94,000 ($.1343).
 
 On
          December 17, 2004, the Company issued 200,000 shares of common stock to
          an
          employee with a fair value of $196,000 ($.98 per share).
 
 On
          November 18, 2004, the Company issued 500,000 shares of common stock to
          a
          consultant with a fair value of $130,000 ($.26 per share).
 
 On
          December 15, 2004, the Company issued 375,000 shares of common stock to
          certain
          debenture holders for payment of interest with a fair value of $67,500
          ($.18 per
          share).
 
 On
          December 15, 2004, the Company issued 150,000 shares of common stock to
          a
          consultant with a fair value of $37,500 ($.25 per share).
 
 On
          December 16, 2004, as additional consideration, the Company borrowed an
          aggregate of $1,160,000 from certain debenture holders under our December
          2004
          Securities Purchase Agreement and issued 250,000 shares of common stock
          to such
          holders with a fair value of $60,000 ($.24 per share) together with 16,312,461
          warrants to purchase shares of common stock valued at $1,100,000. The exercise
          price of each traunch of 5,437,487 warrants is $.10, $.75 and $1.00 per
          share.
          In addition, 232,000 warrants to purchase shares of common stock were granted
          to
          a finder for issue costs and had no value. The exercise price of these
          warrants
          is $.50 per share.
 
 On
          December 28, 2004, as additional consideration, the Company borrowed an
          aggregate of $1,000,000 from certain debenture holders under our December
          2004
          Securities Purchase Agreement and issued 500,000 shares of common stock
          to such
          with a fair value of $370,000 ($.74 per share) together with 4,687,485
          warrants
          to purchase shares of common stock valued at $630,000. The exercise price
          of
          these warrants is $.10.
  **ITEM
          6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS**


The
      following discussion should be read in conjunction with the audited financial
      statements and the notes thereto included elsewhere herein. Our consolidated
      financial statements are stated in United States Dollars and are prepared in
      accordance with United States Generally Accepted Accounting
      Principles.





**Overview**





We
      are
      developing and seeking to commercialize 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 and we are in immediate need
      of
      additional capital to continue our operations. Our ability to generate revenue
      in the future is dependent on our ability to successfully develop and
      commercialize the Phantom Game Service.





Given
      our
      limited resources, and the delays experienced thus far, we are not in a position
      to anticipate a completion date for development of our product or a launch
      date
      for the Phantom Game Service.





**Liquidity
      and Plan of Operations**





We
        have
        incurred recurring losses from operations since inception. Our loss from
        operations for the year ended December 31, 2004 was $27,604,817. At December
        31,
        2004, we had a working capital deficit of $55,978,441 and an accumulated
        deficit
        (total net losses since inception) of $73,671,276. In their report on our
        audited financial statements for the year ended December 31, 2004, 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, 2004, we had received $8,731,747 million in equity investments
        and
        $6,197,760 million in debt and convertible debt financings (net of discount).
        At
        December 31, 2004, we were in default on payment of a promissory note with
        a
        principal amount of $350,000. 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. As of December 31, 2004, we have recorded an aggregate of $4,979,500
        in debt discount, of which $2,175,588 was amortized as interest expense.




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. T he
          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
          has
          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 chief executive officer 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.
  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.


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. 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 have and anticipate continuing to grant common stock to fund payroll
      and certain other ongoing costs. During the year ended December 31, 2004, we
      issued an aggregate of 19,215,321 shares of common stock in settlement of
      payroll and certain other ongoing costs, of which 12,118,601 shares were issued
      under a registration statement and are freely tradable. 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. 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.




-19-




Our
      development activities have been and continue to be constrained by shortages
      in
      working capital. 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. 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 Game Receiver and Streaming Game Technology - The
      Phantom Game Receiver 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. We have engaged third parties to assist with product
      engineering and design work. Due to working capital shortages, efforts by these
      groups on our behalf have been delayed. At December 31, 2004, the Company owed
      Biostar and Walter Dorwin Teague Associates, two of such firms, $311,532 and
      $61,660, respectively, which amounts continue to be outstanding.. In addition,
      we plan to refine and improve upon our streaming techniques in order to reduce
      download times, enhance our user interface that allows customers to browse
      through lists of games and make purchases, and continue our modifications and
      enhancements to the Windows XP Embedded operating system.




Acquiring
        Rights to Game Content - As a consequence of our capital shortfalls, we have
        defaulted in payment on some of our agreements with game publishers. Our
        agreements with game distributors generally provide us with the right on
        a
        non-exclusive basis to distribute games through our Phantom Game Service
        in
        exchange for royalties on net sales. In some cases, we are required to make
        upfront payments, which in some cases, can be applied against future royalties.
        At December 31, 2004, we were party to agreements with a number of distributors,
        of which six required upfront payments, the amount of which totaled $1,085,000.
        As of December 31, 2004, we had made a total of $100,000 in upfront payments
        and
        the balance of $985,000 was in default. We have not been notified by any
        publishers of intent to revoke distribution rights. The agreements generally
        have a duration of a few years, with the earliest expiring in December 2005,
        and
        require renegotiation to extend the term beyond the initial expiration date.
        Unless and until we receive additional financing, we are not planning to
        seek to
        enter into additional agreements of this nature. Our past defaults may adversely
        affect the willingness of these parties to renew the agreements if and when
        needed.




Completing
      Development of the Content (Video Game) Distribution Network - Working with
      our
      partner, Limelight, we intend to finalize the design, testing and roll-out
      of
      our content (video game) distribution network and focus on the development,
      testing and launch of our billing system, respectively.





Prior
      to
      the commercial launch of the Phantom Game Service, we will need to enter into
      arrangements with third party manufacturers which we anticipate would entail
      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 Game Receiver such as logistics, service and
      support.




The
      commercial launch of the Phantom Game Service will require investment in
      marketing and sales activities. If and when we reach that stage, we anticipate
      securing distribution agreements with retail partners as well as promoting
      consumer awareness of the Phantom Game Service through typical marketing
      channels: advertising, public relations, and in-store promotions.





**APPLICATION
      OF CRITICAL ACCOUNTING POLICIES**




STOCK-BASED
      COMPENSATION





We
      believe that stock-based compensation is a critical accounting policy that
      affects our financial condition and results of operations. Statement of
      Financial Account Standards (“SFAS”) No. 123, Accounting for Stock-Based
      Compensation defines a fair-value based method of accounting for stock-based
      employee compensation plans and transactions in which an entity issues its
      equity instruments to acquire goods or services from non-employees, and
      encourages but does not require companies to record compensation cost for
      stock-based employee compensation plans at fair value. The Company has chosen
      to
      continue to account for employee stock-based compensation using the intrinsic
      value method prescribed in Accounting Principles Board Opinion No. 25,
      Accounting for Stock Issued to Employees (“APB No. 25) and related
      interpretations.




-20-





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R “Share-Based Payment”, which addresses the accounting for share-based
      payment transactions. SFAS 123R eliminates the ability to account for
      share-based compensation transactions using APB 25, and instead, generally
      requires that such transactions be accounted and recognized in the statement
      of
      operations based on their fair value. SFAS No. 123R will be effective for small
      business issuers as of the beginning of the first interim or annual reporting
      period that begins after December 15, 2005. SFAS No. 123R offers the Company
      alternative methods of adopting this standard. The Company has not yet
      determined which alternative method it will use. Depending upon the number
      and
      terms of options that may be granted in future periods, the implementation
      of
      this standard could have a material impact on the Company’s financial position
      and results of operations.





IMPAIRMENT
      OF GOODWILL AND LONG-LIVED ASSETS





In
      accordance with Statement of Financial Accounting Standards No. 142, “Goodwill
      and Other Intangible Assets” (SFAS No. 142”), and Statement of Financial
      Accounting Standards No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (“SFAS No. 144”), the Company reviews its non-amortizable
      long-lived assets, including intangible assets and goodwill for impairment
      annually, or sooner whenever events or changes in circumstances indicate the
      carrying amounts of such assets may not be recoverable. Other depreciable or
      amortizable assets are reviewed when indications of impairment exist. Upon
      such
      an occurrence, recoverability of these assets is determined as follows. For
      long-lived assets that are held for use, the Company compares the forecasted
      undiscounted net cash flows to the carrying amount. If the long-lived asset
      is
      determined to be unable to recover the carrying amount, then it is written
      down
      to fair value. For long-lived assets held for sale, assets are written down
      to
      fair value. Fair value is determined based on discounted cash flows, appraised
      values or management’s estimates, depending upon the nature or the assets.
      Intangibles with indefinite lives are tested by comparing their carrying amounts
      to fair value. Impairment within goodwill is tested using a two step method.
      The
      first step is to compare the fair value of the reporting unit to its book value,
      including goodwill. If the fair value of the unit is less than its book value,
      the Company then determines the implied fair value of goodwill by deducting
      the
      fair value of the reporting unit’s net assets from the fair value of the
      reporting unit. If the book value of the goodwill is greater than its implied
      fair value, the Company writes down goodwill to its implied fair value.




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.
 
 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.




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





Our
      consolidated financial statements including an index are included beginning
      on
      page F-1 immediately following the signature page to this report.




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





**PREVIOUS
      INDEPENDENT ACOUNTANTS**





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





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





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





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





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





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





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




-21-





**NEW
      INDEPENDENT ACOUNTANTS**





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





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





**Item
        8A.****CONTROLS
        AND PROCEDURES******[AS
        OF
        THE END OF THE PERIOD COVERED BY THE REPORT ONLY]





Evaluation
        of Disclosure Controls and Procedures





The
      interim chief executive officer who is also the interim chief financial officer,
      after evaluating the effectiveness of our "disclosure controls and procedures"
      (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
      15d-15(e); collectively, "Disclosure Controls") as of the end of the period
      covered by this annual report (the "Evaluation Date") has concluded that as
      of
      the Evaluation Date, our Disclosure Controls were not effective to provide
      reasonable assurance that information required to be disclosed in our reports
      filed or submitted under the Securities Exchange Act of 1934 is recorded,
      processed, summarized and reported within the time periods specified by the
      SEC,
      and that material information relating to our company and any consolidated
      subsidiaries is made known to management, including the interim chief executive
      officer and chief financial officer, particularly during the period when our
      periodic reports are being prepared to allow timely decisions regarding required
      disclosure.





In
        October 2005, Kevin Bachus, our former Chief Executive Officer and Chief
        Financial Officer, together with our independent auditor, determined that
        our
        Disclosure Controls as of the Evaluation Date were not effective in enabling
        us
        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. As noted in the Explanatory Note at the beginning
        of
        this report, Amendment No. 1 was filed to, among other things, correctly
        reflect
        these events in the financial statements contained herein. In
        2006,
        we determined that our Disclosure Controls as of the Evaluation Date were
        not
        effective in enabling us to record and properly report the gains and losses
        on
        derivative liabilities as related to our convertible debentures and warrants.
        This amended report, as noted in the Explanatory Note, is being filed to
        include
        these gains and losses on derivatives in the financial statements contained
        herein. While
        new
        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.





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 quarter ended December 31, 2004 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting. Prospectively, the Company has retained new general
        and administrative staff to more closely monitor and record corporate
        transactions which are intended to strengthen our internal
        controls.





Inherent
        Limitations on Effectiveness of Controls





The
      Company's management, including the interim chief executive officer and chief
      financial officer, who are the same person, does not expect that our Disclosure
      Controls or our internal control over financial reporting will prevent or detect
      all error and all fraud. A control system, no matter how well designed and
      operated, can provide only reasonable, not absolute, assurance that the control
      system's objectives will be met. The design of a control system must reflect
      the
      fact that there are resource constraints, and the benefits of controls must
      be
      considered relative to their costs. Further, because of the inherent limitations
      in all control systems, no evaluation of controls can provide absolute assurance
      that misstatements due to error or fraud will not occur or that all control
      issues and instances of fraud, if any, within the company have been
      detected.





These
      inherent limitations include the realities that judgments in decision-making
      can
      be faulty and that breakdowns can occur because of simple error or mistake.
      Controls can also be circumvented by the individual acts of some persons, by
      collusion of two or more people, or by management override of the controls.
      The
      design of any system of controls is based in part on certain assumptions about
      the likelihood of future events, and there can be no assurance that any design
      will succeed in achieving its stated goals under all potential future
      conditions. Projections of any evaluation of controls effectiveness to future
      periods are subject to risks. Over time, controls may become inadequate because
      of changes in conditions or deterioration in the degree of compliance with
      policies or procedures.




-22-


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





None.




**PART
      III**





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





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





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





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




***Business
      Experience***




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




***Directors
      and Executive Officers***





TIMOTHY
        M. ROBERTS was the founder of our predecessor, Infinium Labs Operating
        Corporation, and has been our Chairman and Chief Executive Officer and a
        member
        of our board of directors since the merger of our subsidiary into Infinium
        Labs
        Operating Corporation. Prior to founding Infinium Labs in December 2002,
        Mr.
        Roberts was Chairman and Chief Executive Officer for Broadband Investment
        Group
        from 1999 through 2000. Broadband Investment Group was a holding company
        which
        owned a portfolio of service companies which handled broadband infrastructure.
        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. In addition, Mr.
        Roberts was an investor in Phoenix Networks, a company located in St. Louis,
        Missouri, and founded by Peter Roberts, Mr. Roberts’ brother. Phoenix Networks
        was in the business of providing local area and wide area network services.
        As a
        nationwide DSL provider, Phoenix grew to 22,000 subscribers before being
        sold to
        MegaPath Networks in late 2000. Mr. Roberts served on the Board of Directors
        of
        Phoenix Networks since June 2001 until resigning in June of
        2005.




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.


-23-




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




KEVIN
      BACHUS became our President and Chief Operating Officer in January 2004. From
      1999 through September 2003, Mr. Bachus was Vice President, Publishing of
      Capital Entertainment Group, of which he was a co-founder. Capital Entertainment
      Group provided funding and guidance to video game developers for development
      projects, as well as, selling complete or near-complete projects to publishers.
      From 1997 through 2001 Mr. Bachus held various positions at Microsoft
      Corporation including as a founding member of the Xbox project team. Mr. Bachus
      previously served as the group product manager for DirectX, where he was
      responsible for promoting Windows as an entertainment vehicle and ensuring
      that
      the DirectX suite of tools became the primary choice for games and multimedia
      developers.




RICHARD
      S. SKOBA became our Executive Vice President of Sales and Business Development
      in February 2004. Prior to joining us, Mr. Skoba was a HP Services from December
      2002 through December 2003 where he served as a Director of Sales and a Director
      of Business Development. Mr. Skoba was a founder and corporate vice president
      at
      Intira Corporation, where he also held the positions of vice president of
      business development and vice president of sales from February 1998 through
      February 2001. Mr. Skoba's career includes his role as one of the founders
      of
      Direct Connect Systems, an enterprise storage management company




TYROL
      R.
      GRAHAM became our Vice President of Product Development in February 2004. Prior
      to joining us, Mr. Graham was at Microsoft Corporation from 1991 through 1999.
      While at Microsoft, Ty worked on projects such as the Windows Hardware Quality
      Labs and DirectX.  In 2000 Ty was a founder of Wildseed Ltd., a technology
      start-up funded in part by Ignition Partners.




***Key
      Employees***




ANDREW
      SCHNEIDER became our Senior Vice President of Marketing in May 2004. Prior
      to
      joining us, Mr. Schneider served as Senior Vice President/General Manager for
      Sony Pictures Digital Entertainment (SPDE) from 1996-2003, where he was
      responsible for developing media software products and online broadband
      entertainment based on Columbia TriStar Television Group and Sony Pictures
      Entertainment brands. Schneider's career includes serving as Director of
      Marketing for Columbia TriStar Interactive and as senior producer for NBC
      Marketing Interactive from 1994-1996, NBC's Network Television Marketing
      division.




JAMES
      J.
      ROBERTS **** is
      our
      Vice President of Corporate Development. Mr. Roberts joined Infinium Labs after
      serving from May 2001 to July 2003 as Director of Corporate Marketing and
      Regional Manager for Interactive Services, Inc., a nationwide provider of
      telecommunications and broadband services. James served from January 2000 to
      January 2001 as Vice President of Marketing at Phoenix Networks, a nationwide
      Internet services provider. James was a founder **** and
      Vice
      President of Marketing at Intira Corporation and Senior Account Manager at
      UNICOM Group.





***Family
      Relationships***




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




***Involvement
      In Certain Legal Proceedings***




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




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




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




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




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





**SECTION
      16(a) REPORTING**





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





With
            respect to our Directors or Executive Officers, we are aware that personal
            obligations to file Forms 3 and 4 during 2004 existed, but one Form 3
            and no
            Form 4s were filed. From a review of the Company’s filings, we see that Richard
            Angelotti, a Director, filed a Form 3 on March 24, 2005 for the period
            dated
            January 15, 2004. Additionally, as provided in Note 11, Related Party
            Transactions, the Company issued its officers and directors common stock
            which
            appear, solely from a review of the Company’s filings, were not timely reported
            on Form 4. More specifically, these transactions are as follows:
 
 On
            July
            28, 2004, the Company issued Richard Angelotti, a director, 800,000 shares
            of
            common stock as consideration for the director's personal guaranty of
            a $500,000
            note payable secured by a real estate mortgage encumbering the director's
            residence. On January 27, 2005, the Company borrowed $300,000 from Timothy
            Roberts, the Company’s Chief Executive Officer, under a 15% promissory note,
            which is payable no later than April 27, 2005.
 
 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.


-24-


**BOARD
      COMMITTEES**





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.





**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.





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.





**ITEM
      10. EXECUTIVE COMPENSATION**





**SUMMARY
      OF EXECUTIVE COMPENSATION**





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





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





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





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




-25-


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





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







1
            includes
                500,000 shares of S-8 stock issued in lieu of cash
                compensation.2
            includes
                500,000 shares of S-8 stock issued in lieu of cash
                compensation.3
            includes
                224,574 shares of S-8 stock issued in lieu of cash
                compensation.4
            includes
                203,400 shares of S-8 stock issued in lieu of cash
                compensation.


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





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





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





**Name**
            
            **Number
                of Securities Underlying Options/ SARs Granted
                (#)**
            
            **%
                of Total Options/ SARs Granted to Employees in Fiscal
                Year****(1)**
            
            **Exercise
                Price**
              **($/Share)****(2)**
            
            **Expiration
                Date**Timothy
                Roberts
            
            
            4,000,000
            
            
            28
            %
            $
            1.43
            
            
            June
                1, 2009Kevin
                Bachus
            
            
            4,000,000
            
            
            28
            %
            $
            0.53
            
            
            June
                1, 2009Richard
                S. Skoba
            
            
            1,500,000
            
            
            11
            %
            $
            0.53
            
            
            June
                1, 2009Andrew
                Schneider
            
            
            1,000,000
            
            
            7
            %
            $
            1.43
            
            
            June
                1, 2009Tyrol
                R. Graham
            
            
            1,000,000
            
            
            7
            %
            $
            0.53
            
            
            June
                1, 2009







(1)
            The
                percentages are based on 14,155,000 total options granted to current
                employees(2)
            Determined
                based on the fair market value of the underlying shares on the date
                of a
                grant.




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




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





No
      options were exercised during 2004.





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





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


-26-


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





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





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





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




**COMPENSATION
      OF DIRECTORS AND EXECUTIVE OFFICERS**




Directors
      and executive officers receive, on an annual basis, incentive stock options
      to
      purchase shares of our common stock as awarded by our Board of Directors in
      consultation with the compensation committee. Issuances, if any, pursuant to
      the
      Company’s stock incentive plan are subject to shareholder consent which, to
      date, has not been provided.




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




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




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





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





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





***Principal
      Stockholders***





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





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





*
            Represents
                less than 1% of our Company’s outstanding stock(1)
            Shares
                inclusive of vested stock options.


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




-27-


***Changes
      in Control***





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





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





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





**TRANSACTIONS
      WITH CERTAIN OFFICERS**





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





On
      July
      28, 2004, the Company issued Richard Angelotti, a director, 800,000 shares
      of
      common stock as consideration for the director's 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, is 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
      June
      21, 2004, the Company compensated the Chief Executive Officer $50,000 as
      consideration for the Chief Executive Officer's personal guaranty at that time
      of a commercial promissory note payable secured by a real estate mortgage
      encumbering the Chief Executive Officer's 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
          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.


**TRANSACTIONS
      WITH PROMOTER**





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





The
        promoters of our Company are our directors and officers .


-28-


**ITEM
      13. EXHIBITS**




(a)
            Exhibits.




Exhibit
                No.
            
            Exhibit
                Description
            
            Location2-1
            
            Agreement
                and Plan of Merger dated as of Filed herewith
            
            Incorporated
                by Reference to ExhibitDecember
                24, 2003 by and among Global Business
            
            2-1
                to Form 8-K filed with the SEC onResources,
                Inc., Global Infinium Merger Sub, Inc.,
            
            January
                20, 2004Infinium
                Labs Corporation and Peter J. Goldstein3-1
            
            Certificate
                of Incorporation
            
            Incorporated
                by Reference to Exhibit3-0
                to Form SB-2 (Registration No.333-67990)
                filed with the SEC onAugust
                20, 20013-2
            
            Certificate
                of Amendment of Certificate of Incorporation
            
            Incorporated
                by reference to Exhibit3-2
                to the Company's Form 10-KSB forthe
                year ended December 31, 2003 (the"Form
                10-KSB")3-3
            
            Certificate
                of Amendment of Certificate of Incorporation
            
            Incorporated
                by reference to Exhibit3-3
                to the Company's Form 10-KSB forthe
                year ended December 31, 2003 (the"Form
                10-KSB")3-4
            
            By-laws
            
            Incorporated
                by reference to Exhibit3-4
                to the Company's Form 10-KSB forthe
                year ended December 31, 2003 (the"Form
                10-KSB")4-1
            
            Stock
                Purchase Agreement dated as of January 22, 2004
            
            Incorporated
                by reference to Exhibitbetween
                Infinium Labs, Inc. and SBI Brightline VI, LLC
            
            4-1
                to Form 8-K filed with the SEC onJanuary
                26, 20044-2
            
            Stock
                Purchase Agreement dated as of January 22, 2004
            
            Incorporated
                by reference to Exhibitbetween
                Infinium Labs, Inc. and Infinium Investment
            
            4-2
                to Form 8-K filed with the SEC onPartners,
                LLC
            
            January
                26, 20044-3
            
            Form
                of Subscription Agreement between Infinium Labs,
            
            Incorporated
                by reference to ExhibitInc.
                and certain stockholders of Infinium Labs, Inc.
            
            4-3
                to the Form 10-KSB10-1
            
            12%
                Secured Subordinated Debenture between the Company
            
            Incorporated
                by reference to Exhibitand
                Contare Ventures, LLC, dated February 23, 2004
            
            10-12
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-2
            
            12%
                Secured Subordinated Debenture between the Company
            
            Incorporated
                by reference to Exhibitand
                Gary Kurfirst, dated February 23, 2004
            
            10-9
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-3
            
            15%
                Secured Debenture between the Company and James
            
            Incorporated
                by reference to ExhibitBeshara,
                dated March 29, 2004
            
            10-4
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-4
            
            15%
                Secured Debenture between the Company and Ronald
            
            Incorporated
                by reference to ExhibitWestman,
                dated April 7, 2004
            
            10-11
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-5
            
            15%
                Secured Subordinated Debenture between the Company
            
            Incorporated
                by reference to Exhibitand
                James Beshara, dated May 3, 2004
            
            10-3
                to the Form 10-QSB filed with theSEC
                on August 23, 2004




-29-




10-6
            
            15%
                Secured Debenture between the Company and Ronald
            
            Incorporated
                by reference to ExhibitWestman,
                dated May 7, 2004
            
            10-1
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-7
            
            Pledge
                Agreement between Robert F. Shambro in favor of
            
            Incorporated
                by reference to ExhibitPhoenix
                Capital Opportunity Fund, dated May 12, 2004
            
            10-6
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-8
            
            Promissory
                Note between the Company and Sharon M.
            
            Incorporated
                by reference to ExhibitBeshara,
                dated May 18, 2004
            
            10-5
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-9
            
            15%
                Secured Subordinated Debenture between the Company
            
            Incorporated
                by reference to Exhibitand
                SBI USA, LLC, dated May 28, 2004
            
            10-10
                to the Form 10-QSB filed with theSEC
                on August 23, 200410-11
            
            Amended
                and restated convertible secured promissory note
            
            Incorporated
                by reference to Exhibitdated,
                June 16, 2004, between the Company and Phantom
            
            10-2
                to the Form 10-QSB filed withInvestors,
                LLC
            
            the
                SEC on August 23, 200410-12
            
            Commercial
                Promissory Note between the Company and
            
            Incorporated
                by reference to ExhibitVideo
                Associates, LLC, dated June 2004
            
            10-8
                to the Form 10-QSB filed withthe
                SEC on August 23, 200410-13
            
            Employee
                Stock Ownership
            
            Incorporated
                by reference to Exhibit10-13
                to the Form 10-QSB filed withthe
                SEC on August 23, 200410-14
            
            Promissory
                Note between the Company and Stephen
            
            Incorporated
                by reference to ExhibitA.
                Witzer, dated July 28, 2004
            
            10-14
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-15
            
            10%
                Secured Promissory Note between the Company and
            
            Incorporated
                by reference to ExhibitHazinu
                Ltd., dated October 20, 2004
            
            4-2
                to Form 8-K filed with the SEC onOctober
                29, 200410-16
            
            10%
                Secured Promissory Note between the Company and JM
            
            Incorporated
                by reference to ExhibitInvestors,
                LLC, Fenmore Holdings, LLC, Viscount
            
            4-6
                to Form 8-K filed with the SEC onInvestments
                Limited and Congregation Mishkan Sholom,
            
            October
                29, 2004dated
                October 27, 200410-17
            
            Securities
                Purchase Agreement between the Company and
            
            Incorporated
                by reference to ExhibitHazinu
                Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
            
            4-1
                to Form 8-K filed with the SEC onViscount
                Investments Limited and Congregation Mishkan
            
            December
                22, 2004Sholom,
                dated December 13, 200410-18
            
            Registration
                Rights Agreement between the Company and
            
            Incorporated
                by reference to ExhibitHazinu
                Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
            
            4-2
                to Form 8-K filed with the SEC onViscount
                Investments Limited and Congregation Mishkan
            
            December
                22, 2004Sholom,
                dated December 13, 200410-19
            
            8%
                Convertible Debenture between the Company and Hazinu
            
            Incorporated
                by reference to ExhibitLtd.,
                JM Investors, LLC, Fenmore Holdings, LLC, Viscount
            
            4-3
                to Form 8-K filed with the SEC onInvestments
                Limited and Congregation Mishkan Sholom,
            
            December
                22, 2004dated
                December 13, 2004




-30-





10-20
            
            8%
                Convertible Debenture between the Company and
            
            Incorporated
                by reference to Form 8-Kaccredited
                investors, dated December 23, 2004
            
            filed
                with the SEC on January 5, 200510-21
            
            Employment
                agreement between the Company and Richard
              Skoba
                dated January 3, 2003
            
            Incorporated
                by reference to Exhibit 10-21 to the
              Form
                10-KSB filed with the SEC on April 20, 200510-22
            
            Pinnacle
                Marketing agreement to serve as manufacturing
            
            Incorporated
                by reference to ExhibitRepresentatives
            
            10-22
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-23
            
            Summit
                Marketing agreement to serve as manufacturing
            
            Incorporated
                by reference to ExhibitRepresentatives
            
            10-23
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-24
            
            Limelight
                Networks agreement to provide digital
            
            Incorporated
                by reference to Exhibitdelivery
                network services
            
            10-24
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-25
            
            Chicony
                agreement to manufacture system hardware
            
            Incorporated
                by reference to Exhibit10-25
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-26
            
            Saitek
                agreement to manufacture system hardware
            
            Incorporated
                by reference to Exhibit10-26
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-27
            
            BIOSTAR®
                Microtech International Corp. agreement for
            
            Incorporated
                by reference to Exhibitengineering,
                industrial design and manufacturing
            
            10-27
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-28
            
            Teague
                agreement for engineering and industrial design
            
            Incorporated
                by reference to Exhibit10-28
                to the Form SB-2/A filed withthe
                SEC on February 14, 200510-29
            
            Employment
                agreement between the Company and Richard
              Skoba
                dated June 1, 2004
            
            Incorporated
                by reference to Exhibit 10-29 to the
              Form
                10-KSB filed with the SEC on April 20, 200510-30
            
            Employment
                agreement between the Company and Timothy
              M.
                Roberts dated September 17, 2004
            
            Incorporated
                by reference to Exhibit 10-30 to the
              Form
                10-KSB filed with the SEC on April 20, 200510-31
            
            Employment
                agreement between the Company and Kevin
              Bachus
                dated November 1, 2003
            
            Incorporated
                by reference to Exhibit 10-31 to the
              Form
                10-KSB filed with the SEC on April 20, 200510-32
            
            Employment
                agreement between the Company and Tyrol
              Graham
                dated January 15, 2004
            
            Incorporated
                by reference to Exhibit 10-32 to the
              Form
                10-KSB filed with the SEC on April 20, 200510-33
            
            Employment
                agreement between the Company and Andrew
              Schneider
                dated May 24, 2004
            
            Incorporated
                by reference to Exhibit 10-33 to the
              Form
                10-KSB filed with the SEC on April 20,
                2005





10-34
            
            Distribution
                Agreement between the Company and Riverdeep, Inc. dated October 20,
                2003
            
            Filed
                herewith10-35
            
            Distribution
                Agreement between the Company and Codemasters Software Company Ltd.
                Dated
                December 3, 2004
            
            Filed
                herewith10-36
            
            Distribution
                Agreement between the Company and Atari, Inc. dated September 14,
                200 4
            
            Filed
                herewith10-37
            
            Distribution
                Agreement between the Company and Eidos, Inc. dated September 21,
                2004
            
            Filed
                herewith10-38
            
            Letter
                of Inter between the Company and Vivendi Universal Games, Inc. dated
                September 20, 2004
            
            Filed
                herewith31-1
            
            Certificate
                of Chief Executive Officer and Interim Chief Financial Officer dated
                February 10,
            
            Filed
                herewith32-1
            
            Certification
                by Chief Executive Officer and Interim Chief Financial Officer dated
                February 10, 2006
            
            Filed
                herewith




-31-


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





Audit
      Fees. The aggregate fees billed by our auditors, for professional services
      rendered for the audit of the Company's annual financial statements for the
      year
      ended December 31, 2004 and for the two months ended December 31, 2003 and
      for
      the reviews of the financial statements included in the Company's Quarterly
      Reports on Form 10-QSB during those fiscal years were $53,625 and
      $18,988 respectively. The aggregate fees billed by our former auditors, for
      professional services rendered for the audit of the Company's annual financial
      statements for the period from December 9, 2002 (Inception) to October 31,
      2003
      was $23,280.





Audit-related
      Fees. None.





Tax
      Fees.
      The Company incurred fees to our former auditors of $44,764 and $5,000 for
      tax
      compliance matters during the year ended December 31, 2004 and the two months
      ended December 31, 2003, respectively.





All
      Other
      Fees. There were no fees billed by our auditors for the above-referenced
      periods, for other non-audit professional services, other than those services
      listed above.




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




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


-32-


**SIGNATURES**




In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this Amendment No. 3 on Form 10-KSB/A to its Annual Report on Form 10-KSB
        for
        the year ended December 31, 2004 to be signed on its behalf by the undersigned,
        thereunto duly authorized.




**INFINIUM
                  LABS, INC.**Date: September
                15,
                2006
              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, 2004 to be
      signed on its behalf by the undersigned, thereunto duly authorized.





**SIGNATURE**
              
              **TITLE**
              
              **DATE****/s/*****Greg
                  Koler***
              
              Chief
                  Executive Officer and
              
              September
                  15, 2006Greg
                  Koler
              
              Interim
                  Chief Financial Officer**/s/*****Timothy
                  Roberts***
              
              Chairman
                  of the Board of Directors
              
              September
                  15, 2006Timothy
                  Roberts**/s/*****Richard
                  Angelotti*****
              
              Director
              
              September
                  15, 2006Richard
                  Angelotti




-33-


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**FINANCIAL
      STATEMENTS**


**AS
      OF DECEMBER 31, 2004 CONSOLIDATED (RESTATED) AND 2003 (RESTATED)**








**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**





**CONTENTS**




PAGES
            
            F-1
            
            Reports
                of Independent Registered Public Accounting FirmsPAGE
            
            F-2
            
            Balance
                Sheets as of December 31, 2004 (Consolidated) (Restated - Note 2)
                and 2003
                (Restated - Note 2)PAGE
            
            F-3
            
            Statements
                of Operations for the Year Ended December 31, 2004 (Consolidated)
                (Restated - Note 2) and for the Two Months Ended December 31, 2003
                (Restated - Note 2) and for the Period from December 9, 2002 (Inception)
                to December 31, 2004 (Restated - Note 2) and for the Period from
                December
                9, 2002 (Inception) to October 31, 2003PAGES
            
            F-4
                - F-7
            
            Statement
                of Changes in Stockholders’ Deficiency for the Period from December 9,
                2002 (Inception) Through December 31, 2004 (Restated - Note
                2)PAGES
            
            F-8
            
            Statements
                of Cash Flows for the Year Ended December 31, 2004 (Consolidated)
                (Restated - Note 2) and for the Two Months Ended December 31, 2003
                (Restated - Note 2) and for the Period from December 9, 2002 (Inception)
                to December 31, 2004 (Restated - Note 2) and for the Period from
                December
                9, 2002 (Inception) to October 31, 2003PAGES
            
            F-9
                - F-30
            
            Notes
                to Financial Statements












**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors of:


Infinium
      Labs, Inc.


(A
      Development Stage Company)





We
      have
      audited the accompanying balance sheets of Infinium Labs, Inc. and subsidiary
      (A
      Development Stage Company) as of December 31, 2004 (consolidated) and 2003,
      and
      the related statements of operations, changes in stockholders’ deficiency and
      cash flows for the year ended December 31, 2004 (consolidated), for the two
      months ended December 31, 2003 and for the period from December 9, 2002
      (inception) to December 31, 2004 (consolidated). These financial statements
      are
      the responsibility of the Company’s management. Our responsibility is to express
      an opinion on these financial statements based on our audit. The financial
      statements of Infinium Labs Corporation as of October 31, 2003, were audited
      by
      other auditors whose report dated December 11, 2003, except for Note 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 financial statements referred to above present fairly in all
      material respects, the financial position of Infinium Labs, Inc. and subsidiary
      (A Development Stage Company) as of December 31, 2004 (consolidated) and 2003
      and the results of its operations and its cash flows for the year ended December
      31, 2004 (consolidated), for the two months ended December 31, 2003 and for
      the
      period from December 9, 2002 (inception) to December 31, 2004, in conformity
      with accounting principles generally accepted in the United States of
      America.





The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 9 to the
        consolidated financial statements, the Company has had recurring net losses
        from
        inception of $73,671,276, has a working capital deficiency of $55,978,441,
        a
        stockholders deficiency of $55,241,384, and used cash in operations from
        inception of $11,996,783. This raises substantial doubt about its ability
        to
        continue as a going concern. Management’s plans concerning this matter are also
        described in Note 10. The accompanying consolidated financial statements
        do not
        include any adjustments that might result from the outcome of this
        uncertainty.





As
      discussed in Note 2, the Company restated its Financial Statements for the
      two
      months ended December 31, 2003 and the year ended December 31, 2004
      (consolidated).





WEBB
      & COMPANY, P.A.





Boynton
      Beach, Florida


April
        14,
        2005, except for Notes 1(P), 2(C), 5, 7, 8 (A), 8 (D), 9 (B), 10, 11
        and 12 (A) as to which date is August 18, 2006.





F-1





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Balance
      Sheets**




December
                  31,
                2004
                (Consolidated)
              
              December
                  31, 2003**ASSETS****Restated
                  - Note 2****Current
                  Assets:**Cash
              
              $
              4,102
              
              $
              45,852Restricted
                  Cash
              
              
              894,910
              
              
              —Prepaid
                  Expenses
              
              
              66,589
              
              
              —Other
                  Receivable
              
              
              407
              
              
              3,350Total
                  Current Assets
              
              
              966,008
              
              
              49,202**Property
                  and Equipment, Net**
              
              
              475,122
              
              
              162,763**Other
                  Assets:**Deposits
              
              
              5,440
              
              
              7,490Intangible
                  asset, net (Note 3)
              
              
              256,495
              
              
              300,000Total
                  Other Assets
              
              
              261,935
              
              
              307,490**Total
                  Assets**
              
              
              1,703,065
              
              
              519,455**LIABILITIES
                    AND STOCKHOLDERS’ DEFICIENCY****Current
                  Liabilities:**Accounts
                  payable
              
              $
              3,598,885
              
              $
              349,005Due
                  to developers
              
              
              985,000
              
              
              —Accrued
                  interest expense
              
              
              301,415
              
              
              6,781Other
                  accrued expense
              
              
              105,000
              
              
              120,850Accrued
                  payroll and payroll taxes (Note 8(G))
              
              
              1,665,769
              
              
              75,997Derivatives
                  (Note 5(B))
              
              
              42,990,032
              
              
              —Promissory
                  notes (Note 5(A))
              
              
              7,298,348
              
              
              366,154**Total
                  Current Liabilities**
              
              
              56,944,449
              
              
              918,787**Commitments
                  and Contingencies**
              
              
              —
              
              
              —**Stockholders’
                  Deficiency:**Preferred
                  stock, $0.001 par value, 10,000,000 shares authorized, none issued
                  and
                  outstanding
              
              
              —
              
              
              —Common
                  stock, $0.0001 par value, 200,000,000 shares authorized, 121,090,655
                  and
                  69,115,900 shares issued and outstanding, respectively (Note
                  6)
              
              
              12,109
              
              
              6,911Additional
                  paid-in capital (Note 6)
              
              
              18,440,300
              
              
              2,702,348Subscription
                  receivable
              
              
              (22,517
              )
              
              (163,517
              )Accumulated
                  deficit during development stage
              
              
              (73,671,276
              )
              
              (2,945,074
              )Total
                  Stockholders’ Deficiency
              
              
              (55,241,384
              )
              
              (399,332
              )**Total
                  Liabilities and Stockholders’ Deficiency**
              
              
              1,703,065
              
              
              519,455




See
      accompanying Notes to Financial Statements.




F-2





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Operations**




For
                  the Year Ended December 31, 2004
                (Consolidated)
              
              For
                  the Two Months Ended December 31, 2003
              
              For
                  the Period
                from
                December
                  9, 2002 (Inception) to
                October
                  31, 2003
              
              For
                  the Period from
                December
                  9, 2002
                (Inception
                  to December 31, 2004)
                (Consolidated)Restated
                  - Note 2
              
              Restated
                  - Note 2
              
              
              
              Restated
                  - Note 2**Operating
                  Expenses:**Development
                  costs
              
              $
              3,130,854
              
              $
              145,943
              
              $
              259,407
              
              $
              3,536,204Advertising
              
              
              1,380,377
              
              
              55,141
              
              
              153,038
              
              
              1,588,556Salary
                  expense
              
              
              6,985,422
              
              
              172,484
              
              
              —
              
              
              7,157,906Professional
                  fees
              
              
              2,808,733
              
              
              58,133
              
              
              837,737
              
              
              3,704,603Consultants
              
              
              9,082,345
              
              
              75,816
              
              
              783,860
              
              
              9,942,021Impairment
                  of assets
              
              
              352,299
              
              
              —
              
              
              —
              
              
              352,299General
                  and administrative
              
              
              3,864,787
              
              
              130,032
              
              
              236,087
              
              
              4,230,906Total
                  Operating Expenses
              
              
              27,604,817
              
              
              637,549
              
              
              2,270,129
              
              
              30,512,495**Net
                  Loss from Operations**
              
              
              (27,604,817
              )
              
              (637,549
              )
              
              (2,270,129
              )
              
              (30,512,495
              )**Other
                  Income (Expense):**Other
                  income
              
              
              1,897
              
              
              37
              
              
              —
              
              
              1,934Loss
                  on sale of equipment
              
              
              (448
              )
              
              —
              
              
              —
              
              
              (448
              )IRS
                  penalty and interest expense
              
              
              (528,377
              )
              
              (19,437
              )
              
              —
              
              
              (547,814
              )Gain
                  / (Loss) on derivatives
              
              
              (36,906,415
              )
              
              —
              
              
              —
              
              
              (36,906,415
              )Interest
                  expense
              
              
              (5,688,042
              )
              
              (17,996
              )
              
              —
              
              
              (5,706,038
              )Total
                  Other Income (Expense)
              
              
              (43,121,385
              )
              
              (37,396
              )
              
              —
              
              
              (43,158,781
              )**Loss
                  before Income Taxes**
              
              
              (70,726,202
              )
              
              (674,945
              )
              
              (2,270,129
              )
              
              (73,671,276
              )**Income
                  Taxes**
              
              
              —
              
              
              —
              
              
              —
              
              
              —**Net
                  Loss**
              
              $
              (70,726,202
              )
              $
              (674,945
              )
              $
              (2,270,129
              )
              $
              (73,671,276
              )**Per
                  Common Share**Loss
                  per common share - basic and diluted
              
              $
              (0.70
              )
              $
              (0.01
              )
              $
              (0.04
              )
              $
              (0.93
              )Weighted
                  average - basic and diluted
              
              
              100,688,617
              
              
              67,745,088
              
              
              57,420,568
              
              
              79,230,175





See
      accompanying Notes to Financial Statements.




F-3





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


**For
      the Period from December 9, 2002 (Inception) to December 31,
      2004**




Preferred
                Stock
            
            Common
                Stock
            
            Additional
                Paid-In
            
            Accumulated
                Deficit During Development
            
            Stock
                SubscriptionsShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stage
            
            Receivable
            
            TotalStock
                issued to founders ($0.0004 per share)
            
            
            —
            
            $
            —
            
            
            58,189,728
            
            $
            5,819
            
            $
            12,703
            
            $
            —
            
            $
            (18,517
            )
            $
            5Stock
                issued for cash ($0.12 per share)
            
            
            —
            
            
            —
            
            
            4,423,012
            
            
            442
            
            
            526,261
            
            
            —
            
            
            —
            
            
            526,703Stock
                issued for services ($0.3775 per share)
            
            
            —
            
            
            —
            
            
            2,957,376
            
            
            296
            
            
            1,112,709
            
            
            —
            
            
            —
            
            
            1,113,005Net
                loss for the period from December 9, 2002 (inception) to October
                31,
                2003
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,270,129
            )
            
            —
            
            
            (2,270,129
            )Balance,
                October 31, 2003
            
            
            —
            
            
            —
            
            
            65,570,116
            
            
            6,557
            
            
            1,651,673
            
            
            (2,270,129
            )
            
            (18,517
            )
            
            (630,416
            )Stock
                issued for cash ($0.28 per share)
            
            
            —
            
            
            —
            
            
            2,169,148
            
            
            217
            
            
            612,172
            
            
            —
            
            
            (145,000
            )
            
            467,389Stock
                issued for signage rights ($0.3175 per share)
            
            
            —
            
            
            —
            
            
            942,600
            
            
            94
            
            
            299,906
            
            
            —
            
            
            —
            
            
            300,000Stock
                issued for services ($0.3175 per share)
            
            
            —
            
            
            —
            
            
            434,036
            
            
            43
            
            
            138,597
            
            
            —
            
            
            —
            
            
            138,640Net
                loss for the two months ended December 31, 2003
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (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
            )
            
            —
            
            
            —
            
            
            —Shares
                issued for cash ($0.25 per share)
            
            
            —
            
            
            —
            
            
            6,650,000
            
            
            665
            
            
            1,661,835
            
            
            —
            
            
            —
            
            
            1,662,500Stock
                issued for cash ($0.257 per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            141,000
            
            
            141,000Shares
                issued with note payable ($0.78 per share)
            
            
            —
            
            
            —
            
            
            560,000
            
            
            56
            
            
            433,944
            
            
            —
            
            
            —
            
            
            434,000Shares
                issued for legal settlement ($1.475 per share)
            
            
            —
            
            
            —
            
            
            66,668
            
            
            7
            
            
            98,328
            
            
            —
            
            
            —
            
            
            98,335Shares
                issued for services ($1.475 per share)
            
            
            —
            
            
            —
            
            
            1,750,000
            
            
            175
            
            
            2,581,075
            
            
            —
            
            
            —
            
            
            2,581,250Shares
                issued with note payable ($1.47 per share)
            
            
            —
            
            
            —
            
            
            7,500
            
            
            —
            
            
            11,025
            
            
            —
            
            
            —
            
            
            11,025





See
      accompanying Notes to Financial Statements.




F-4





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


**For
      the Period from December 9, 2002 (Inception) to December 31,
      2004**




Preferred
                Stock
            
            Common
                Stock
            
            Additional
                Paid-In
            
            Accumulated
                Deficit During Development
            
            Stock
                SubscriptionsShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stage
            
            Receivable
            
            TotalShares
                issued with note payable ($1.42 per share)
            
            
            —
            
            
            —
            
            
            200,000
            
            
            20
            
            
            283,980
            
            
            —
            
            
            —
            
            
            284,000Shares
                issued with note payable ($1.475 per share)
            
            
            —
            
            
            —
            
            
            100,000
            
            
            10
            
            
            147,490
            
            
            —
            
            
            —
            
            
            147,500Shares
                issued with note payable ($1.13 per share)
            
            
            —
            
            
            —
            
            
            60,000
            
            
            6
            
            
            67,794
            
            
            —
            
            
            —
            
            
            67,800Shares
                issued with note payable ($1.43 per share)
            
            
            —
            
            
            —
            
            
            33,000
            
            
            3
            
            
            47,187
            
            
            —
            
            
            —
            
            
            47,190Shares
                issued with note payable ($1.475 per share)
            
            
            —
            
            
            —
            
            
            511,000
            
            
            51
            
            
            753,674
            
            
            —
            
            
            —
            
            
            753,725Share
                issued for loan default penalty
                ($1.475 per share)
            
            
            —
            
            
            —
            
            
            74,999
            
            
            8
            
            
            110,616
            
            
            —
            
            
            —
            
            
            110,624Share
                issued for loan default penalty
                ($1.13 per share)
            
            
            —
            
            
            —
            
            
            75,000
            
            
            8
            
            
            84,742
            
            
            —
            
            
            —
            
            
            84,750Share
                issued for loan default penalty
                ($1.475 per share)
            
            
            —
            
            
            —
            
            
            80,000
            
            
            8
            
            
            117,992
            
            
            —
            
            
            —
            
            
            118,000Share
                issued for loan default penalty
                ($1.56 per share)
            
            
            —
            
            
            —
            
            
            603,038
            
            
            61
            
            
            942,487
            
            
            —
            
            
            —
            
            
            942,548Shares
                issued for loan default penalty
                ($1.47 per share)
            
            
            —
            
            
            —
            
            
            955,312
            
            
            96
            
            
            1,404,213
            
            
            —
            
            
            —
            
            
            1,404,309Shares
                issued for cash ($2.50 per share)
            
            
            —
            
            
            —
            
            
            40,000
            
            
            4
            
            
            99,996
            
            
            —
            
            
            —
            
            
            100,000Shares
                issued for legal settlement ($1.455 per share)
            
            
            —
            
            
            —
            
            
            53,332
            
            
            5
            
            
            77,560
            
            
            —
            
            
            —
            
            
            77,565Shares
                issued for cash ($2.00 per share)
            
            
            —
            
            
            —
            
            
            100,000
            
            
            10
            
            
            199,990
            
            
            —
            
            
            —
            
            
            200,000




See
      accompanying Notes to Financial Statements.




F-5





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


**For
      the Period from December 9, 2002 (Inception) to December 31,
      2004**




Preferred
                Stock
            
            Common
                Stock
            
            Additional
                Paid-In
            
            Accumulated
                Deficit During Development
            
            Stock
                SubscriptionsShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stage
            
            Receivable
            
            TotalShare
                issued to consultants for services
                ($1.44 per share)
            
            
            —
            
            
            —
            
            
            830,000
            
            
            83
            
            
            1,195,117
            
            
            —
            
            
            —
            
            
            1,195,200Share
                issued to consultants for services ($1.475 per share)
            
            
            —
            
            
            —
            
            
            100,000
            
            
            10
            
            
            147,490
            
            
            —
            
            
            —
            
            
            147,500Share
                issued to consultants for services
                ($1.60 per share)
            
            
            —
            
            
            —
            
            
            279,260
            
            
            28
            
            
            446,788
            
            
            —
            
            
            —
            
            
            446,816Share
                issued to consultants for services
                ($0.92 per share)
            
            
            —
            
            
            —
            
            
            440,000
            
            
            44
            
            
            404,756
            
            
            —
            
            
            —
            
            
            404,800Beneficial
                conversion of promissory notes at $0.75 per share
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            71,275
            
            
            —
            
            
            —
            
            
            71,275Shares
                issued for loan guaranty ($1.04 per share)
            
            
            —
            
            
            —
            
            
            800,000
            
            
            80
            
            
            831,920
            
            
            —
            
            
            —
            
            
            832,000Shares
                issued to consultants ($1.13 per share)
            
            
            —
            
            
            —
            
            
            1,000,000
            
            
            100
            
            
            1,129,900
            
            
            —
            
            
            —
            
            
            1,130,000Share
                issued to consultants for services
                ($0.64 per share)
            
            
            —
            
            
            —
            
            
            21,460
            
            
            2
            
            
            13,732
            
            
            —
            
            
            —
            
            
            13,734Share
                issued to consultants for services
                ($0.61 per share)
            
            
            —
            
            
            —
            
            
            200,000
            
            
            20
            
            
            121,980
            
            
            —
            
            
            —
            
            
            122,000Share
                issued to consultants for services
                ($0.60 per share)
            
            
            —
            
            
            —
            
            
            36,000
            
            
            4
            
            
            21,416
            
            
            —
            
            
            —
            
            
            21,420Share
                issued to consultants for services
                ($0.60 per share)
            
            
            —
            
            
            —
            
            
            1,933,224
            
            
            193
            
            
            1,162,251
            
            
            —
            
            
            —
            
            
            1,162,444Shares
                issued to employees ($0.33 per share)
            
            
            —
            
            
            —
            
            
            300,000
            
            
            30
            
            
            98,970
            
            
            —
            
            
            —
            
            
            99,000Shares
                issued for cash ($0.25 per share)
            
            
            —
            
            
            —
            
            
            1,900,400
            
            
            190
            
            
            474,910
            
            
            —
            
            
            —
            
            
            475,100




See
      accompanying Notes to Financial Statements.




F-6





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


**For
      the Period from December 9, 2002 (Inception) to December 31,
      2004**




Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-In
              
              Accumulated
                  Deficit During Development
              
              Stock
                  SubscriptionsShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              TotalShares
                  issued to employees ($0.32 per share)
              
              
              —
              
              
              —
              
              
              1,790,000
              
              
              179
              
              
              565,321
              
              
              —
              
              
              —
              
              
              565,500Shares
                  issued to employees ($0.22 per share)
              
              
              —
              
              
              —
              
              
              5,199,967
              
              
              520
              
              
              1,136,579
              
              
              —
              
              
              —
              
              
              1,137,099Shares
                  issued to executives ($0.22 per share)
              
              
              —
              
              
              —
              
              
              1,100,000
              
              
              110
              
              
              240,432
              
              
              —
              
              
              —
              
              
              240,542Share
                  issued to consultants for services
                  ($0.21 per share)
              
              
              —
              
              
              —
              
              
              3,885,410
              
              
              388
              
              
              811,753
              
              
              —
              
              
              —
              
              
              812,141Shares
                  issued with notes payable ($0.42 per share)
              
              
              —
              
              
              —
              
              
              1,750,000
              
              
              175
              
              
              734,825
              
              
              —
              
              
              —
              
              
              735,000Share
                  issued to consultants for services
                  ($0.28 per share)
              
              
              —
              
              
              —
              
              
              1,350,000
              
              
              135
              
              
              377,365
              
              
              —
              
              
              —
              
              
              377,500Shares
                  issued for interest ($0.18 per share)
              
              
              —
              
              
              —
              
              
              375,000
              
              
              38
              
              
              67,462
              
              
              —
              
              
              —
              
              
              67,500Shares
                  issued for services ($0.25 per share)
              
              
              —
              
              
              —
              
              
              150,000
              
              
              15
              
              
              37,485
              
              
              —
              
              
              —
              
              
              37,500Shares
                  issued for cash ($0.16 per share)
              
              
              —
              
              
              —
              
              
              1,649,635
              
              
              165
              
              
              263,910
              
              
              —
              
              
              —
              
              
              264,075Beneficial
                  conversion of promissory notes at $0.10 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              318,500
              
              
              —
              
              
              —
              
              
              318,500Fair
                  value of warrants issued in conjunction with promissory notes ranging
                  from
                  $0.10 per share to $1.00 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              295,000
              
              
              —
              
              
              —
              
              
              295,000Shares
                  contributed in kind
              
              
              —
              
              
              —
              
              
              (1,191,450
              )
              
              (119
              )
              
              119
              
              
              —
              
              
              —
              
              
              —Reclassification
                  of warrants to derivative liability
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,353,617
              )
              
              —
              
              
              —
              
              
              (4,353,617
              )Net
                  loss, December 31, 2004
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (70,726,202
              )
              
              —
              
              
              (70,726,202
              )**BALANCE,
                  DECEMBER 31, 2004 (CONSOLIDATED) (RESTATED - NOTE
                  2)**
              
              
              —
              
              $
              —
              
              
              121,090,655
              
              $
              12,109
              
              $
              18,440,300
              
              $
              (73,671,276
              )
              $
              (22,517
              )
              $
              (55,241,384
              )




See
      accompanying Notes to Financial Statements.




F-7





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Cash Flows**





For
                  the Year Ended
                December
                  31, 2004
                (Consolidated)
              
              For
                  the
                Two
                  Months Ended
                December
                  31, 2003
              
              For
                  the Period from December 9, 2002 (Inception) to
                October
                  31, 2003
              
              For
                  the Period from
                December
                  9, 2002
                (Inception)
                  to December 31, 2004**Cash
                  Flows from Operating Activities:**
              
              Restated
                  - Note 2
              
              Restated
                  - Note 2
              
              
              
              Restated
                  - Note 2Net
                  loss
              
              $
              (70,726,202
              )
              $
              (674,945
              )
              $
              (2,270,129
              )
              $
              (73,671,276
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              170,059
              
              
              3,614
              
              
              675
              
              
              174,348Impairment
                  of assets
              
              
              352,299
              
              
              —
              
              
              —
              
              
              352,299Loss
                  on disposal of assets
              
              
              448
              
              
              —
              
              
              —
              
              
              448Common
                  stock issued for services
              
              
              8,452,305
              
              
              138,680
              
              
              1,113,005
              
              
              9,703,990Common
                  Stock issued to employees
              
              
              2,042,141
              
              
              —
              
              
              —
              
              
              2,042,141Common
                  stock issued for legal settlements
              
              
              175,900
              
              
              —
              
              
              —
              
              
              175,900Common
                  stock issued for interest
              
              
              2,727,731
              
              
              —
              
              
              —
              
              
              2,727,731Common
                  stock issued for loan guarantee
              
              
              832,000
              
              
              —
              
              
              —
              
              
              832,000Amortization
                  of interest expense
              
              
              2,150,588
              
              
              25,000
              
              
              —
              
              
              2,175,588(Gain)
                  / Loss on derivatives
              
              
              36,906,415
              
              
              —
              
              
              —
              
              
              36,906,415Changes
                  in operating assets and liabilities:Decrease
                  (increase) in current assets:Prepaid
                  expenses and other receivables
              
              
              (63,646
              )
              
              (36
              )
              
              (3,314
              )
              
              (66,996
              )Deposits
              
              
              2,050
              
              
              (7,490
              )
              
              —
              
              
              (5,440
              )Increase
                  (decrease) in current liabilities:Accounts
                  payable
              
              
              3,249,880
              
              
              
              
              
              
              
              
              3,598,885Due
                  to developers
              
              
              985,000
              
              
              
              
              
              
              
              
              985,000Accrued
                  interest
              
              
              294,634
              
              
              
              
              
              
              
              
              301,415Other
                  accrued expense
              
              
              (15,850
              )
              
              
              
              
              
              
              
              105,000Accrued
                  payroll and payroll taxes
              
              
              1,589,772
              
              
              (50,427
              )
              
              603,060
              
              
              1,665,769Net
                  Cash Used in Operating Activities
              
              
              (10,874,476
              )
              
              (565,604
              )
              
              (556,703
              )
              
              (11,996,783
              )**Cash
                  Flows from Investing Activities:**Purchase
                  of property and equipment
              
              
              (803,415
              )
              
              (103,388
              )
              
              (63,664
              )
              
              (970,467
              )Sale
                  of property and equipment
              
              
              11,755
              
              
              —
              
              
              —
              
              
              11,755Increase
                  in restricted cash
              
              
              (894,910
              )
              
              —
              
              
              —
              
              
              (894,910
              )Net
                  Cash Used in Investing Activities
              
              
              (1,686,570
              )
              
              (103,388
              )
              
              (63,664
              )
              
              (1,853,622
              )**Cash
                  Flows from Financing Activities:**Repayments
                  of notes payable
              
              
              (1,075,000
              )
              
              —
              
              
              —
              
              
              (1,075,000
              )Proceeds
                  from stockholder
              
              
              —
              
              
              —
              
              
              4,940
              
              
              4,940Payments
                  to stockholder
              
              
              —
              
              
              (4,940
              )
              
              —
              
              
              (4,940
              )Proceeds
                  from sale of common stock, net
              
              
              7,737,690
              
              
              478,588
              
              
              515,469
              
              
              8,731,747Promissory
                  note
              
              
              5,856,606
              
              
              241,154
              
              
              100,000
              
              
              6,197,760Net
                  Cash Provided by Financing Activities
              
              
              12,519,296
              
              
              714,802
              
              
              620,409
              
              
              13,854,507NET
                  INCREASE (DECREASE) IN CASH
              
              
              (41,750
              )
              
              45,810
              
              
              42
              
              
              4,102CASH
                  AT BEGINNING OF PERIOD
              
              
              45,852
              
              
              42
              
              
              —
              
              
              —CASH
                  AT END OF PERIOD
              
              $
              4,102
              
              $
              45,852
              
              $
              42
              
              $
              4,102**Supplemental
                  Disclosure of Cash Flow Information:**Cash
                  paid for interest
              
              $
              508,308
              
              $
              6,780
              
              $
              —
              
              $
              515,088




**Supplemental
      Disclosure of Non-Cash Investing and Financing
      Activities:**




During
      2003, the Company issued 235,600 shares of common stock with a fair value of
      $300,000 for intangible signage rights.




F-8


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**




**NOTE
      1** **** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION**





***(A)
      Organization***




Infinium
      Labs, Inc. (“Infinium”) a Delaware corporation, formed on December 9, 2002, and
      located in Sarasota, Florida, is a development stage company, and as such has
      devoted most of its efforts since inception to developing its business plan,
      issuing common stock, raising capital and developing its products.




Infinium
      Labs, Inc. is developing an innovative broadband video game delivery system
      designed to allow consumers to purchase and play games directly over the
      internet. Infinium Labs Inc.’s service also will have the capacity to allow
      multiplayer tournaments and contests, both against other subscribers and against
      PC gamers. The subscriber can access all of this without ever having to go
      to a
      store to purchase games.





On
      January 5, 2004, Global Business Resources, Inc., a State of Delaware
      Corporation, consummated an agreement with Infinium Labs, Inc. a Delaware
      corporation, pursuant to which Infinium Labs, Inc. exchanged all of its then
      issued and outstanding shares of common stock for 58,189,728 shares or
      approximately 81% of the common stock of Global Business Resources, Inc. As
      a
      result of the agreement, the transaction was treated for accounting purposes
      as
      a capital transaction and recapitalization by the accounting acquirer (Infinium
      Labs, Inc.) and as reorganization by the accounting acquiree (Global Business
      Resources, Inc.). Subsequent to the merger, Global Business Resources, Inc.
      changed its name to Infinium Labs, Inc. and Infinium Labs, Inc. changed its
      fiscal year end to December 31 from October 31.





Accordingly,
      the financial statements include the following:





(1) The
      balance sheet consists of the net assets of the acquirer at historical cost
      and
      the net assets of the acquiree at historical cost.





(2) The
      statement of operations includes the operations of the acquirer for the periods
      presented and the operations of the acquiree from the date of the
      merger.





***(B)
      Use of Estimates***





In
      preparing financial statements in conformity with generally accepted accounting
      principles, management is required to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and the disclosure of contingent
      assets and liabilities at the date of the financial statements and revenues
      and
      expenses during the reported period. Actual results could differ from those
      estimates.





***(C)
      Consolidation***





The
      accompanying December 31, 2004 consolidated financial statements include the
      accounts of Infinium Labs, Inc. and its wholly owned subsidiary, Infinium Labs
      Operating Corporation. The accompanying financial statements for the period
      from
      November 1, 2003 through December 31, 2003 are for our wholly owned subsidiary,
      Infinium Labs Operating Corporation. The accompanying financial statements
      for
      the period from December 9, 2002 (Inception) through October 31, 2003 are for
      our wholly owned subsidiary, Infinium Labs Operating Corporation. Intercompany
      transactions and balances have been eliminated in consolidation.





***(D)
      Research and Development Costs***





The
      Company’s software products reach technological feasibility shortly before the
      products are released for manufacturing. Costs incurred after technological
      feasibility is established are not material, and accordingly, the Company
      expenses all research and development costs when incurred.





***(E)
      Property and Equipment***





Property
      and equipment are stated at cost, less accumulated depreciation. Expenditures
      for maintenance and repairs are charged to expense as incurred. Depreciation
      is
      provided using the straight-line method over the estimated useful life of three
      to seven years. Various note holders have a security interest in the Company’s
      assets.




F-9





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





***(F)
      Income Taxes***





The
      Company accounts for income taxes under the Statement of Financial Accounting
      Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under
      Statement 109, deferred tax assets and liabilities are recognized for the future
      tax consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Under Statement 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period that includes the enactment
      date.





***(G)
      Loss Per Share***





Basic
      and
      diluted net loss per common share is computed based upon the weighted average
      common shares outstanding as defined by statement of Financial Accounting
      Standards “SFAS” No. 128, “Earnings per Share.” For the twelve months
      ended December 31, 2004, two months ended December 31, 2003, the period
      from December 9, 2002 (Inception) to October 31, 2003 and from the period from
      December 9, 2002 (Inception) to December 31, 2004, the effect of common share
      equivalents was anti-dilutive and not included in the calculation of diluted
      net
      loss per common share.




***(H)
      Advertising***





Advertising
      costs are expensed either in the periods in which those costs are incurred
      or
      the first time the advertising takes place. For the year ended December 31,
      2004, the two months ended December 31, 2003, the period from December 9, 2002
      (Inception) to October 31, 2003 and the period from December 9, 2002 (Inception)
      to December 31, 2004 the company incurred advertising costs of $1,380,377,
      $55,141, $153,038 and $1,588,556, respectively.





***(I)
      Business Segments***





The
      Company operates in one segment and therefore segment information is not
      presented.





***(J)
      Recent Accounting Pronouncements***





Statement
      of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
      amendment of ARB No. 43, Chapter 4”” SFAS No. 152, “Accounting for Real Estate
      Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,” SFAS
      No. 153, “Exchanges of Non-monetary Assets - an amendment of APB Opinion No.
      29,” and SFAS No. 123 (revised 2004), “Share-Based Payment,” were recently
      issued. SFAS No. 151, 152, 153 and 123 (revised 2004) have no current
      applicability to the Company and have no effect on the financial
      statements.





***(K)
      Cash and Cash Equivalents***





The
      Company considers all highly liquid temporary cash investments with an original
      maturity of three months or less to be cash equivalents. As of December 31,
      2004, the Company had $894,910 held in an attorney trust account related to
      the
      notes payable issued in December 2004. The release of the funds to the Company
      was contingent upon the Form SB-2 being filed with the SEC. The form SB-2 was
      filed with the SEC on January 5, 2005 and, subsequently, the $894,910 was
      transferred from the attorney trust account into Infinium Labs, Inc.’s bank
      account on January 6, 2005.





***(L)
      Concentration of Credit Risk***





The
      Company at times has cash in banks in excess of FDIC insurance limits and places
      its temporary cash investments with high credit quality financial institutions.
      At December 31, 2004, the Company had no cash in excess of FDIC insurance
      limits.




***(M)
      Fair Value of Financial Instruments***





The
      carrying amounts reported in the balance sheet for cash, receivables, accrued
      expenses and notes payable approximate fair value based on the short-term
      maturity of these instruments.




F-10





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**




***(N)
      Stock Based Compensation***





The
      Company accounts for employee stock options in accordance with APB Opinion
      No.
      25, “Accounting For Stock Issued To Employees” and has adopted the
      disclosure-only option under SFAS No. 123. The Company accounts for non-employee
      stock transactions in accordance with SFAS No. 123 as amended by SFAS 148
“Accounting for Stock-Based Compensation - Transition and Disclosure” requires
      that companies, which do not elect to account for stock-based compensation
      as
      prescribed by this statement, disclose the pro-forma effects on earnings per
      share as id SFAS 123 has been adopted.




***(O)
      Long-Lived Assets, Goodwill and Intangible Assets***





In
      accordance with SFAS 142 and 144, long-lived assets, goodwill and certain
      identifiable intangible assets held and used by the Company are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. For purposes of evaluating
      the recoverability of long-lived assets, goodwill and intangible assets, the
      recoverability test is performed using undiscounted net cash flows related
      to
      the long-lived assets.





***(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**





***(A)
      Payroll and Corresponding Payroll Tax Liabilities***





The
      Company determined that certain employees were incorrectly classified as
      consultants during the year ended December 31, 2004 and the two months ended
      December 31, 2003. The Company has reclassified these consultants to employees
      and has restated these expenses and related liabilities at December 31, 2004
      and
      December 31, 2003.





***(B)
      Penalties and Interest on Payroll Tax Liabilities***





The
      Company determined that penalties and interest were applicable to unpaid payroll
      tax liabilities that existed as a result of employees originally classified
      as
      consultants during the year ended December 31, 2004 and the two months ended
      December 31, 2003. The Company also determined that penalties and interest
      were
      applicable to additional unpaid payroll tax liabilities recorded during the
      year
      ended December 31, 2004. The Company has included these penalties and interest
      in the restated expenses and related liabilities at December 31, 2004 and
      December 31, 2003.





***(C)
        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", which requires a periodic
        valuation of their fair value and a corresponding recognition of liabilities
        associated with such derivatives during the year ended December 31, 2004.
        The
        Company has included this expense and related liability at December 31,
        2004.





A
      summary
      of significant effects of the restatement is as follows:




Year
                  Ended
                December
                  31, 2004
                (As
                  Previously
                Reported)
              
              Amount
                  of
                Change
              
              Year
                  Ended
                December
                  31, 2004
                (As
                  Restated)Statement
                  of OperationsSalary
                  expense
              
              $
              6,776,876
              
              $
              208,546
              
              $
              6,985,422Consultants
              
              
              9,130,767
              
              
              (48,422
              )
              
              9,082,345Total
                  Operating Expenses
              
              
              27,444,693
              
              
              160,124
              
              
              27,604,817Net
                  loss from operations
              
              
              (27,444,693
              )
              
              (160,124
              )
              
              (27,604,817
              )IRS
                  penalty and interest expense
              
              
              0
              
              
              (528,377
              )
              
              (528,377
              )Derivatives
                  expense
              
              
              0
              
              
              (36,906,415
              )
              
              (36,906,415
              )Total
                  Other Income (Expense)
              
              
              (5,686,593
              )
              
              (37,434,792
              )
              
              (43,121,385
              )Net
                  loss
              
              
              (33,131,286
              )
              
              (37,594,916
              )
              
              (70,726,202
              )Loss
                  per common share - basic and diluted
              
              $
              (0.33
              )
              $
              (0.37
              )
              $
              (0.70
              )




F-11





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**




December
                  31, 2004
                (As
                  Previously Reported)
              
              Amount
                  of
                Change
              
              December
                  31, 2004
                (As
                  Restated)Balance
                  SheetAccrued
                  payroll and payroll taxes
              
              $
              834,682
              
              $
              831,087
              
              $
              1,665,769Derivatives
              
              
              0
              
              
              42,990,032
              
              
              42,990,032Total
                  current liabilities
              
              
              13,123,330
              
              
              43,821,119
              
              
              56,944,449Additional
                  paid-in capital
              
              
              24,523,917
              
              
              (6,083,617
              )
              
              18,440,300Accumulated
                  deficit during development stage
              
              
              (36,000,363
              )
              
              (37,670,913
              )
              
              (73,671,276
              )Total
                  Stockholders’ Deficiency
              
              $
              (11,486,854
              )
              $
              (43,754,530
              )
              $
              (55,241,384
              )




Two
                Months Ended
              December
                31, 2003
              (As
                Previously
              Reported)
            
            Amount
                of
              Change
            
            Two
                Months Ended
              December
                31, 2003
              (As
                Restated)Statement
                of OperationsSalary
                expense
            
            $
            0
            
            $
            172,484
            
            $
            172,484Consultants
            
            
            191,740
            
            
            (115,924
            )
            
            75,816Total
                Operating Expenses
            
            
            580,989
            
            
            56,560
            
            
            637,549Net
                loss from operations
            
            
            (580,989
            )
            
            (56,560
            )
            
            (637,549
            )IRS
                penalty and interest expense
            
            
            0
            
            
            (19,437
            )
            
            (19,437
            )Total
                Other Income (Expense)
            
            
            (17,959
            )
            
            (19,437
            )
            
            (37,396
            )Net
                loss
            
            
            (598,948
            )
            
            (75,997
            )
            
            (674,945
            )Loss
                per common share - basic and diluted
            
            $
            (0.01
            )
            $
            (0.00
            )
            $
            (0.01
            )




December
                31, 2003
              (As
                Previously Reported)
            
            Amount
                of
              Change
            
            December
                31, 2003
              (As
                Restated)Balance
                SheetAccrued
                payroll and payroll taxes
            
            $
            0
            
            $
            75,997
            
            $
            75,997Total
                current liabilities
            
            
            842,790
            
            
            75,997
            
            
            918,787Accumulated
                deficit during development stage
            
            
            (2,869,077
            )
            
            (75,997
            )
            
            (2,945,074
            )Total
                Stockholders’ Deficiency
            
            $
            (323,335
            )
            $
            (75,997
            )
            $
            (399,332
            )




F-12





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





**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 will amortize the cost over the life
      of
      the agreement. As of December 31, 2004, the Company has amortized $43,505 of
      expense of the signage rights.





**NOTE
      4** **** **PROPERTY
      AND EQUIPMENT**





Property
      and equipment consisted of the following as of:





December
                31,
              2004
            
            December 31,
              2003
            
            October
                31,
              2003Office
                equipment
            
            $
            79,331
            
            $
            25,684
            
            $
            10,467Computer
                equipment
            
            
            347,677
            
            
            69,072
            
            
            15,161Computer
                software
            
            
            368,232
            
            
            10,451
            
            
            —Office
                furniture
            
            
            126,631
            
            
            40,558
            
            
            28,503Leasehold
                improvements
            
            
            36,914
            
            
            21,288
            
            
            9,533958,785
            
            
            167,053
            
            
            63,664Less
                accumulated depreciation
            
            
            (131,364
            )
            
            (4,290
            )
            
            (675
            )Less
                impairment
            
            
            (352,299
            )
            
            —
            
            
            —$
            475,122
            
            $
            162,763
            
            $
            62,989





Depreciation
      expense during the twelve month period ended December 31, 2004, the two month
      period ended December 31, 2003, the period from December 9, 2002 (Inception)
      to
      October 31, 2003 and the period from December 9, 2002 (Inception) to December
      31, 2004 was $127,075, $3,614, $675 and $131,364, respectively. During 2004,
      the
      Company recognized impairment of property and equipment of $352,299 due to
      the
      closing of the Company’s Dallas, Texas office as well as the restructuring and
      consolidation of the corporate office in Sarasota, Florida.





**NOTE
      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 and Chief Executive officer. The
      maximum borrowings available under the debenture agreement are $750,000. The
      debenture is secured by all of the Company's assets and is convertible in its
      entirety at the option of the holder into the Company's common stock at a
      conversion price of $1.00. There was no beneficial conversion recognized on
      the
      issuance of the convertible notes payable as the conversion price was equal
      to
      recent cash offering price. During February 2004, the entire convertible note
      was repaid with cash of $275,000. At December 31, 2004, the outstanding balance
      on the convertible debenture was $0.




F-13





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





During
      2003, the Company entered into a $100,000 convertible note payable in full
      settlement of a lawsuit. The note is non-interest bearing and was due August
      11,
      2004. The note is convertible at the option of the note holder at any time
      at
      the current trading price of the Company's common stock. During February 2004,
      the entire convertible note was repaid with cash of $100,000. At December 31,
      2004, the balance on the note payable was $0.





In
      February 2004, the Company authorized a private debt offering of secured 12%
      and
      15% promissory notes with due dates one year from the date of issuance, within
      sixty days of the Company's SB-2 becoming effective or upon the Company
      receiving an equity investment of at least $15,000,000. For each loan to the
      Company, the lender was also entitled to 20,000 shares of the Company's common
      stock. During the twelve months ended December 31, 2004, the Company issued
      an
      aggregate of $2,400,000 promissory notes and issued 560,000 common shares.
      The
      shares were treated as a discount to the private offering, the shares were
      valued at $434,000 based on the market price on the dates the funds were
      received and the discount is being amortized over the life of the notes. These
      notes secured with the assets of the Company are currently in
      default.




On
        February 27, 2004, the Company borrowed $500,000 under a 12% secured
        subordinated debenture for a maximum term of 12 months. This debenture is
        secured with the assets of the Company and is currently in
        default.





On
        April
        7, 2004, the Company borrowed $500,000 under a 15% promissory note which
        was
        initially payable on December 15, 2004 and subsequently became payable on
        March
        31, 2005 per a conversion option agreement dated November 10, 2004 that entitles
        the note holder to convert the amount of the note into shares of stock at
        a per
        share price of $0.10; 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 150% 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 were amortized
        over the life of the note. The note was fully paid off as of December 31,
        2004.





On
        May 7,
        2004, the Company borrowed $250,000 under a 15% promissory note which was
        initially payable on September 15, 2004 and was extended to April 30, 2005
        per a
        conversion option agreement dated November 10, 2004 that entitles the note
        holder to convert the amount of the note into shares of stock at a per share
        price of $0.10; 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 is secured with the assets
        of the
        Company.




On
      May
      19, 2004, the Company borrowed $417,260 under a 15% secured promissory note
      which was initially payable on June 3, 2004 but has been amended to January
      15,
      2005 for an additional consideration of $30,000. The additional consideration
      is
      being amortized over the life of the amendment as of December 31, 2004. This
      note is currently in default.





On
      May
      28, 2004, the Company borrowed $350,000 under a 15% secured promissory note,
      which was payable August 1, 2004. As additional consideration, the Company
      issued the holder 33,000 shares of common stock having a fair value of $47,190.
      The shares were treated as a discount to the note and the discount is being
      amortized over the life of the note. The note is secured with the assets of
      the
      Company. As of December 31, 2004, this note was in default but was subsequently
      settled on January 6, 2005 via a Conversion Agreement which converted the entire
      amount of the note into common stock at a per share price of $0.10 (see Note
      11).




On
      May
      28, 2004, the Company borrowed $350,000 under a 15% promissory note which was
      initially payable on June 8, 2004 but has been amended to January 1, 2005 for
      additional consideration of $30,000. The additional consideration is being
      amortized over the life of the amendment as of December 31, 2004. As additional
      consideration, the Company issued the holder 7,500 shares of common stock having
      a fair value of $11,025. The shares were treated as a discount to the note
      and
      the discount is being amortized over the life of the note. This note is
      currently in default.




F-14





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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 Chief Executive
        Officer’s personal guaranty of note, the Company compensated the Chief Executive
        Officer $50,000. On April 11, 2005, the note was paid in full via a Conversion
        Agreement which converted the entire amount of the note into common stock
        at a
        per share price of $0.15.





On
      July
      28, 2004, the Company borrowed $500,000 under a 15% promissory note which is
      payable on July 28, 2005. As consideration for a Director's personal guaranty
      of
      note, the Company issued the Director 800,000 shares of common stock having
      a
      fair value of $832,000.





On
      September 13, 2004, the Company borrowed $350,000 under a 15% secured promissory
      note, which is payable September 13, 2005. The note is secured with the assets
      of the Company. On January 6, 2005, the note was paid in full via a Conversion
      Agreement which converted the entire amount of the note into common stock at
      a
      per share price of $0.10.




On
      October 20, 2004, the Company entered into a Bridge Loan Agreement with Hazinu
      Ltd. pursuant to which the Lender advanced the principal amount of $300,000
      to
      the Company on October 21, 2004 in exchange for (i) a 10% secured promissory
      note in such principal amount, (ii) 500,000 shares of our common stock, and
      (iii) warrants to purchase 500,000 shares of our common stock at an exercise
      price of $0.50 per share. The value of the shares and warrants of $152,500
      and
      $147,500, respectively were treated as a discount to the note and the discount
      is being amortized over the life of the note. The note was due December 31,
      2004
      and during December 2004, the entire note was repaid with cash. At December
      31,
      2004, the outstanding balance on the convertible debenture was $0.





On
      October 27, 2004, the Company entered into a Bridge Loan Agreement with JM
      Investors, LLC, Fenmore Holdings, LLC, Viscount Investments Limited and
      Congregation Mishkan Sholom pursuant to which the Lenders advanced an aggregate
      principal amount of $300,000 to the Company on October 28, 2004 in exchange
      for
      (i) 10% secured promissory notes in such aggregate principal amount, (ii)
      500,000 shares of our common stock and (iii) warrants to purchase an aggregate
      of 500,000 shares of our common stock at an exercise price of $0.50 per share.
      The value of the shares and warrants of $152,500 and $147,500, respectively
      were
      treated as a discount to the note and the discount is being amortized over
      the
      life of the note. The note was due December 31, 2004 and during December 2004,
      the entire note was repaid with cash. At December 31, 2004, the outstanding
      balance on the convertible debenture was $0.





On
        December 13, 2004, the Company entered into a Bridge Loan Agreement with
        15
        various entities pursuant to which the Lenders advanced an aggregate principal
        amount of $1,160,000 to the Company on December 16, 2004 in exchange for
        (i) 8%
        secured promissory notes in such aggregate principal amount, (ii) 250,000
        shares
        of our common stock and (iii) warrants to purchase an aggregate of 16,312,461
        shares of our common stock at exercise prices ranging from $0.10 to $1.00
        per
        share. The value of the shares and warrants of $60,000 and $1,100,000,
        respectively were treated as a discount to the note and the discount is being
        amortized over the life of the note. The 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. The note is due December 16, 2005.




F-15





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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.
        The note is due December 28, 2005.





Notes
                  payable - face value
              
              $
              10,102,260Note
                  payable - discount
              
              
              2,803,912$
              7,298,348





The
      discount from the face value of the promissory notes is being amortized over
      the
      life of the promissory notes as additional interest expense. During the twelve
      month period ended December 31, 2004, the two month period ended December 31,
      2003, the period from December 9, 2002 (Inception) to October 31, 2003 and
      the
      period from December 9, 2002 (Inception) to December 31, 2004, the Company
      has
      recorded interest expense from the discounts of $2,150,588, $25,000, $0 and
      $2,175,588, respectively.




All
      of
      these transactions were exempt from the registration requirements of Section
      4(2) of the Securities Act as transactions not involving a public
      offering.





***(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. T he
            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
            has
            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 chief executive officer 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.
  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, 2004 of $55,890.





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, 2004, the Company recorded a loss on
        derivatives of $22,499,402 as a result of the financing described above in
        accordance with guidance provided in EITF 00-19:




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.





On
        December 13, 2004 the fair value of all other outstanding warrants was
        $4,353,617 and was reclassified from Additional Paid-In Capital to Derivatives
        Liability. At December 31, 2004 the fair value was $18,760,630 and the increase
        of $14,407,013 was recorded as a loss on derivatives as provided for in EITF
        00-19.




**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
      2004. Therefore, all 2,022,900 warrants were outstanding and exercisable as
      of
      December 31, 2004.





On
      August
      26, 2004, the Company issued 100,000 shares of common stock for $200,000 ($2.00
      per share).




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.




F-16





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





During
      2004, the Company issued 1,750,000 shares of common stock for software
      development and consulting services with a fair value of $2,581,250 ($1.475
      per
      share).





During
      2004, the Company issued 279,260 shares of common stock for services with a
      fair
      value of $446,816 ($1.60 per share).





During
      2004, the Company issued 830,000 shares of restricted common stock for services
      to three consultants having a fair value of $1,195,200 ($1.44 per
      share).





During
      2004, the Company issued 440,000 shares of restricted common stock for services
      with a fair value of $404,800 ($.92 per share).





During
      2004, the Company issued 100,000 shares of our restricted common stock for
      services with a fair value of $147,500 ($1.475 per share).





During
      2004, the Company issued 1,933,224 shares to consultants for services with
      a
      fair value of $1,162,444 ($0.60 per share).





On
      July
      28, 2004, as consideration for the Director's personal guaranty of a note
      payable (see Note 4), the Company issued the Director 800,000 shares of common
      stock having a fair value of $832,000 ($1.04 per share). These shares issued
      to
      the Director were restricted shares of common stock and, therefore, were not
      tradable at the time of issuance. These shares of common stock issued to the
      Director may become unrestricted on July 28, 2005.





During
      August 2004, the Company issued 1,000,000 shares to consultants for real estate
      service with a fair value of $1,130,000 ($1.13 per share).




During
      August 2004, the Company issued 21,460 shares to a consultant for services
      with
      a fair value of $13,734 ($0.64 per share).





During
      August, 2004, the Company issued 200,000 shares to a consultant for financial
      services with a fair value of $122,000 ($0.61 per share).





During
      August 2004, the Company issued 36,000 shares to a consultant for engineering
      services with a fair value of $21,420 ($0.60 per share).





On
      September 30, 2004, the Company issued 300,000 to employees as a bonus with
      a
      fair value of $99,000 ($0.33 per share).





During
      2004, the Company issued 1,790,000 shares of common stock to employees with
      a
      fair value of $565,500 ($0.32 per share) for bonuses. This transaction was
      exempt from registration under Section 4(2) of the Securities Act because it
      did
      not involve a public offering.





During
      2004, the Company issued 5,199,967 shares of common stock to employees with
      a
      fair value of $1,137,099 ($0.22 per share) as regular compensation. This
      transaction was exempt from registration under Section 4(2) of the Securities
      Act because it did not involve a public offering.





During
      2004, the Company issued 1,100,000 shares of common stock to executives with
      a
      fair value of $240,542 ($0.22 per share) as compensation. This transaction
      was
      exempt from registration under Section 4(2) of the Securities Act because it
      did
      not involve a public offering.





During
      2004, the Company issued 3,885,410 shares of common stock for consulting
      services with a fair value of $812,141 ($0.21 per share). This transaction
      was
      exempt from registration under Section 4(2) of the Securities Act because it
      did
      not involve a public offering.





During
      2004, the Company issued 1,350,000 shares of common stock for consulting
      services with a fair value of $377,500 ($0.28 per share). This transaction
      was
      exempt from registration under Section 4(2) of the Securities Act because it
      did
      not involve a public offering.





During
      2004, the Company issued 150,000 shares of common stock for advisory services
      with a fair value of $37,500 ($0.25 per share). This transaction was exempt
      from
      registration under Section 4(2) of the Securities Act because it did not involve
      a public offering.




F-17





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





***(C)
      Stock Issued for Legal Settlement***





During
      February 2004, the Company issued 66,668 shares of common stock with a fair
      value of $98,335 ($1.475 per share) in partial settlement of a
      lawsuit.





On
      June
      4, 2004, the Company issued 53,332 shares of common stock with a fair value
      of
      $77,565 in final settlement of a lawsuit ($1.455 per share).





***(D)
      Stock Issued for Cash with Notes Payable***





During
      2004, the Company issued 560,000 shares of common stock with a fair value of
      $434,000 as additional consideration for a note payable. The fair value of
      the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      note ($0.78 per share).





During
      2004, the Company issued 200,000 shares of common stock with a fair value of
      $284,000 as additional consideration for a note payable. The fair value of
      the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      note ($1.42 per share).





During
      2004, the Company issued 100,000 shares of common stock with a fair value of
      $147,500 as additional consideration for a note payable. The fair value of
      the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      note ($1.475 per share).





During
      2004, the Company issued 60,000 shares of common stock with a fair value of
      $67,800 as additional consideration for a note payable. The fair value of the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      note ($1.13 per share).





During
      2004, the Company issued 33,000 shares of common stock with a fair value of
      $47,190 as additional consideration for a note payable. The fair value of the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      note ($1.43 per share).





During
      2004, the Company issued 511,000 shares of common stock with a fair value of
      $753,725 as additional consideration for a note payable. The fair value of
      the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      note ($1.475 per share).





During
      2004, the Company issued 7,500 shares of common stock with a fair value of
      $11,025 as additional consideration for a note payable. The fair value of the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      note ($1.47 per share).




During
      2004, the Company issued 1,750,000 shares of common stock with a fair value
      of
      $735,000 as additional consideration for notes payable. The fair value of the
      stock was allocated from the total proceeds received on the note payable and
      the
      resulting discount on the note payable will be amortized over the life of the
      notes ($0.42 per share).





***(E)
      Stock Issued for Cash as Interest on Notes
      Payable***





During
      2004, the Company issued 375,000 shares to note payable holders for accrued
      interest on the notes with a fair value of $67,500 ($0.18 per
      share).




***(F)
      Stock Issued Under Loan Default Provisions***





During
      2004, the Company issued 74,999 shares to a note payable holder under a loan
      default provision with a fair value of $110,624 ($1.475 per share).




During
      2004, the Company issued 75,000 shares to a note payable holder under a loan
      default provision with a fair value of $84,750 ($1.13 per share).




F-18





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





During
      2004, the Company issued 80,000 shares to a note payable holder under a loan
      default provision with a fair value of $118,000 ($1.475 per share).





During
      2004, the Company issued 603,038 shares to a note payable holder under a loan
      default provision with a fair value of $942,548 ($1.56 per share).





During
      2004, the Company issued 955,312 shares to a note payable holder under a loan
      default provision with a fair value of $1,404,309 ($1.47 per
      share).





***(G)
      In Kind Contribution***





During
      2004, 1,191,450 shares of common stock were returned to the Company by a
      stockholder and recorded as an In Kind Contribution.





***(H)
      Stock Dividend***





During
      January 2004, the Company declared a 4 for 1 common stock dividend effected
      to
      stockholders of record on January 19, 2004. Per share and weighted average
      share
      amounts have been retroactively restated in the accompanying financial
      statements and related notes to reflect this dividend.





***(I)
      Stock Split***





During
      May 2004, the Company declared a 4 for 1 common stock split effected to
      stockholders of record on May 5, 2004. Per share and weighted average share
      amounts have been retroactively restated in the accompanying financial
      statements and related notes to reflect this split.





***(J)
      Stock Issued in Reverse Merger***





On
      January 5, 2004, the Company issued 16,156,000 shares of common stock for all
      the outstanding shares of Global Business Resources.





All
      of
      these transactions were exempt from registration requirements of Section 4(2)
      of
      the Securities Act as transactions not involving a public offering.





***(K)
      Obligation to Reserve Stock***





As
        of
        December 31, 2004, the Company had an obligation to reserve 22,710,521 shares
        of
        common stock issuable upon conversion of debentures. In addition, as of December
        31, 2004, the Company had outstanding options and warrants totaling 55,816,597
        shares of common stock.




F-19





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**




**NOTE
          7** **** **INCOME
          TAXES**
 
 Income
          tax expense (benefit) is summarized as follows:
 
 Year
                    Ended
                  December
                    31, 2004
                
                Two
                    Months Ended December 31, 2003
                
                December
                    9, 2002 (Inception) through October 31, 2003
                
                December
                    9, 2002 (Inception) through December 31, 2004Current:Federal
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -State
                
                
                -
                
                
                -
                
                
                -
                
                
                -Deferred
                    - Federal and State
                
                
                -
                
                
                -
                
                
                -
                
                
                -Income
                    tax expense (benefit)
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
 
 The
          Company's tax expense differs from the "expected" tax expense as
          follows:
 
 Year
                    Ended
                  December
                    31, 2004
                
                Two
                    Months Ended December 31, 2003
                
                December
                    9, 2002 (Inception) through October 31, 2003
                
                December
                    9, 2002 (Inception) through December 31, 2004U.S.
                    Federal income tax expense (benefit)
                
                $
                (12,543,111
                )
                $
                (253,982
                )
                $
                (854,250
                )
                $
                (13,651,343
                )Effect
                    on net operating loss carryforward
                
                
                12,543,111
                
                
                253,982
                
                
                854,250
                
                
                13,651,343$
                -
                
                $
                -
                
                $
                -
                
                $
                -
 
 The
          tax
          effects of temporary differences that give rise to significant portions
          of
          deferred tax assets and liabilities are as follows:
 
 December
                    31,
                  2004
                
                December
                    31,
                  2003
                
                October
                    31,
                  2003Deferred
                    tax assets:Net
                    operating loss carryforward
                
                $
                13,651,343
                
                $
                1,108,231
                
                $
                854,250Total
                    gross deferred tax assets
                
                
                13,651,343
                
                
                1,108,231
                
                
                854,250Less
                    valuation allowance
                
                
                (13,651,343
                )
                
                (1,108,231
                )
                
                (854,250
                )Net
                    deferred tax assets
                
                $
                -
                
                $
                -
                
                $
                -
 
 At
          December 31, 2004, the Company had a net operating loss carry forward of
          approximately $36,277,817 for U.S. Federal income tax purposes available
          to
          offset future taxable income expiring through 2025. The net change in the
          valuation allowance during the year ended December 31, 2004 was an increase
          of
          $12,543,111.




F-20





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





**NOTE
      8** **** **COMMITMENTS
      AND CONTINGENCIES**





***(A)
      Distribution Agreements***





**Riverdeep,
      Inc** .




Infinium
      signed a distribution agreement with Riverdeep, Inc. ("Riverdeep") date October
      20, 2003 that will allow Infinium to market Riverdeep's catalog of award-winning
      video games and edutainment software on the Phantom Game System. The agreement
      expires on March 30, 2006 and authorizes Infinium to distribute Riverdeep's
      products, via the Phantom Game Service or pre-load, onto the Phantom Game
      Receiver. The titles will be available to subscribers of the Phantom Game
      Service on both a pay-per-play and pay-to-own basis.





The
      agreement with Riverdeep requires Infinium to make the following guaranteed,
      non-refundable, irrevocable, non-transferable license fees as follows:




March
                  30, 2004
              
              $
              50,000June
                  30, 2004
              
              
              50,000September
                  30, 2004
              
              
              125,000Total
              
              $
              225,000




In
      addition, Infinium incurs license fees with respect to each unit of product
      distributed. These per unit license fees shall be applied against the
      aforementioned guaranteed license fees. Once the guaranteed license fees have
      been earned down and recouped by Infinium, then Infinium shall pay directly
      to
      Riverdeep the per unit license fees for every unit of product it distributes.
      The per unit unlimited license (pay-to-own) fee ranges from $6.50 to $28.00
      per
      title. The per unit limited license (pay-per-play) fee equals fifty percent
      (50%) of Infinium's revenue realized from the limited licenses granted to end
      users.




As
      the
      Company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the payments for
      the guaranteed license fees, the company has expensed the guaranteed license
      fees as incurred. From December 9, 2002 (inception) through December 31, 2004,
      $225,000 of guaranteed license fees had been accrued and reported on the
      accompanying financial statements.





In
      the
      event that the per unit license fees exceed the guaranteed license fees, those
      per unit license fees will be expensed as incurred. Accordingly, the
      corresponding revenue related to the product distribution will be recognized
      as
      earned.





The
      Company is currently in default of this agreement.





**Codemasters
      Software Company Ltd.**




Infinium
      signed a distribution agreement with The Codemasters Software Company Ltd.
      (“Codemasters”) dated December 3, 2004 that will allow Infinium to market
      Codemasters’ catalog of video games software on the Phantom Game System. The
      agreement expires on December 31, 2005 and authorizes Infinium to distribute
      Codemasters’ products, via the Phantom Game Service or pre-load, onto the
      Phantom Game Receiver. The titles will be available to subscribers of the
      Phantom Game Service on both a pay-per-play and pay-to-own basis.




The
      agreement with Codemasters requires Infinium to make the following advance
      royalty payments as follows:


November
                  21, 2004
              
              $
              25,000Upon
                  receipt of the Licensor Deliverables
              
              
              25,000Total
              
              $
              50,000


In
      addition, Infinium incurs royalty fees with respect to each unit of product
      distributed. These per unit royalty fees shall be applied against the
      aforementioned advance royalty payments. Once the advance royalty payments
      have
      been earned down and recouped by Infinium, then Infinium shall pay directly
      to
      Codemasters the per unit royalty fees for every unit of product it distributes.
      The per unit royalty fee ranges from 25% to 50% of Infinium’s net receipts with
      a minimum per unit royalty fee ranging from $1.25 to $7.16 per
      title.




F-21




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2004, $50,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





In
      the
      event that the per unit royalty fees exceed the advance royalty payments, those
      per unit royalty fees will be expensed as incurred. Accordingly, the
      corresponding revenue related to the product distribution will be recognized
      as
      earned. The Company is currently in default of this agreement.




**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, 2004, $500,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





In
      the
      event that the per unit royalty fees exceed the advance royalty payments, those
      per unit royalty fees will be expensed as incurred. Accordingly, the
      corresponding revenue related to the product distribution will be recognized
      as
      earned. The Company is currently in default of this agreement.





**Eidos
      Inc.**




Infinium
      signed a distribution agreement with Eidos Inc. (“Eidos”) dated September 21,
      2004 that will allow Infinium to market Eidos’s catalog of video games software
      on the Phantom Game System. The agreement expires on December 31, 2005 and
      authorizes Infinium to distribute Eidos’s products, via the Phantom Game Service
      or pre-load, onto the Phantom Game Receiver. The titles will be available to
      subscribers of the Phantom Game Service on both a pay-per-play and pay-to-own
      basis.




The
      agreement with Eidos requires Infinium to make the following non-refundable
      advance royalty payments as follows:


September
                  25, 2004
              
              $62,500Upon
                  receipt of the Licensor Deliverables
              
              
              62,500Total
              
              $
              125,000


In
      addition, Infinium incurs royalty fees with respect to each unit of product
      distributed. These per unit royalty fees shall be applied against the
      aforementioned advance royalty payments. Once the advance royalty payments
      have
      been earned down and recouped by Infinium, then Infinium shall pay directly
      to
      Eidos the per unit royalty fees for every unit of product it distributes. The
      per unit royalty fee ranges from 25% to 50% of Infinium’s net
      receipts.




F-22





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





As
        the
        company has not commenced sales of the game system and there is no definitive
        way to determine the future economic benefit associated with the advance
        payments, the company has expensed the advance royalty payments as incurred.
        From December 9, 2002 (inception) through December 31, 2004, $125,000 of
        guaranteed license fees had been accrued and reported on the accompanying
        financial statements.





In
      the
      event that the per unit royalty fees exceed the advance royalty payments, those
      per unit royalty fees will be expensed as incurred. Accordingly, the
      corresponding revenue related to the product distribution will be recognized
      as
      earned. The Company is currently in default of this agreement.




**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.  $175,000 has been accrued 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




**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, 2004, $10,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





In
      the
      event that the per unit royalty fees exceed the advance royalty payments, those
      per unit royalty fees will be expensed as incurred. Accordingly, the
      corresponding revenue related to the product distribution will be recognized
      as
      earned. The Company is currently in default of this agreement.





***(B)
      Development Agreement***





The
      company has a development agreement 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, 2004, $312,000 of expenses have been accrued and reported on the
      accompanying financial statements. At December 31, 2004, no payments had been
      made to Biostar and the Company was in default of this agreement.




F-23




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





***(C)
      Leases***





Infinium
      leases office space in Sarasota, Florida (starting September 18, 2003) and
      Seattle, Washington (starting August 1, 2004) under operating leases that expire
      in 2009 and 2006, respectively. Minimum future rental payments under these
      leases are as follows:




Year
                  Ending December 31,2005
              
              $
              571,8932006
              
              
              491,0552007
              
              
              309,9382008
              
              
              329,3782009
              
              
              309,355Thereafter
              
              
              —$
              2,011,619




The
      Florida lease provides for a renewal option of 5 years at a rental rate equal
      to
      the last year of the initial term with an increase equal to the Consumer Price
      Index not to exceed 5%. Rent expense for the year ended December 31, 2004,
      the
      two months ended December 31, 2003, the period from December 9, 2002 (Inception)
      to October 31, 2003 and the period from December 9, 2002 (Inception) to December
      31, 2004 was $373,590, $3,859, $0 and $377,449, respectively.





***(D)
      Litigation***





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





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




The
        parties entered into a settlement agreement whereby we agreed to pay SBI
        $55,000. The Company accrued this as a contingent liability in December 2004.
        To
        date this amount has not been made and as a result SBI has brought a new
        action
        in the Superior Court of California, Orange County, for breach of the settlement
        agreement and seeking damages of $58,000.00. The action was filed in November
        2005 and served in February 2006. The Company accrued an additional $3,000
        as a
        contingent liability in September 2005 upon notice from SBI.




F-24





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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





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





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





Infinium
      Labs, Inc., Timothy M. Roberts and Robert Shambro v. Digital Interactive
      Streams, Inc. and Royal O'Brien ,
      No. 2004 CA 8193 NC. Plaintiffs have sued Defendants alleging breach of a
      settlement agreement ("Settlement Agreement") and conversion, and are seeking
      damages in an amount to be determined by the Court. Defendants have
      counterclaimed alleging breach of the Settlement Agreement and are seeking
      $500,000, warrants to purchase Infinium common stock and a declaratory judgment
      that they materially complied with the Settlement Agreement. The parties
      currently are conducting discovery and no amounts have been accrued as of
      December 31, 2004.




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




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





***(E)
      Employment Agreements***





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





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





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




F-25




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**




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





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




***(F)
      Licenses***





As
      detailed in Note 7(A), we have entered into agreements with a number of
      publishers to provide content for our *Phantom
      Game Service* .
      These
      agreements provide that we pay an advance to each publisher, which is recoupable
      by us against future royalties payable to these publishers under their
      respective agreements. At December 31, 2004, we owed an aggregate of $885,000
      to
      these publishers pursuant to these agreements and if we fail to pay these
      advances, these agreements may be terminated.





***(G)
      Payroll Taxes***





The
      Company has accrued applicable employment taxes for individuals that were
      initially deemed and paid as independent contractors during the year ended
      December 31, 2004 and the two months ended December 31, 2003 but, subsequently,
      reclassified as employees by the Company. In addition, the Company has recorded
      our 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 pay additional taxes for the year ended


December
      31, 2004.


As
                  of
                December
                  31,
                2004
              
              As
                  of
                December
                  31,
                2003Payroll
                  taxes
              
              $
              1,117,952
              
              $
              56,560Penalties
                  and interest
              
              
              547,817
              
              
              19,437Total
                  accrued payroll and payroll taxes
              
              $
              1,665,769
              
              $
              75,997




**NOTE
      9** **** **STOCK
      OPTIONS AND WARRANTS**




***(A)
      Stock Options Issued Under Qualified Stock Option
      Plan***




Under
      the
      2004 Incentive Stock Option Plan, the Company may grant incentive stock options
      to its employees, officers, directors, and consultants of the Company to
      purchase up to 25,000,000 shares of common stock. Under the plan, the exercise
      price of each option equals or exceeds the market price of the Company’s stock
      on the date of grant, and the options’ maximum term is five years. Options are
      granted at various times and are exercisable per a 36 month vesting
      period.





During
      2004, the Company granted 18,505,000 stock options to certain employees during
      the year ended December 31, 2004. The Company applies APB Opinion No. 25 and
      related interpretations in accounting for stock options issued to employees.
      Accordingly, no compensation cost has been recognized for options issued to
      employees. Had compensation cost been determined based on the fair market value
      at the grant date, consistent with SFAS 123, the Company’s net income (loss)
      would have changed to the pro-forma amounts indicated below.





Year
                  Ended
                December
                  31,
                2004
              
              Two
                  Months Ended
                December
                  31,
                2003
              
              December
                  9, 2002 (Inception) through
                October
                  31,
                2003
              
              December
                  9, 2002 (Inception) through December 31,
                2004Net
                  loss available to common shareholders
              
              
              As
                  Reported
              
              $
              (70,726,202
              )
              $
              (674,945
              )
              $
              (2,270,129
              )
              $
              (73,671,276
              )Pro
                  Forma
              
              $
              (71,912,660
              )
              $
              (674,945
              )
              $
              (2,270,129
              )
              $
              (74,857,734
              )Basic
                  and diluted loss per share
              
              
              As
                  Reported
              
              $
              (0.70
              )
              $
              (0.01
              )
              $
              (0.04
              )
              $
              (0.93
              )Pro
                  Forma
              
              $
              (0.71
              )
              $
              (0.01
              )
              $
              (0.04
              )
              $
              (0.94
              )





The
        fair
        value of each option grant is estimated on the date of grant using the
        Black-Scholes option pricing model with the following weighted average
        assumptions used for grants in 2004: dividend yield of zero; expected volatility
        of 187%, risk-free interest rate of 3.86%; expected life of five years for
        the
        plan. The cost of the options was calculated based on the amount of vested
        shares as the vesting period is the same as the service period of the options
        (3
        years). Based on the common stock share price, the weighted average shares
        equal
        the primary EPS on the income statement for the year ended December 31, 2004,
        the two months ended December 31, 2003, from December 9, 2002 (Inception)
        through October 31, 2003 and from December 9, 2002 (Inception) through December
        31, 2004 of $(0.70), $(0.01), $(0.04) and $(0.93),
        respectively.




F-26




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





A
      summary
      of the status of Company’s fixed stock option plan as of
      December 31, 2004 and 2003, and the changes during the years then
      ended is presented below:


December
                  31, 2004
              
              December
                  31, 2003Fixed
                  Options
              
              
              Shares
              
              
              Weighted
                Average
                  Exercise Price
              
              
              Shares
              
              
              Weighted
                Average
                  Exercise PriceOutstanding
                  at beginning of period
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Cancelled
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Granted
              
              
              18,505,000
              
              $
              1.43
              
              
              —
              
              $
              —Forfeited
              
              
              3,355,000
              
              $
              1.43
              
              
              —
              
              $
              —Expired
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Exercised
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Outstanding at end of period
              
              
              15,150,000
              
              $
              1.43
              
              
              —
              
              $
              —Options exercisable at period end
              
              
              5,184,862
              
              
              
              
              
              —Weighted
                  average fair value of options granted to employees during the
                  year
              
              $
              1.43
              
              
              
              
              $
              —




Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of
                Exercise
                  Price
              
              Number
                  Outstanding at
                December
                  31, 2004
              
              Weighted
                  Average
                Remaining
                  Contractual Life
              
              Weighted
                  Average
                Exercise
                  Price
              
              Number
                Exercisable
                  at
                December
                  31, 2004
              
              Weighted
                  Average
                Exercise
                  Price$0.00
                  - 0.99
              
              
              —
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —1.00
                  - 1.99
              
              
              15,150,000
              
              
              4.5
              
              
              1.43
              
              
              5,184,862
              
              
              1.4315,150,000
              
              
              4.5
              
              $
              1.43
              
              
              5,184,862
              
              $
              1.43
   Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of
                Exercise
                  Price
              
              Number
                Outstanding
                  at
                December
                  31, 2003
              
              Weighted
                  Average
                Remaining
                  Contractual Life
              
              Weighted
                  Average
                Exercise
                  Price
              
              Number
                  Exercisable at December 31, 2003
              
              Weighted
                  Average
                Exercise
                  Price$0.00
                  - 0.99
              
              
              —
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —1.00
                  - 1.99
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              ——
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —


During
      the period ended October 31, 2003, the Company had no Stock Option Plan in
      place.




F-27




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





***(B)
      Warrants Issued and Outstanding***





Stock
      Purchase Warrants





For
      the
      twelve months ended December 31, 2004, the Company granted warrants to purchase
      shares of common stock in conjunction with notes payable. The warrants were
      treated as discounts to the notes and the company recognized an expense of
      $345,384 in the statement of operations for the year ended December 31, 2004,
      for the amortization of the discounts related to the warrants.





December
                  31,
                2004
              
              December
                  31,
                2003
              
              October
                  31,
                2003Warrants
                  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
              
              
              4,404,966
              
              
              —
              
              
              —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.
              
              
              8,722,604
              
              
              —
              
              
              —Warrants
                  issued with subscription agreements. The term of the warrants are
                  five
                  years expiring November 10, 2009 and are exercisable at $0.25 per
                  share.
              
              
              678,900
              
              
              —
              
              
              —Warrants
                  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
              
              
              —
              
              
              —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
              
              
              —
              
              
              —Warrants
                  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
              
              
              —
              
              
              —Warrants
                  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
              
              
              —
              
              
              —Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring October 22, 2009. The warrants are exercisable at
                  $0.50 per
                  share.
              
              
              500,000
              
              
              —
              
              
              —Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring October 27, 2009. The warrants are exercisable at
                  $0.50 per
                  share.
              
              
              500,000
              
              
              —
              
              
              —Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              5,437,487
              
              
              —
              
              
              —Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $0.75
                  per share.
              
              
              5,437,487
              
              
              —
              
              
              —Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $1.00
                  per share.
              
              
              5,437,487
              
              
              —
              
              
              —Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              4,687,485
              
              
              —
              
              
              —Total
              
              
              40,666,597
              
              
              —
              
              
              —




**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
        $73,671,276, has a working capital deficiency of $55,978,441, a stockholders
        deficiency of $55,241,384 and has a negative cash flow from operations of
        $11,996,783. This raises substantial doubt about its ability to continue
        as a
        going concern. The ability of the Company to continue as a going concern
        is
        dependent on the Company’s ability to raise additional capital and implement its
        business plan. The financial statements do not include any adjustments that
        might be necessary if the Company is unable to continue as a going
        concern.





Management
      believes that actions presently being taken to obtain additional funding and
      implement its business plan provide the opportunity for the Company to continue
      as a going concern.





**NOTE
      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, 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
            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
            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
            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.


F-28




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**






**NOTE
      12**  **SUBSEQUENT
      EVENTS**





***(A)
      Notes Payable***


On
              January 27, 2005, the Company borrowed $300,000 Timothy Roberts, the
              Company’s
              Chief Executive Officer, under a 15% promissory note, which is payable
              no later
              than April 27, 2005. . 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
              January 28, 2005, the Company borrowed $135,000 under a 17% promissory
              note,
              which is payable no later than April 30, 2005.
 
  On
              January 31, 2005, the Company borrowed $175,000 under a 15% 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
              January 31, 2005, the Company borrowed $100,000 under a 15% 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
              February 3, 2005, the Company borrowed $100,000 under a 15% 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
              March
              9, 2005, the Company borrowed $400,000 under a 10% promissory note,
              which is
              payable no later than April 15, 2005. The note and interest are in
              default.
 
 On
              March
              21, 2005, the Company borrowed $200,000 under a 17% promissory note,
              which is
              payable no later than May 10, 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.
 
 On
              April
              7, 2005, the Company borrowed $300,000 under a 12% promissory note,
              which was
              payable no later than August 5, 2005.
  ***(B)
        Common Stock Issuances***





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





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





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





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





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





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




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





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




F-29




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





***(C)
      Stock Returned per Legal Settlement***





During
      2005, Sensable Technologies returned their 120,000 shares of common stock after
      the Company’s receipt of the $150,000 payment from Sensable Technologies as a
      specified in the Second Amendment to Concurrent Use and Settlement Agreement
      dated May 28, 2004.





***(D)
      Litigation***





Sue
      Bohle & Associates d/b/a The Bohle Company v. Infinium Labs, Inc. ,
      No.
      2005 CA 003604 NC. The Bohle Company has sued Infinium in the Circuit Court
      for
      Sarasota County, Florida, alleging breach of contract and seeking damages in
      the
      amount of $262,151.63 plus interest. Infinium expects to enter into a negotiated
      settlement with The Bohle Company. The Company has recorded $285,939.12 in
      accounts payable related to vendor payments due The Bohle Company as of December
      31, 2004.





***(E)
      Amendment to Articles of Incorporation***





During
      2005, the Company amended its Articles of Incorporation to provide for an
      increase in its authorized share capital. The authorized capital stock increased
      to 600,000,000 common shares at a par value of $0.0001 per share.




F-30