**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-KSB**





**(Mark
      One)**


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


**For
      the fiscal year ended December 31, 2005**


**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**







**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)**206-370-4758**
              (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 is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





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 as of December 31, 2005.




At
      May
      15, 2006, 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 $8,578,501.





The
      number of shares issued and outstanding of our company’s common stock at May 16,
      2006 was 541,789,024.





**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**





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












**INDEX** ****
  **Page**
                **Number**PART
                  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
              22Item
                  8B.
              Other
                  Information
              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
              29Item
                  14.
              Principal
                  Accountant Fees and Services
              29








**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 Lapboard, a wireless,
      rotating custom keyboard/turntable with integrated mousepad. After establishing
      the Phantom Lapboard, we may seek to develop and commercialize the Phantom
      Game
      Service.





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 Lapboard.





Since
      inception through December 31, 2005, we have incurred aggregate losses of
      $66,579,467. Our loss from operations for year ended December 31, 2005 was
      $29,814,606; our loss from operations for the year ended December 31, 2004
      was
      $33,819,787. In addition, as of December 31, 2005, we had an accumulated deficit
      of $66,579,467.





While
      we
      anticipate release of the Phantom Lapboard in October 2006, delays may occur
      and
      given our limited resources, we need immediate additional capital to continue
      development of the Phantom Lapboard as well as general operations.





In
      their
      report dated May16, 2006, 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, 2005. 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.





**Phantom
      Lapboard**





Currently
      our business activities are almost entirely dedicated to the development of
      the
      Phantom Lapboard. The Phantom Lapboard is comprised of the following key
      features: (1) a 360-degree rotating keyboard for left or right-handed users;
      (2)
      the first keyboard with a lap board for maximum comfort; (3) the first keyboard
      with mouse integrated 30 degree lift; (4) wireless functionality from
      approximately 30 feet; (5) gaming and media optimized key layout; (6) customized
      gamer keys for the competitive edge, (7) extended spacebar and (8) intended
      to
      have maximum durability to keep up with significant game play.





The
      Phantom Lapboard’s integrated mousepad provides a mousing surface anywhere the
      keyboard is used. This feature enhances the game experience by bringing the
      user’s hands closer together. The Phantom Lapboard turntable feature enables the
      user to find their individual “comfort zone” and the turntable and key layout
      optimizes use by left-handed and right-handed users.


3





**Media
      coverage**





The
      Phantom Lapboard was featured at the tenth anniversary of the E 3 game show
      in
      Los Angeles, California in 2004.





**Marketing
      Objectives & Strategies**





Our
      objective is to increase awareness and build buzz for Phantom Lapboard launch.
      To do this, we intend to intercept pc gamers virally by inhabiting their
      communities and informing them about the Phantom Lapboard in an informal and
      provocative manner and leveraging PR assets to create incremental industry
      and
      consumer buzz.





**Viral
      Marketing**





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





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





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





We
      intend
      to utilize low cost guerilla event/stunts to demo the product, reward
      involvement and interest from core target groups and to draw media attention
      to
      the Phantom Lapboard introduction. We will schedule PR announcements and
      interviews at appropriate times and intend to introduce highly limited and
      targeted print and web advertising to support launch and key promotional
      tentpoles (GDC, E3, Grads & Dads).





After
      initial launch, we intend to use database marketing and relationship marketing
      techniques to build loyalty and increase sales, roll out targeted advertising
      and promotions to grow initial interest/purchase of lapboard and to support
      new
      retailer partnerships, and leverage contract and content partnerships for
      presence at key industry events - i.e. E3 at Blizzard booth, gaming tournaments,
      etc.





**Distribution
      Strategy**





We
      intend
      to market and sell the Phantom Lapboard direct to consumer through our Internet
      website. We may establish other sales and marketing distribution channels
      through brick and mortar retailers.





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





We
      do not
      have a direct sales force. As such, we intend to rely on direct to consumer
      sales on our Internet website and possibly on third parties to identify and
      help
      us secure retail channel distribution for the Phantom Lapboard. 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.


4





**Competition**





While
      we
      are not aware of any direct competitors to our Phantom Lapboard, we will compete
      indirectly with a large number of hardware manufacturers, Internet sites, and
      other companies providing gaming and entertainment services. Our competitors
      may
      include hardware manufactures, Internet sites, and other companies providing
      gaming and entertainment accessories; vertical markets where competitors may
      have advantages in expertise, brand recognition, and other factors; and
      manufacturers of personal computers or game consoles who may develop their
      own
      accessories to which they would direct their customers.





**Intellectual
      Property 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 Lapboard through both design and utility patent
      applications in the United States and potentially in other countries in which
      we
      intend to market our products and services.





As
      of May
      16, 2006, we had a total of 6 pending domestic patent applications with the
      US
      Patent and Trademark Office, entitled:


(1)
              **METHOD
                  AND APPARATUS FOR BACKLIGHTING OF A KEYBOARD FOR USE WITH A GAME****DEVICE
                  APPLICATION FILED AUGUST 2,
                  2004**
  (2)
                **METHOD
                    FOR AUTOMATIC PATCHING OF A SPARSELY STREAMED APPLICATION **FILED SEPTEMEBER
                    29,
                    2004****
  (3)
                    **MODIFIED
                          KEYBOARD AND SYSTEMS CONTAINING THE KEYBOARD APPLICATION****FILED
                          MAY 6, 2005**
 (4)
                          **MULTI-MODE
                                  POINTING DEVICE AND SYSTEMS AND METHODS USING THE
                                  POINTING****DEVICE
                                  APPLICATION FILED MAY 6, 2005**
 (5)
                                  **MULTIPOSITION
                                            MULTILEVEL USER INTERFACE SYSTEM****APPLICATION
                                            FILED****MAY
                                            6, 2005**
 (6)
                                          **SYSTEM
                                                      FOR SECURELY BOOTING A COMPUTER
                                                      DEVICE****APPLICATION
                                                      FILED****JULY
                                                      6,
                                                      2005**


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





We
      are
      pursuing federal registration of our trademarks and service marks in the United
      States with the U.S. Patent and Trademark Office. As of May 16, 2006, we had
      2
      independent federal trademarks registered, the design of the Phantom logo which
      expires on December 21, 2014 and the word "Phantom" which expires on June 14,
      2015 and 6 applications pending.





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





**EMPLOYEES**





At
      May
      16, 2006, we had 5 full-time employees, one who is in research and development
      and 4 of whom are general and administrative personnel. There is no collective
      bargaining agreement in place.


5





**RISK
      FACTORS**





**RISKS
      RELATED TO OUR BUSINESS AND COMPANY**





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





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





We
      incurred net losses of $29,814,606 for the year ended December 31, 2005 and
      $33,819,787 for the year ended December 31, 2004. Our monthly burn rate is
      approximately $300,000 per month and, accordingly, we will need to raise
      approximately $3,600,000 over the next 12 months in order to sustain our current
      operations. We cannot assure you that we can achieve or sustain profitability
      on
      a quarterly or annual basis in the future. If revenues grow more slowly than
      we
      anticipate, or if operating expenses exceed our expectations or cannot be
      adjusted accordingly, we will continue to incur losses. We will continue to
      incur losses until we are able to market and sell our products. Our possible
      success is dependent upon the successful development and marketing of our
      products, as to which there is no assurance. Any future success that we might
      enjoy will depend upon many factors, including factors out of our control or
      which cannot be predicted at this time. These factors may include changes in
      or
      increased levels of competition, including the entry of additional competitors
      and increased success by existing competitors, changes in general economic
      conditions, increases in operating costs, including costs of supplies, personnel
      and equipment, reduced margins caused by competitive pressures and other
      factors. These conditions may have a materially adverse effect upon us or may
      force us to reduce or curtail operations. In addition, we will require
      additional funds to sustain and expand our sales and marketing activities,
      particularly if a well-financed competitor emerges. Based on our current funding
      arrangement with Golden Gate, upon the effectiveness of a registration
      statement, which will allow Golden Gate to convert its convertible debenture
      and
      exercise its warrants and, in turn, provide us with funding, we do not
      anticipate that we will require additional funds to continue our operations
      for
      the next 9 months. In the event that our financing arrangement with Golden
      Gate
      is terminated or if we need additional financing, there can be no assurance
      that
      financing will be available in amounts or on terms acceptable to us, if at
      all.
      The inability to obtain sufficient funds from operations or external sources
      would require us to curtail or cease operations. Any additional equity financing
      may involve substantial dilution to our then existing shareholders.





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





In
      their
      report dated May 16, 2006, our independent auditors stated that our financial
      statements for the year ended December 31, 2005 were prepared assuming that
      we
      would continue as a going concern. Our ability to continue as a going concern
      is
      an issue raised as a result of cash flow constraints, a working capital deficit
      of $11,965,644, an accumulated deficit of $66,579,467 at December 31, 2005
      recurring losses from operations and the default on $3,486,759 of notes payable
      at December 31, 2005. We continue to experience net losses. Our ability to
      continue as a going concern is subject to our ability to generate a profit
      and/or obtain necessary funding from outside sources, including obtaining
      additional funding from the sale of our securities, increasing sales or
      obtaining loans and grants from various financial institutions where possible.
      Our continued net losses and stockholders’ deficit increases the difficulty in
      meeting such goals and there can be no assurances that such methods will prove
      successful.





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





We
      will
      need to obtain additional funding in order to:





o
            fund
                product development and launch of our Phantom Lapboard;





o
            finance
                additional growth and working capital requirements;





6





o
            respond
                to competitive pressures; and





o
            respond
                to other opportunities or challenges as they arise.





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





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





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





o
            Expand
                our current operating activities;





o
            fund
                sales and marketing activities;





o
            manufacture
                inventory; and





o
            incur
                capital expenditures.





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





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





Because
      we have a limited operating history and because the PC accessory industry is
      characterized by rapidly changing technologies, evolving industry standards,
      frequent new product and service introductions, and changing customer demands,
      our costs may change dramatically over time. For example, in the event that
      the
      cost to manufacture the Phantom Lapboard is higher than projected or our
      manufacturing costs increase dramatically, we may not be able to generate
      profit, which may cause us to go out of business.





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





As
      disclosed on Form 8-K filed with the SEC on April 19, 2006, we have an agreement
      with Itron Technology, Inc., a third-party manufacturer, for the production
      of
      the Phantom Lapboard. We expect to rely on sole suppliers for a number of key
      components for the Phantom Lapboard. We will not control the time and resources
      that these third parties devote to our business. We cannot be certain that
      these
      parties will perform their obligations as expected or that any revenue, cost
      savings, or other benefits will be derived from the efforts of these parties.
      If
      any of these parties breaches or terminates its agreement with us or otherwise
      fails to perform their obligations in a timely manner, we may be delayed or
      prevented from commercializing our Phantom Lapboard. Because our relationships
      with these parties are expected to be non-exclusive, they may also support
      products and services that compete directly with us, or offer similar or greater
      support to our competitors. Any of these events could require us to undertake
      unforeseen additional responsibilities or devote additional resources to
      commercialize our Phantom Lapboard. This outcome would harm our ability to
      compete effectively and achieve increased market acceptance and brand
      recognition.


7





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





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





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





As
      disclosed on Form 8-K filed with the SEC on April 19, 2006, we have an agreement
      with Itron Technology, Inc., a third-party manufacturer, for the production
      of
      the Phantom Lapboard. We expect to sell these units direct to consumers as
      well
      as through retailers and distributors. As part of this effort, we expect to
      maintain some finished goods inventory of the units throughout the year.
      Overseeing manufacturing processes and managing inventory are outside of our
      core business and our experience in these areas is limited. If we fail to
      effectively oversee the manufacturing process and manage inventory, we may
      suffer from insufficient inventory to meet consumer demand or excess inventory.
      Ineffective oversight of the manufacturing process could also result in product
      recalls.





**WE
      EXPECT TO DISTRIBUTE THE PHANTOM LAPBOARD THROUGH RETAIL DISTRIBUTION AND IF
      RETAILERS ARE NOT SUCCESSFUL OR ARE UNWILLING TO SELL OUR PRODUCTS, WE MAY
      BE
      UNABLE TO SELL TO SUCH BRICK AND MORTAR RETAIL CONSUMERS.**





We
      may
      depend on retail distribution to sell the Phantom Lapboard. In the event that
      retailers are reluctant to sell our products or in the event that their proposed
      financial terms are unacceptable to us, we may be unable to sell to traditional
      brick and mortar retail consumers, which may cause us to go out of business.





**OUR
      PHANTOM LAPBOARD, WHILE COSTLY TO DEVELOP, MAY FAIL TO GAIN MARKET ACCEPTANCE.
      IF OUR PHANTOM LAPBOARD DOES NOT GAIN MARKET ACCEPTANCE, WE MAY BE UNABLE TO
      OPERATE OUR BUSINESS.**





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





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





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





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


8





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





While
      we
      are not aware of any direct competitors to our Phantom Lapboard, we will compete
      indirectly with a large number of hardware manufacturers, Internet sites, and
      other companies providing gaming and entertainment services. Our competitors
      may
      include hardware manufactures, Internet sites, and other companies providing
      gaming and entertainment accessories; vertical markets where competitors may
      have advantages in expertise, brand recognition, and other factors; and
      manufacturers of personal computers or game consoles who may develop their
      own
      accessories to which they would direct their customers.





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





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





Our
      success will depend upon our senior management and technical personnel,
      particularly Greg Koler, our Chief Executive Officer and Interim Chief Financial
      Officer. The loss of the services of this or other persons may cause us to
      go
      out of business. Our success also depends on our ability to attract and retain
      qualified technical, sales, marketing, customer support, financial and
      accounting, and managerial personnel. Competition for such personnel in the
      PC
      accessories industry can be intense, and we cannot be certain that we will
      be
      able to retain our key personnel or that we can attract, integrate or retain
      other highly qualified personnel in the future.





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





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





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





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





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


9





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





**RISKS
      RELATING TO OUR CURRENT FINANCING ARRANGEMENT**





**THERE
      ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE DEBENTURES, AND WARRANTS
      THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS
      THE MARKET PRICE OF OUR COMMON STOCK.**





As
      of May
      16, 2006, we had 541,789,024shares of common stock issued and outstanding and
      convertible debentures outstanding that may be converted into an estimated
      489,604,317 shares of common stock at current market prices, and outstanding
      warrants to purchase 59,428,812 shares of common stock. In addition, the number
      of shares of common stock issuable upon conversion of the outstanding
      convertible debentures may increase if the market price of our stock declines.
      All of the shares, including all of the shares issuable upon conversion of
      the
      debentures and upon exercise of our warrants, may be sold without restriction.
      The sale of these shares may adversely affect the market price of our common
      stock.





**THE
      CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE DEBENTURES
      COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH WILL
      CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.**





Our
      obligation to issue shares upon conversion of our convertible debentures is
      essentially limitless. The following is an example of the amount of shares
      of
      our common stock that are issuable, upon conversion of our convertible
      debentures (excluding accrued interest), based on market prices 25%, 50% and
      75%
      below the market price, as of May 16, 2006 of $0.02.





**%
                Below**
              **Market**
            
            **Price
                Per**
              **Share**
            
            **Effective**
              **Conversion**
              **Price**
            
            **Number**
              **of
                Shares**
              **Issuable**
            
            **%
                of**
              **Outstanding**
              **Stock**25%
            
            $
            .015
            
            $
            .012
            
            
            453,333,333
            
            
            50.68
            %50%
            
            $
            .01
            
            $
            .008
            
            
            682,500,000
            
            
            60.74
            %75%
            
            $
            .005
            
            $
            .004
            
            
            1,370,000,000
            
            
            75.64
            %





As
      illustrated, the number of shares of common stock issuable upon conversion
      of
      our convertible debentures will increase if the market price of our stock
      declines, which will cause dilution to our existing stockholders.





**THE
      CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR 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.**





Golden
      Gate is contractually required to exercise its warrants on a concurrent basis.
      The issuance of shares in connection with the exercise of the warrants and
      conversion of the convertible debentures results in the issuance of shares
      at an
      effective 20% 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 stockholder 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, not only the sale of shares issued upon conversion
      or exercise of debentures, warrants and options, but also the mere perception
      that these sales could occur, may adversely affect the market price of the
      common stock.





**THE
      ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND EXERCISE
      OF
      OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR
      EXISTING STOCKHOLDERS.**


10





The
      issuance of shares upon conversion of the convertible debentures and exercise
      of
      warrants may result in substantial dilution to the interests of other
      stockholders since the selling stockholder may ultimately convert and sell
      the
      full amount issuable on conversion. Although the selling stockholder may not
      convert its convertible debentures and/or exercise their warrants if such
      conversion or exercise would cause them to own more than 9.99% of our
      outstanding common stock, this restriction does not prevent the selling
      stockholder from converting and/or exercising some of their holdings and then
      converting the rest of their holdings. In this way, the selling stockholder
      could sell more than this limit while never holding 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 UNABLE TO ISSUE SHARES OF COMMON STOCK UPON CONVERSION OF THE CONVERTIBLE
      DEBENTURE FOR ANY REASON, WE ARE REQUIRED TO PAY PENALTIES TO GOLDEN GATE,
      REDEEM THE CONVERTIBLE DEBENTURE AT 130% AND/OR COMPENSATE GOLDEN GATE FOR
      ANY
      BUY-IN THAT IT IS REQUIRED TO MAKE.**





If
      we are
      unable to issue shares of common stock upon conversion of the convertible
      debenture as a result of our inability to increase our authorized shares of
      common stock or as a result of any other reason, we are required to:





1
            pay
                late payments to Golden Gate for late issuance of common stock upon
                conversion of the convertible debenture,in
                the amount of $100 per business day after the delivery date for each
                $10,000 of convertible debenture principalamount
                being converted or redeemed.





2
            in
                the event we are prohibited from issuing common stock, or fail to
                timely
                deliver common stock on a delivery date,or
                upon the occurrence of an event of default, then at the election
                of Golden
                Gate, we must pay to Golden Gate a sumof
                money determined by multiplying up to the outstanding principal amount
                of
                the convertible debenture designated
              by
                Golden Gate by 130%, together with accrued but unpaid interest thereon.





3
            if
                ten days after the date we are required to deliver common stock to
                Golden
                Gate pursuant to a conversion,Golden
                Gate purchases (in an open market transaction or otherwise) shares
                of
                common stock to deliver in satisfactionof
                a sale by Golden Gate of the common stock which it anticipated receiving
                upon such conversion (a "Buy-In"), thenwe
                are required to pay in cash to Golden Gate the amount by which its
                total
                purchase price (including brokeragecommissions,
                if any) for the shares of common stock so purchased exceeds the aggregate
                principal and/or interestamount
                of the convertible debenture for which such conversion was not timely
                honored, together with interest thereonat
                a rate of 15% per annum, accruing until such amount and any accrued
                interest thereon is paid in full.





In
      the
      event that we are required to pay penalties to Golden Gate or redeem the
      convertible debentures held by Golden Gate, we may be required to curtail or
      cease our operations.





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





In
      January 2006, we entered into a Securities Purchase Agreement for the sale
      of an
      aggregate of $50,000 principal amount of convertible debentures, which are
      presently outstanding. The convertible debentures are due and payable, with
      51⁄4 %
      interest, three years from the date of issuance, unless sooner converted into
      shares of our common stock. In addition, any event of default could require
      the
      early repayment of the convertible debentures at a price equal to 130% of the
      amount due under the debentures. We anticipate that the full amount of the
      convertible debentures, together with accrued interest, will be converted into
      shares of our common stock, in accordance with the terms of the convertible
      debentures. If we are required to repay the convertible 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.





**RISKS
      RELATING TO OUR COMMON STOCK**





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


11





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:




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




2.
            the broker or dealer receive from the investor
                a written
                agreement to the transaction, setting forth the identity
                and quantity of the penny stock to be
                purchased.




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




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




2.
            make a reasonable determination that the transactions
                in
                penny stocks are suitable for that person and the
                person has sufficient knowledge and experience in financial matters
                to be
                capable of evaluating the risksof
                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:




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




2.
            that the broker or dealer received a signed,
                written
                agreement from the investor prior to the
                transaction.




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





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




12




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





Our
      corporate headquarters are located in Seattle, Washington  in
      approximately 500 square feet of space occupied under a lease with a monthly
      rental rate of approximately $3,300 that expires in May, at the end of May,
      2006. The Company is currently in negotiations to extend the aforementioned
      lease.





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





Amscot
      Corporation v. Infinium Labs, Inc. and Gregory E. Hawkins ,
      No.
      05-00069, Div J. In April 2005, Amscot obtained a default judgment in the
      Circuit Court for Hillsborough County, Florida associated with an action to
      enforce a negotiable instrument. We dispute the judgment and may seek to reopen
      the matter in the future. The judgment is for $50,873.




Beshara
      v. Infinium Labs Corporation ,
      No.
      2005 CA 5103 NC. In May 2005, Beshara sued us in the Circuit Court for Sarasota
      County, Florida, alleging default of a promissory note and seeking damages
      of
      approximately $1,400,000.00. On October 25, 2005, we settled accrued interest
      through October 31, 2005, together with reasonable attorneys’ fees, in the
      amount of $384,192 through issuance of 7,114,667 shares of our stock. On March
      17, 2006, we entered into a conversion agreement with Beshara in order to reduce
      a portion of the outstanding principal and interest with, as of May 16, 2006,
      40,000,000 shares of common stock.





Black
      Rocket Euro RSCG, LLC v. Infinium Labs, Inc. ,
      No.
      2005 CA 5008 NC. In May 2005, Black Rocket sued us in the Circuit Court for
      Sarasota County, Florida, alleging breach of contract and seeking damages in
      the
      amount of $95,272.00. Due to an administrative error, our attorney neglected
      to
      file a notice of appearance and on January 25, 2006, Black Rocket obtained
      a
      default judgment in the amount of $104,629. We have recorded $104,629 in
      accounts payable related to vendor payments due Black Rocket Euro RSCG, LLC.





CDW
      Corporation v. Infinium Labs Corporation ,
      No.
      05-M1-131484. In May 2005, CDW sued us in the Circuit Court of Cook County,
      Illinois, alleging breach of contract and seeking damages in the amount of
      $26,958. Due to financial constraints, we may not be able to replace local
      counsel. On February 7, 2006, the court entered judgment and we have recorded
      $26,958 in accounts payable related to vendor payments due CDW Corporation.





GMR
      Marketing, LLC, v. Infinium Labs, Inc., No.
      20050CA-10535NC. In January 2006, GMR sued us in the District Court of Florida,
      Sarasota County, alleging breach of contract and seeking damages in the amount
      of $107,544. Due to an error with our Florida counsel an answer to the complaint
      was not filed and on February 1, 2005 GMR received a default judgment in the
      amount of $107,883. As of February 9, 2006, our Florida counsel indicated he
      will seek to set aside the order on grounds for medical reasons, but as of
      May
      16, 2006 he has not filed this request with the aforementioned court.





Infinium
      Labs, Inc. v. Digital Interactive Streams, Inc. ,
      No.
      2004 CA 8193 NC. In August 2004 we sued DiStream alleging breach of a settlement
      agreement and conversion and seeking damages of an unspecified amount. The
      parties entered into a settlement agreement resolving all claims without
      additional cost (cash or stock) on February 28, 2006 that will result in
      dismissal of the aforementioned action. On May 9, 2006, the aforementioned
      litigation was dismissed.





Longview
      Special Finance, Inc. v. Infinium Labs, Inc. ,
      No. 06
      CV 1772. In March 2006, Longview sued us in United States District in the
      Southern District of New York alleging breach of contract and requesting, in
      part, issuance of all remaining shares requested in prior conversion notices
      (as
      more fully described in our SB-2 filed on February 13, 2006). The complaint
      contains errors relating to debt previously repaid and other jurisdictional
      issues. The parties entered into a negotiated settlement related to a portion
      of
      Longview’s claims on April 7, 2006. Under the terms of the agreement, Infinium
      converted a portion of Longview’s requested conversion request and Longview
      agreed to dismiss the aforementioned matter in May 2006 and standstill on any
      further request for conversion or bring any additional claim on with respect
      to
      Infinium’s failure to reserve adequate shares for Longview or deliver shares
      under a conversion.





Motley
      Fool v. Infinium Labs, Inc., No.
      CL05001480. In October 2005, Motley Fool sued us in the Circuit Court for
      Alexandria, Virginia, Civil Division, alleging breach of contract and seeking
      damages in the amount of $70,000. On March 9, 2006, the parties entered into
      a
      settlement agreement in which we settled the actual claim, together with
      reasonable attorneys’ fees, in the amount of $52,702 through issuance of
      2,195,905 shares of our stock.





M.
      Tyler Boles v. Infinium Labs, Inc., No.
      V06-30. In January 2006, M. Tyler Boles sued us in the General District Court
      for Nelson County, Delaware, alleging a claim for money and seeking damages
      in
      the amount of $1,200. A judgment was entered in March 2006 for $1,254.





Oracle
      USA, Inc. v. Infinium Labs, Inc. ,
      No.
      C05-5049. In December 2005, Oracle USA sued us in the United States District
      Court, Northern District of California, San Francisco Division, alleging breach
      of contract and seeking damages in the amount of $198,818. In March 2006
      judgment was entered against Infinium **** in
      the
      aforementioned court for $199,068.


13





SBI
      USA, LLC v. Infinium Labs, Inc., No.
      05CC10694. In November 2005, SBI USA, LLC, sued us in the Superior Court of
      California, Orange County, alleging breach of contract and seeking damages
      in
      the amount of $58,000. Judgment was entered against Infinium **** in
      the
      aforementioned court in April 2006 for $55,000.





Walter
      Dorwin Teague Associates v. Infinium Labs, Inc., No.
      05-9-35846-2. In December 2005, Teague Associates entered an arbitration award
      in the Superior Court for King County, Washington. The judgment is for $51.843.





In
      the
      Matter of Certain Fax Blasts, SF-2926.  In
      approximately January 2005, we received subpoenas for documents from the
      Securities and Exchange Commission (“SEC”) in an investigation entitled In the
      Matter of Certain Fax Blasts. In compliance with other SEC issued subpoenas,
      several former employees, including our Chairman of the Board of Directors,
      have
      given testimony to the SEC’s staff while several current employees have
      participated in off-record interviews with the SEC staff.





Timothy
      M. Roberts, the Company's Chairman of the Board of Directors, received a “Wells
      Notice” from the SEC in 2005. The Wells Notice was received by Mr. Roberts in a
      personal capacity. This Wells Notice was issued in connection with the SEC’s
      investigation relating to “phony fax scams” in which several penny stocks,
      including ours, were promoted to potential investors and resulted in charges
      filed by the SEC against two stock promoters. Under the SEC's procedures,
      the  Wells
      Notice indicates that the staff of the SEC intends to recommend that the SEC
      bring a civil enforcement action against Mr. Roberts alleging violations of
      federal securities laws. Recipients of Wells Notices have the opportunity to
      respond to the SEC staff before any formal recommendation is made.





In
      May
      2006, Mr. Roberts, in his personal capacity, was served with a complaint from
      the SEC in the matter entitled Securities
      and Exchange Commission vs. Timothy M. Roberts in the
      US District Court for the Middle District of Florida, Orlando Division, pursuant
      to which the SEC alleges that Mr. Roberts made false statements with regard
      to
      the Company’s prospects while at the same time selling his shares of the
      Company’s common stock for personal gain through his alleged participation in a
“phony fax scam”. The SEC seeks judgment against Mr. Roberts enjoining him from
      future violations of securities laws, requiring that he disgorge any gain or
      benefit he received from past violations, and imposing penalties for the
      violations. Further, the SEC seeks a judgment prohibiting Mr. Roberts from
      serving in the future as an officer or director of a public company and from
      participating in any offering of “penny stocks”.





From
      time
      to time, we may become party to litigation or other legal proceedings that
      we
      consider to be a part of the ordinary course of our business. We may become
      involved in material legal proceedings in the future.





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





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.


14


**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 reflect the high and low for our common stock based on
      inter-dealer prices, without retail mark-up, mark-down or commission and may
      not
      represent actual transactions. The high and low bid prices of our common stock
      for the periods indicated below are as follows:




**Quarter
                Ended**
            
            **High**
            
            **Low**3/31/06
            
            $
            0.46
            
            $
            0.01212/31/2005
            
            $
            0.04
            
            $
            0.00109/30/2005
            
            $
            0.12
            
            $
            0.0406/30/2005
            
            $
            0.28
            
            $
            0.0903/31/2005
            
            $
            1.60
            
            $
            0.2412/31/2004
            
            $
            1.45
            
            $
            0.1909/30/2004
            
            $
            1.81
            
            $
            0.3106/30/2004
            
            $
            2.02
            
            $
            0.9203/31/2004
            
            $
            2.50
            
            $
            0.30





**HOLDERS**





As
      of May
      16, 2006, we had approximately 743 holders of our common stock. The number
      of
      record holders was determined from the records of our transfer agent and does
      not include beneficial owners of common stock whose shares are held in the
      names
      of various security brokers, dealers, and registered clearing agencies. The
      transfer agent of our common stock is Corporate Stock Transfer, Denver,
      Colorado, (303) 282-4800.





**COMMON
      STOCK**





We
      are
      authorized to issue up to 600,000,000 shares of common stock, par value $.0001
      per share. As of May 16, 2006, approximately 541,789,024 shares of our common
      stock are issued and outstanding.





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





**Dividend
      Policy**





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





**Recent
      Unregistered Sales of Securities**





Unless
      otherwise stated or filed on a Form 8-K or 10-QSB in 2005, 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.


15





On
      October 10, 2005, we issued 7,246,455 shares of common stock with a fair value
      of $200,147 ($.029 per share) in partial settlement of two notes and accrued
      interest.  We recognized a loss of $9,964 on these transactions. The shares
      were issued under a court ordered settlement pursuant to 3(a)(10) under the
      Securities Act of 1933.





On
      November 2, 2005, we settled an outstanding debt to a vendor by issuing
      5,071,175 shares of common stock to the vendor. The fair market value of the
      settlement was $111,566 ($.022 per share). The shares were issued under a court
      ordered settlement pursuant to 3(a)(10) under the Securities Act of
      1933.





On
      November 7, 2005, we settled a lawsuit by issuing 1,052,632 shares of common
      stock to the plaintiff in this matter with a fair market value of $24,965
      ($0.022 per share). An additional 82,143 shares of common stock were issued
      to
      the plaintiff’s attorney with a fair market value of $1,807 ($0.022 per share).
      The shares were issued under a court ordered settlement pursuant to 3(a)(10)
      under the Securities Act of 1933.





On
      November 16, 2005, we issued shares totaling 7,948,856 shares to two note
      payable holders for accrued interest and related legal fees on the note with
      a
      fair value of $119,232 ($0.015 per share). We recognized a loss of $13,514
      on
      the transactions. The shares were issued under a court ordered settlement
      pursuant to 3(a)(10) under the Securities Act of 1933.





On
      December 30, 2005, we issued an aggregate of 16,000,000 shares of common stock
      to certain of our debenture holders from our December 2004 Securities Purchase
      Agreement upon a partial conversion of their debentures. The fair market value
      was $272,000 ($0.017 per share). We recognized no gain or loss on these
      conversions.





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





On
      February 15, 2006, we issued 372,414 shares of common stock to a consultant
      with
      a fair market value of $6,703 ($.018 per share).





On
      March
      16, 2006, we issued 243,243 shares of common stock to a consultant with a fair
      market value of $5,716 ($.0235 per share).





On
      March
      8, 2006, we issued an aggregate of 19,999,999 shares of common stock to certain
      of our debenture holders from our December 2004 Securities Purchase Agreement
      upon a partial conversion of their debentures. The fair market value was
      $580,000 ($0.029 per share). We recognized a loss of $34,021 on these
      conversions.





On
      March
      10, 2006, we issued 2,195,905 shares of common to a vendor for settlement of
      claims and associated legal fees with a fair market value of $52,702 ($.024
      per
      share). We recognized a gain of $2,673.28 on this settlement. The shares were
      issued under a court ordered settlement pursuant to 3(a)(10) under the
      Securities Act of 1933.




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





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





On
      April
      10, 2006, we issued an aggregate of 15,000,000 shares of common stock to certain
      of our debenture holders from our December 2004 Securities Purchase Agreement
      upon a partial conversion of their debentures. The fair market value was
      $285,000 ($0.019 per share) and a loss of $3,890 was recognized on these
      conversions.


16





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





**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS**





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


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

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





**Overview**





We
      are
      developing and seeking to commercialize the Phantom Lapboard, a wireless,
      rotating custom keyboard/turntable with integrated mousepad . 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 Lapboard.





With
      adequate financing, we will launch the Phantom Lapboard in 2006 for sale
      directly through our Internet website. The Phantom Lapboard is designed with
      a
      pc gamer in mind, and is intended to transform the way gamers think about
      computer keyboards.





Some
      features of the Phantom Lapboard are: (1) a 360 degree rotating keyboard for
      left or right-handed users; (2) the first keyboard with a lap board for maximum
      comfort; (3) the first keyboard with mouse integrated 45 degree lift; (4)
      wireless functionality from approximately 30 feet; (5) gaming and media
      optimized key layout; (6) customized gamer keys for the competitive edge, (7)
      extended spacebar and (8) intended to have maximum durability to keep up with
      significant game play.





The
      Phantom Lapboard’s integrated mousepad provides a mousing surface anywhere the
      keyboard is used. This feature enhances the game experience by bringing the
      user’s hands closer together. The Phantom Lapboard turntable feature enables the
      user to find their individual “comfort zone” and the turntable and key layout
      optimizes use by left-handed and right-handed users.





**Plan
      of Operations**





We
      have
      incurred recurring losses from operations since inception. Our loss from
      operations for the year ended December 31, 2005 was $29,814,606. Our loss from
      operations for the year ended December 31, 2004 was $33,819,787. At December
      31,
      2005, we had a working capital deficit of $11,965,644 and accumulated losses
      since inception of $66,579,467. In their report on our audited financial
      statements for the year ended December 31, 2005, 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, 2005, we had received approximately $3.6 million in equity
      investments and $13.6 million in debt and convertible debt financings.


17





At
      December 31, 2005, we were in default on payment of promissory notes with a
      principal amount of $3,486,759. 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, 2005, we have recorded an aggregate of $5,561,115 in debt discount,
      of which $5,561,115 was amortized as interest expense. In connection with
      financings aggregating $2.16 million in December 2004, 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.





**Liquidity
      and Capital Resources**





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





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





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





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





Our
      development activities have been and continue to be constrained by shortages
      in
      working capital. As a result, we have experienced delays in bringing our Phantom
      Game Service to market, which in turn has triggered the need for additional
      efforts to address changing design and engineering standards, as well as the
      need for renegotiation of arrangements with game content providers as existing
      arrangements lapse in advance of commercial launch. Due to the foregoing
      factors, in the fourth quarter of 2005, we restructured our business and our
      resources to focus predominantly on the Phantom Lapboard. Subject to obtaining
      sufficient financing, we anticipate focusing our efforts over the next 12 months
      on the following principal activities:





**Completing
      Development of the Phantom Lapboard** -
      The
      Phantom Lapboard was originally intended for retail launch in 2004 and its
      design was based upon that premise. We are currently in the process of revising
      and updating the hardware to take advantage of newer technology to ensure that
      the product is technically compelling and that we are able to have an adequate
      supply of components.





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.





**Completing
      Development of the Lapboard Distribution Network** -
      Working
      with our partners we intend to finalize the design, testing and roll-out of
      Phantom Lapboard.





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





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


18





**Critical
      Accounting Policies**





STOCK-BASED
      COMPENSATION





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





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





IMPAIRMENT
      OF GOODWILL AND LONG-LIVED ASSETS





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





INCOME
      TAXES





Income
      taxes are provided for using the liability method whereby future tax assets
      and
      liabilities are recognized using current tax rates on the difference between
      the
      financial statement carrying amounts and the respective tax basis of the assets
      and liabilities. The Company provides a valuation allowance on future tax assets
      when it is more likely than not, that such assets will not be realized.





RESEARCH
      AND DEVELOPMENT COSTS





Research
      costs are expensed as incurred. Development costs are also generally expensed
      as
      incurred unless such costs meet the criteria necessary for deferral and
      amortization. To qualify for deferral, the costs must related to a technically
      feasible, identifiable product that the Company intends to produce and market,
      there must be a clearly defined market for the product and Company must have
      the
      resources, or access to the resources, necessary to complete the development.
      The Company has not deferred any development costs to date.




19




**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
      replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
      companies are required to measure the compensation costs of share-based
      compensation arrangements based on the grant-date fair value and recognize
      the
      costs in the financial statements over the period during which employees are
      required to provide services. Share-based compensation arrangements include
      stock options, restricted share plans, performance-based awards, share
      appreciation rights and employee share purchase plans. In March 2005 the SEC
      issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views
      of the staff regarding the interaction between SFAS No. 123(R) and certain
      SEC
      rules and regulations and provides the staff's views regarding the valuation
      of
      share-based payment arrangements for public companies. SFAS No. 123(R) permits
      public companies to adopt its requirements using one of two methods. On April
      14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
      123R. Companies may elect to apply this statement either prospectively, or
      on a
      modified version of retrospective application under which financial statements
      for prior periods are adjusted on a basis consistent with the pro forma
      disclosures required for those periods under SFAS 123. Effective January 1,
      2006, the Company has fully adopted the provisions of SFAS No. 123R and related
      interpretations as provided by SAB 107. As such, compensation cost is measured
      on the date of grant at their fair value. Such compensation amounts, if any,
      are
      amortized over the respective vesting periods of the option grant. The Company
      applies this statement prospectively.





In
      May
      2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. 
This Statement replaces APB Opinion No,. 20, Accounting Changes, and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
      and changes the requirements for the accounting for and reporting of a change
      in
      accounting principle. This Statement applies to all voluntary changes in
      accounting principle.  It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions.  SFAS 154 also requires that a change in
      depreciation, amortization or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle.  This Statement is effective in fiscal years
      beginning after December 15, 2005.   The Company has not yet
      determined the effect of implementing this standard.




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





Our
      consolidated financial statements including an index and 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** ****





On
      January 5, 2004, Baumann, Raymondo & Company PA resigned as our independent
      accountants. The Board of Directors approved the decision to change independent
      accountants. The report of Baumann, Raymondo & Company PA on our financial
      statements for the fiscal year ended October 31, 2003 and reports through
      January 5, 2004 contained no adverse opinion or disclaimer of opinion and were
      not qualified or modified as to uncertainty, audit scope or accounting
      principles, except that Baumann, Raymondo's opinion in its report on our
      financial statements for the fiscal year 2003 expressed substantial doubt with
      respect to our ability to continue as a going concern.





In
      connection with its audit for the most recent fiscal year ended October 31,
      2003
      and through January 5, 2004, 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. 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.





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




20




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




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




As
      of the
      end of the period covered by this report, we conducted an evaluation, under
      the
      supervision and with the participation of our chief executive officer and
      interim chief financial officer, who are the same person, of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of
      the
      Exchange Act). Based upon this evaluation, our chief executive officer who
      is
      also our interim chief financial officer concluded that our disclosure controls
      and procedures are not effective to ensure that information required to be
      disclosed by us in the reports that we file or submit under the Exchange
      Act **** is
      recorded, processed, summarized and reported, within the time periods specified
      in the Commission's rules and forms **.**





Through
      November 2005, 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. In December 2005,
      the
      Company restated all previous quarterly filing since inception as well amending
      its 2004 10-KSB. 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




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





There
      were changes in our internal controls or in other factors that could affect
      these controls during our last fiscal quarter that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting. Beginning in September 2005, the Company hired new staff to handle
      finance and legal matters as well as a new Chief Executive Officer. The Company
      still maintains outside finance and legal consultants to assist where
      appropriate and when funding is available. With additional financing the Company
      will round out its staff in order to better comply with controls and procedures
      regulated under the Exchange Act.




**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
      2005.





**Name**
            
            **Position
                Held with Our Company**
            
            **Age**Greg
                Koler
            
            Chief
                Executive Officer and Interim Chief Financial Officer
            
            49Richard
                Angelotti
            
            Director
            
            61Tim
                Roberts
            
            Chairman
                of the Board of Directors
            
            35





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.




21




***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***




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





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





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





TIMOTHY
      M. ROBERTS was the founder of our predecessor, Infinium Labs Operating
      Corporation, and has been our Chairman and a member of our board of directors
      since the merger of our subsidiary into Infinium Labs Operating Corporation.
      He
      was also the Chief Executive Officer and Chief Financial Officer from inception
      through August 15, 2005. Prior to founding Infinium Labs in December 2002,
      Mr.
      Roberts was Chairman and Chief Executive Officer for Broadband Investment Group
      from 1999 through 2000. Broadband Investment Group was a holding company which
      owned a portfolio of service companies which handled technology layers 1-7.
      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.





**Richard
      Angelotti, Director.**





RICHARD
      ANGELOTTI was a director of our predecessor, Infinium Labs Operating
      Corporation, since its formation and has been a member of our board of directors
      since the merger. Mr. Angelotti has been the CEO of Angelotti & Rosenberg
      Financial Group from March 2004 through the present. Mr. Angelotti served as
      the
      Principal of Global Financial Asset Management from August 2003 through February
      2004 and was a Senior Vice President of Morgan Keegan from February 1999 through
      August 2003. He has over 12 years of experience as a financial advisor, and
      has
      held executive positions for major investment firms such as Northern Trust
      Bank
      of Sarasota, Bank of Boston in Florida, UBS Paine Webber, and Morgan Keegan.
      Mr.
      Angelotti holds Series 6, 7, 63, 65 Insurance and Annuity licenses.





***Key
      Employees***




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. Mr. Graham resigned from our
      company on February 24, 2006.





***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;




22





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**





Section
      16(a) of the Securities Exchange Act of 1934 requires our directors and
      executive officers and persons who beneficially own more than ten percent of
      a
      registered class of our equity securities to file with the SEC initial reports
      of ownership and reports of change in ownership of common stock and other equity
      securities of our company. Officers, directors and greater than ten percent
      stockholders are required by SEC regulations to furnish us with copies of all
      Section 16(a) forms they file. Based solely on the review of copies of such
      reports furnished to us, we believe that during the fiscal year
      ended December 31, 2005, our executive officers, directors and all persons
      who own more than ten percent of a registered class of our equity securities
      complied with all Section 16(a) filing requirements, except: (1) Mr. Koler
      did
      not file a Form 3 and Form 4; (2) Mr. Angelotti filed one Form 4
      late; (3) Mr. Roberts reported numerous transactions late on Form
      5s and filed five Form 4s late; and (4) Mr. Bachus, our former
      Chief Executive Officer, filed two Form 4s late.





**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.


23





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





Terms
      of Office





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





**ITEM
      10. EXECUTIVE COMPENSATION**





**SUMMARY
      OF EXECUTIVE COMPENSATION**





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





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





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





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




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


**SUMMARY
                  COMPENSATION TABLE**
 **Annual
                  Compensation**
              
              **Long
                  Term Compensation****Awards**
              
              **Payouts****Name
                  and Principal Position**
              ****
              **Year**
              ****
              **Salary**
              ****
              **Bonus**
              ****
              **Other
                  Annual Compen-sation(1)**
              ****
              **Securities
                  Underlying Options/ SARs Granted (#)**
              ****
              **Restricted
                  Shares or Restricted Share Units**
              ****
              **LTIP**
                **Payouts**
              ****
              **All
                  Other Compen-sation**Timothy
                  M. Roberts Chairman, Chief
              
              
              2005
              
              $
              142,5942
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilExecutive
                Officer and
                Director(1)
              
              
              2004
              
              $
              250,0003
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil2003
              
              $
              2,500
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilGreg
                  Koler Chief Executive Officer
              
              
              2005
              
              $
              29,4875
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Niland Interim
                Chief
                Financial Officer(4)
              
              
              2004
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil2003
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilKevin
                  Bachus Former President and
              
              
              2005
              
              $
              158,0507
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilFormer Chief
                Operating
                Officer(6)
              
              
              2004
              
              $
              250,0008
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              2,100,000
              
              
              Nil
              
              
              Nil2003
              
              $
              16,667
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilRichard
                  S. Skoba Former Executive
              
              
              2005
              
              $
              136,89610
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilVice President
                of
                Sales
              
              
              2004
              
              $
              207,96511
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Niland Business
                Development(9)
              
              
              2003
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilTyrol
                  Graham Former Vice President
              
              
              2005
              
              $
              217,33313
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilDevelopment
                (12)
              
              
              2004
              
              $
              150,00014
              
              
              Nil
                  Nil
              
              
              Nil
              
              
              Nil
              
              
              2,100,000
              
              
              Nil
              
              
              Nil2003
              
              
              Nil
              
              
              
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil




24





1
            Resigned
                as an officer of our company on August 15, 2005.2
            includes
                1,382,298 shares of S-8 stock issued in lieu of cash
                compensation.3
            includes
                500,000 shares of S-8 stock issued in lieu of cash
                compensation.4
            Appointed
                as an officer and director of our company on November 18,
                2005.5
            For
                his role as a director and officer Mr. Koler was compensated solely
                in
                cash.6
            Resigned
                as an officer and director of our company on November 17,
                2005.7
            includes
                1,212,960 shares of S-8 stock issued in lieu of cash
                compensation.8
            includes
                500,000 shares of S-8 stock issued in lieu of cash
                compensation.9
            Resigned
                from our company on April 30, 2005.10
            includes
                1,722,598 shares of S-8 stock issued in lieu of cash
                compensation.11
            includes
                224,574 shares of S-8 stock issued in lieu of cash
                compensation.12
            Resigned
                from our company on February 24, 2006.13
            includes
                4,719,739 shares of S-8 stock issued in lieu of cash
                compensation.14
            includes
                565,966 shares of S-8 stock issued in lieu of cash
                compensation.




**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**Not
                Applicable.
            
            
            0
            
            
            0
            %
            $
            0
            
            
            --Not
                Applicable.
            
            
            0
            
            
            0
            %
            $
            0
            
            
            --Not
                Applicable.
            
            
            0
            
            
            0
            %
            $
            0
            
            
            --


25





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





The
      Company's 2004 Omnibus Incentive Compensation Plan required shareholder consent
      which has not been obtained and will not be requested.  As such, any
      options granted under the Plan are not effective.





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





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





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





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





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





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





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





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


26





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





Other
      Compensation





There
      are
      no annuity, pension or retirement benefits proposed to be paid to officers,
      directors, or employees of our company in the event of retirement at normal
      retirement date as there was no existing plan as of December 31, 2005 provided
      for or contributed to by our company.





**COMPENSATION
      OF DIRECTORS AND EXECUTIVE OFFICERS**




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




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




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




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





**Stock
      Options**




**Plan
                category**
            ****
            **Number
                of securities**
              **To
                be issued upon**
              **exercise
                of**
              **outstanding
                options,**
              **warrants
                and rights**
            ****
            **Weighted-average**
              **exercise
                price**
              **of
                outstanding**
              **options,
                warrants**
              **and
                rights**
            ****
            **Number
                of securities**
              **remaining
                for**
              **available
                for future**
              **issuance
                under**
              **equity
                compensation**
              **plans
                (excluding**
              **securities
                reflected**
              **in
                column a))**(a)
            
            (b)
            
            (c)EquityCompensationplans
                approvedby
                shareholders
            
            0
            
            0
            
            0EquityCompensationplans
                not approvedby
                shareholders
            
            0
            
            0
            
            0




**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 May 16, 2006 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.




27


**Name
                and Address of Beneficial Owner**
            ****
            **Amount
                and Nature of**
              **Beneficial**
              **Ownership**
            ****
            **Percentage**
              **of
                Class(1)**Timothy
                M. Roberts
            
            
            20,670,225
            
            
            3.83
            %Greg
                Koler
            
            
            6,016100(2)
            
            
            1.11
            %Richard
                Angelotti
            
            
            1,420,000
            
            
            0.26
            %All
                Officers and Directors as a group (3 persons)
            
            
            28,106,325
            
            
            5.21
            %








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


(1)
            Based
                on 539,943,571 shares of common stock issued and outstanding as of
                May 16,
                2006. Beneficial ownership is determined in accordance with the rules
                of
                the Securities and Exchange Commission and generally includes voting
                or
                investment power with respect to securities. Except as otherwise
                indicated, we believe that the beneficial owners of the common stock
                listed above, based on information furnished by such owners, have
                sole
                investment and voting power with respect to such shares, subject
                to
                community property laws where applicable.(2)
            Includes
                1,000,000 shares of common stock which we are obligated to issue
                under Mr.
                Koler’s Employment Agreement but as of May 16, 2006, such shares have not
                been issued.




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





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





On
      July
      28, 2004, we issued 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, was payable to Stephen A.
      Witzer, Trustee U/A dated February 7, 1985.The principal is for $500,000 with
      interest calculated at fifteen percent (15%) per annum, plus a five percent
      (5%)
      penalty, if applicable, for any late payment. In the event of an uncured
      default, the interest increases to eighteen percent (18%) per annum. On December
      9, 2005, this promissory note was assigned by Witzer to a director. The terms
      of
      the promissory note were subsequently amended to provide that as of November
      1,
      2005, principal and accrued interest totaled $560,437. With respect to the
      revised principal, commencing November 2, 2005, simple interest at a rate of
      fifteen percent (15%) per annum will accrue on a monthly basis until December
      31, 2006 (maturity date), at which time the entire remaining principal and
      all
      accrued and unpaid interest are due in full.





On
      January 27, 2005, we borrowed $300,000 from Timothy Roberts, our former CEO
      and
      a director of our company, under a 15% promissory note, which was payable no
      later than April 27, 2005. The note was subsequently transferred by Mr. Roberts
      to parties unaffiliated with us. In June 2005, the full principal and interest
      was settled in consideration for our issuance of 3,187,206 shares of common
      stock to the holders, valued at $318,721.




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


28





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





On
      January 11, 2006, Greg Koler, our Chief Executive Officer, was entitled to
      1,000,000 shares of common stock under the terms of his employment agreement.
      As
      of May 16, 2006, such shares have not been issued.





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





**TRANSACTIONS
      WITH PROMOTER**





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




**ITEM
      13. EXHIBITS**




Exhibit
      # Exhibit
      Name




2.1   Agreement
      and Plan of Merger dated as of December 24, 2003 by and among Global Business
      Resources, Inc., Global Infinium Merger Sub, Inc., Infinium Labs Corporation
      and
      Peter J. Goldstein ( Incorporated
      by Reference to Exhibit 2.1 to Form 8-K filed with the SEC on January 20,
      2004).




3.1  Certificate
      of Incorporation ( Incorporated
      by Reference to Exhibit 3.0 to Form SB-2 (Registration No. 333-67990) filed
      with
      the SEC on August 20, 2001 ).





3.2   Certificate
      of Amendment to Certificate of Incorporation (Incorporated by reference to
      Exhibit 3.2 to the Company's Form 10-KSB for the year
      ended December 31, 2003 ).





3.3   Certificate
      of Amendment to Certificate of Incorporation ( Incorporated
      by reference to Exhibit 3.3 to the Company's Form 10-KSB for the year ended
      December 31, 2003 ).





3.4 Bylaws
      ( Incorporated
      by reference to Exhibit 3.4 to the Company's Form 10-KSB for the year ended
      December 31, 2003 ).





10.1  Stock
      Purchase Agreement dated as of January 22, 2004 between Infinium Labs, Inc.
      and
      SBI Brightline VI, LLC ( Incorporated
      by reference to Exhibit 4.1 to Form 8-K filed with the SEC on January 26,
      2004 ).





10.2 Stock
      Purchase Agreement dated as of January 22, 2004 between Infinium Labs, Inc.  and
      Infinium Investment Partners, LLC ( Incorporated
      by reference to Exhibit 4.1 to Form 8-K filed with the SEC on January 26,
      2004 ).





10.3  Form
      of
      Subscription Agreement between Infinium Labs, Inc. and certain stockholders
      of
      Infinium Labs, Inc. ( Incorporated
      by reference to Exhibit 4.3 to the Form 10-KSB for the year ended December
      31,
      2003 ).





10.4  12%
      Secured Subordinated Debenture between the Company and Contare Ventures, LLC
      dated February 23, 2004 ( Incorporated
      by reference to Exhibit 10.12 to the Form 10-QSB filed with the SEC on August
      23, 2004 ).





10.5  12%
      Secured Subordinated Debenture between the Company and Gary Kurfirst, dated
      February 23, 2004 ( Incorporated
      by reference to Exhibit 10.9 to the Form 10-QSB filed with the SEC on August
      23,
      2004 ).





10.6  15%
      Secured Debenture between the Company and James Beshara, dated March 29,
      2004 ( Incorporated
      by reference to Exhibit 10.4 to the Form 10-QSB filed with the SEC on August
      23,
      2004 ).


29





10.7   15%
      Secured Debenture between the Company and Ronald Westman, dated April 7,
      2004 ( Incorporated
      by reference to Exhibit 10.11 to the Form 10-QSB filed with the SEC on August
      23, 2004 ).





10.8   15%
      Secured Subordinated Debenture between the Company and James Beshara, dated
      May
      3, 2004 ( Incorporated
      by reference to Exhibit 10.3 to the Form 10-QSB filed with the SEC on August
      23,
      2004 ).




10.9   15%
      Secured Debenture between the Company and Ronald Westman, dated May 7,
      2004 ( Incorporated
      by reference to Exhibit 10.1 to the Form 10-QSB filed with the SEC on August
      23,
      2004 ).





10.10   Pledge
      Agreement between Robert F. Shambro in favor of Phoenix Capital Opportunity
      Fund, dated May 12, 2004 ( Incorporated
      by reference from Exhibit 10.6 to
      the
      Form 10-QSB filed with the SEC on August 23, 2004 ).





10.11   Promissory
      Note between the Company and Sharon M. Beshara, dated May 18, 2004 (Incorporated by reference from Exhibit 10.5 to
      the
      Form 10-QSB filed with the SEC on August 23, 2004 ).





10.12   15%
      Secured Subordinated Debenture between the Company and  and
      SBI
      USA, LLC, dated May 28, 2004 ( Incorporated
      by reference from Exhibit 10.10 to
      the
      Form 10-QSB filed with the SEC on August 23, 2004) .





10.13   Amended
      and restated convertible secured promissory note dated, June 16, 2004, between
      the Company and Phantom Investors, LLC ( Incorporated
      by reference from Exhibit 10.2 to
      the
      Form 10-QSB filed with the SEC on August 23, 2004) .





10.14   Commercial
      Promissory Note between the Company and Video Associates, LLC, dated June 2004


(Incorporated
      by reference from Exhibit 10.8 to
      the
      Form 10-QSB filed with the SEC on August 23, 2004) .





10.15   Employee
      Stock Ownership ( Incorporated
      by reference from Exhibit 10.13 to
      the
      Form 10-QSB filed with the SEC on August 23, 2004) .





10.16   Promissory
      Note between the Company and Stephen A. Witzer, dated July 28, 2004  ( Incorporated
      by reference from Exhibit 10.14 of to
      the
      Form SB-2/A filed with the SEC on February 14, 2005) .





10.17   10%
      Secured Promissory Note between the Company and Hazinu Ltd., dated October
      20,
      2004 (Incorporated
      by reference from Exhibit 4.2 of to
      Form
      8-K filed with the SEC on October 29, 2004) .





10.18   10%
      Secured Promissory Note between the Company and JM Investors, LLC, Fenmore
      Holdings, LLC, Viscount  Investments
      Limited and Congregation Mishkan Sholom, dated October 27, 2004 (Incorporated
      by reference from Exhibit 4.6 of to
      Form
      8-K filed with the SEC on October 29, 2004)





10.19   Securities
      Purchase Agreement between the Company and JM Investors, LLC, Fenmore Holdings,
      LLC, Viscount Investments Limited and Congregation Mishkan Sholom dated
      December 13, 2004 (Incorporated
      by reference from Exhibit 4.1 to
      Form
      8-K filed with the SEC on October 29, 2004) .





10.20   Registration
      Rights Agreement  between
      the Company and JM Investors, LLC, Fenmore Holdings, LLC, Viscount Investments
      Limited and Congregation Mishkan Sholom dated
      December 13, 2004 (Incorporated
      by reference from Exhibit 4.2 to
      Form
      8-K filed with the SEC on October 29, 2004).





10.21   8%
      Convertible Debenture between the Company and
      JM
      Investors, LLC, Fenmore Holdings, LLC, Viscount Investments Limited and
      Congregation Mishkan Sholom dated
      December 13, 2004 (Incorporated
      by reference from Exhibit 4 .3  to
      Form
      8-K filed with the SEC on October 29, 2004) .





10.22   8%
      Convertible Debenture between the Company and
      accredited investors dated
      December 23, 2004 (Incorporated
      by reference to
      Form
      8-K filed with the SEC on January 5, 2005) .





10.23   Pinnacle
      Marketing Agreement to serve as manufacturing representatives ( Incorporated
      by reference from to
      Exhibit 10.21 to the Form 10-KSB filed with the SEC on April 20,
      2005) .


30





10.24   Summit
      Marketing Agreement to serve as manufacturing representatives (Incorporated
      by
      reference from to Exhibit 10.22 to the Form SB-2/A filed with the SEC on February
      14, 2005 ).





10.25   Limelight
      Networks Agreement to serve as manufacturing representatives (Incorporated
      by
      reference from to Exhibit 10.24 to the Form SB-2/A filed with the SEC on February
      14, 2005 ).





10.26   Chicony
      agreement to manufacture system hardware (Incorporated by reference from to
      Exhibit 10.25 to the Form SB-2/A filed with the SEC on February
      14, 2005 ).





10.27   Saitek
      agreement to manufacture system hardware (Incorporated by reference from to
      Exhibit 10.26 to the Form SB-2/A filed with the SEC on February
      14, 2005 ).





10.28   BIOSTAR®
      Microtech International Corp. agreement for engineering, industrial design
      and
      manufacturing (Incorporated
      by reference from to Exhibit 10.27 to the Form SB-2/A filed with the SEC on February
      14, 2005 ).





10.29   Teague
      agreement for engineering and industrial design ( Incorporated
      by reference from to Exhibit 10.28 to the Form SB-2/A filed with the SEC on February
      14, 2005 ).





10.30   6%
      Promissory Note between the Company and Nite Capital L.P., dated March 9, 2005 ( Incorporated
      by reference from Exhibit 10.39 to
      the
      Form 10-QSB filed with the SEC on May 23, 2005) .





10.31   17%
      Promissory Note between the Company and Ron Westman., dated March 21, 2005 ( Incorporated
      by reference from Exhibit 10.40 to
      the
      Form 10-QSB filed with the SEC on May 23, 2005) .





10.32   12%
      Promissory Note between the Company and Rob Shambro, dated April 7, 2005 ( Incorporated
      by reference from Exhibit 10.1 to
      the
      Form 10-QSB filed with the SEC on August 15, 2005) .





10.33   17%
      Promissory Note between the Company and Fred Niedrich, dated April 29, 2005 ( Incorporated
      by reference from Exhibit 10.2 to
      the
      Form 10-QSB filed with the SEC on August 15, 2005) .





10.34   17%
      Promissory Note between the Company and Fred Niedrich, dated June 13, 2005 ( Incorporated
      by reference from Exhibit 10.3 to
      the
      Form 10-QSB filed with the SEC on August 15, 2005) .





10.35   17%
      Promissory Note between the Company and James Breshara, dated June 30, 2005 ( Incorporated
      by reference from Exhibit 10.4 to
      the
      Form 10-QSB filed with the SEC on August 15, 2005) .





10.36   15%
      Promissory Note between the Company and Edward Breshara, dated September 7,
      2005 ( Incorporated
      by reference from Exhibit 10.1 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .





10.37   5%
      Promissory Note between the Company and Sharon Breshara, dated September 7,
      2005 ( Incorporated
      by reference from Exhibit 10.2 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .





10.38   5%
      Promissory Note between the Company and Fred Niedrich, dated September 13,
      2005 ( Incorporated
      by reference from Exhibit 10.3 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .





10.39   5%
      Promissory Note between the Company and Fred Niedrich, dated September 19,
      2005 ( Incorporated
      by reference from Exhibit 10.4 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .





10.40   %
      Promissory Note between the Company and Fred Niedrich, dated November 1, 2005 ( Incorporated
      by reference from Exhibit 10.5 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .





10.41   %
      Promissory Note between the Company and Edward Breshara, dated November 7,
      2005 ( Incorporated
      by reference from Exhibit 10.6 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .





10.42   5%
      Assignment of Promissory Note between Stephen A. Witzer, Trustee and Director,
      Richard Angelotti, dated December 9, 2005 ( Incorporated
      by reference from Exhibit 10.7 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .





10.43   Amendment
      to Promissory Note between the Company and Director, Richard Angelotti, dated
      December 9, 2005 ( Incorporated
      by reference from Exhibit 10.8 to
      the
      Form 10-QSB filed with the SEC on December 22, 2005) .


31





10.44   Employment
      agreement between the Company and Tyrol Graham
      dated January 15, 2004 ( Incorporated
      by reference from to Exhibit 10.32 to the Form 10-KSB filed with the SEC on April
      20,
      2005 ).





10.45   Employment
      agreement between the Company and Greg Koler dated
      January 11, 2006 ( Incorporated
      by reference from to Exhibit 10.1 to the Form 8-K filed with the SEC on January
      13, 2006 ).





10.46   Stockholder
      vesting agreement between the Company and Greg Koler dated
      January 11, 2006 ( Incorporated
      by reference from to Exhibit 10.2 to the Form 8-K filed with the SEC on January
      13, 2006 ).





10.47   Securities
      Purchase Agreement dated as of January 24 , 2006 by and between Infinium Labs,
      Inc. and Golden Gate Investors, Inc. ( Incorporated
      by reference from to Exhibit 10.1 to the Form 8-K filed with the SEC on January
      31, 2006 ).





10.48   Registration
      Rights Agreement dated as of January 24, 2006 by and between Infinium Labs,
      Inc.
      and Golden Gate Investors, Inc. ( Incorporated
      by reference from to Exhibit 10.2 to the Form 8-K filed with the SEC on January
      31, 2006 ).





10.49 51⁄4%
      Convertible Debenture of Infinium Labs, Inc. dated as of January 24, 2006. ( Incorporated
      by reference from to Exhibit 10.3 to the Form 8-K filed with the SEC on January
      31, 2006 ).





10.50   Warrant
      to Purchase Common Stock of Infinium Labs, Inc. dated as of January 24, 2006
      ( Incorporated
      by reference from to Exhibit 10.4 to the Form 8-K filed with the SEC on January
      31, 2006 ) .





10.51   Addendum
      to Convertible Debenture, Warrant to Purchase Common Stock and Securities
      Purchase Agreement dated as of January 24, 2006 by and between Infinium Labs,
      Inc. and Golden Gate Investors, Inc.  ( Incorporated
      by reference from to Exhibit 10.5 to the Form 8-K filed with the SEC on January
      31, 2006 ).





31.1
      Certification by Chief Executive Officer and Chief Financial Officer pursuant
      to
      Sarbanes-Oxley Section 302 (filed herewith).





32.1
      Certification by Chief Executive Officer and Chief Financial Officer pursuant
      to
      18 U.S.C. Section 1350 (filed herewith).





**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
      years ended December 31, 2005 and December 31, 2004 and for the reviews of
      the
      financial statements included in the Company's Quarterly Reports on Form 10-QSB
      during those fiscal years were $63,758 and $53,625 respectively.





Audit-related
      Fees. None.





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 Annual Report on Form 10-KSB for the year ended December 31, 2005 to be
      signed on its behalf by the undersigned, thereunto duly authorized.




**INFINIUM
                LABS, INC.**Date: 
                May 19, 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, 2005 to be
      signed on its behalf by the undersigned, thereunto duly authorized.





**SIGNATURE**
            ****
            **TITLE**
            ****
            **DATE****/s/*****Greg
                Koler***
            
            Chief
                Executive Officer and
            
            May
                19, 2006Greg
                Koler
            
            Interim
                Chief Financial Officer**/s/*****Timothy
                Roberts***
            
            Chairman
                of the Board of Directors
            
            May
                19, 2006Timothy
                Roberts**/s/*****Richard
                Angelotti*****
            
            Director
            
            May
                19, 2006Richard
                Angelotti




33


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**FINANCIAL
      STATEMENTS**





**AS
      OF DECEMBER 31, 2005 CONSOLIDATED AND 2004 (RESTATED)**





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**CONTENTS**





PAGES
            F-1
            Reports
                of Independent Registered Public Accounting FirmPAGE
            F-2
            Balance
                Sheets as of December 31, 2004 (Consolidated) and 2004 (Restated)PAGE
            F-3
            Statements
                of Operations for the Year Ended December 31, 2005
                (Consolidated) and 2004 (Restated) and for the Period from December
                9,
                2002 (Inception) to December 31, 2005PAGES
            F-4-F-19
            Statement
                of Changes in Stockholders’ Deficiency for the Period
                from December 9, 2002 (Inception) Through December 31,
                2005PAGES
            F-20
            Statements
                of Cash Flows for the Year Ended December 31, 2005
                (Consolidated) and 2004 (Restated) and for the Period from December
                9,
                2002 (Inception) to December 31, 2005PAGES
            F-22-F-52
            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, 2005 (consolidated) and the
      related statements of operations, changes in stockholders’ deficiency and cash
      flows for the year ended December 31, 2005 (consolidated), 2004, and for the
      period from December 9, 2002 (inception) to December 31, 2005. 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 consolidated 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, 2005, 2004, and
      the
      results of its operations and its cash flows for the years ended December 31,
      2005 and 2004, 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 10 to
      the consolidated financial statements, the Company has had recurring losses
      from
      inception of $66,579,467, has a working capital deficiency of $11,965,644,
      a
      stockholders deficiency of $11,965,644, notes in default of $3,486,759 and
      used
      cash in operations from inception of $15,339,599. This raises substantial doubt
      about its ability to continue as a going concern. Management’s plans concerning
      this matter are also described in Note 10. The accompanying consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.





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





May
      16,
      2006


F-1




**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Balance Sheet**


**December
      31, 2005**





**ASSETS****Current
                Assets:**Cash
            
            $
            603Prepaid
                Expenses
            
            
            7,071Total
                Current Assets
            
            
            7,674**Total
                Assets**
            
            $
            7,674**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****Current
                Liabilities:**Accounts
                payable
            
            $
            3,839,274Due
                to developers
            
            
            845,000Accrued
                interest expense
            
            
            846,137Other
                accrued expense
            
            
            6,506Accrued
                payroll and payroll taxes (Note 8(F))
            
            
            2,364,205Promissory
                notes, net (Note 5)
            
            
            4,072,196**Total
                Current Liabilities**
            
            
            11,973,318**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, 600,000,000 shares authorized, 399,823,667
                shares issued and outstanding (Note 6)
            
            
            39,982Additional
                paid-in capital (Note 6)
            
            
            55,077,909Subscription
                receivable
            
            
            (22,517
            )Deferred
                Compensation
            
            
            (481,551
            )Accumulated
                deficit during development stage
            
            
            (66,579,467
            )Total
                Stockholders’ Deficiency
            
            
            (11,965,644
            )**Total
                Liabilities and Stockholders’ Deficiency**
            
            $
            7,674




See
        Notes
        to Accompanying Consolidated Financial Statements




F-2


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statements of Operations**


**For
                  the Year Ended December 31, 2005**
              ****
              **For
                  the Year Ended December 31, 2004**
                **Restated**
                **Note
                  2**
              ****
              **For
                  the Period from December 9, 2002 (Inception to December 31,
                  2005)****Operating
                  Expenses:**Development
                  costs
              
              $
              (13,927
              )
              $
              3,130,854
              
              $
              3,522,277Advertising
              
              
              404,331
              
              
              1,380,377
              
              
              1,992,887Salary
                  expense
              
              
              5,677,365
              
              
              6,985,422
              
              
              12,835,271Professional
                  fees
              
              
              1,265,317
              
              
              2,808,733
              
              
              4,969,920Consultants
              
              
              3,111,392
              
              
              9,082,345
              
              
              13,053,413Impairment
                  of assets
              
              
              502,090
              
              
              352,299
              
              
              854,389General
                  and administrative
              
              
              2,220,324
              
              
              3,864,787
              
              
              6,451,230Total
                  Operating Expenses
              
              
              13,166,892
              
              
              27,604,817
              
              
              43,679,387**Net
                  Loss from Operations**
              
              
              (13,166,892
              )
              
              (27,604,817
              )
              
              (43,679,387
              )**Other
                  Income (Expense):**Other
                  income
              
              
              383
              
              
              1,897
              
              
              2,317Gain
                  / (Loss) on sale of equipment
              
              
              (5,011
              )
              
              (448
              )
              
              (5,459
              )Gain
                  / (Loss) on conversion of notes
              
              
              (10,671,647
              )
              
              
              
              
              (10,671,647
              )Gain
                  / (Loss) on stock issued for payroll taxes
              
              
              (62,269
              )
              
              
              
              
              (62,269
              )Interest
                  expense
              
              
              (5,700,848
              )
              
              (5,688,042
              )
              
              (11,406,886
              )Payroll
                  Tax Penalties & Interest
              
              
              (208,322
              )
              
              (528,377
              )
              
              (756,136
              )Total
                  Other Income (Expense)
              
              
              (16,647,714
              )
              
              (6,214,970
              )
              
              (22,900,080
              )**Loss
                  before Income Taxes**
              
              
              (29,814,606
              )
              
              (33,819,787
              )
              
              (66,579,467
              )**Income
                  Taxes**
              
              
              -
              
              
              -
              
              
              -**Net
                  Loss**
              
              $
              (29,814,606
              )
              $
              (33,819,787
              )
              $
              (66,579,467
              )**Per
                  Common Share**Loss
                  per common share - basic and diluted
              
              $
              (0.14
              )
              $
              (0.34
              )
              $
              (0.50
              )Weighted
                  average - basic and diluted
              
              
              219,727,249
              
              
              100,688,617
              
              
              133,897,292


See
        Notes
        to Accompanying Consolidated Financial Statements


F-3







**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders'
      Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**


**Preferred Stock********Common Stock********Additional Paid-In********Accumulated Deficit During Development********Stock Subscriptions********Deferred************************Shares********Amount********Shares********Amount********Capital********Stage********Receivable********Compensation********Total**Stock issued to founders ($0.0004 per share)$58,189,728$5,819$12,703$$(18,517)$5Stock issued for cash ($0.12 per share)4,423,012442526,261526,703Stock issued for services ($0.3775 per share)2,957,3762961,112,7091,113,005Net loss for the period from December 9, 2002 (inception) to October 31, 2003(2,270,129)(2,270,129)Balance, October 31, 200365,570,1166,5571,651,673(2,270,129)(18,517)(630,416)Stock issued for cash ($0.28 per share)2,169,148217612,172(145,000)467,389Stock issued for signage rights ($0.3175 per share)942,60094299,906300,000Stock issued for services ($0.3175 per share)434,03643138,597138,640See Notes to Accompanying Consolidated Financial StatementsF-4**INFINIUM LABS, INC. AND SUBSIDIARY****(A DEVELOPMENT STAGE COMPANY)****Consolidated Statement of Stockholders' Deficiency****For the Period from December 9, 2002 (Inception) to December 31, 2005****Preferred Stock****Common Stock****Additional****Paid-In****Accumulated****Deficit During****Development****Stock****Subscriptions****Deferred****Shares****Amount****Shares****Amount****Capital****Stage****Receivable****Compensation****Total**Net loss for the two months ended December 31, 2003(674,945)(674,945)Balance, December 31, 200369,115,9006,9112,702,348(2,945,074)(163,517)(399,332)Recapitalization of Global Business Resources16,156,0001,615(1,615)0Shares issued for cash ($0.25 per share)6,650,0006651,661,8351,662,500Shares issued for cash ($0.257 per share)141,000141,000Shares issued with note payable ($0.78 per share)560,00056433,944434,000Shares issued for legal settlement ($1.475 per share)66,668798,32898,335Shares issued for services ($1.475 per share)1,750,0001752,581,0752,581,250Shares issued with note payable ($1.47 per share)7,50011,02511,025Shares issued with note payable ($1.42 per share)200,00020283,980284,000Shares issued with note payable ($1.475 per share)100,00010147,490147,500See Notes to Accompanying Consolidated Financial Statements


F-5






**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **Consolidated
        Statement of Stockholders' Deficiency**
 
 **For
        the Period from December 9, 2002 (Inception) to December 31,
        2005**





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




See
        Notes
        to Accompanying Consolidated Financial Statements




F-6




**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **Consolidated
        Statement of Stockholders' Deficiency**
 
 **For
        the Period from December 9, 2002 (Inception) to December 31,
        2005**


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


See
        Notes
        to Accompanying Consolidated Financial Statements




F-7


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **Consolidated
        Statement of Stockholders' Deficiency**
 
 **For
        the Period from December 9, 2002 (Inception) to December 31,
        2005**


**Preferred
                Stock**
            ****
            **Common
                Stock**
            ****
            **Additional**
              **Paid-In**
            ****
            **Accumulated**
              **Deficit
                During**
              **Development**
            ****
            **Stock**
              **Subscriptions**
            ****
            **Deferred**
            ****
            ****
            ********
            ****
            **Shares**
            ****
            **Amount**
            ****
            **Shares**
            ****
            **Amount**
            ****
            **Capital**
            ****
            **Stage**
            ****
            **Receivable**
            ****
            **Compensation**
            ****
            **Total**Shares
                issued to employees ($0.33 per share)
            
            
            
            
            
            
            
            
            300,000
            
            
            30
            
            
            98,970
            
            
            
            
            
            
            
            
            
            
            
            99,000Shares
                issued for cash ($0.25 per share)
            
            
            
            
            
            
            
            
            1,900,400
            
            
            190
            
            
            474,910
            
            
            
            
            
            
            
            
            
            
            
            475,100Shares
                issued to employees ($0.32 per share)
            
            
            
            
            
            
            
            
            1,790,000
            
            
            179
            
            
            565,321
            
            
            
            
            
            
            
            
            
            
            
            565,500Shares
                issued to employees ($0.22 per share)
            
            
            
            
            
            
            
            
            5,199,967
            
            
            520
            
            
            1,136,579
            
            
            
            
            
            
            
            
            
            
            
            1,137,099Shares
                issued to executives ($0.22 per share)
            
            
            
            
            
            
            
            
            1,100,000
            
            
            110
            
            
            240,432
            
            
            
            
            
            
            
            
            
            
            
            240,542Shares
                issued to consultants for services
                ($0.21 per share)
            
            
            
            
            
            
            
            
            3,885,410
            
            
            388
            
            
            811,753
            
            
            
            
            
            
            
            
            
            
            
            812,141Shares
                issued with notes payable ($0.42 per share)
            
            
            
            
            
            
            
            
            1,750,000
            
            
            175
            
            
            734,825
            
            
            
            
            
            
            
            
            
            
            
            735,000Shares
                issued to consultants for services
                ($0.28 per share)
            
            
            
            
            
            
            
            
            1,350,000
            
            
            135
            
            
            377,365
            
            
            
            
            
            
            
            
            
            
            
            377,500Shares
                issued for interest ($0.18 per share)
            
            
            
            
            
            
            
            
            375,000
            
            
            38
            
            
            67,462
            
            
            
            
            
            
            
            
            
            
            
            67,500Shares
                issued for services ($0.25 per share)
            
            
            
            
            
            
            
            
            150,000
            
            
            15
            
            
            37,485
            
            
            
            
            
            
            
            
            
            
            
            37,500Shares
                issued for cash ($0.16 per share)
            
            
            
            
            
            
            
            
            1,649,635
            
            
            165
            
            
            263,910
            
            
            
            
            
            
            
            
            
            
            
            264,075


See
        Notes
        to Accompanying Consolidated Financial Statements




F-8


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **Consolidated
        Statement of Stockholders' Deficiency**
 
 **For
        the Period from December 9, 2002 (Inception) to December 31,
        2005**


**Preferred
                Stock**
            ****
            **Common
                Stock**
            ****
            **Additional**
              **Paid-In**
            ****
            **Accumulated**
              **Deficit
                During**
              **Development**
            ****
            **Stock**
              **Subscriptions**
            ****
            **Deferred**
            ****
            ****
            ********
            ****
            **Shares**
            ****
            **Amount**
            ****
            **Shares**
            ****
            **Amount**
            ****
            **Capital**
            ****
            **Stage**
            ****
            **Receivable**
            ****
            **Compensation**
            ****
            **Total**Beneficial
                conversion of promissory notes at $0.10 per share
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            318,500
            
            
            
            
            
            
            
            
            
            
            
            318,500Fair
                value of warrants issued in conjunction with promissory notes ranging
                from
                $0.10 per share to $1.00 per share
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,025,000
            
            
            
            
            
            
            
            
            
            
            
            2,025,000Shares
                contributed in kind
            
            
            
            
            
            
            
            
            (1,191,450
            )
            
            (119
            )
            
            119
            
            
            
            
            
            
            
            
            
            
            
            0Net
                loss, December 31, 2004
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (33,819,787
            )
            
            
            
            
            
            
            
            (33,819,787
            )Balance,
                December 31, 2004
            
            
            
            
            
            
            
            
            121,090,655
            
            
            12,109
            
            
            24,523,917
            
            
            (36,764,861
            )
            
            (22,517
            )
            
            
            
            
            (12,251,352
            )Shares
                issued to Director for services
                ($1.59 per share)
            
            
            
            
            
            
            
            
            40,000
            
            
            4
            
            
            63,596
            
            
            
            
            
            
            
            
            
            
            
            63,600Shares
                issued to consultants for services
                ($0.87 per share)
            
            
            
            
            
            
            
            
            125,179
            
            
            13
            
            
            108,916
            
            
            
            
            
            
            
            
            
            
            
            108,929Shares
                issued to convert note payable ($1.18 per share)
            
            
            
            
            
            
            
            
            7,043,750
            
            
            704
            
            
            8,310,921
            
            
            
            
            
            
            
            
            
            
            
            8,311,625Shares
                issued to consultants for services
                ($0.54 per share)
            
            
            
            
            
            
            
            
            1,200,000
            
            
            120
            
            
            647,880
            
            
            
            
            
            
            
            
            
            
            
            648,000Shares
                issued to convert note payable ($0.365 per share)
            
            
            
            
            
            
            
            
            4,925,291
            
            
            493
            
            
            1,797,238
            
            
            
            
            
            
            
            
            
            
            
            1,797,731Shares
                issued to consultants for services
                ($0.32 per share)
            
            
            
            
            
            
            
            
            1,722,453
            
            
            172
            
            
            558,675
            
            
            
            
            
            
            
            
            (19,665
            )
            
            539,182




See
      Notes to Accompanying Consolidated Financial
      Statements




F-9


**INFINIUM
          LABS, INC. AND SUBSIDIARY**
 
 **(A
          DEVELOPMENT STAGE COMPANY)**
 
 **Consolidated
          Statement of Stockholders' Deficiency**
 
 **For
          the Period from December 9, 2002 (Inception) to December 31,
          2005**


**Preferred
                Stock**
            ****
            **Common
                Stock**
            ****
            **Additional**
              **Paid-In**
            ****
            **Accumulated**
              **Deficit
                During**
              **Development**
            ****
            **Stock**
              **Subscriptions**
            ****
            **Deferred**
            ****
            ****
            ********
            ****
            **Shares**
            ****
            **Amount**
            ****
            **Shares**
            ****
            **Amount**
            ****
            **Capital**
            ****
            **Stage**
            ****
            **Receivable**
            ****
            **Compensation**
            ****
            **Total**Shares
                issued to employees ($0.25 per share)
            
            
            
            
            
            
            
            
            225,000
            
            
            22
            
            
            56,228
            
            
            
            
            
            
            
            
            
            
            
            56,250Shares
                issued to convert note payable ($0.122 per share)
            
            
            
            
            
            
            
            
            5,815,069
            
            
            582
            
            
            711,336
            
            
            
            
            
            
            
            
            
            
            
            711,918Shares
                issued to consultant for services
                ($0.32 per share)
            
            
            
            
            
            
            
            
            100,000
            
            
            10
            
            
            31,990
            
            
            
            
            
            
            
            
            
            
            
            32,000Shares
                issued to Director for services
                ($0.34 per share)
            
            
            
            
            
            
            
            
            800,000
            
            
            80
            
            
            271,920
            
            
            
            
            
            
            
            
            
            
            
            272,000Beneficial
                conversion of promissory notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            375,000
            
            
            
            
            
            
            
            
            
            
            
            375,000Shares
                issued to consultants for services
                ($0.32 per share)
            
            
            
            
            
            
            
            
            1,423,734
            
            
            143
            
            
            319,812
            
            
            
            
            
            
            
            
            
            
            
            319,955Shares
                issued to convert note payable ($0.17 per share)
            
            
            
            
            
            
            
            
            13,325,000
            
            
            1,333
            
            
            2,280,600
            
            
            
            
            
            
            
            
            
            
            
            2,281,933Shares
                issued to consultant for services
                ($0.18 per share)
            
            
            
            
            
            
            
            
            250,000
            
            
            25
            
            
            44,975
            
            
            
            
            
            
            
            
            
            
            
            45,000Shares
                issued to employee ($0.23 per share)
            
            
            
            
            
            
            
            
            100,000
            
            
            10
            
            
            22,990
            
            
            
            
            
            
            
            
            
            
            
            23,000Shares
                issued to employees ($0.15 per share)
            
            
            
            
            
            
            
            
            601,725
            
            
            60
            
            
            90,199
            
            
            
            
            
            
            
            
            
            
            
            90,259Shares
                issued to convert note payable ($0.10 per share)
            
            
            
            
            
            
            
            
            2,936,644
            
            
            294
            
            
            293,370
            
            
            
            
            
            
            
            
            
            
            
            293,664




See
      Notes to Accompanying Consolidated Financial
      Statements




F-10


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **Consolidated
        Statement of Stockholders' Deficiency**
 
 **For
        the Period from December 9, 2002 (Inception) to December 31,
        2005**
 **Preferred
                    Stock**
                ****
                **Common
                    Stock**
                ****
                **Additional**
                  **Paid-In**
                ****
                **Accumulated**
                  **Deficit
                    During**
                  **Development**
                ****
                **Stock**
                  **Subscriptions**
                ****
                **Deferred**
                ****
                ****
                ********
                ****
                **Shares**
                ****
                **Amount**
                ****
                **Shares**
                ****
                **Amount**
                ****
                **Capital**
                ****
                **Stage**
                ****
                **Receivable**
                ****
                **Compensation**
                ****
                **Total**Loss
                    on conversion of note payable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                69,863
                
                
                
                
                
                
                
                
                
                
                
                69,863Shares
                    issued to employees ($0.15 per share)
                
                
                
                
                
                
                
                
                678,067
                
                
                68
                
                
                101,242
                
                
                
                
                
                
                
                
                
                
                
                101,310Shares
                    issued to consultants for services
                    ($0.15 per share)
                
                
                
                
                
                
                
                
                2,255,097
                
                
                225
                
                
                338,550
                
                
                
                
                
                
                
                
                
                
                
                338,775Shares
                    issued to employees ($0.15 per share)
                
                
                
                
                
                
                
                
                962,324
                
                
                96
                
                
                143,244
                
                
                
                
                
                
                
                
                
                
                
                143,340Shares
                    issued to employees ($0.12 per share)
                
                
                
                
                
                
                
                
                1,162,720
                
                
                116
                
                
                139,410
                
                
                
                
                
                
                
                
                
                
                
                139,526Shares
                    issued to executive ($0.15 per share)
                
                
                
                
                
                
                
                
                250,000
                
                
                25
                
                
                37,475
                
                
                
                
                
                
                
                
                
                
                
                37,500Shares
                    issued to convert note payable ($0.16 per share)
                
                
                
                
                
                
                
                
                3,961,170
                
                
                396
                
                
                633,391
                
                
                
                
                
                
                
                
                
                
                
                633,787Shares
                    issued to convert note payable ($0.16 per share)
                
                
                
                
                
                
                
                
                3,700,000
                
                
                370
                
                
                591,630
                
                
                
                
                
                
                
                
                
                
                
                592,000Shares
                    issued to convert note payable ($0.14 per share)
                
                
                
                
                
                
                
                
                5,900,000
                
                
                590
                
                
                825,828
                
                
                
                
                
                
                
                
                
                
                
                826,418Shares
                    issued to convert note payable ($0.14 per share)
                
                
                
                
                
                
                
                
                12,000,000
                
                
                1,200
                
                
                1,685,636
                
                
                
                
                
                
                
                
                
                
                
                1,686,836Shares
                    issued to satisfy vendor payable ($0.16 per share)
                
                
                
                
                
                
                
                
                1,976,021
                
                
                198
                
                
                315,965
                
                
                
                
                
                
                
                
                
                
                
                316,163




See
      Notes to Accompanying Consolidated Financial
      Statements




F-11





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**


**Preferred
                  Stock**
              ****
              **Common
                  Stock**
              ****
              **Additional**
                **Paid-In**
              ****
              **Accumulated**
                **Deficit
                  During**
                **Development**
              ****
              **Stock**
                **Subscriptions**
              ****
              **Deferred**
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Stage**
              ****
              **Receivable**
              ****
              **Compensation**
              ****
              **Total**Shares
                  issued to executive ($0.10 per share)
              
              
              
              
              
              
              
              
              250,000
              
              
              25
              
              
              24,975
              
              
              
              
              
              
              
              
              
              
              
              25,000Shares
                  issued to executive ($0.10 per share)
              
              
              
              
              
              
              
              
              500,000
              
              
              50
              
              
              49,950
              
              
              
              
              
              
              
              
              
              
              
              50,000Shares
                  issued to consultants for services
                  ($0.11 per share)
              
              
              
              
              
              
              
              
              2,934,536
              
              
              293
              
              
              322,342
              
              
              
              
              
              
              
              
              
              
              
              322,635Shares
                  issued to employees ($0.08 per share)
              
              
              
              
              
              
              
              
              2,122,675
              
              
              212
              
              
              178,188
              
              
              
              
              
              
              
              
              
              
              
              178,400Shares
                  issued to convert note payable ($0.11 per share)
              
              
              
              
              
              
              
              
              3,695,339
              
              
              369
              
              
              403,642
              
              
              
              
              
              
              
              
              
              
              
              404,011Shares
                  returned to Treasury per legal settlement
                  ($1.47 per share)
              
              
              
              
              
              
              
              
              (120,000
              )
              
              (12
              )
              
              (175,888
              )
              
              
              
              
              
              
              
              
              
              
              (175,900
              )Shares
                  issued to convert note payable ($0.10 per share)
              
              
              
              
              
              
              
              
              2,075,453
              
              
              208
              
              
              207,337
              
              
              
              
              
              
              
              
              
              
              
              207,545Loss
                  on conversion of note payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              62,263
              
              
              
              
              
              
              
              
              
              
              
              62,263Shares
                  issued to convert note payable ($0.10 per share)
              
              
              
              
              
              
              
              
              3,187,206
              
              
              319
              
              
              318,402
              
              
              
              
              
              
              
              
              
              
              
              318,721Loss
                  on conversion of note payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              95,616
              
              
              
              
              
              
              
              
              
              
              
              95,616Shares
                  issued to convert note payable ($0.10 per share)
              
              
              
              
              
              
              
              
              1,110,298
              
              
              111
              
              
              110,919
              
              
              
              
              
              
              
              
              
              
              
              111,030




See
      Notes to Accompanying Consolidated Financial
      Statements




F-12





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**


**Preferred
                  Stock**
              ****
              **Common
                  Stock**
              ****
              **Additional**
                **Paid-In**
              ****
              **Accumulated**
                **Deficit
                  During**
                **Development**
              ****
              **Stock**
                **Subscriptions**
              ****
              **Deferred**
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Stage**
              ****
              **Receivable**
              ****
              **Compensation**
              ****
              **Total**Loss
                  on conversion of note payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,309
              
              
              
              
              
              
              
              
              
              
              
              3,309Shares
                  issued to convert note payable ($0.10 per share)
              
              
              
              
              
              
              
              
              1,109,069
              
              
              111
              
              
              110,796
              
              
              
              
              
              
              
              
              
              
              
              110,907Loss
                  on conversion of note payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,272
              
              
              
              
              
              
              
              
              
              
              
              3,272Shares
                  issued to convert note payable ($0.10 per share)
              
              
              
              
              
              
              
              
              1,863,852
              
              
              186
              
              
              186,199
              
              
              
              
              
              
              
              
              
              
              
              186,385Loss
                  on conversion of note payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,416
              
              
              
              
              
              
              
              
              
              
              
              3,416Beneficial
                  conversion of promissory notes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              220,400
              
              
              
              
              
              
              
              
              
              
              
              220,400Warrants
                  issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              594,429
              
              
              
              
              
              
              
              
              
              
              
              594,429Deferred
                  Compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,941
              
              
              9,941Shares
                  issued to consultants for services
                  ($0.10 per share)
              
              
              
              
              
              
              
              
              500,000
              
              
              50
              
              
              49,950
              
              
              
              
              
              
              
              
              (10,000
              )
              
              40,000Shares
                  issued to consultants for services
                  ($0.096 per share)
              
              
              
              
              
              
              
              
              32,000
              
              
              3
              
              
              3,069
              
              
              
              
              
              
              
              
              
              
              
              3,072Shares
                  issued to consultants for services
                  ($0.084 per share)
              
              
              
              
              
              
              
              
              22,000
              
              
              2
              
              
              1,849
              
              
              
              
              
              
              
              
              
              
              
              1,851Shares
                  issued to consultants for services
                  ($0.09 per share)
              
              
              
              
              
              
              
              
              72,223
              
              
              7
              
              
              6,493
              
              
              
              
              
              
              
              
              
              
              
              6,500




See
      Notes to Accompanying Consolidated Financial
      Statements




F-13





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**


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




See
      Notes to Accompanying Consolidated Financial
      Statements




F-14





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**




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




See
      Notes to Accompanying Consolidated Financial
      Statements




F-15





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**


**Preferred
                  Stock**
              ****
              **Common
                  Stock**
              ****
              **Additional**
                **Paid-In**
              ****
              **Accumulated**
                **Deficit
                  During**
                **Development**
              ****
              **Stock**
                **Subscriptions**
              ****
              **Deferred**
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Stage**
              ****
              **Receivable**
              ****
              **Compensation**
              ****
              **Total**Shares
                  issued to convert accrued interest on note payable ($0.054 per
                  share)
              
              
              
              
              
              
              
              
              7,114,667
              
              
              711
              
              
              383,481
              
              
              
              
              
              
              
              
              
              
              
              384,192Shares
                  issued to consultants for services
                  ($0.06 per share)
              
              
              
              
              
              
              
              
              250,000
              
              
              25
              
              
              14,975
              
              
              
              
              
              
              
              
              
              
              
              15,000Shares
                  issued to consultants for services
                  ($0.05 per share)
              
              
              
              
              
              
              
              
              1,629,027
              
              
              163
              
              
              81,288
              
              
              
              
              
              
              
              
              (27,505
              )
              
              53,946Shares
                  issued to satisfy vendor payable ($0.049 per share)
              
              
              
              
              
              
              
              
              6,361,113
              
              
              636
              
              
              311,059
              
              
              
              
              
              
              
              
              
              
              
              311,695Shares
                  issued to convert notes payable ($0.0472 per share)
              
              
              
              
              
              
              
              
              12,882,049
              
              
              1,288
              
              
              617,479
              
              
              
              
              
              
              
              
              
              
              
              618,767Loss
                  on conversion of notes payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              14,169
              
              
              
              
              
              
              
              
              
              
              
              14,169Shares
                  issued to convert note payable ($0.045 per share)
              
              
              
              
              
              
              
              
              3,385,259
              
              
              339
              
              
              151,998
              
              
              
              
              
              
              
              
              
              
              
              152,337Loss
                  on conversion of note payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              16,926
              
              
              
              
              
              
              
              
              
              
              
              16,926Shares
                  issued to employees ($0.055 per share)
              
              
              
              
              
              
              
              
              5,415,729
              
              
              542
              
              
              297,323
              
              
              
              
              
              
              
              
              (85,758
              )
              
              212,107Shares
                  issued to employees ($0.05 per share)
              
              
              
              
              
              
              
              
              3,045,708
              
              
              305
              
              
              151,981
              
              
              
              
              
              
              
              
              (44,648
              )
              
              107,638




See
      Notes to Accompanying Consolidated Financial
      Statements




F-16





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**


**Preferred
                  Stock**
              ****
              **Common
                  Stock**
              ****
              **Additional**
                **Paid-In**
              ****
              **Accumulated**
                **Deficit
                  During**
                **Development**
              ****
              **Stock**
                **Subscriptions**
              ****
              **Deferred**
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Stage**
              ****
              **Receivable**
              ****
              **Compensation**
              ****
              **Total**Shares
                  issued to employees ($0.045 per share)
              
              
              
              
              
              
              
              
              3,977,894
              
              
              398
              
              
              178,607
              
              
              
              
              
              
              
              
              (50,058
              )
              
              128,947Deferred
                  Compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,724
              
              
              9,724Shares
                  issued to consultants for services
                  ($0.032 per share)
              
              
              
              
              
              
              
              
              264,822
              
              
              26
              
              
              8,448
              
              
              
              
              
              
              
              
              
              
              
              8,474Shares
                  issued to consultants for services
                  ($0.029 per share)
              
              
              
              
              
              
              
              
              500,000
              
              
              50
              
              
              14,450
              
              
              
              
              
              
              
              
              
              
              
              14,500Shares
                  issued to consultants for services
                  ($0.020 per share)
              
              
              
              
              
              
              
              
              1,536,850
              
              
              154
              
              
              30,583
              
              
              
              
              
              
              
              
              
              
              
              30,737Shares
                  issued to convert note payable ($.029 per share)
              
              
              
              
              
              
              
              
              7,246,455
              
              
              725
              
              
              199,459
              
              
              
              
              
              
              
              
              
              
              
              200,184Loss
                  on conversion of note
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,964
              
              
              
              
              
              
              
              
              
              
              
              9,964Shares
                  issued to employees ($0.025 per share)
              
              
              
              
              
              
              
              
              15,299,873
              
              
              1,530
              
              
              380,967
              
              
              
              
              
              
              
              
              (112,695
              )
              
              269,802Shares
                  issued to employees ($0.028 per share)
              
              
              
              
              
              
              
              
              699,780
              
              
              70
              
              
              19,524
              
              
              
              
              
              
              
              
              
              
              
              19,594Shares
                  issued to consultants for services
                  ($0.022 per share)
              
              
              
              
              
              
              
              
              2,247,956
              
              
              225
              
              
              49,230
              
              
              
              
              
              
              
              
              
              
              
              49,455Shares
                  issued to consultants for services
                  ($0.024 per share)
              
              
              
              
              
              
              
              
              1,000,000
              
              
              100
              
              
              23,900
              
              
              
              
              
              
              
              
              
              
              
              24,000Shares
                  issued to consultants for services ($0.021 per share)
              
              
              
              
              
              
              
              
              6,380,900
              
              
              638
              
              
              133,361
              
              
              
              
              
              
              
              
              (91,165
              )
              
              42,834




See
      Notes to Accompanying Consolidated Financial
      Statements




F-17





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**


**Preferred
                  Stock**
              ****
              **Common
                  Stock**
              ****
              **Additional**
                **Paid-In**
              ****
              **Accumulated**
                **Deficit
                  During**
                **Development**
              ****
              **Stock**
                **Subscriptions**
              ****
              **Deferred**
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Stage**
              ****
              **Receivable**
              ****
              **Compensation**
              ****
              **Total**Shares
                  issued to consultants for services ($0.015 per share)
              
              
              
              
              
              
              
              
              2,000,000
              
              
              200
              
              
              29,800
              
              
              
              
              
              
              
              
              
              
              
              30,000Shares
                  issued to employees ($0.022 per share)
              
              
              
              
              
              
              
              
              1,134,261
              
              
              113
              
              
              24,840
              
              
              
              
              
              
              
              
              (5,328
              )
              
              19,625Shares
                  issued to satisfy vendor payable ($0.022 per share)
              
              
              
              
              
              
              
              
              5,071,175
              
              
              507
              
              
              111,059
              
              
              
              
              
              
              
              
              
              
              
              111,566Shares
                  issued to satisfy vendor payable ($0.022 per share)
              
              
              
              
              
              
              
              
              1,134,775
              
              
              114
              
              
              24,851
              
              
              
              
              
              
              
              
              
              
              
              24,965Shares
                  issued to convert notes payable & accrued interest ($0.015 per
                  share)
              
              
              
              
              
              
              
              
              7,948,856
              
              
              795
              
              
              104,925
              
              
              
              
              
              
              
              
              
              
              
              105,720Loss
                  on conversion of notes payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,513
              
              
              
              
              
              
              
              
              
              
              
              13,513Shares
                  issued to consultants for services ($0.02 per share)
              
              
              
              
              
              
              
              
              10,694,577
              
              
              1,069
              
              
              212,823
              
              
              
              
              
              
              
              
              (188,510
              )
              
              25,382Shares
                  issued to employees ($0.02 per share)
              
              
              
              
              
              
              
              
              30,342,931
              
              
              3,034
              
              
              592,570
              
              
              
              
              
              
              
              
              (176,513
              )
              
              419,091Gain
                  on Note Conversion Settlement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0Shares
                  issued to convert notes payable ($0.017)
              
              
              
              
              
              
              
              
              16,000,000
              
              
              1,600
              
              
              79,141
              
              
              
              
              
              
              
              
              
              
              
              80,741Warrants
                  issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              335,933
              
              
              
              
              
              
              
              
              
              
              
              335,933




See
      Notes to Accompanying Consolidated Financial
      Statements




F-18





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





**For
      the Period from December 9, 2002 (Inception) to December 31,
      2005**   **Preferred
                  Stock**
              ****
              **Common
                  Stock**
              ****
              **Additional**
                **Paid-In**
              ****
              **Accumulated**
                **Deficit
                  During**
                **Development**
              ****
              **Stock**
                **Subscriptions**
              ****
              **Deferred**
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Stage**
              ****
              **Receivable**
              ****
              **Compensation**
              ****
              **Total**Deferred
                  compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              503,260
              
              
              503,260Net
                  loss, December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (29,814,606
              )
              
              
              
              
              
              
              
              (29,814,606
              )**BALANCE,
                  December 31, 2005**
              
              
              
              
              
              
              
              
              399,823,667
              
              $
              39,982
              
              $
              55,077,909
              
              $
              (66,579,467
              )
              $
              (22,517
              )
              
              (481,551
              )
              $
              (11,965,644
              )




See
      Notes to Accompanying Consolidated Financial
      Statements




F-19





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Consolidated
      Statements of Cash Flows**





For
                the Year
              Ended
              December
                31, 2005
              (Consolidated)
            
            For
                the Year
              Ended
              December
                31, 2004
              (Consolidated)
            
            For
                the Period
              From
              December
                9,2002
              (Inception)
                to
              December
                31, 2005**Cash
                Flows from Operating Activities:**Net
                loss
            
            $
            (29,814,606
            )
            $
            (33,819,787
            )
            $
            (66,579,467
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Depreciation
                and amortization
            
            
            208,547
            
            
            170,059
            
            
            382,895Impairment
                of assets
            
            
            502,090
            
            
            352,299
            
            
            854,389Loss
                on disposal of assets
            
            
            5,011
            
            
            448
            
            
            5,459Common
                stock issued for services
            
            
            4,493,531
            
            
            8,452,305
            
            
            14,197,521Common
                Stock issued to employees
            
            
            2,821,858
            
            
            2,042,141
            
            
            4,863,999Common
                stock issued for legal settlements
            
            
            (175,900
            )
            
            175,900
            
            
            -Common
                stock issued for interest
            
            
            1,243,314
            
            
            2,727,731
            
            
            3,971,045Common
                stock issued for loan guarantee
            
            
            -
            
            
            832,000
            
            
            832,000Common
                stock issued for vendor settlement
            
            
            1,020,353
            
            
            -
            
            
            1,020,353(Gain)/Loss
                on vendor settlement
            
            
            (27,367
            )
            
            -
            
            
            (27,367
            )Loss
                on conversion of notes payable
            
            
            10,671,647
            
            
            -
            
            
            10,671,647Legal
                fees on conversion of notes payable
            
            
            40,131
            
            
            -
            
            
            40,131Legal
                fees on vendor settlement
            
            
            28,483
            
            
            -
            
            
            28,483Amortization
                of interest expense
            
            
            3,399,312
            
            
            2,150,588
            
            
            5,574,900Warrants
                Issued
            
            
            930,362
            
            
            -
            
            
            930,362Changes
                in operating assets and liabilities:Decrease
                (increase) in current assets:Prepaid
                expenses and other receivables
            
            
            59,925
            
            
            (63,646
            )
            
            (7,071
            )Deposits
            
            
            5,440
            
            
            2,050
            
            
            -Increase
                (decrease) in current liabilities:Accounts
                payable
            
            
            240,389
            
            
            3,249,880
            
            
            3,839,274Due
                to developers
            
            
            (140,000
            )
            
            985,000
            
            
            845,000Accrued
                interest
            
            
            544,722
            
            
            294,634
            
            
            846,137Other
                accrued expense
            
            
            (98,494
            )
            
            (15,850
            )
            
            6,506Accrued
                payroll and payroll taxes
            
            
            698,436
            
            
            1,589,772
            
            
            2,364,205Net
                Cash Used in Operating Activities
            
            
            (3,342,816
            )
            
            (10,874,476
            )
            
            (15,339,599
            )**Cash
                Flows from Investing Activities:**Purchase
                of property and equipment
            
            
            10,310
            
            
            (803,415
            )
            
            (960,157
            )Sale
                of property and equipment
            
            
            5,660
            
            
            11,755
            
            
            17,415Increase
                in restricted cash
            
            
            894,910
            
            
            (894,910
            )
            
            -Net
                Cash (Used) in Investing Activities
            
            
            910,880
            
            
            (1,686,570
            )
            
            (942,742
            )**Cash
                Flows from Financing Activities:**Repayments
                of notes payable
            
            
            -
            
            
            (1,075,000
            )
            
            (1,075,000
            )Proceeds
                from stockholder
            
            
            -
            
            
            -
            
            
            4,940Payments
                to stockholder
            
            
            -
            
            
            -
            
            
            (4,940
            )Proceeds
                from sale of common stock, net
            
            
            595,400
            
            
            7,737,690
            
            
            9,327,147Promissory
                note
            
            
            1,833,037
            
            
            5,856,606
            
            
            8,030,797Net
                Cash Provided by Financing Activities
            
            
            2,428,437
            
            
            12,519,296
            
            
            16,282,944NET
                INCREASE (DECREASE) IN CASH
            
            
            (3,499
            )
            
            (41,750
            )
            
            603CASH
                AT BEGINNING OF PERIOD
            
            
            4,102
            
            
            45,852
            
            
            -CASH
                AT END OF PERIOD
            
            $
            603
            
            $
            4,102
            
            $
            603**Supplemental
                Disclosure of Cash Flow Information:**Cash
                paid for interest
            
            $
            18,750
            
            $
            508,308
            
            $
            533,838





See
      Notes
      to Accompanying Consolidated Financial Statements





F-20


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Consolidated
      Statements of Cash Flows**





**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.





During
      2005, the Company issued 112,768,500 shares of common stock to convert 25 notes
      payable aggregating $8,458,501.




See
        Notes
        to Accompanying Consolidated Financial Statements


F-21


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**





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





***(A)
      Organization and Basis of Presentation***





Infinium
      Labs, Inc. (“Infinium”) a Delaware corporation, formed on December 9, 2002, and
      located in Seattle, Washington, 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, 2005 and December 31, 2004 consolidated financial
      statements include the accounts of Infinium Labs, Inc. and its 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.


F-22


INFINIUM
        LABS, INC. AND SUBSIDIARY
 (A
        DEVELOPMENT STAGE COMPANY)
 **Notes
        to Consolidated Financial Statements**


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




Property
      and equipment are stated at cost, less accumulated depreciation. Expenditures
      for maintenance and repairs are charged to expense as incurred. Depreciation
      is
      provided using the straight-line method over the estimated useful life of three
      to seven years. Various note holders have a security interest in the Company’s
      assets. In December 2005, all remaining assets were impaired.




***(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 year ended December 31,
      2005, the year ended December 31, 2004 and the period from December 9, 2002
      (Inception) through December 31, 2005, 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,
      2005, the year ended December 31, 2004 and the period from December 9, 2002
      (Inception) to December 31, 2005, the Company incurred advertising costs of
      $404,331, $1,380,377, $1,992,887 respectively.




***(I)
      Business Segments***




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




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




In
      December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
      replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
      companies are required to measure the compensation costs of share-based
      compensation arrangements based on the grant-date fair value and recognize
      the
      costs in the financial statements over the period during which employees are
      required to provide services. Share-based compensation arrangements include
      stock options, restricted share plans, performance-based awards, share
      appreciation rights and employee share purchase plans. In March 2005 the SEC
      issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views
      of the staff regarding the interaction between SFAS No. 123(R) and certain
      SEC
      rules and regulations and provides the staff's views regarding the valuation
      of
      share-based payment arrangements for public companies. SFAS No. 123(R) permits
      public companies to adopt its requirements using one of two methods. On April
      14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
      123R. Companies may elect to apply this statement either prospectively, or
      on a
      modified version of retrospective application under which financial statements
      for prior periods are adjusted on a basis consistent with the pro forma
      disclosures required for those periods under SFAS 123. Effective January 1,
      2006, the Company has fully adopted the provisions of SFAS No. 123R and related
      interpretations as provided by SAB 107. As such, compensation cost is measured
      on the date of grant at their fair value. Such compensation amounts, if any,
      are
      amortized over the respective vesting periods of the option grant. The Company
      applies this statement prospectively.


F-23




**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


In
      May
      2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. 
This Statement replaces APB Opinion No,. 20, Accounting Changes, and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
      and changes the requirements for the accounting for and reporting of a change
      in
      accounting principle. This Statement applies to all voluntary changes in
      accounting principle.  It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions.  SFAS 154 also requires that a change in
      depreciation, amortization or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle.  This Statement is effective in fiscal years
      beginning after December 15, 2005.   The Company has not yet
      determined the effect of implementing this standard.




***(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.





***(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, 2005, 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.




***(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 if 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.


F-24


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**
 **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. The Company has
          reclassified these consultants to employees and has restated these expenses
          and
          related liabilities at December 31, 2004.
 
 ***(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. 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.
 
 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
                )Total
                    Other Income (Expense)
                
                
                (5,686,593
                )
                
                (528,377
                )
                
                (6,214,970
                )Net
                    loss
                
                
                (33,131,286
                )
                
                (688,501
                )
                
                (33,819,787
                )Loss
                    per common share - basic and diluted
                
                $
                (0.33
                )
                $
                (0.01
                )
                $
                (0.34
                )


**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, 2005, the Company has amortized $96,651 of
      expense of the signage rights. The remaining value of $203,049 was impaired
      in
      December 2005 as a result of the Company’s decision to close the Sarasota,
      Florida office.





**NOTE 4      
      PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following as of:




****
            **December
                31, 2005**Office
                equipment
            
            $
            77,190Computer
                equipment
            
            
            340,170Computer
                software
            
            
            357,922Office
                furniture
            
            
            110,686Leasehold
                improvements
            
            
            36,914922,882Less
                accumulated depreciation
            
            
            (278,295
            )Less
                impairment
            
            
            (654,897
            )Property & Equipment, Net
            
            $
            -





Depreciation
      expense during the twelve months ended December 31, 2005, the twelve months
      ended December 31, 2004, and the period from December 9, 2002 (Inception) to
      December 31, 2005 was $155,400, $127,075 and $286,765, respectively. During
      2005
      and 2004, the Company recognized impairment of property and equipment of
      $298,741 and 352,299 respectively due to the restructuring of the offices in
      Seattle, Washington and Sarasota, Florida.




**NOTE 5**  **NOTES
      PAYABLE**





During
      2003, the Company received $275,000, net of offering costs of $25,000 in the
      form of a 20% secured convertible debenture that matures on February 28, 2004
      and is guaranteed by the Company's Chairman. 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, 2005, the outstanding balance on the convertible debenture was
      $0.




During
      2003, the Company entered into a $100,000 convertible note payable in full
      settlement of a lawsuit. The note is non-interest bearing and was due August
      11,
      2004. The note is convertible at the option of the note holder at any time
      at
      the current trading price of the Company's common stock. During February 2004,
      the entire convertible note was repaid with cash of $100,000. At December 31,
      2005, the balance on the note payable was $0.




In
      February 2004, the Company authorized a private debt offering of secured 12%
      and
      15% promissory notes with due dates one year from the date of issuance, within
      sixty days of the Company's SB-2 becoming effective or upon the Company
      receiving an equity investment of at least $15,000,000. For each loan to the
      Company, the lender was also entitled to 20,000 shares of the Company's common
      stock. During the twelve months ended December 31, 2004, the Company issued
      an
      aggregate of $2,400,000 promissory notes and issued 560,000 common shares.
      The
      shares were treated as a discount to the private offering, the shares were
      valued at $434,000 based on the market price on the dates the funds were
      received and the discount is being amortized over the life of the notes.
      $1,000,000 of these notes were settled on May 16, 2005 via a Settlement
      Agreement which converted the entire amount of the note into common stock at
      a
      per share price of $0.14. The Company recognized a loss on the conversion of
      $540,000. At September 30, 2005, the balance on theses notes payable was
      $1,400,000 which is currently in default. Accrued interest of $364,192 was
      paid
      on the $1,400,000 note in August 2005 via a Settlement Agreement which converted
      the accrued interest on the note to common stock at a per share price of $.054.
      Unpaid interest on the note at December 31, 2005 was $32,814. These notes are
      secured with the assets of the Company.


F-25


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


On
      February 27, 2004, the Company borrowed $500,000 under a 12% secured
      subordinated debenture for a maximum term of 12 months. As additional
      consideration, the Company issued to the holder 200,000 shares of common stock
      having a fair value of $284,000. The shares were treated as a discount to the
      debenture and the discount is being amortized over the life of the debenture.
      This note was settled on May 16, 2005 via a Settlement Agreement which converted
      the entire amount of the note into common stock at a per share price of $0.14.
      The Company recognized a loss on the conversion of $265,500.




On
      April
      7, 2004, the Company borrowed $500,000 under a 15% promissory note which was
      initially payable on December 15, 2004 and subsequently became payable on March
      31, 2005 per a conversion option agreement dated November 10, 2004 that entitles
      the note holder to convert the amount of the note into shares of stock at a
      per
      share price of $0.10; the conversion option was treated as a $216,000 discount
      to the debenture and the discount was amortized over the life of the conversion
      option agreement. In addition, the note holder is entitled to a Stock Purchase
      Warrant for 200% of the number of shares obtained in the conversion at a warrant
      exercise price of $0.10. The note was 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 and the Company issued 11,630,138 warrants exercisable at $0.10 per
      share. The Company recognized a loss on the conversion of $130,411.




On
      May 7,
      2004, the Company borrowed $100,000 under a 15% promissory note. As additional
      consideration, the Company issued the holder 40,000 shares of common stock
      having a fair value of $55,200. The shares were treated as a discount to the
      note and the discount is being amortized over the life of the note. The note
      was
      fully paid off as of December 31, 2005.




On
      May 7,
      2004, the Company borrowed $250,000 under a 15% promissory note which was
      initially payable on September 15, 2004 and was extended to April 30, 2005
      per a
      conversion option agreement dated November 10, 2004 that entitles the note
      holder to convert the amount of the note into shares of stock at a per share
      price of $0.10; the conversion option was treated as a $102,500 discount to
      the
      debenture and the discount was amortized over the life of the conversion option
      agreement. In addition, the note holder is entitled to a Stock Purchase Warrant
      for 200% of the number of shares obtained in the conversion at a warrant
      exercise price of $0.10. As additional consideration, the Company issued to
      the
      holder 100,000 shares of common stock having a fair value of $147,500. The
      shares were treated as a discount to the note and the discount is being
      amortized over the life of the note. The note was secured with the assets of
      the
      Company. On May 7, 2005, the note was paid in full via a Conversion Agreement
      which converted the entire amount of the note into common stock at a per share
      price of $0.10 and the Company issued 5,873,288 warrants exercisable at $0.10
      per share. The Company recognized a loss on the conversion of $69,863.




On
      May
      19, 2004, the Company borrowed $417,260 under a 15% secured promissory note
      which was initially payable on June 3, 2004 but has been amended to January
      15,
      2005 for an additional consideration of $30,000. The additional consideration
      was amortized over the life of the amendment. This note was settled on May
      10,
      2005 via a Settlement Agreement which converted the entire amount of the note
      into common stock at a per share price of $0.16. The Company recognized a loss
      on the conversion of $158,447.


F-26




**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


On
      May
      28, 2004, the Company borrowed $350,000 under a 15% secured promissory note,
      which was payable August 1, 2004. As additional consideration, the Company
      issued the holder 33,000 shares of common stock having a fair value of $47,190.
      The shares were treated as a discount to the note and the discount was amortized
      over the life of the note. The note is secured with the assets of the Company.
      This note was settled on January 6, 2005 via a Conversion Agreement which
      converted the entire amount of the note into common stock at a per share price
      of $0.10. The Company recognized a loss on the conversion of $3,803,625.




On
      May
      28, 2004, the Company borrowed $350,000 under a 15% promissory note which was
      initially payable on June 8, 2004 but has been amended to January 1, 2005 for
      additional consideration of $30,000. The additional consideration was amortized
      over the life of the amendment. As additional consideration, the Company issued
      the holder 7,500 shares of common stock having a fair value of $11,025. The
      shares were treated as a discount to the note and the discount was amortized
      over the life of the note. This note was settled on May 10, 2005 via a
      Settlement Agreement which converted the entire amount of the note into common
      stock at a per share price of $0.16. The Company recognized a loss on the
      conversion of $222,000.




On
      June
      4, 2004, the Company borrowed $825,000 under a 15% secured convertible
      promissory note, which was initially due no later than June 3, 2005 but the
      note
      was amended and is now payable no later than January 15, 2005. As additional
      consideration, the Company issued the holder 511,000 shares of common stock
      having a fair value of $753,725. The shares were treated as a discount to the
      note and the discount is being amortized over the life of the note. The Company
      recognized beneficial conversion on the promissory note of $71,275. The
      beneficial conversion was treated as a discount to the note and the discount
      is
      being amortized over the life of the note. The note is secured with the assets
      of the Company. On February 11, 2005, the note was paid in full via a Conversion
      Agreement which converted the entire amount of the note into common stock at
      a
      per share price of $0.215. The Company recognized a loss on the conversion
      of
      $738,794.





On
      June
      21, 2004, the Company borrowed $1,500,000 under a 15% promissory note, which
      was
      payable no later than June 22, 2005. As additional consideration, the Company
      issued the holder 60,000 shares of common stock having a fair value of $67,800.
      The shares were treated as a discount to the note and the discount is being
      amortized over the life of the note. As consideration for the Chairman’s
      personal guaranty of note, the Company compensated the Chairman $50,000. This
      note was settled on April 11, 2005 via a Settlement Agreement which converted
      the entire amount of the note into common stock at a per share price of $0.17.
      The Company recognized a loss on the conversion of $716,933.




On
      July
      28, 2004, the Company borrowed $500,000 under a 15% promissory note which is
      payable on July 28, 2005. As consideration for 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 November 1, 2005 the note and unpaid interest was
      assigned to a Director. On December 9, 2005 the note was amended to include
      accrued interest of $60,437 with simple interest due December 31, 2006. The
      principal and accrued interest on this note as of December 31, 2005 was
      $574,682.




On
      September 13, 2004, the Company borrowed $350,000 under a 15% secured promissory
      note, which is payable September 13, 2005. The note is secured with the assets
      of the Company. On January 6, 2005, the note was paid in full via a Conversion
      Agreement which converted the entire amount of the note into common stock at
      a
      per share price of $0.10. The Company recognized a loss on the conversion of
      $3,803,625.


F-27




**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


On
      October 20, 2004, the Company entered into a Bridge Loan Agreement with Hazinu
      Ltd. pursuant to which the Lender advanced the principal amount of $300,000
      to
      the Company on October 21, 2004 in exchange for (i) a 10% secured promissory
      note in such principal amount, (ii) 500,000 shares of our common stock, and
      (iii) warrants to purchase 500,000 shares of our common stock at an exercise
      price of $0.50 per share. The value of the shares and warrants of $152,500
      and
      $147,500, respectively were treated as a discount to the note and the discount
      is being amortized over the life of the note. The note was due December 31,
      2004
      and during December 2004, the entire note was repaid with cash. At December
      31,
      2005, 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, 2005, 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. On October 10, 2005 $20,000 of the note
      and
      $1,183 of accrued interest was converted through a settlement at a per share
      price of $0.029. The Company recognized a loss on the conversion of $1,300.
      On
      December 30, 2005 $59,074 of the note was converted per the conversion terms
      of
      the note at a per share price of $0.004875 and $0.005650. No gain or loss was
      recognized by the Company on the conversion. The note was due December 16,
      2005
      and is currently in default. At December 31, 2005, the outstanding balance
      on
      the convertible note was $1,483,424.




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. . On October 10, 2005 $137,500 of the note and $8,875 of accrued interest
      was converted through a settlement at a per share price of $0.029. The Company
      recognized a loss on the conversion of $8,664. On December 30, 2005 $21,667
      of
      the note was converted per the conversion terms of the note at a per share
      price
      of $0.004875. No gain or loss was recognized by the Company on the conversion.
      The note was due December 28, 2005 and is currently in default. At December
      31,
      2005, the outstanding balance on the convertible note was
      $1,145,359.





On
      January 27, 2005, the Company borrowed $300,000 from Timothy Roberts, the
      Company’s Chairman, under a 15% promissory note, which was payable no later than
      April 27, 2005. This note was settled on June 13, 2005 via a Settlement
      Agreement which converted the entire amount of the note into common stock at
      a
      per share price of $0.10. The Company recognized a loss on the conversion of
      $95,616.


F-28


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


On
      January 28, 2005, the Company borrowed $135,000 under a 17% promissory note,
      which was payable no later than March 29, 2005. On September 15, 2005, the
      entire amount of the note was converted at a per share price of $0.05. The
      Company recognized a loss on the conversion of $16,926.




On
      January 31, 2005, the Company borrowed $175,000 under a 15% convertible
      promissory note, which is payable no later than May 10, 2005. The note is
      convertible into 1,000,000 million shares of common stock and the Company
      recognized beneficial conversion on the promissory note of $175,000. The
      beneficial conversion was treated as a discount to the note and the discount
      is
      being amortized over the life of the note. On June 10, 2005, the entire amount
      of the note was converted at a per share price of $0.10. The Company recognized
      a loss on the conversion of $3,416.




On
      January 31, 2005, the Company borrowed $100,000 under a 15% convertible
      promissory note, which is payable no later than May 10, 2005. The note is
      convertible into 1,000,000 million shares of common stock and the Company
      recognized beneficial conversion on the promissory note of $100,000. The
      beneficial conversion was treated as a discount to the note and the discount
      was
      amortized over the life of the note. On June 10, 2005, the entire amount of
      the
      note was converted at a per share price of $0.10. The Company recognized a
      loss
      on the conversion of $3,309.




On
      February 3, 2005, the Company borrowed $100,000 under a 15% convertible
      promissory note, which is payable no later than May 10, 2005. The note is
      convertible into 1,000,000 million shares of common stock and the Company
      recognized beneficial conversion on the promissory note of $100,000. The
      beneficial conversion was treated as a discount to the note and the discount
      was
      amortized over the life of the note. On June 10, 2005, the entire amount of
      the
      note was converted at a per share price of $0.10. The Company recognized a
      loss
      on the conversion of $3,272.




On
      March
      9, 2005, the Company borrowed $400,000 under a 10% promissory note, which was
      payable no later than May 9, 2005. This note was settled on June 13, 2005 via
      a
      Settlement Agreement which converted the entire amount of the note into common
      stock at a per share price of $0.11. The Company recognized no gain or loss
      on
      the conversion.




On
      March
      21, 2005, the Company borrowed $200,000 under a 17% promissory note, which
      was
      payable no later than May 20, 2005. This note was settled on June 10, 2005
      via a
      Conversion Agreement which converted the entire amount of the note into common
      stock at a per share price of $0.10. The Company recognized a loss on the
      conversion of $62,263.  In conjunction with the conversion, the Company
      issued 6,226,359 warrants at an exercise price of $0.10 per share.




On
      April
      7, 2005, the Company borrowed $300,000 under a 12% promissory note, which was
      payable no later than August 5, 2005. On September 15, 2005, the entire amount
      of the note was converted at a per share price of $0.05. The Company recognized
      a loss on the conversion of$13,277.




On
      April
      29, 2005, the Company borrowed $200,000 under a 17% promissory note, which
      was
      payable no later than July 28, 2005. On September 15, 2005, the entire amount
      of
      the note was converted at a per share price of $0.05. The Company recognized
      a
      loss on the conversion of$654.




On
      June
      13, 2005, the Company borrowed $68,000 under a 17% promissory note, which was
      payable no later than August 12, 2005. On September 15, 2005, the entire amount
      of the note was converted at a per share price of $0.05. The Company recognized
      a loss on the conversion of$238.





On
      June
      30, 2005, the Company borrowed $100,000 under a 17% promissory note, which
      is
      unsecured and was payable no later than September 28, 2005. On August 11, 2005,
      the entire amount of the note was converted at a per share price of $0.05.
      The
      Company recognized no gain or loss on the conversion.


F-29


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**
  On
      September 7, 2005, the Company borrowed $50,000 under a 15% promissory note,
      which is unsecured and was payable no later than November 7, 2005. On November
      16, 2005, the entire amount of the note was converted at a per share price
      of
      $0.015. The Company recognized a loss on the conversion of $6,757.




On
      September 7, 2005, the Company borrowed $50,000 under a 15% promissory note,
      which is unsecured and was payable no later than November 7, 2005. On November
      16, 2005, the entire amount of the note was converted at a per share price
      of
      $0.015. The Company recognized a loss on the conversion of $6,757.





On
      September 13, 2005, the Company borrowed $40,000 under a 15% promissory note,
      which is unsecured and was payable no later than November 13, 2005. The note
      and
      interest are currently in default. At December 31, 2005, the outstanding balance
      on the note was $41,966.


On
      September 19, 2005, the Company borrowed $100,000 under a 15% promissory note,
      which is unsecured and is payable no later than November 19, 2005. The note
      and
      interest are currently in default. At December 31, 2005, the outstanding balance
      on the note was $104,619.





On
      November 1, 2005, the Company borrowed $15,000 under a 15% promissory note,
      which is unsecured and is payable no later than January 1, 2006. The interest
      is
      currently in default. At December 31, 2005, the outstanding balance on the
      note
      was $15,376.





On
      November 7, 2005, the Company borrowed $25,000 under a 15% promissory note,
      which is unsecured and is payable no later than December 6, 2005. The note
      and
      interest are currently in default. At December 31, 2005, the outstanding balance
      on the note was $25,616.





On
      December 1, 2005, the Company borrowed $10,000 under a 15% promissory note,
      which is unsecured and is payable no later than December 1, 2006. Interest
      is
      payable upon maturity.




Notes
                payable - face value
            
            $
            4,072,196Notes
                payable - discount
            
            
            -Notes
                payable, net
            
            $
            4,072,196





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, 2005, the twelve month period ended December
      31,
      2004 and the period from December 9, 2002 (Inception) to December 31, 2005,
      the
      Company has recorded interest expense from the discounts of $3,399,312,
      $2,150,588 and $5,574,900, respectively.





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





**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).


F-30


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


During
      2003, the Company issued 1,748,380 shares of common stock for $545,717 ($0.28
      per share), net of offering costs of $11,239.




During
      2003, the Company issued 420,768 shares of common stock for $66,672 ($0.16
      per
      share).




During
      2004, the Company issued 6,650,000 shares of common stock for $1,662,500 ($0.25
      per share).





During
      2004, the Company issued 40,000 shares of common stock for cash of $100,000
      ($2.50 per share).




During
      2004, the Company issued 1,900,400 shares of common stock for $475,100 ($0.25
      per share). In connection with this transaction, the Company issued 2,022,900
      warrants to purchase common stock exercisable at a price of $0.25. The warrants
      are fully exercisable at any time for a period of five years after the closing
      date of the sale. None of the warrants were executed, forfeited or expired
      in
      2005. Therefore, all 2,022,900 warrants were outstanding and exercisable as
      of
      March 31, 2005.




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




During
      2004, the Company issued 1,649,635 shares of common stock for $264,075 ($0.16
      per share).




***(B)
      Stock Issued for Services***





During
      2002, the Company issued 2,957,376 shares of common stock for software
      development services valued for financial accounting purposes at $1,113,005
      ($0.3775 per share) based upon recent cash offering prices.




During
      2003, the Company issued 434,036 shares of common stock for software development
      services valued for financial accounting purposes at $138,640 ($0.3175 per
      share) based upon recent cash offering prices.




During
      2003, the Company issued 942,600 shares of common stock for signature rights
      valued for financial accounting purposes at $300,000 ($0.3175 per share) based
      upon recent cash offering prices.




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




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




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




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





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





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





On
      July
      28, 2004, as consideration for the Director's personal guaranty of a note
      payable 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.


F-31


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


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 shares of restricted common
      stock
      to employees as a bonus with a fair value of $99,000 ($0.33 per
      share).





During
      2004, the Company issued 1,790,000 shares of common stock to employees with
      a
      fair value of $565,500 ($0.32 per share) for bonuses. .





During
      2004, the Company issued 5,199,967 shares of common stock to employees with
      a
      fair value of $1,137,099 ($0.22 per share) as regular compensation.





During
      2004, the Company issued 1,100,000 shares of common stock to executives with
      a
      fair value of $240,542 ($0.22 per share) as compensation.





During
      2004, the Company issued 3,885,410 shares of common stock for consulting
      services with a fair value of $812,141 ($0.21 per share).




During
      2004, the Company issued 1,350,000 shares of common stock for consulting
      services with a fair value of $377,500 ($0.28 per share).





During
      2004, the Company issued 150,000 shares of common stock for advisory services
      with a fair value of $37,500 ($0.25 per share).





On
      January 4, 2005, the Company issued 40,000 shares of common stock to a Director
      for services with a fair value of $63,600 ($1.59 per share).





During
      January 2005, the Company issued 125,179 shares of common stock for consulting
      services with a fair value of $108,929 ($0.87 per share).





On
      January 28, 2005, the Company issued 1,200,000 shares of common stock for
      consulting services with a fair value of $648,000 ($0.54 per share).





On
      March
      10, 2005, the Company issued 100,000 shares of common stock for consulting
      services with a fair value of $32,000 ($0.32 per share).





On
      March
      11, 2005, the Company issued 800,000 shares of common stock to a Director for
      services with a fair value of $272,000 ($0.34 per share).


F-32


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


During
      March 2005, the Company issued 1,722,453 shares of common stock for consulting
      services with a fair value of $558,847 ($0.32 per share) of which $19,665 was
      considered deferred compensation.





On
      March
      28, 2005, the Company issued 225,000 shares of common stock to employees with
      a
      fair value of $56,250 ($0.25 per share) as compensation.





During
      April 2005, the Company issued 1,423,734 shares of common stock for consulting
      services with a fair value of $319,955 ($0.22 per share).





During
      April 2005, the Company issued 100,000 shares of restricted common stock to
      employees as a bonus with a fair value of $23,000 ($0.23 per
      share).





On
      April
      18, 2005, the Company issued 250,000 shares of restricted common stock for
      consulting services with a fair value of $45,000 ($0.18 per share).





During
      April 2005, the Company issued 601,725 shares of common stock to employees
      with
      a fair value of $90,259 ($0.15 per share) as regular compensation.




During
      April 2005, the Company issued 678,067 shares of common stock to employees
      with
      a fair value of $101,310 ($0.15 per share) as regular compensation.





During
      May 2005, the Company issued 2,255,097 shares of common stock for consulting
      services with a fair value of $338,775 ($0.15 per share).





During
      May 2005, the Company issued 962,324 shares of common stock to employees with
      a
      fair value of $143,340 ($0.15 per share) as regular compensation.





During
      May 2005, the Company issued 250,000 shares of common stock to an executive
      with
      a fair value of $37,500 ($0.15 per share) as compensation.




During
      May 2005, the Company issued 250,000 shares of common stock to an executive
      with
      a fair value of $37,500 ($0.15 per share) as compensation.





During
      May 2005, the Company issued 1,162,720 shares of common stock to employees
      with
      a fair value of $139,526 ($0.12 per share) as regular compensation.





During
      June 2005, the Company issued 2,122,675 shares of common stock to employees
      with
      a fair value of $178,400 ($0.08 per share) as regular compensation.





During
      June 2005, the Company issued 250,000 shares of common stock to an executive
      with a fair value of $25,000 ($0.10 per share) as compensation.





During
      June 2005, the Company issued 500,000 shares of common stock to an executive
      with a fair value of $50,000 ($0.10 per share) as compensation.





During
      June 2005, the Company issued 2,934,536 shares of common stock for consulting
      services with a fair value of $322,635 ($0.11 per share).





During
      July 2005, the Company issued 500,000 shares of common stock for consulting
      services with a fair value of $50,000 ($0.10 per share) of which $10,000 was
      considered deferred compensation.


F-33


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


During
      July 2005, the Company issued 32,000 shares of common stock for consulting
      services with a fair value of $3,072 ($0.096 per share).





During
      July 2005, the Company issued 22,000 shares of common stock for consulting
      services with a fair value of $1,851 ($0.084 per share).





During
      July 2005, the Company issued 72,223 shares of common stock for consulting
      services with a fair value of $6,500 ($0.09 per share).





During
      July 2005, the Company issued 50,000 shares of common stock for consulting
      services with a fair value of $4,302 ($0.086 per share).





During
      July 2005, the Company issued 50,000 shares of common stock to employees with
      a
      fair value of $5,000 ($0.10 per share).





During
      July 2005, the Company issued 2,767,036 shares of common stock to employees
      with
      a fair value of $195,292 ($0.07 per share).





During
      August 2005, the Company issued 182,799 shares of common stock to employees
      with
      a fair value of $12,796 ($0.07 per share).





During
      August 2005, the Company issued 100,000 shares of common stock to employees
      with
      a fair value of $6,500 ($0.65 per share).





During
      August 2005, the Company issued 1,891,655 shares of common stock to executives
      with a fair value of $132,416 ($0.07 per share) as compensation.





During
      August 2005, the Company issued 150,000 shares of common stock for consulting
      services with a fair value of $10,500 ($0.07 per share) as compensation.





During
      August 2005, the Company issued 492,940 shares of common stock for consulting
      services with a fair value of $39,435 ($0.08 per share) as compensation.





During
      August 2005, the Company issued 333,340 shares of common stock for consulting
      services with a fair value of $30,000 ($0.09 per share) as compensation.





During
      August 2005, the Company issued 86,667 shares of common stock for consulting
      services with a fair value of $6,500 ($0.075 per share) as compensation.





During
      August 2005, the Company issued 250,000 shares of common stock for consulting
      services with a fair value of $15,000 ($0.06 per share).





During
      August 2005, the Company issued 100,000 shares of common stock to an employee
      with a fair value of $7,000 ($0.07 per share).





During
      August 2005, the Company issued 2,399,879 shares of common stock for consulting
      services with a fair value of $167,992 ($0.07 per share) of which $140,000
      was
      considered deferred compensation.





During
      August 2005, the Company issued 62,500 shares of common stock for consulting
      services with a fair value of $5,625 ($0.09 per share).





During
      August 2005, the Company issued 53,571 shares of common stock for consulting
      services with a fair value of $3,214 ($0.06 per share).


F-34


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


During
      August 2005, the Company issued 750,000 shares of common stock for consulting
      services with a fair value of $52,500 ($0.07 per share).





During
      August 2005, the Company issued 2,600,000 shares of common stock to employees
      with a fair value of $182,000 ($0.07 per share).





During
      August 2005, the Company issued 5,000,000 shares of common stock to a Director
      with a fair value of $350,000 ($0.07 per share).





During
      August 2005, the Company issued 10,000,000 shares of common stock to the CEO
      with a fair value of $700,000 ($0.07 per share).





During
      September 2005, the Company issued 250,000 shares of common stock for consulting
      services with a fair value of $15,000 ($0.06 per share).





During
      September 2005, the Company issued 1,629,027 shares of common stock for
      consulting services with a fair value of $81,451 ($0.05 per share) of which
      $27,505 was considered deferred compensation.





During
      September 2005, the Company issued 5,415,729 shares of common stock to employees
      with a fair value of $297,865 ($0.055 per share) of which $85,758 was considered
      deferred compensation.





During
      September 2005, the Company issued 3,045,708 shares of common stock to employees
      with a fair value of $152,286 ($0.05 per share) of which $44,648 was considered
      deferred compensation.





During
      September 2005, the Company issued 3,977,894 shares of common stock to employees
      with a fair value of $179,005 ($0.045 per share) of which $50,058 was considered
      deferred compensation.





During
      October 2005, the Company issued 264,822 shares of common stock for consulting
      services with a fair value of $8,474 ($0.032 per share).





During
      October 2005, the Company issued 500,000 shares of common stock for consulting
      services with a fair value of $14,500 ($0.029 per share).





During
      October 2005, the Company issued 1,536,850 shares of common stock for consulting
      services with a fair value of $30,737 ($0.02 per share).





During
      October 2005, the Company issued 15,299,873 shares of common stock to employees
      with a fair value of $382,497 ($0.025 per share) of which $112,695 was
      considered deferred compensation.





During
      October 2005, the Company issued 699,780 shares of common stock to employees
      with a fair value of $19,594 ($0.028 per share).





During
      November 2005, the Company issued 2,247,956 shares of common stock for
      consulting services with a fair value of $49,455 ($0.022 per
      share).





During
      November 2005, the Company issued 1,000,000 shares of common stock for
      consulting services with a fair value of $24,000 ($0.024 per
      share).





During
      November 2005, the Company issued 6,380,900 shares of common stock for
      consulting services with a fair value of $133,999 ($0.021 per share) of which
      $91,165 was considered deferred compensation.





During
      November 2005, the Company issued 2,000,000 shares of common stock for
      consulting services with a fair value of $30,000 ($0.015 per
      share).


F-35




**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


During
      November 2005, the Company issued 1,134,261 shares of common stock to employees
      with a fair value of $24,953 ($0.022 per share) of which $5,328 was considered
      deferred compensation.





During
      December 2005, the Company issued 10,694,577 shares of common stock for
      consulting services with a fair value of $213,892 ($0.02 per share) of which
      $188,510 was considered deferred compensation.





During
      December 2005, the Company issued 30,342,931 shares of common stock to employees
      with a fair value of $595,604 ($0.02 per share) of which $176,513 was considered
      deferred compensation.




***(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).





During
      June 2005, the Company returned 120,000 shares of common stock with a fair
      value
      of $175,900 ($1.475 per share) were returned to Treasury in settlement of a
      lawsuit.





***(D)
      Stock Issued for Vendor Settlement***





During
      May 2005, the Company issued 1,976,021 shares of common stock with a fair value
      of $316,163 ($0.16 per share) in settlement of a vendor payable.





During
      August 2005, the Company issued 2,549,075 shares of common stock with a fair
      value of $229,417 ($0.09 per share) in settlement of the 2005 rent for the
      Sarasota office. Of this amount $52,631 was considered deferred compensation.





During
      August 2005, the Company issued 368,375 shares of common stock with a fair
      value
      of $29,470 ($0.08 per share) in settlement of a vendor payable.





During
      September 2005, the Company settled the outstanding amounts plus related legal
      fees with Biostar by issuing 6,361,113 shares of common stock with a fair value
      of $311,695 ($0.049 per share) on the date of settlement. The shares were
      issued under a court ordered settlement pursuant to 3(a)(10) under the
      Securities Act of 1933.





During
      November 2005, the Company settled the outstanding amounts plus legal fees
      with
      Mythics Inc. by issuing 5,071,175 shares of common stock with a fair value
      of
      $111,566 ($0.022 per share). The shares were issued under a court ordered
      settlement pursuant to 3(a)(10) under the Securities Act of 1933.





During
      November 2005, the Company settled the outstanding amounts plus legal fees
      with
      SG Capital by issuing 1,134,775 shares of common stock with a fair value of
      $24,965 ($0.022 per share). The shares were issued under a court ordered
      settlement pursuant to 3(a)(10) under the Securities Act of 1933.




***(E)
      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).


F-36


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


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).





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





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





During
      August 2005, the Company issued 7,114,667 shares to a note payable holder for
      accrued interest on the note with a fair value of $384,192 ($0.054 per share).
      The Company recognized no gain or loss on this transaction.




***(G)
      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).


F-37


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 Notes
        to
        Consolidated Financial Statements


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




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





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





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





***(H)
      Stock Issued for Conversion of Notes Payable***





On
      January 6, 2005, the Company issued 7,043,750 shares of common stock with a
      fair
      value of $8,311,625 to convert a note payable with a fair value of $704,375
      ($0.10 per share). The Company recognized a loss of $7,607,250 ($1.08 per share)
      on the conversion of this note.





On
      February 11, 2005, the Company issued 4,925,291 shares of common stock with
      a
      fair value of $1,797,731 to convert a note payable with a fair value of
      $1,058,938 ($0.215 per share). The Company recognized a loss of $738,794 ($0.15
      per share) on the conversion of this note.





On
      March
      22, 2005, the Company issued 5,815,069 shares of common stock with a fair value
      of $711,918 to convert a note payable with a fair value of $581,507 ($0.10
      per
      share). The Company recognized a loss of $130,411 ($0.022 per share) on the
      conversion of this note.





On
      April
      11, 2005, the Company issued 13,325,000 shares of common stock with a fair
      value
      of $2,281,933 to convert a note payable with a fair value of $1,565,000 ($0.12
      per share). The Company recognized a loss of $716,933 ($0.05 per share) on
      the
      conversion of this note.





During
      April 2005, the Company issued 2,936,644 shares of common stock to convert
      a
      note payable with a fair value of $293,664 ($0.10 per share).





On
      May
      10, 2005, the Company issued 3,961,170 shares of common stock with a fair value
      of $633,787 to convert a note payable with a fair value of $475,340 ($0.12
      per
      share). The Company recognized a loss of $158,447 ($0.04 per share) on the
      conversion of this note.





On
      May
      10, 2005, the Company issued 3,700,000 shares of common stock with a fair value
      of $592,000 to convert a note payable with a fair value of $370,000 ($0.10
      per
      share). The Company recognized a loss of $222,000 ($0.06 per share) on the
      conversion of this note.





On
      May
      16, 2005, the Company issued 5,900,000 shares of common stock with a fair value
      of $826,418 to convert a note payable with a fair value of $560,918 ($0.095
      per
      share). The Company recognized a loss of $265,500 ($0.045 per share) on the
      conversion of this note.




On
      May
      16, 2005, the Company issued 12,000,000 shares of common stock with a fair
      value
      of $1,686,836 to convert a note payable with a fair value of $1,146,836 ($0.095
      per share). The Company recognized a loss of $540,000 ($0.045 per share) on
      the
      conversion of this note.





During
      June 2005, the Company issued 3,695,339 shares of common stock to convert a
      note
      payable with a fair value of $404,011 ($0.11 per share).


F-38


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


On
      June
      10, 2005, the Company issued 2,075,453 shares of common stock to convert a
      note
      payable with a fair value of $207,545 ($0.10 per share). The Company recognized
      a loss of $62,263 on the conversion of this note.





On
      June
      10, 2005, the Company issued 3,187,206 shares of common stock to convert a
      note
      payable with a fair value of $318,721 ($0.10 per share). The Company recognized
      a loss of $95,616 on the conversion of this note.





On
      June
      10, 2005, the Company issued 1,110,298 shares of common stock to convert a
      note
      payable with a fair value of $111,030 ($0.10 per share). The Company recognized
      a loss of $3,309 on the conversion of this note.





On
      June
      10, 2005, the Company issued 1,109,069 shares of common stock to convert a
      note
      payable with a fair value of $110,907 ($0.10 per share). The Company recognized
      a loss of $3,272 on the conversion of this note.




On
      June
      10, 2005, the Company issued 1,863,852 shares of common stock to convert a
      note
      payable with a fair value of $186,385 ($0.10 per share). The Company recognized
      a loss of $3,416 on the conversion of this note.





On
      August
      11, 2005, the Company issued 2,096,623 shares of common stock to convert a
      note
      payable with a fair value of $104,831 ($0.05 per share). The Company recognized
      no gain or loss on the conversion of this note.





On
      September 15, 2005, the Company issued 12,882,049 shares of common stock to
      convert three notes payable with a fair value of $608,054 ($0.0472 per share).
      The Company recognized a loss of $36,048 on the conversion of these
      notes.





On
      September 15, 2005, the Company issued 3,385,259 shares of common stock to
      convert a note payable with a fair value of $152,337 ($0.045 per share). The
      Company recognized a loss of $16,926 on the conversion of this
      note.





On
      October 10, 2005, the Company issued 7,246,455 shares of common stock to convert
      notes payable with a fair value of $210,148 ($0.029). The Company recognized
      a
      loss of $9,964 on the partial conversion of the notes.





On
      November 16, 2005, the Company issued 7,948,856 shares of common stock to
      convert notes payable with a fair value of $119,233 ($0.015 per share). The
      Company recognized a loss of $13,513 on the conversion of the
      notes.





On
      December 30, 2005, the Company issued 16,000,000 shares of common stock to
      convert notes payable in the amount of $80,741 as per the conversion terms
      of
      the note. No gain or loss was recognized on the conversion.





***(I)
      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.





***(J)
      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.


F-39


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


***(K)
      Stock Split***




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




***(L)
      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.





***(M)
      Obligation to Reserve Stock***





As
      of
      December 31, 2005, the Company had an obligation to reserve 60,879,731 shares
      of
      common stock issuable upon conversion of debentures. In addition, as of December
      31, 2005, the Company had outstanding warrants totaling 59,428,812 shares of
      common stock.




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




On
      February 24, 2005, the Company amended its Articles of Incorporation to provide
      for an increase in its authorized share capital. The authorized capital stock
      increased to 600,000,000 common shares at a par value of $0.0001 per
      share.




**NOTE 7**  **INCOME
      TAXES**





Income
      tax expense (benefit) is summarized as follows:


**Year
                  Ended December 31,**
                **2005**
              
              **Year
                  Ended December 31,**
                **2004**
              
              **December
                  9, 2002 (Inception) through December 31, 2005**Current:Federal
              
              
              
              
              
              
              
              $
              -
              
              $
              -
              
              $
              -State
              
              
              
              
              
              
              
              
              -
              
              
              -
              
              
              -Deferred
                  - Federal and State
              
              
              
              
              
              
              
              
              -
              
              
              -
              
              
              -Income
                  tax expense (benefit)
              
              
              
              
              
              
              
              $
              -
              
              $
              -
              
              $
              -


The
      Company's tax expense differs from the "expected" tax expense as
      follows:




**Year
                Ended December 31,**
              **2005**
            ****
            **Year
                Ended December 31,**
              **2004**
            ****
            **December
                9, 2002 (Inception) through December 31, 2005**U.S.
                Federal income tax expense (benefit)
            
            
            
            
            
            
            
            $
            (10,063,671
            )
            $
            (12,867,701
            )
            $
            (22,931,372
            )Effect
                on net operating loss carryforward
            
            
            
            
            
            
            
            
            10,
                063,671
            
            
            12,867,701
            
            
            22,931,372$
            -
            
            $
            -
            
            $
            -





F-40


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


The
      tax
      effects of temporary differences that give rise to significant portions of
      deferred tax assets and liabilities are as follows:




**December
                31, 2005**
            ****
            **December
                31, 2004**Deferred
                tax assets:Net
                operating loss carry forward
            
            $
            22,931,372
            
            $
            12,867,701Total
                gross deferred tax assets
            
            
            22,931,372
            
            
            12,867,701Less
                valuation allowance
            
            
            (22,931,372
            )
            
            (12,867,701
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -




At
      December 31, 2005, the Company had a net operating loss carry forward of
      $66,579,467 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, 2005 was an increase of
      $10,063,671.





**NOTE 8
      COMMITMENTS AND CONTINGENCIES**





***(A)
      Distribution Agreements***





**Riverdeep,
      Inc** .


Infinium
      signed a distribution agreement with Riverdeep, Inc. ("Riverdeep") dated October
      23, 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
            
            $
            50,000September
                30, 2004
            
            
            50,000September
                30, 2004
            
            
            125,000Total
            
            $
            225,000





F-41


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


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, 2005,
      $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 expired on December 31, 2005 and authorizes Infinium to distribute
      Codemasters’ products, via the Phantom Game Service or pre-load, onto the
      Phantom Game Receiver. The titles will be available to subscribers of the
      Phantom Game Service on both a pay-per-play and pay-to-own basis.





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





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





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





As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2005, $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.


F-42


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


**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, 2005, $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 expired on December 31, 2005 and
      authorizes Infinium to distribute Eidos’s products, via the Phantom Game Service
      or pre-load, onto the Phantom Game Receiver. The titles 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-43


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated 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, 2005, $125,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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





**Enlight
      Inc.**


Infinium
      signed a distribution agreement with Enlight Interactive Inc. (“Enlight”) 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, 2005, $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.




**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.


F-44


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated 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, 2005, $175,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.








The
      letter of intent with Vivendi requires Infinium to make the following
      non-refundable payments:





September
                25, 2004
            
            $
            125,000Total
            
            $
            125,000




***(B)
      Development Agreement***





The
      company has a development agreement dated October 11, 2004 in place with BIOSTAR
      for the Phantom Game Receiver mainboard and graphics adapter. Terms are:
      $156,000 due at signing; $78,000 due before ship of pilot production units
      from
      Biostar; $78,000 due on acceptance of pilot units. The end design product will
      be wholly owned by the company. From December 9, 2002 (inception) through
      December 31, 2005, $337,139 of expenses have been accrued and reported on the
      accompanying financial statements. During September 2005, the Company settled
      the outstanding amounts plus related legal fees with Biostar by issuing
      6,361,113 shares of common stock with a fair value of $311,695 on the date
      of
      settlement. The shares were issued under a court ordered settlement pursuant
      to
      3(a)(10) under the Securities Act of 1933.





***(C)
      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 31,2006
            
            
            245,0352007
            
            
            194,0112008
            
            
            205,4272009
            
            
            87,577Thereafter
            
            
            -$
            732,050





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, 2005,
      the
      year ended December 31, 2004, and the period from December 9, 2002 (Inception)
      to December 31, 2005 was $572,107, $373,590 and $949,557,
      respectively.




***(D)
      Litigation***





Amscot
      Corporation v. Infinium Labs, Inc. and Gregory E. Hawkins ,
      No.
      05-00069, Div J. In April 2005, Amscot obtained a default judgment in the
      Circuit Court for Hillsborough County, Florida associated with an action to
      enforce a negotiable instrument. We dispute the judgment and may seek to reopen
      the matter in the future. The judgment is for $50,873.


F-45




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




Beshara
      v. Infinium Labs Corporation ,
      No.
      2005 CA 5103 NC. In May 2005, Beshara sued us in the Circuit Court for Sarasota
      County, Florida, alleging default of a promissory note and seeking damages
      of
      approximately $1,400,000.00. On October 25, 2005, we settled accrued interest
      through October 31, 2005, together with reasonable attorneys’ fees, in the
      amount of $384,192 through issuance of 7,114,667 shares of our stock. On March
      17, 2006, we entered into a conversion agreement with Beshara in order to reduce
      a portion of the outstanding principal and interest with, as of May 16, 2006,
      40,000,000 shares of common stock.





Black
      Rocket Euro RSCG, LLC v. Infinium Labs, Inc. ,
      No.
      2005 CA 5008 NC. In May 2005, Black Rocket sued us in the Circuit Court for
      Sarasota County, Florida, alleging breach of contract and seeking damages in
      the
      amount of $95,272.00. Due to an administrative error, our attorney neglected
      to
      file a notice of appearance and on January 25, 2006, Black Rocket obtained
      a
      default judgment in the amount of $104,629. We have recorded $104,629 in
      accounts payable related to vendor payments due Black Rocket Euro RSCG, LLC.





CDW
      Corporation v. Infinium Labs Corporation ,
      No.
      05-M1-131484. In May 2005, CDW sued us in the Circuit Court of Cook County,
      Illinois, alleging breach of contract and seeking damages in the amount of
      $26,958. Due to financial constraints, we may not be able to replace local
      counsel. On February 7, 2006, the court entered judgment and we have recorded
      $26,958 in accounts payable related to vendor payments due CDW Corporation.





GMR
      Marketing, LLC, v. Infinium Labs, Inc., No.
      20050CA-10535NC. In January 2006, GMR sued us in the District Court of Florida,
      Sarasota County, alleging breach of contract and seeking damages in the amount
      of $107,544. Due to an error with our Florida counsel an answer to the complaint
      was not filed and on February 1, 2005 GMR received a default judgment in the
      amount of $107,883. As of February 9, 2006, our Florida counsel indicated he
      will seek to set aside the order on grounds for medical reasons, but as of
      May
      16, 2006 he has not filed this request with the aforementioned court.





Infinium
      Labs, Inc. v. Digital Interactive Streams, Inc. ,
      No.
      2004 CA 8193 NC. In August 2004 we sued DiStream alleging breach of a settlement
      agreement and conversion and seeking damages of an unspecified amount. The
      parties entered into a settlement agreement resolving all claims without
      additional cost (cash or stock) on February 28, 2006 that will result in
      dismissal of the aforementioned action. On May 9, 2006, the aforementioned
      litigation was dismissed.





Longview
      Special Finance, Inc. v. Infinium Labs, Inc. ,
      No. 06
      CV 1772. In March 2006, Longview sued us in United States District in the
      Southern District of New York alleging breach of contract and requesting, in
      part, issuance of all remaining shares requested in prior conversion notices
      (as
      more fully described in our SB-2 filed on February 13, 2006). The complaint
      contains errors relating to debt previously repaid and other jurisdictional
      issues. The parties entered into a negotiated settlement related to a portion
      of
      Longview’s claims on April 7, 2006. Under the terms of the agreement, Infinium
      converted a portion of Longview’s requested conversion request and Longview
      agreed to dismiss the aforementioned matter in May 2006 and standstill on any
      further request for conversion or bring any additional claim on with respect
      to
      Infinium’s failure to reserve adequate shares for Longview or deliver shares
      under a conversion.





Motley
      Fool v. Infinium Labs, Inc., No.
      CL05001480. In October 2005, Motley Fool sued us in the Circuit Court for
      Alexandria, Virginia, Civil Division, alleging breach of contract and seeking
      damages in the amount of $70,000. On March 9, 2006, the parties entered into
      a
      settlement agreement in which we settled the actual claim, together with
      reasonable attorneys’ fees, in the amount of $52,702 through issuance of
      2,195,905 shares of our stock.





M.
      Tyler Boles v. Infinium Labs, Inc., No.
      V06-30. In January 2006, M. Tyler Boles sued us in the General District Court
      for Nelson County, Delaware, alleging a claim for money and seeking damages
      in
      the amount of $1,200. A judgment was entered in March 2006 for $1,254.


F-46


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


Oracle
      USA, Inc. v. Infinium Labs, Inc. ,
      No.
      C05-5049. In December 2005, Oracle USA sued us in the United States District
      Court, Northern District of California, San Francisco Division, alleging breach
      of contract and seeking damages in the amount of $198,818. In March 2006
      judgment was entered against Infinium **** in
      the
      aforementioned court for $199,068.





SBI
      USA, LLC v. Infinium Labs, Inc., No.
      05CC10694. In November 2005, SBI USA, LLC, sued us in the Superior Court of
      California, Orange County, alleging breach of contract and seeking damages
      in
      the amount of $58,000. Judgment was entered against Infinium **** in
      the
      aforementioned court in April 2006 for $55,000.





Walter
      Dorwin Teague Associates v. Infinium Labs, Inc., No.
      05-9-35846-2. In December 2005, Teague Associates entered an arbitration award
      in the Superior Court for King County, Washington. The judgment is for $51.843.





In
      the
      Matter of Certain Fax Blasts, SF-2926.  In
      approximately January 2005, we received subpoenas for documents from the
      Securities and Exchange Commission (“SEC”) in an investigation entitled In the
      Matter of Certain Fax Blasts. In compliance with other SEC issued subpoenas,
      several former employees, including our Chairman of the Board of Directors,
      have
      given testimony to the SEC’s staff while several current employees have
      participated in off-record interviews with the SEC staff.





Timothy
      M. Roberts, the Company's Chairman of the Board of Directors, received a “Wells
      Notice” from the SEC in 2005. The Wells Notice was received by Mr. Roberts in a
      personal capacity. This Wells Notice was issued in connection with the SEC’s
      investigation relating to “phony fax scams” in which several penny stocks,
      including ours, were promoted to potential investors and resulted in charges
      filed by the SEC against two stock promoters. Under the SEC's procedures, the
      Wells Notice indicates that the staff of the SEC intends to recommend that
      the
      SEC bring a civil enforcement action against Mr. Roberts alleging violations
      of
      federal securities laws. Recipients of Wells Notices have the opportunity to
      respond to the SEC staff before any formal recommendation is made.





In
      May
      2006, Mr. Roberts, in his personal capacity, was served with a complaint from
      the SEC in the matter entitled Securities
      and Exchange Commission vs. Timothy M. Roberts in the
      US District Court for the Middle District of Florida, Orlando Division, pursuant
      to which the SEC alleges that Mr. Roberts made false statements with regard
      to
      the Company’s prospects while at the same time selling his shares of the
      Company’s common stock for personal gain through his alleged participation in a
“phony fax scam”. The SEC seeks judgment against Mr. Roberts enjoining him from
      future violations of securities laws, requiring that he disgorge any gain or
      benefit he received from past violations, and imposing penalties for the
      violations. Further, the SEC seeks a judgment prohibiting Mr. Roberts from
      serving in the future as an officer or director of a public company and from
      participating in any offering of “penny stocks”.





From
      time
      to time, we may become party to litigation or other legal proceedings that
      we
      consider to be a part of the ordinary course of our business. We may become
      involved in material legal proceedings in the future.





***(E)
      Licenses***





As
      detailed above in Note 8 (A), the Company has entered into agreements with
      a number of publishers to provide content for our *Phantom
      Game Service* .
      These
      agreements provide that we pay an advance to each publisher, which is recoupable
      by us against future royalties payable to these publishers under their
      respective agreements. As of December 31, 2005, the Company currently owes
      an
      aggregate of $845,000 to these publishers pursuant to these agreements and,
      if
      we fail to pay these advances, these agreements may be
      terminated.


F-47




**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


***(F)
      Payroll Taxes***





The
      Company has accrued applicable employment taxes for individuals that were
      initially deemed and paid as independent contractors during the twelve months
      ended December 31, 2003 and the three months ended March 31, 2004 but,
      subsequently, reclassified as employees by the Company. In addition, the Company
      has recorded an estimate for interest and penalties that are due for the
      Company’s failure to timely file and pay taxes for these individuals as well as
      for the Company’s failure to timely file and/or pay payroll taxes for the third
      quarter of 2004 and the first, second, third and fourth quarters of 2005. The
      amount recorded in accrued payroll and payroll taxes consists of the
      following:





**As
                of**
              **December
                31, 2005**Payroll
            
            $
            84,500Payroll
                taxes
            
            
            1,544,278Penalties
                and interest
            
            
            735,427Accrued
                payroll and payroll taxes
            
            $
            2,364,205





***(G)
      Employment Agreements***





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





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





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





***(H)
      Other Material Agreements***





As
      disclosed on Form 8-K filed with the SEC on April 19, 2006, we have an agreement
      with Itron Technology, Inc., a third-party manufacturer, for the production
      of
      the Phantom Lapboard.





**NOTE 9
      STOCK OPTIONS AND WARRANTS**





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





The
      Company's 2004 Omnibus Incentive Compensation Plan required shareholder consent
      which has not been obtained and will not be requested.  As such, any
      options granted under the Plan are not effective.


F-48


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


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




Stock
      Purchase Warrants





For
      the
      year ended December 31, 2005, the Company granted warrants to purchase 6,226,359
      shares of common stock in conjunction with a note payable settlement valued
      at
      $594,429. The Company recognized a loss on the settlement for these warrants
      based on the fair value of the warrants on the grant date using the
      Black-Scholes option pricing model with the following weighted average
      assumptions: dividend yield of zero; expected volatility of 175%, risk-free
      interest rate of 3.84%; expected life of five years. Additional warrants were
      granted to purchase 8,160,000 shares of common stock. These warrants were not
      related to a specific financing or investment in the Company. The fair value
      of
      these warrants was expensed using the Black-Scholes option pricing model with
      the following weighted average assumptions: dividend yield of zero; expected
      volatility of 179%, risk-free interest rate of 3.95%; expected life of three
      years.





**December
                31,**
              **2005**
            
            **December
                31,**
              **2004**Warrants
                for common stock issued to a note holder. The term of the warrants
                are
                five years expiring November 10, 2009. The warrants are exercisable
                at
                $0.10 per share
            
            
            5,873,288
            
            
            5,107,081Warrants
                for common stock issued to a note holder. The term of the warrants
                are
                five years expiring November 10, 2009. The warrants are exercisable
                at
                $0.10 per share.
            
            
            11,630,138
            
            
            8,722,604Warrants
                issued with subscription agreements. The term of the warrants are
                five
                years expiring November 10, 2009 and are exercisable at $0.10 per
                share.
            
            
            678,900
            
            
            678,900Warrants
                issued with subscription agreements. The term of the warrants are
                five
                years expiring November 10, 2009 and are exercisable at $0.25 per
                share.
            
            
            1,344,000
            
            
            1,344,000Warrants
                issued with subscription agreements. The term of the warrants are
                five
                years expiring November 10, 2009 and are exercisable at $0.10 per
                share.
            
            
            3,084,181
            
            
            3,084,181Warrants
                issued in conjunction with convertible notes. The term of the warrants
                are
                five years expiring December 31, 2009 and are exercisable at $0.50
                per
                share.
            
            
            232,000
            
            
            232,000Warrants
                issued in conjunction with convertible notes. The term of the warrants
                are
                five years expiring December 31, 2009 and are exercisable at $0.50
                per
                share.
            
            
            200,000
            
            
            200,000Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring October 22, 2009. The warrants are exercisable at
                $0.50 per
                share.
            
            
            500,000
            
            
            500,000Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring October 27, 2009. The warrants are exercisable at
                $0.50 per
                share.
            
            
            500,000
            
            
            500,000Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $0.26667
                per share.
            
            
            5,437,487
            
            
            5,437,487Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $0.75
                per share.
            
            
            5,437,487
            
            
            5,437,487Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $1.00
                per share.
            
            
            5,437,487
            
            
            5,437,487Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $0.10
                per share.
            
            
            4,687,485
            
            
            4,687,485Warrants
                for common stock issued to an investor. The term of the warrants
                are five
                years expiring June 10, 2010. The warrants are exercisable at $0.10
                per share.
            
            
            6,226,359
            
            
            -Warrants
                for common stock issued to an investor. The term of the warrants
                is three
                years expiring September 19, 2008. The warrants are exercisable at
                $0.10
                per share.
            
            
            8,160,000
            
            
            -Total
            
            
            59,428,812
            
            
            41,368,712




F-49


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


**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
      $66,579,467, has a working capital deficiency of $11,965,644, a stockholders’
deficiency of $11,965,644 and has a negative cash flow from operations of
      $15,339,599 from inception and notes payable in default of $3,486,759. This
      raises substantial doubt about its ability to continue as a going concern.
      The
      ability of the Company to continue as a going concern is dependent on the
      Company’s ability to raise additional capital and implement its business plan.
      The financial statements do not include any adjustments that might be necessary
      if the Company is unable to continue as a going concern.




Management
      believes that actions presently being taken to obtain additional funding, settle
      notes payable currently in default and implement its business plan provide
      the opportunity for the Company to continue as a going concern.





**NOTE
      11**  **RELATED
      PARTY TRANSACTIONS**





On
      January 27, 2005, the Company borrowed $300,000 from Timothy Roberts, the
      Company’s Chairman, under a 15% promissory note, which was payable no later than
      April 27, 2005. This note was settled on June 13, 2005 via a Settlement
      Agreement which converted the entire amount of the note into common stock at
      a
      per share price of $0.10. The Company recognized a loss on the conversion of
      $95,616.





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





***(A)
      Common Stock Issuances***





During
      January 2006, the Company issued 510,992 shares of common stock for consulting
      services with a fair value of $8,534 ($0.0167 per share).





During
      January 2006, the Company issued 2,789,000 shares of common stock for consulting
      services with a fair value of $58,579 ($0.021 per share).


F-50


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**


During
      January 2006, the Company issued 2,900,000 shares of common stock with a fair
      value of $41,760 ($.0144 per share) in settlement of a note and accrued
      interest.  A loss of $13,327 was recognized on the transaction. The shares
      were issued under a court ordered settlement pursuant to 3(a)(10) under the
      Securities Act of 1933.





During
      January 2006, the Company issued 7,030,932 shares of common stock to employees
      with a fair value of $133,588 ($.019 per share).





During
      February 2006, the Company issued 6,327,718 shares of common stock for
      consulting services with a fair value of $113,899 ($0.018 per
      share).





During
      February 2006, the Company issued 6,014,753 shares of common stock to employees
      with a fair value of $108,266 ($.018 per share).





During
      February 2006, the Company returned to the Treasury 152,113 shares of common
      stock previously issued to employees with a fair value of $3,042 ($.02 per
      share).





During
      February 2006, the Company issued restricted common stock for 372,414 shares
      as
      a fee for obtaining financing. The fair value was $6,703 ($0.018 per
      share).





During
      March 2006, the Company issued 255,319 shares of common stock for consulting
      services with a fair value of $6,000 ($0.0235 per share).





During
      March 2006, the Company issued 646,552 shares of common stock for consulting
      services with a fair value of $12,931 ($0.02 per share).





During
      March 2006, the Company issued 4,060,913 shares of common stock for consulting
      services with a fair value of $80,000 ($0.0197 per share).





During
      March 2006, the Company issued 1,724,138 shares of common stock for consulting
      services with a fair value of $35,000 ($0.0203 per share).





During
      March 2006, the Company issued 2,195,905 shares of common stock in full
      settlement of amounts due to a vendor. The fair value was $52,702 ($0.024 per
      share). The shares were issued under a court ordered settlement pursuant to
      3(a)(10) under the Securities Act of 1933.





During
      March 2006, the Company issued 1,636,330 shares of common stock in full
      settlement of a note and accrued interest. The fair value was $31,090 ($0.019
      per share) and a gain of $3,229 was recognized on the settlement. The shares
      were issued under a court ordered settlement pursuant to 3(a)(10) under the
      Securities Act of 1933.





During
      March 2006, the Company issued restricted common stock for 243,243 shares as
      a
      fee for obtaining financing. The fair value was $5,716 ($0.0235 per
      share).





During
      March 2006, the Company issued 9,650,377 shares of common stock to employees
      with a fair value of $226,784 ($.0235 per share).





During
      March 2006, the Company returned to the Treasury 49,752 shares of common stock
      previously issued to employees with a fair value of $995 ($.02 per
      share).





During
      March 2006, the Company issued 5,219,112 shares of common stock to employees
      with a fair value of $99,621 ($.0197 per share).


F-51




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**







During
      March 2006, the Company issued 40,000,000 shares of common stock in partial
      conversion of a note and accrued interest. The fair value was $860,000
      (10,000,000 shares at $0.026 and 30,000,000 shares at $0.02 per share) and
      a
      loss of $223,174 was recognized the conversion.





During
      March 2006, the Company issued 19,999,999 shares of common stock in partial
      conversion of notes and accrued interest. Principal and interest in the amount
      of $119,059 was converted per the conversion terms of the note. The various
      conversion prices were $0.004875, $0,005650, $0.0114825 and $0.013022 per share
      and a loss of $34,021 was recognized on the conversion of interest.





During
      April 2006, the Company issued 157,000 shares of common stock for consulting
      services with a fair value of $2,983 ($0.019 per share).





During
      April 2006, the Company issued 250,000 shares of common stock for consulting
      services with a fair value of $5,000 ($0.02 per share).





During
      April 2006, the Company issued 182,051 shares of common stock for consulting
      services with a fair value of $3,550 ($0.0195 per share).





During
      April 2006, the Company issued 15,000,000 shares of common stock in partial
      conversion of notes and accrued interest. Principal and interest in the amount
      of $123,164 was converted per the conversion terms of the note. The various
      conversion prices were $0.004875, $0,005650, $0.0114825 and $0.013022 per share
      and a loss of $3,890 was recognized on the conversion of interest.





During
      May 2006, the Company issued 15,000,000 shares of common stock in partial
      conversion of notes. Principal in the amount of $131,303 was converted per
      the
      conversion terms of the note. The various conversion prices were $0.004875,
      $0,005650, $0.0114825 and $0.013022 per share.





***(B)
      Notes Payable***





On
      January 25, 2006, the Company borrowed $50,000 under a three year 5.25%
      unsecured promissory note with 5,000,000 warrants attached at an exercise price
      of $1.09.





**(C)
      Related Party Transactions**





On
      January 1, 2006, the Company converted $91,775 owed under employee expense
      reimbursements to a former employee and current Director. The note is unsecured
      and bears an 8% rate of interest.





***(D)
      Itron***





On
      April
      19, 2006, we entered into an agreement with Itron Technology, Inc., a
      third-party manufacturer, for the production of the Phantom Lapboard. For
      an
      agreed upon amount, payable in cash and Stock after Itron meets certain
      milestones, Itron will develop and produce the Phantom Lapboard. Itron has
      provided various representations and warranties with respect to the development
      and production of the Phantom Lapboard. If the milestones are met the company
      anticipates shipping the Phantom Lapboard in October 2006.







F-52