**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-KSB/A**





**(Amendment
      No.2)**


**(Mark
      One)**


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





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


**OR**


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





**For
      the transition period from to**





**Commission
      file number 0-24269**


___________________


**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.)**1191
                2****nd****Avenue, Suite 500,**
              **Seattle,
                WA 98101**
              (Address
                of principal executive offices) (Zip Code)**206-393-3000**
              (Issuer’s
                telephone number)




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





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




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





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





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




Indicate
      by check mark whether the registrant is a shell company (as defined by Rule
      12b-2 of the Exchange Act).


Yes o
      No x





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





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





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





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







**Table
        of Contents**


**Index
        to Financial
        Statements**


**INDEX**




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








-2-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**EXPLANATORY
      NOTE**




This
      Amendment No. 2 on Form 10-KSB/A (“Form 10-KSB/A”) to Infinium Labs, Inc.’s
      Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004,
      initially filed with the Securities and Exchange Commission (“SEC”) on April 20,
      2005 (the “Original Filing”) and amended by amendment filed on December 20, 2005
      ("Amendment No. 1"), is being filed to reflect responses to comments received
      from the SEC in connection with a review of our filings, as well as additional
      disclosure revisions deemed appropriate by current management. In addition,
      Amendment No. 1 was filed to reflect a restatement of our consolidated
      financial statements as of and for the year ended December 31, 2004, and
      the notes related thereto, as discussed in Note 3 to the Consolidated Financial
      Statements of Infinium Labs, Inc. and Subsidiary included in Item 7.





As
      previously disclosed in a Current Report on Form 8-K filed with the SEC on
      October 28, 2005, and as disclosed in the Explanatory Note to Amendment No.
      1, our Board of Directors determined that our previously issued audited
      financial statements for the two months ended December 31, 2003 and the year
      ended December 31, 2004 should not be relied upon because they contain errors.
      The errors relate to (i) misclassifying employees as independent contractors
      in
      the fourth quarter of 2003 and the first quarter of 2004, and (ii) our failure
      to record sufficient loss contingency accruals in 2004 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.





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




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




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






-3-
 **Table
          of Contents**


**Index
        to Financial Statements**




**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING INFORMATION**





THIS
      ANNUAL REPORT ON FORM 10-KSB, INCLUDING EXHIBITS THERETO, CONTAINS
      FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
      ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
      1934,
      AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE
      WORDS "ANTICIPATES”, "BELIEVES”, "EXPECTS”, "INTENDS”, "FORECASTS”, "PLANS”,
      "FUTURE”, "STRATEGY”, OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE
      ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
      STATEMENTS, INCLUDING THOSE DESCRIBED IN "RISK FACTORS" AND ITEM 6. MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION IN THIS FORM 10-KSB. THE COMPANY
      ASSUMES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
      ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN OTHER FACTORS, EXCEPT
      AS
      REQUIRED BY LAW.





**PART
      I**





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





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




**General
      Overview**





We
      are
      developing and seeking to commercialize the Phantom Game Service, a video game
      delivery system designed to allow consumers to search, preview and play a large
      selection of video games on demand via a broadband Internet connection.





We
      have
      not yet generated any revenue from operations. Our ability to generate revenue
      in the future is dependent on our ability to successfully develop and
      commercialize the Phantom Game Service.





Since
      inception through December 31, 2004, we have incurred aggregate losses of
      $36,764,861. Our loss from operations for year ended December 31, 2004 was
      $33,819,787; our loss from operations for the two months ended December 31,
      2003
      was $674,945. In addition, as of December 31, 2004, we had an accumulated
      deficit of $36,764,861 and we need immediate additional capital to continue
      operations. Given our limited resources, and the delays experienced thusfar,
      we
      are not in a position to anticipate a completion date for development of our
      product or a launch date for the Phantom Game Service.





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





**Corporate
      History**





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





-4-
 **Table
          of Contents**


**Index
        to Financial Statements**




**Phantom
      Game Service**





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


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




* Display:
        Any
        TV
 * HDTV
        Compatible
 * Connectivity:
        Any broadband connection
 * Processor:
        Advanced Micro Devices (AMD) Sempron family
 * Graphics
        Processor: NVIDIA 3D graphics accelerator
 * System
        Memory: 256 Megabyte
 * Dolby
        digital
        5.1 Channel Audio
 * Operating
        System: Microsoft Windows XP Embedded
 * Hard
        Disk
        Drive: 80GigaByte hard drive w/ intelligent cache management
 * Accessories:
        Wireless Lapboard and game pad controllers to be sold separately
 * Wide
        variety
        of input and output connectors
 * Sophisticated
        security, digital rights management (DRM) and content encryption
 * Transparent
        patches and upgrades
 * Client
        updates add new features to the service
 * Content
        management keeps games fresh and reliable




·
              Streaming
                  Game Technology - The Phantom Game Receiver and the Phantom Game
                  Service
                  are designed to work in concert to deliver retail quality video
                  games to
                  consumers over standard home broadband Internet connections. A
                  technique
                  has been developed and is continuing to be refined by our company
                  which
                  allows us to take games, traditionally delivered on CD-ROM or DVD
                  media,
                  and convert them into digital streams of data. This technology
                  is designed
                  to allow consumers to start playing most games in less time than
                  it would
                  take to install the game from a CD-ROM or DVD.
  ·
              Game
                  Content - We anticipate offering consumers a wide range of commercial
                  video games. Because the games will be stored digitally on hosted
                  servers
                  there is no investment in warehouse space or physical inventory,
                  either by
                  the game publishers or by our company. We anticipate being able
                  to offer
                  many of the same games that would be found in a typical game retailer.
                  In
                  addition we intend to offer games no longer available at retail
                  and
                  specialty games that can be difficult to locate. Because the Phantom
                  Game
                  Receiver is intended to run the Windows XP Embedded operating system,
                  it
                  should be capable of distributing an extremely wide range of games
                  originally designed for use on personal computers.


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





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




-5-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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




**Product
      Benefits**





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





*Windows-Based
      Platform*





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





*Unlimited
      Space For Game Software*





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





*Increased
      Profitability*





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





*Closed
      System Prevents Piracy*





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





**Content
      Strategy**





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





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




-6-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


. **Distribution
      Strategy**





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





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





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





**Competition**





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





***Gaming
      Platforms***





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





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




-7-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


***Game
      Developers and Distributors***





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





***PC
      Game Services***





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





**Intellectual
      Property Strategy**





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





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




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




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





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





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




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





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





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




-8-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**RISK
      FACTORS**





**RISKS
      RELATED TO OUR BUSINESS AND COMPANY**





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





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





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





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





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





Since
      inception through December 31, 2004, we have incurred aggregate losses of
      $36,764,861. Our loss from operations for the fiscal year ended December 31,
      2004 was $33,819,787. There is no assurance that we will operate profitably
      or
      will generate positive cash flow in the future. In addition, our operating
      results in the future may be subject to significant fluctuations due to many
      factors not within our control, such as the unpredictability of when, if ever,
      our product will be launched, when customers will order products, the size
      of
      customers' orders, the demand for our products, and the level of competition
      and
      general economic conditions.





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




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





We
      will
      need to obtain additional funding in order to:





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





·
            finance
                additional growth and working capital requirements;





·
            respond
                to competitive pressures; and





·
            respond
                to other opportunities or challenges as they arise.





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




-9-
 **Table
          of Contents**


**Index
        to Financial Statements**




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




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





·
            expand
                our current operating expenses;





·
            fund
                sales and marketing activities;





·
            manufacture
                inventory; and





·
            incur
                capital expenditures.





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





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





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





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





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





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





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





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





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




-10-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





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





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





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





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





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





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





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





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





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





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




-11-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





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





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





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
      evolving gaming industry, we must implement financial and management controls;
      maintain our reporting systems and procedures; continue to scale our serving
      systems and upgrade their functional capabilities; and expand, train, retain
      and
      manage our work force. We cannot be certain that our systems, procedures or
      controls will be adequate to support our 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.





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





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





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





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





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





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




-12-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





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





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





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





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




-13-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**RISKS
      RELATED TO OUR FINANCING AGREEMENTS**





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





As
      of
      December 31, 2004, we had 121,090,655 shares of common stock issued and
      outstanding and an obligation to reserve 46,656,000 shares issuable upon
      conversion of debentures in the aggregate principal amount of $2,160,000. In
      addition, at that date we had outstanding options and warrants to purchase
      41,014,493 shares of common stock. Under certain circumstances described in
      the
      next risk factor, the number of shares of common stock issuable upon conversion
      of the outstanding debentures may increase if the market price of our stock
      declines. The sale or potential sale of these shares may adversely affect the
      market price of our common stock.





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





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





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





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





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





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




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





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





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




-14-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





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





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





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





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





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





OUR
      STOCK
      PRICE CAN BE EXTREMELY VOLATILE.





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




-15-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


WE
      DO NOT
      EXPECT TO PAY DIVIDENDS.





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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




-16-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





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




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





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





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





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





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





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





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




-17-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





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





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





NONE




**PART
      II**





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





**Market
      for Common Stock**





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





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





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


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





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





**Dividend
      Policy**





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





**Recent
      Unregistered Sales of Securities**





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




-18-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


During
      2004, the Company issued 750,000 shares of common stock with a fair value of
      $430,000 as additional consideration for notes payable ($0.57 per
      share).





During
      2004, the Company issued 1,650,000 shares of common stock to employees with
      a
      fair value of $507,500 ($0.31 per share).





During
      2004, the Company issued 500,000 shares of common stock to a consultant with
      a
      fair value of $130,000 ($0.26 per share).





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).





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





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





**Overview**





We
      are
      developing and seeking to commercialize the Phantom Game Service, a video game
      delivery system designed to allow consumers to search, preview and play a large
      selection of video games on demand via a broadband Internet connection.





We
      have
      not yet generated any revenue from operations and we are in immediate need
      of
      additional capital to continue our operations. Our ability to generate revenue
      in the future is dependent on our ability to successfully develop and
      commercialize the Phantom Game Service.





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





**Liquidity
      and Plan of Operations**





We
      have
      incurred recurring losses from operations since inception. Our loss from
      operations for the year ended December 31, 2004 was $33,819,787. At December
      31,
      2004, we had a working capital deficit of $12,988,409 and an accumulated deficit
      of $36,764,861. In their report on our audited financial statements for the
      year
      ended December 31, 2004, our independent auditors expressed substantial doubt
      about our ability to continue as a going concern.




Our
      activities to date have been funded by equity and debt investments. As of
      December 31, 2004, we had received approximately $3.6 million in equity
      investments and $11.2 million in debt and convertible debt financings. At
      December 31, 2004, we were in default on payment of a promissory note with
      a
      principal amount of $350,000. Our outstanding debt for borrowed money has
      generally been provided on a short-term basis, bears interest at rates ranging
      from 8% to 17% and, in many cases, was accompanied by the grant of common stock
      or warrants to purchase common stock, which contributed to the costs of the
      financings. As of December 31, 2004, we have recorded an aggregate of $4,979,500
      in debt discount, of which $2,175,588 was amortized as interest expense. In
      connection with 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.




We
      do not
      have sufficient cash to continue operations for the next 12 months and are
      in
      immediate need of additional capital to fund our plan of operation. We presently
      have no commitments for additional financing and may not be able to obtain
      such
      financing. To support our working capital needs pending receipt of sufficient
      financing, we are seeking to settle outstanding liabilities through issuance
      of
      equity, and have and anticipate continuing to grant common stock to fund payroll
      and certain other ongoing costs. During the year ended December 31, 2004, we
      issued an aggregate of 19,215,321 shares of common stock in settlement of
      payroll and certain other ongoing costs, of which 12,118,601 shares were issued
      under a registration statement and are freely tradable. Unless and until we
      receive sufficient financing, we expect to continue to be forced to rely on
      issuances of common stock under similar arrangements in settlement of payroll
      and such other costs. Issuances of equity will dilute existing stockholder’s
      ownership and will have a depressive effect on our stock price, which will
      result in greater dilution for subsequent equity issuances and further downward
      pressure on our stock price. If we are unable to obtain additional financing
      as
      and when needed, we will need to scale back and/or reprioritize our planned
      operations, our assets may be foreclosed upon by secured lenders and we may
      be
      forced to cease operations completely.




-19-
 **Table
          of Contents**


**Index
        to Financial Statements**




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




Completing
      Development of the Phantom Game Receiver and Streaming Game Technology - The
      Phantom Game Receiver was originally intended for retail launch in 2004 and
      its
      design was based upon that premise. We are currently in the process of revising
      and updating the hardware to take advantage of newer technology to ensure that
      the product is technically compelling and that we are able to have an adequate
      supply of components. We have engaged third parties to assist with product
      engineering and design work. Due to working capital shortages, efforts by these
      groups on our behalf have been delayed. At December 31, 2004, the Company owed
      Biostar and Walter Dorwin Teague Associates, two of such firms, $311,532 and
      $61,660, respectively, which amounts continue to be outstanding.. In addition,
      we plan to refine and improve upon our streaming techniques in order to reduce
      download times, enhance our user interface that allows customers to browse
      through lists of games and make purchases, and continue our modifications and
      enhancements to the Windows XP Embedded operating system.




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




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





Prior
      to
      the commercial launch of the Phantom Game Service, we will need to enter into
      arrangements with third party manufacturers which we anticipate would entail
      investing in pre-manufacturing activities, including the purchase of tooling
      and
      components, as well as ancillary operations around the manufacturing and
      distribution of the Phantom Game Receiver such as logistics, service and
      support.




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





**APPLICATION
      OF CRITICAL ACCOUNTING POLICIES**




STOCK-BASED
      COMPENSATION





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




-20-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





IMPAIRMENT
      OF GOODWILL AND LONG-LIVED ASSETS





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




INCOME
      TAXES





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





RESEARCH
      AND DEVELOPMENT COSTS





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




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





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




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





**PREVIOUS
      INDEPENDENT ACOUNTANTS**





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





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





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





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





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





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





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




-21-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**NEW
      INDEPENDENT ACOUNTANTS**





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





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





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





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





Evaluation
      of Disclosure Controls and Procedures





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





Our
      Disclosure Controls as of the Evaluation Date were not effective in enabling
      us
      to record and properly report sufficient loss contingency accruals to cover
      possible monetary penalties and interest relating to our failure to file certain
      payroll and withholding tax returns and to satisfy required withholding and
      payroll tax obligations. As noted in the Explanatory Note at the beginning
      of
      this report, this amended report is being filed to, among other things,
      correctly reflect these events in the financial statements contained herein.
      While new management is focused on improving our company’s Disclosure Controls
      to ensure timely and proper reporting, there can be no assurance that other
      items do not currently exist, or will not occur in the future, that reflect
      ineffective Disclosure Controls as of the Evaluation Date.





In
      connection with the evaluation referred to in the foregoing paragraph, we have
      identified no change in our internal control over financial reporting that
      occurred during the quarter ended December 31, 2004 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.





Inherent
      Limitations on Effectiveness of Controls





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





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




-22-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





None.




**PART
      III**





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





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





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





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




***Business
      Experience***




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




***Directors
      and Executive Officers***





TIMOTHY
      M. ROBERTS was the founder of our predecessor, Infinium Labs Operating
      Corporation, and has been our Chairman and Chief Executive Officer and a member
      of our board of directors since the merger of our subsidiary into Infinium
      Labs
      Operating Corporation. Prior to founding Infinium Labs in December 2002, Mr.
      Roberts was Chairman and Chief Executive Officer for Broadband Investment Group
      from 1999 through 2000. Broadband Investment Group was a holding company which
      owned a portfolio of service companies which handled technology layers 1-7.
      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 was a director of our predecessor, Infinium Labs Operating
      Corporation, since its formation and has been a member of our board of directors
      since the merger. Mr. Angelotti has been the CEO of Angelotti & Rosenberg
      Financial Group from March 2004 through the present. Mr. Angelotti served as
      the
      Principal of Global Financial Asset Management from August 2003 through February
      2004 and was a Senior Vice President of Morgan Keegan from February 1999 through
      August 2003. He has over 12 years of experience as a financial advisor, and
      has
      held executive positions for major investment firms such as Northern Trust
      Bank
      of Sarasota, Bank of Boston in Florida, UBS Paine Webber, and Morgan Keegan.
      Mr.
      Angelotti holds Series 6, 7, 63, 65 Insurance and Annuity licenses.




-23-
 **Table
          of Contents**


**Index
        to Financial Statements**




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




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




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




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




***Key
      Employees***




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




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





***Family
      Relationships***




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




***Involvement
      In Certain Legal Proceedings***




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




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




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




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




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





**SECTION
      16(a) REPORTING**





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





With
      respect to our Directors or Executive Officers, we are aware that personal
      obligations to file Form 4s during 2004 existed, but no Form 4s were
      filed.




-24-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**BOARD
      COMMITTEES**





To
      date,
      none of our Directors is an “audit committee financial expert” within the
      meaning of Item 401(e) of Regulation S-B. The Company lacks the financial
      resources to form audit and nominating committees. Notwithstanding, the Company
      is seeking to add new outside directors including a financial expert, as defined
      by Item 401(e) of Regulation S-B.





**CODE
      OF ETHICS**





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





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





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





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





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





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





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





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





**ITEM
      10. EXECUTIVE COMPENSATION**





**SUMMARY
      OF EXECUTIVE COMPENSATION**





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





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





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





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






-25-
 **Table
          of Contents**


**Index
        to Financial Statements**




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





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







1
            includes
                500,000 shares of S-8 stock issued in lieu of cash
                compensation.2
            includes
                500,000 shares of S-8 stock issued in lieu of cash
                compensation.


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


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





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





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





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


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




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




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





No
      options were exercised during 2004.





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





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




-26-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





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





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




**COMPENSATION
      OF DIRECTORS AND EXECUTIVE OFFICERS**




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




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




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




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





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





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





***Principal
      Stockholders***





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





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





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


(1)
            Shares
                inclusive of vested stock options.


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






-27-
 **Table
          of Contents**


**Index
        to Financial
        Statements**
  ***Changes
      in Control***





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





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





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





**TRANSACTIONS
      WITH CERTAIN OFFICERS**





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





On
      July
      28, 2004, the Company issued a director 800,000 shares of common stock as
      consideration for the director's personal guaranty of a promissory note payable
      secured by a real estate mortgage encumbering the director's residence.
  The note, effective on July 28, 2004 and expiring on July 27, 2005,
      is payable to Stephen A. Witzer, Trustee U/A dated February 7, 1985.  The
      principal is for $500,000 with interest calculated at fifteen percent (15%)
      per
      annum, plus a five percent (5%) penalty, if applicable, for any late
      payment.  In the event of an uncured default, the interest increases to
      eighteen percent (18%) per annum.





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





**TRANSACTIONS
      WITH PROMOTER**





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





The
      promoters of our Company are our directors and officers.




-28-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**ITEM
      13. EXHIBITS**




(a)
            Exhibits.




Exhibit
                  No.
              
              Exhibit
                  Description
              
              Location2-1
              
              Agreement
                  and Plan of Merger dated as of Filed herewith
              
              Incorporated
                  by Reference to ExhibitDecember
                  24, 2003 by and among Global Business
              
              2-1
                  to Form 8-K filed with the SEC onResources,
                  Inc., Global Infinium Merger Sub, Inc.,
              
              January
                  20, 2004Infinium
                  Labs Corporation and Peter J. Goldstein3-1
              
              Certificate
                  of Incorporation
              
              Incorporated
                  by Reference to Exhibit3-0
                  to Form SB-2 (Registration No.333-67990)
                  filed with the SEC onAugust
                  20, 20013-2
              
              Certificate
                  of Amendment of Certificate of Incorporation
              
              Incorporated
                  by reference to Exhibit3-2
                  to the Company's Form 10-KSB forthe
                  year ended December 31, 2003 (the"Form
                  10-KSB")3-3
              
              Certificate
                  of Amendment of Certificate of Incorporation
              
              Incorporated
                  by reference to Exhibit3-3
                  to the Company's Form 10-KSB forthe
                  year ended December 31, 2003 (the"Form
                  10-KSB")3-4
              
              By-laws
              
              Incorporated
                  by reference to Exhibit3-4
                  to the Company's Form 10-KSB forthe
                  year ended December 31, 2003 (the"Form
                  10-KSB")4-1
              
              Stock
                  Purchase Agreement dated as of January 22, 2004
              
              Incorporated
                  by reference to Exhibitbetween
                  Infinium Labs, Inc. and SBI Brightline VI, LLC
              
              4-1
                  to Form 8-K filed with the SEC onJanuary
                  26, 20044-2
              
              Stock
                  Purchase Agreement dated as of January 22, 2004
              
              Incorporated
                  by reference to Exhibitbetween
                  Infinium Labs, Inc. and Infinium Investment
              
              4-2
                  to Form 8-K filed with the SEC onPartners,
                  LLC
              
              January
                  26, 20044-3
              
              Form
                  of Subscription Agreement between Infinium Labs,
              
              Incorporated
                  by reference to ExhibitInc.
                  and certain stockholders of Infinium Labs, Inc.
              
              4-3
                  to the Form 10-KSB10-1
              
              12%
                  Secured Subordinated Debenture between the Company
              
              Incorporated
                  by reference to Exhibitand
                  Contare Ventures, LLC, dated February 23, 2004
              
              10-12
                  to the Form 10-QSB filed with theSEC
                  on August 23, 200410-2
              
              12%
                  Secured Subordinated Debenture between the Company
              
              Incorporated
                  by reference to Exhibitand
                  Gary Kurfirst, dated February 23, 2004
              
              10-9
                  to the Form 10-QSB filed with theSEC
                  on August 23, 200410-3
              
              15%
                  Secured Debenture between the Company and James
              
              Incorporated
                  by reference to ExhibitBeshara,
                  dated March 29, 2004
              
              10-4
                  to the Form 10-QSB filed with theSEC
                  on August 23, 200410-4
              
              15%
                  Secured Debenture between the Company and Ronald
              
              Incorporated
                  by reference to ExhibitWestman,
                  dated April 7, 2004
              
              10-11
                  to the Form 10-QSB filed with theSEC
                  on August 23, 200410-5
              
              15%
                  Secured Subordinated Debenture between the Company
              
              Incorporated
                  by reference to Exhibitand
                  James Beshara, dated May 3, 2004
              
              10-3
                  to the Form 10-QSB filed with theSEC
                  on August 23, 2004
   -29-
 **Table
            of Contents**
 **Index
          to Financial Statements**
  10-6
                
                15%
                    Secured Debenture between the Company and Ronald
                
                Incorporated
                    by reference to ExhibitWestman,
                    dated May 7, 2004
                
                10-1
                    to the Form 10-QSB filed with theSEC
                    on August 23, 200410-7
                
                Pledge
                    Agreement between Robert F. Shambro in favor of
                
                Incorporated
                    by reference to ExhibitPhoenix
                    Capital Opportunity Fund, dated May 12, 2004
                
                10-6
                    to the Form 10-QSB filed with theSEC
                    on August 23, 200410-8
                
                Promissory
                    Note between the Company and Sharon M.
                
                Incorporated
                    by reference to ExhibitBeshara,
                    dated May 18, 2004
                
                10-5
                    to the Form 10-QSB filed with theSEC
                    on August 23, 200410-9
                
                15%
                    Secured Subordinated Debenture between the Company
                
                Incorporated
                    by reference to Exhibitand
                    SBI USA, LLC, dated May 28, 2004
                
                10-10
                    to the Form 10-QSB filed with theSEC
                    on August 23, 200410-11
                
                Amended
                    and restated convertible secured promissory note
                
                Incorporated
                    by reference to Exhibitdated,
                    June 16, 2004, between the Company and Phantom
                
                10-2
                    to the Form 10-QSB filed withInvestors,
                    LLC
                
                the
                    SEC on August 23, 200410-12
                
                Commercial
                    Promissory Note between the Company and
                
                Incorporated
                    by reference to ExhibitVideo
                    Associates, LLC, dated June 2004
                
                10-8
                    to the Form 10-QSB filed withthe
                    SEC on August 23, 200410-13
                
                Employee
                    Stock Ownership
                
                Incorporated
                    by reference to Exhibit10-13
                    to the Form 10-QSB filed withthe
                    SEC on August 23, 200410-14
                
                Promissory
                    Note between the Company and Stephen
                
                Incorporated
                    by reference to ExhibitA.
                    Witzer, dated July 28, 2004
                
                10-14
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-15
                
                10%
                    Secured Promissory Note between the Company and
                
                Incorporated
                    by reference to ExhibitHazinu
                    Ltd., dated October 20, 2004
                
                4-2
                    to Form 8-K filed with the SEC onOctober
                    29, 200410-16
                
                10%
                    Secured Promissory Note between the Company and JM
                
                Incorporated
                    by reference to ExhibitInvestors,
                    LLC, Fenmore Holdings, LLC, Viscount
                
                4-6
                    to Form 8-K filed with the SEC onInvestments
                    Limited and Congregation Mishkan Sholom,
                
                October
                    29, 2004dated
                    October 27, 200410-17
                
                Securities
                    Purchase Agreement between the Company and
                
                Incorporated
                    by reference to ExhibitHazinu
                    Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
                
                4-1
                    to Form 8-K filed with the SEC onViscount
                    Investments Limited and Congregation Mishkan
                
                December
                    22, 2004Sholom,
                    dated December 13, 200410-18
                
                Registration
                    Rights Agreement between the Company and
                
                Incorporated
                    by reference to ExhibitHazinu
                    Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
                
                4-2
                    to Form 8-K filed with the SEC onViscount
                    Investments Limited and Congregation Mishkan
                
                December
                    22, 2004Sholom,
                    dated December 13, 200410-19
                
                8%
                    Convertible Debenture between the Company and Hazinu
                
                Incorporated
                    by reference to ExhibitLtd.,
                    JM Investors, LLC, Fenmore Holdings, LLC, Viscount
                
                4-3
                    to Form 8-K filed with the SEC onInvestments
                    Limited and Congregation Mishkan Sholom,
                
                December
                    22, 2004dated
                    December 13, 2004
   -30-
 **Table
              of Contents**
 **Index
            to Financial Statements**
  10-20
                
                8%
                    Convertible Debenture between the Company and
                
                Incorporated
                    by reference to Form 8-Kaccredited
                    investors, dated December 23, 2004
                
                filed
                    with the SEC on January 5, 200510-21
                
                Employment
                    agreement between the Company and Richard
                  Skoba
                      dated January 3, 2003
                
                Incorporated
                    by reference to Exhibit 10-21 to the
                  Form
                    10-KSB filed with the SEC on April 20, 200510-22
                
                Pinnacle
                    Marketing agreement to serve as manufacturing
                
                Incorporated
                    by reference to ExhibitRepresentatives
                
                10-22
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-23
                
                Summit
                    Marketing agreement to serve as manufacturing
                
                Incorporated
                    by reference to ExhibitRepresentatives
                
                10-23
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-24
                
                Limelight
                    Networks agreement to provide digital
                
                Incorporated
                    by reference to Exhibitdelivery
                    network services
                
                10-24
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-25
                
                Chicony
                    agreement to manufacture system hardware
                
                Incorporated
                    by reference to Exhibit10-25
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-26
                
                Saitek
                    agreement to manufacture system hardware
                
                Incorporated
                    by reference to Exhibit10-26
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-27
                
                BIOSTAR®
                    Microtech International Corp. agreement for
                
                Incorporated
                    by reference to Exhibitengineering,
                    industrial design and manufacturing
                
                10-27
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-28
                
                Teague
                    agreement for engineering and industrial design
                
                Incorporated
                    by reference to Exhibit10-28
                    to the Form SB-2/A filed withthe
                    SEC on February 14, 200510-29
                
                Employment
                    agreement between the Company and Richard
                  Skoba
                      dated June 1, 2004
                
                Incorporated
                    by reference to Exhibit 10-29 to the
                  Form
                    10-KSB filed with the SEC on April 20, 200510-30
                
                Employment
                    agreement between the Company and Timothy
                  M.
                      Roberts dated September 17, 2004
                
                Incorporated
                    by reference to Exhibit 10-30 to the
                  Form
                    10-KSB filed with the SEC on April 20, 200510-31
                
                Employment
                    agreement between the Company and Kevin
                  Bachus
                      dated November 1, 2003
                
                Incorporated
                    by reference to Exhibit 10-31 to the
                  Form
                    10-KSB filed with the SEC on April 20, 200510-32
                
                Employment
                    agreement between the Company and Tyrol
                  Graham
                    dated January 15, 2004
                
                Incorporated
                    by reference to Exhibit 10-32 to the
                  Form
                    10-KSB filed with the SEC on April 20, 200510-33
                
                Employment
                    agreement between the Company and Andrew
                  Schneider
                    dated May 24, 2004
                
                Incorporated
                    by reference to Exhibit 10-33 to the
                  Form
                    10-KSB filed with the SEC on April 20,
                    2005




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




-31-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


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





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





Audit-related
      Fees. None.





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





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




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




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




-32-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this Amendment No. 2 on Form 10-KSB/A to its Annual Report on Form 10-KSB for
      the year ended December 31, 2004 to be signed on its behalf by the undersigned,
      thereunto duly authorized.


**INFINIUM
                LABS, INC.**Date: February
                10, 2006
            By:
            /s/ Greg
                KolerName:  
                Greg Koler
              Title:     Chief
                Executive Officer and Interim Chief Financial Officer







-33-
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**FINANCIAL
      STATEMENTS**


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
















**Table
          of Contents** **Index
            to Financial
            Statements**




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**





**CONTENTS**


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







**Table
          of Contents**


**Index
      to Financial Statements**


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**







To
      the
      Board of Directors of:


Infinium
      Labs, Inc.


(A
      Development Stage Company)





We
      have
      audited the accompanying balance sheets of Infinium Labs, Inc. and subsidiary
      (A
      Development Stage Company) as of December 31, 2004 (consolidated) and 2003,
      and
      the related statements of operations, changes in stockholders’ deficiency and
      cash flows for the year ended December 31, 2004 (consolidated), for the two
      months ended December 31, 2003 and for the period from December 9, 2002
      (inception) to December 31, 2004 (consolidated). These financial statements
      are
      the responsibility of the Company’s management. Our responsibility is to express
      an opinion on these financial statements based on our audit. The financial
      statements of Infinium Labs Corporation as of October 31, 2003, were audited
      by
      other auditors whose report dated December 11, 2003, except for Note F as to
      which the date is January 26, 2004, expressed an unqualified opinion on those
      statements.





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





In
      our
      opinion, the financial statements referred to above present fairly in all
      material respects, the financial position of Infinium Labs, Inc. and subsidiary
      (A Development Stage Company) as of December 31, 2004 (consolidated) and 2003
      and the results of its operations and its cash flows for the year ended December
      31, 2004 (consolidated), for the two months ended December 31, 2003 and for
      the
      period from December 9, 2002 (inception) to December 31, 2004, in conformity
      with accounting principles generally accepted in the United States of
      America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 9 to the
      consolidated financial statements, the Company has had recurring losses from
      inception of $36,764,861, has a working capital deficiency of $12,988,409,
      a
      stockholders deficiency of $12,251,352 and used cash in operations from
      inception of $11,996,783. This raises substantial doubt about its ability to
      continue as a going concern. Management’s plans concerning this matter are also
      described in Note 10. The accompanying consolidated financial statements do
      not
      include any adjustments that might result from the outcome of this
      uncertainty.





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








WEBB
      & COMPANY, P.A.





Boynton
      Beach, Florida


April
      14,
      2005, except for Note 2, 7, 8(G), 9, 10 as to which date is December 16,
      2005.


F-1
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Balance
      Sheets**




**ASSETS****Restated
                - Note 2**December
                31,
              2004
              (Consolidated)
            
            December
                31, 2003**Current
                Assets:**Cash
            
            $
            4,102
            
            $
            45,852Restricted
                Cash
            
            
            894,910
            
            
            –Prepaid
                Expenses
            
            
            66,589
            
            
            –Other
                Receivable
            
            
            407
            
            
            3,350Total
                Current Assets
            
            
            966,008
            
            
            49,202**Property
                and Equipment, Net**
            
            
            475,122
            
            
            162,763**Other
                Assets:**Deposits
            
            
            5,440
            
            
            7,490Intangible
                asset, net (Note 3)
            
            
            256,495
            
            
            300,000Total
                Other Assets
            
            
            261,935
            
            
            307,490**Total
                Assets**
            
            
            1,703,065
            
            
            519,455**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****Current
                Liabilities:**Accounts
                payable
            
            $
            3,598,885
            
            $
            349,005Due
                to developers
            
            
            985,000
            
            
            –Accrued
                interest expense
            
            
            301,415
            
            
            6,781Other
                accrued expense
            
            
            105,000
            
            
            120,850Accrued
                payroll and payroll taxes (Note 8(G))
            
            
            1,665,769
            
            
            75,997Promissory
                notes (Note 5)
            
            
            7,298,348
            
            
            366,154**Total
                Current Liabilities**
            
            
            13,954,417
            
            
            918,787**Commitments
                and Contingencies**
            
            
            –
            
            
            –**Stockholders’
                Deficiency:**Preferred
                stock, $0.001 par value, 10,000,000 shares authorized, none issued
                and
                outstanding
            
            
            –
            
            
            –Common
                stock, $0.0001 par value, 200,000,000 shares authorized, 121,090,655
                and
                69,115,900 shares issued and outstanding, respectively (Note
                6)
            
            
            12,109
            
            
            6,911Additional
                paid-in capital (Note 6)
            
            
            24,523,917
            
            
            2,702,348Subscription
                receivable
            
            
            (22,517
            )
            
            (163,517
            )Accumulated
                deficit during development stage
            
            
            (36,764,861
            )
            
            (2,945,074
            )Total
                Stockholders’ Deficiency
            
            
            (12,251,352
            )
            
            (399,332
            )**Total
                Liabilities and Stockholders’ Deficiency**
            
            
            1,703,065
            
            
            519,455








See
      accompanying Notes to Financial Statements.


F-2
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Operations**




For
                the Year Ended December 31, 2004
              (Consolidated)
            
            For
                the Two Months Ended December 31, 2003
            
            For
                the Period
              from
              December
                9, 2002 (Inception) to
              October
                31, 2003
            
            For
                the Period from
              December
                9, 2002
              (Inception
                to December 31, 2004)
              (Consolidated)Restated
                - Note 2
            
            Restated
                - Note 2
            
            
            
            Restated
                - Note 2**Operating
                Expenses:**Development
                costs
            
            $
            3,130,854
            
            $
            145,943
            
            $
            259,407
            
            $
            3,536,204Advertising
            
            
            1,380,377
            
            
            55,141
            
            
            153,038
            
            
            1,588,556Salary
                expense
            
            
            6,985,422
            
            
            172,484
            
            
            –
            
            
            7,157,906Professional
                fees
            
            
            2,808,733
            
            
            58,133
            
            
            837,737
            
            
            3,704,603Consultants
            
            
            9,082,345
            
            
            75,816
            
            
            783,860
            
            
            9,942,021Impairment
                of assets
            
            
            352,299
            
            
            –
            
            
            –
            
            
            352,299General
                and administrative
            
            
            3,864,787
            
            
            130,032
            
            
            236,087
            
            
            4,230,906Total
                Operating Expenses
            
            
            27,604,817
            
            
            637,549
            
            
            2,270,129
            
            
            30,512,495**Net
                Loss from Operations**
            
            
            (27,604,817
            )
            
            (637,549
            )
            
            (2,270,129
            )
            
            (30,512,495
            )**Other
                Income (Expense):**Other
                income
            
            
            1,897
            
            
            37
            
            
            –
            
            
            1,934Loss
                on sale of equipment
            
            
            (448
            )
            
            –
            
            
            –
            
            
            (448
            )IRS
                penalty and interest expense
            
            
            (528,377
            )
            
            (19,437
            )
            
            –
            
            
            (547,814
            )Interest
                expense
            
            
            (5,688,042
            )
            
            (17,996
            )
            
            –
            
            
            (5,706,038
            )Total
                Other Income (Expense)
            
            
            (6,214,970
            )
            
            (37,396
            )
            
            –
            
            
            (6,252,366
            )**Loss
                before Income Taxes**
            
            
            (33,819,787
            )
            
            (674,945
            )
            
            (2,270,129
            )
            
            (36,764,861
            )**Income
                Taxes**
            
            
            –
            
            
            –
            
            
            –
            
            
            –**Net
                Loss**
            
            $
            (33,819,787
            )
            $
            (674,945
            )
            $
            (2,270,129
            )
            $
            (36,764,861
            )**Per
                Common Share**Loss
                per common share - basic and diluted
            
            $
            (0.34
            )
            $
            (0.01
            )
            $
            (0.04
            )
            $
            (0.46
            )Weighted
                average - basic and diluted
            
            
            100,688,617
            
            
            67,745,088
            
            
            57,420,568
            
            
            79,230,175





See
      accompanying Notes to Financial Statements.


F-3
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


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




Preferred
                Stock
            
            Common
                Stock
            
            Additional
                Paid-In
            
            Accumulated
                Deficit During Development
            
            Stock
                SubscriptionsShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stage
            
            Receivable
            
            TotalStock
                issued to founders ($0.0004 per share)
            
            
            –
            
            $
            –
            
            
            58,189,728
            
            $
            5,819
            
            $
            12,703
            
            $
            –
            
            $
            (18,517
            )
            $
            5Stock
                issued for cash ($0.12 per share)
            
            
            –
            
            
            –
            
            
            4,423,012
            
            
            442
            
            
            526,261
            
            
            –
            
            
            –
            
            
            526,703Stock
                issued for services ($0.3775 per share)
            
            
            –
            
            
            –
            
            
            2,957,376
            
            
            296
            
            
            1,112,709
            
            
            –
            
            
            –
            
            
            1,113,005Net
                loss for the period from December 9, 2002 (inception) to October
                31,
                2003
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            (2,270,129
            )
            
            –
            
            
            (2,270,129
            )Balance,
                October 31, 2003
            
            
            –
            
            
            –
            
            
            65,570,116
            
            
            6,557
            
            
            1,651,673
            
            
            (2,270,129
            )
            
            (18,517
            )
            
            (630,416
            )Stock
                issued for cash ($0.28 per share)
            
            
            –
            
            
            –
            
            
            2,169,148
            
            
            217
            
            
            612,172
            
            
            –
            
            
            (145,000
            )
            
            467,389Stock
                issued for signage rights ($0.3175 per share)
            
            
            –
            
            
            –
            
            
            942,600
            
            
            94
            
            
            299,906
            
            
            –
            
            
            –
            
            
            300,000Stock issued for services ($0.3175 per share)
            
            
            –
            
            
            –
            
            
            434,036
            
            
            43
            
            
            138,597
            
            
            –
            
            
            –
            
            
            138,640Net
                loss for the two months ended December 31, 2003
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            (674,945
            )
            
            –
            
            
            (674,945
            )Balance,
                December 31, 2003 (Restated - Note 2)
            
            
            –
            
            
            –
            
            
            69,115,900
            
            
            6,911
            
            
            2,702,348
            
            
            (2,945,074
            )
            
            (163,517
            )
            
            (399,332
            )Recapitalization
                of Global Business Resources
            
            
            –
            
            
            –
            
            
            16,156,000
            
            
            1,615
            
            
            (1,615
            )
            
            –
            
            
            –
            
            
            –Shares
                issued for cash ($0.25 per share)
            
            
            –
            
            
            –
            
            
            6,650,000
            
            
            665
            
            
            1,661,835
            
            
            –
            
            
            –
            
            
            1,662,500Stock
                issued for cash ($0.257 per share)
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            141,000
            
            
            141,000Shares
                issued with note payable ($0.78 per share)
            
            
            –
            
            
            –
            
            
            560,000
            
            
            56
            
            
            433,944
            
            
            –
            
            
            –
            
            
            434,000Shares
                issued for legal settlement ($1.475 per share)
            
            
            –
            
            
            –
            
            
            66,668
            
            
            7
            
            
            98,328
            
            
            –
            
            
            –
            
            
            98,335Shares
                issued for services ($1.475 per share)
            
            
            –
            
            
            –
            
            
            1,750,000
            
            
            175
            
            
            2,581,075
            
            
            –
            
            
            –
            
            
            2,581,250Shares
                issued with note payable ($1.47 per share)
            
            
            –
            
            
            –
            
            
            7,500
            
            
            –
            
            
            11,025
            
            
            –
            
            
            –
            
            
            11,025





See
      accompanying Notes to Financial Statements.


F-4
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


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




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








See
      accompanying Notes to Financial Statements.


F-5
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


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




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








See
      accompanying Notes to Financial Statements.


F-6
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Stockholders' Deficiency**


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




Preferred
                Stock
            
            Common
                Stock
            
            Additional
                Paid-In
            
            Accumulated
                Deficit During Development
            
            Stock
                SubscriptionsShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stage
            
            Receivable
            
            TotalShares
                issued to employees ($0.32 per share)
            
            
            –
            
            
            –
            
            
            1,790,000
            
            
            179
            
            
            565,321
            
            
            –
            
            
            –
            
            
            565,500Shares
                issued to employees ($0.22 per share)
            
            
            –
            
            
            –
            
            
            5,199,967
            
            
            520
            
            
            1,136,579
            
            
            –
            
            
            –
            
            
            1,137,099Shares
                issued to executives ($0.22 per share)
            
            
            –
            
            
            –
            
            
            1,100,000
            
            
            110
            
            
            240,432
            
            
            –
            
            
            –
            
            
            240,542Share
                issued to consultants for services
                ($0.21 per share)
            
            
            –
            
            
            –
            
            
            3,885,410
            
            
            388
            
            
            811,753
            
            
            –
            
            
            –
            
            
            812,141Shares
                issued with notes payable ($0.42 per share)
            
            
            –
            
            
            –
            
            
            1,750,000
            
            
            175
            
            
            734,825
            
            
            –
            
            
            –
            
            
            735,000Share
                issued to consultants for services
                ($0.28 per share)
            
            
            –
            
            
            –
            
            
            1,350,000
            
            
            135
            
            
            377,365
            
            
            –
            
            
            –
            
            
            377,500Shares
                issued for interest ($0.18 per share)
            
            
            –
            
            
            –
            
            
            375,000
            
            
            38
            
            
            67,462
            
            
            –
            
            
            –
            
            
            67,500Shares
                issued for services ($0.25 per share)
            
            
            –
            
            
            –
            
            
            150,000
            
            
            15
            
            
            37,485
            
            
            –
            
            
            –
            
            
            37,500Shares
                issued for cash ($0.16 per share)
            
            
            –
            
            
            –
            
            
            1,649,635
            
            
            165
            
            
            263,910
            
            
            –
            
            
            –
            
            
            264,075Beneficial
                conversion of promissory notes at $0.10 per share
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            318,500
            
            
            –
            
            
            –
            
            
            318,500Fair
                value of warrants issued in conjunction with promissory notes ranging
                from
                $0.10 per share to $1.00 per share
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            2,025,000
            
            
            –
            
            
            –
            
            
            2,025,000Shares
                contributed in kind
            
            
            –
            
            
            –
            
            
            (1,191,450
            )
            
            (119
            )
            
            119
            
            
            –
            
            
            –
            
            
            –Net
                loss, December 31, 2004
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            (33,819,787
            )
            
            –
            
            
            (33,819,787
            )**BALANCE,
                DECEMBER 31, 2004 (CONSOLIDATED) (RESTATED - NOTE
                2)**
            
            
            –
            
            $
            –
            
            
            121,090,655
            
            $
            12,109
            
            $
            24,523,917
            
            $
            (36,764,861
            )
            $
            (22,517
            )
            $
            (12,251,352
            )








See
      accompanying Notes to Financial Statements.


F-7
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Statement
      of Cash Flows**





For
                the Year Ended
              December
                31, 2004
              (Consolidated)
            
            For
                the
              Two
                Months Ended
              December
                31, 2003
            
            For
                the Period from December 9, 2002 (Inception) to
              October
                31, 2003
            
            For
                the Period from
              December
                9, 2002
              (Inception)
                to December 31, 2004**Cash
                Flows from Operating Activities:**
            
            Restated
                - Note 2
            
            Restated
                - Note 2
            
            
            
            Restated
                - Note 2Net
                loss
            
            $
            (33,819,787
            )
            $
            (674,945
            )
            $
            (2,270,129
            )
            $
            (36,764,861
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            170,059
            
            
            3,614
            
            
            675
            
            
            174,348Impairment
                of assets
            
            
            352,299
            
            
            –
            
            
            –
            
            
            352,299Loss
                on disposal of assets
            
            
            448
            
            
            –
            
            
            –
            
            
            448Common
                stock issued for services
            
            
            8,452,305
            
            
            138,680
            
            
            1,113,005
            
            
            9,703,990Common
                Stock issued to employees
            
            
            2,042,141
            
            
            –
            
            
            –
            
            
            2,042,141Common
                stock issued for legal settlements
            
            
            175,900
            
            
            –
            
            
            –
            
            
            175,900Common
                stock issued for interest
            
            
            2,727,731
            
            
            –
            
            
            –
            
            
            2,727,731Common
                stock issued for loan guarantee
            
            
            832,000
            
            
            –
            
            
            –
            
            
            832,000Amortization
                of interest expense
            
            
            2,150,588
            
            
            25,000
            
            
            –
            
            
            2,175,588Changes
                in operating assets and liabilities:Decrease
                (increase) in current assets:Prepaid
                expenses and other receivables
            
            
            (63,646
            )
            
            (36
            )
            
            (3,314
            )
            
            (66,996
            )Deposits
            
            
            2,050
            
            
            (7,490
            )
            
            –
            
            
            (5,440
            )Increase
                (decrease) in current liabilities:Accounts
                payable
            
            
            3,249,880
            
            
            
            
            
            
            
            
            3,598,885Due
                to developers
            
            
            985,000
            
            
            
            
            
            
            
            
            985,000Accrued
                interest
            
            
            294,634
            
            
            
            
            
            
            
            
            301,415Other
                accrued expense
            
            
            (15,850
            )
            
            
            
            
            
            
            
            105,000Accrued
                payroll and payroll taxes
            
            
            1,589,772
            
            
            (50,427
            )
            
            603,060
            
            
            1,665,769Net
                Cash Used in Operating Activities
            
            
            (10,874,476
            )
            
            (565,604
            )
            
            (556,703
            )
            
            (11,996,783
            )**Cash
                Flows from Investing Activities:**Purchase
                of property and equipment
            
            
            (803,415
            )
            
            (103,388
            )
            
            (63,664
            )
            
            (970,467
            )Sale
                of property and equipment
            
            
            11,755
            
            
            –
            
            
            –
            
            
            11,755Increase
                in restricted cash
            
            
            (894,910
            )
            
            –
            
            
            –
            
            
            (894,910
            )Net
                Cash Used in Investing Activities
            
            
            (1,686,570
            )
            
            (103,388
            )
            
            (63,664
            )
            
            (1,853,622
            )**Cash
                Flows from Financing Activities:**Repayments
                of notes payable
            
            
            (1,075,000
            )
            
            –
            
            
            –
            
            
            (1,075,000
            )Proceeds
                from stockholder
            
            
            –
            
            
            –
            
            
            4,940
            
            
            4,940Payments
                to stockholder
            
            
            –
            
            
            (4,940
            )
            
            –
            
            
            (4,940
            )Proceeds
                from sale of common stock, net
            
            
            7,737,690
            
            
            478,588
            
            
            515,469
            
            
            8,731,747Promissory
                note
            
            
            5,856,606
            
            
            241,154
            
            
            100,000
            
            
            6,197,760Net
                Cash Provided by Financing Activities
            
            
            12,519,296
            
            
            714,802
            
            
            620,409
            
            
            13,854,507NET
                INCREASE (DECREASE) IN CASH
            
            
            (41,750
            )
            
            45,810
            
            
            42
            
            
            4,102CASH
                AT BEGINNING OF PERIOD
            
            
            45,852
            
            
            42
            
            
            –
            
            
            –CASH
                AT END OF PERIOD
            
            $
            4,102
            
            $
            45,852
            
            $
            42
            
            $
            4,102**Supplemental
                Disclosure of Cash Flow Information:**Cash
                paid for interest
            
            $
            508,308
            
            $
            6,780
            
            $
            –
            
            $
            515,088




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


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





F-8
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**







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





***(A)
      Organization***




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




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





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





Accordingly,
      the financial statements include the following:





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





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





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





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





***(C)
      Consolidation***





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





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





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





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





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




F-9
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





***(F)
      Income Taxes***





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





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





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




***(H)
      Advertising***





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





***(I)
      Business Segments***





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





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





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





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





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





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





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




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





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




F-10
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**







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





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




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





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





**NOTE
      2****RESTATEMENT
      OF FINANCIAL STATEMENTS**





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





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





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





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





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
              )





F-11
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**




December
                  31, 2004
                (As
                  Previously Reported)
              
              Amount
                  of
                Change
              
              December
                  31, 2004
                (As
                  Restated)Balance
                  SheetAccrued
                  payroll and payroll taxes
              
              $
              834,682
              
              $
              831,087
              
              $
              1,665,769Total
                  current liabilities
              
              
              13,123,330
              
              
              831,087
              
              
              13,954,417Accumulated
                  deficit during development stage
              
              
              (36,000,363
              )
              
              (764,498
              )
              
              (36,764,861
              )Total
                  Stockholders’ Deficiency
              
              $
              (11,486,854
              )
              $
              (764,498
              )
              $
              (12,251,352
              )




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




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








F-12
 **Table
          of Contents**


**Index
        to Financial
        Statements**
  **INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





**NOTE
      3**  **INTANGIBLE
      ASSETS**





During
      2003, the Company entered into an agreement for the signage rights to a building
      located in Sarasota, Florida. The agreement called for the Company to issue
      942,600 shares of common stock in exchange for signage rights beginning April
      1,
      2004 through May 31, 2009. The shares were valued at the recent cash offering
      price aggregating $300,000. The Company will amortize the cost over the life
      of
      the agreement. As of December 31, 2004, the Company has amortized $43,505 of
      expense of the signage rights.





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





Property
      and equipment consisted of the following as of:





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





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





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





During
      2003, the Company received $275,000, net of offering costs of $25,000 in the
      form of a 20% secured convertible debenture that matures on February 28, 2004
      and is guaranteed by the Company's Chairman and Chief Executive officer. The
      maximum borrowings available under the debenture agreement are $750,000. The
      debenture is secured by all of the Company's assets and is convertible in its
      entirety at the option of the holder into the Company's common stock at a
      conversion price of $1.00. There was no beneficial conversion recognized on
      the
      issuance of the convertible notes payable as the conversion price was equal
      to
      recent cash offering price. During February 2004, the entire convertible note
      was repaid with cash of $275,000. At December 31, 2004, the outstanding balance
      on the convertible debenture was $0.




F-13
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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




On
      February 27, 2004, the Company borrowed $500,000 under a 12% secured
      subordinated debenture for a maximum term of 12 months. As additional
      consideration, the Company issued to the holder 200,000 shares of common stock
      having a fair value of $284,000. The shares were treated as a discount to the
      debenture and the discount is being amortized over the life of the debenture.
      This debenture is secured with the assets of the Company and is currently in
      default.





On
      April
      7, 2004, the Company borrowed $500,000 under a 15% promissory note which was
      initially payable on December 15, 2004 and subsequently became payable on March
      31, 2005 per a conversion option agreement dated November 10, 2004 that entitles
      the note holder to convert the amount of the note into shares of stock at a
      per
      share price of $0.10; the conversion option was treated as a $216,000 discount
      to the debenture and the discount was amortized over the life of the conversion
      option agreement. In addition, the note holder is entitled to a Stock Purchase
      Warrant for 150% of the number of shares obtained in the conversion at a warrant
      exercise price of $0.10. The note is secured with the assets of the Company.
      On
      March 22, 2005, the note was paid in full via a Conversion Agreement which
      converted the entire amount of the note into common stock at a per share price
      of $0.10. The Company recognized a loss on the conversion of
      $130,411.





On
      May 7,
      2004, the Company borrowed $100,000 under a 15% promissory note. The note
      was fully paid off as of December 31, 2004.





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




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





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




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




F-14
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





On
      June
      21, 2004, the Company borrowed $1,500,000 under a 15% promissory note, which
      was
      payable no later than June 22, 2005. As additional consideration, the Company
      issued the holder 60,000 shares of common stock having a fair value of $67,800.
      The shares were treated as a discount to the note and the discount is being
      amortized over the life of the note. As consideration for the Chief Executive
      Officer’s personal guaranty of note, the Company compensated the Chief Executive
      Officer $50,000. On April 11, 2005, the note was paid in full via a Conversion
      Agreement which converted the entire amount of the note into common stock at
      a
      per share price of $0.15.





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





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




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





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





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




F-15
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





On
      December 28, 2004, the Company entered into a Bridge Loan Agreement with 14
      various entities pursuant to which the Lenders advanced an aggregate principal
      amount of $1,000,000 to the Company on January 6, 2005 in exchange for (i)
      8%
      secured promissory notes in such aggregate principal amount, (ii) 500,000 shares
      of our common stock and (iii) warrants to purchase an aggregate of 4,4687,485
      shares of our common stock at an exercise price of $0.10 per share. The value
      of
      the shares and warrants of $370,000 and $630,000, respectively were treated
      as a
      discount to the note and the discount is being amortized over the life of the
      note. The note is due December 28, 2005.


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





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




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





**NOTE
      6** **STOCKHOLDERS’
      DEFICIENCY**





***(A)
      Stock Issued for Cash***





During
      2002, the Company issued 58,189,728 shares of common stock to its founder for
      $18,522 ($0.0004 per share).





During
      2003, the Company issued 4,423,012 shares of common stock for cash of $526,703
      ($0.12 per share).





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





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





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





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





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





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




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





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





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





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





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




F-16
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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





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





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





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





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





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





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




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





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





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





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





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





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





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





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





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





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




F-17
 **Table
          of Contents**


**Index
      to Financial Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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





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





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





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





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





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





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





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





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





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




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





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





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




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





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




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




F-18
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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





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





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





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





***(H)
      Stock Dividend***





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





***(I)
      Stock Split***





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





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





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





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





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





As
      of
      December 31, 2004, the Company had an obligation to reserve 46,656,000 shares
      of
      common stock issuable upon conversion of debentures. In addition, as of December
      31, 2004, the Company had outstanding options and warrants totaling 41,014,493
      shares of common stock.




F-19
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**




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





Income
      tax expense (benefit) is summarized as follows:





Year
                Ended
              December
                31, 2004
            
            Two
                Months Ended December 31, 2003
            
            December
                9, 2002 (Inception) through October 31, 2003
            
            December
                9, 2002 (Inception) through December 31, 2004Current:Federal
            
            $
            –
            
            $
            –
            
            $
            –
            
            $
            –State
            
            
            –
            
            
            –
            
            
            –
            
            
            –Deferred
                - Federal and State
            
            
            –
            
            
            –
            
            
            –
            
            
            –Income
                tax expense (benefit)
            
            $
            –
            
            $
            –
            
            $
            –
            
            $
            –





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





Year
                Ended
              December
                31, 2004
            
            Two
                Months Ended December 31, 2003
            
            December
                9, 2002 (Inception) through October 31, 2003
            
            December
                9, 2002 (Inception) through December 31, 2004U.S.
                Federal income tax expense (benefit)
            
            $
            (11,836,925
            )
            $
            (236,231
            )
            $
            (794,545
            )
            $
            (12,867,701
            )Effect
                on net operating loss carryforward
            
            
            11,836,925
            
            
            236,231
            
            
            794,545
            
            
            12,867,701$
            –
            
            $
            –
            
            $
            –
            
            $
            –





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





December
                31,
              2004
            
            December
                31,
              2003
            
            October
                31,
              2003Deferred
                tax assets:Net
                operating loss carryforward
            
            $
            12,867,701
            
            $
            1,030,776
            
            $
            794,545Total
                gross deferred tax assets
            
            
            12,867,701
            
            
            1,030,776
            
            
            794,545Less
                valuation allowance
            
            
            (12,867,701
            )
            
            (1,030,776
            )
            
            (794,545
            )Net
                deferred tax assets
            
            $
            –
            
            $
            –
            
            $
            –





At
      December 31, 2004, the Company had a net operating loss carryforward of
      approximately $36,764,861 for U.S. Federal income tax purposes available to
      offset future taxable income expiring through 2025. The net change in the
      valuation allowance during the year ended December 31, 2004 was an increase
      of
      $11,836,925.





F-20
 **Table
          of Contents** **Index
            to Financial
            Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





***(A)
      Distribution Agreements***





**Riverdeep,
      Inc** .




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





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


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





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




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





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





The
      Company is currently in default of this agreement.





**Codemasters
      Software Company Ltd.**




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





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


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





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




F-21
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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




**Atari,
      Inc.**




Infinium
      signed a distribution agreement with Atari, Inc. (“Atari”) dated September 14,
      2004 that will allow Infinium to market Atari’s catalog of video games software
      on the Phantom Game System. The agreement expires on September 14, 2007 and
      authorizes Infinium to distribute Atari’s products, via the Phantom Game Service
      or pre-load, onto the Phantom Game Receiver. The titles will be available to
      subscribers of the Phantom Game Service on both a pay-per-play and pay-to-own
      basis.





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


September
                19, 2004
            
            $
            300,000September 29, 2004
            
            
            200,000Total
            
            $
            500,000





In
      addition, Infinium incurs royalty fees with respect to each unit of product
      distributed. These per unit royalty fees shall be applied against the
      aforementioned advance royalty payments. Once the advance royalty payments
      have
      been earned down and recouped by Infinium, then Infinium shall pay directly
      to
      Atari the per unit royalty fees for every unit of product it distributes. The
      per unit royalty fee ranges from $5.00 to $15.00 per title.





As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2004, $500,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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





**Eidos
      Inc.**




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




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


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





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




F-22
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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




**Vivendi
        International**
  Infinium
        signed a letter of intent with Vivendi Universal Games, Inc. (“Vivendi”) dated
        September 20, 2004 that will allow Infinium to market and distribute certain
        games on the Phantom Game Service to future end-users, if any, through a
        sale,
        license, subscription or on a time basis.  The agreement expires two years
        from delivery of the gold master for each Vivendi Game although Vivendi has
        the
        right to terminate the agreement as of September 5, 2005 as Infinium did
        not
        commercially release the Phantom Game Service.  For such right, Infinium
        was to pay Vivendi $125,000 within five (5) days after execution of the letter
        of intent, $125,000 after a definitive agreement was signed and $250,000
        upon
        delivery of a master CD with Vivendi Games.  Infinium did not remit the
        initial $125,000 due to Vivendi and no definitive agreement was ever
        negotiated.   Infinium is currently in default under the letter of
        intent.
 The
          agreement with Vivendi requires Infinium to make the following non-refundable
          payments:
  September
                    25, 2004
                
                $
                150,000Total
                
                $
                150,000


**Enlight
      Inc.**




Infinium
      signed a distribution agreement with Enlight Interactive Inc. (“Enlight”) dated
      September 21, 2004 that will allow Infinium to market Enlight’s catalog of video
      games software on the Phantom Game System. The agreement expires on September
      2,
      2009 and authorizes Infinium to distribute Enlight’s products, via the Phantom
      Game Service or pre-load, onto the Phantom Game Receiver. The titles will be
      available to subscribers of the Phantom Game Service on both a pay-per-play
      and
      pay-to-own basis.





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


October 2, 2004
            
            $
            5,000Upon receipt of the Licensor Deliverables
            
            
            5,000Total
            
            $
            10,000




In
      addition, Infinium incurs royalty fees with respect to each unit of product
      distributed. These per unit royalty fees shall be applied against the
      aforementioned advance royalty payments. Once the advance royalty payments
      have
      been earned down and recouped by Infinium, then Infinium shall pay directly
      to
      Enlight the per unit royalty fees for every unit of product it distributes.
      The
      per unit royalty fee ranges from 30% to 50% of Infinium’s net
      receipts





As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2004, $10,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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





***(B)
      Development Agreement***





The
      company has a development agreement dated October 11, 2004 in place with BIOSTAR
      for the Phantom Game Receiver mainboard and graphics adapter. Terms are:
      $156,000 due at signing; $78,000 due before ship of pilot production units
      from
      Biostar; $78,000 due on acceptance of pilot units. The end design product will
      be wholly owned by the company. From December 9, 2002 (inception) through
      December 31, 2004, $312,000 of expenses have been accrued and reported on the
      accompanying financial statements. At December 31, 2004, no payments had been
      made to Biostar and the Company was in default of this agreement.




F-23
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





***(C)
      Leases***





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





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




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





***(D)
      Litigation***





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





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




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


F-24
 **Table
          of Contents**


**Index
        to Financial Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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





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





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





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




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




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





***(E)
      Employment Agreements***





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





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





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




F-25
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**








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





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




***(F)
      Licenses***





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





***(G)
      Payroll Taxes***





The
      Company has accrued applicable employment taxes for individuals that were
      initially deemed and paid as independent contractors during the year ended
      December 31, 2004 and the two months ended December 31, 2003 but, subsequently,
      reclassified as employees by the Company. In addition, the Company has recorded
      our estimate for interest and penalties that are due for the Company’s failure
      to timely file and pay taxes for these individuals, as well as, for the
      Company’s failure to timely file and pay additional taxes for the year ended
      December 31, 2004.


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





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




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




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





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





Year
                Ended
              December
                31, 2004
            
            Two
                Months Ended
              December
                31, 2003
            
            December
                9, 2002 (Inception) through
              October
                31, 2003
            
            December
                9, 2002 (Inception) through December 31, 2004Net
                loss available to common shareholders
            
            
            As
                Reported
            
            $
            (33,819,787
            )
            $
            (674,945
            )
            $
            (2,270,129
            )
            $
            (36,764,861
            )Pro
                Forma
            
            $
            (35,006,245
            )
            $
            (674,945
            )
            $
            (2,270,129
            )
            $
            (37,951,319
            )Basic
                and diluted loss per share
            
            
            As
                Reported
            
            $
            (0.34
            )
            $
            (0.01
            )
            $
            (0.04
            )
            $
            (0.46
            )Pro
                Forma
            
            $
            (0.35
            )
            $
            (0.01
            )
            $
            (0.04
            )
            $
            (0.48
            )





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions used for grants in 2004: dividend yield of zero; expected volatility
      of 187%, risk-free interest rate of 3.86%; expected life of five years for
      the
      plan. The cost of the options was calculated based on the amount of vested
      shares as the vesting period is the same as the service period of the options
      (3
      years). Based on the common stock share price, the weighted average shares
      equal
      the primary EPS on the income statement for the year ended December 31, 2004,
      the two months ended December 31, 2003, from December 9, 2002 (Inception)
      through October 31, 2003 and from December 9, 2002 (Inception) through December
      31, 2004 of $(0.34), $(0.01), $(0.04) and $(0.46), respectively.




F-26
 **Table
          of Contents**


**Index
        to Financial Statements**




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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




Options
                  Outstanding
              
              Options
                  ExercisableRange
                    of
                  Exercise
                    Price
              
              Number
                  Outstanding at
                December
                  31, 2004
              
              Weighted
                  Average
                Remaining
                  ContractualLife
              
              WeightedAverage
                ExercisePrice
              
              Number
                Exercisable
                  at
                December
                  31, 2004
              
              Weighted
                  Average
                Exercise
                  Price$0.00
                  - 0.99
              
              
              –
              
              
              –
              
              $
              –
              
              
              –
              
              $
              –1.00
                  - 1.99
              
              
              15,150,000
              
              
              4.5
              
              
              1.43
              
              
              5,184,862
              
              
              1.4315,150,000
              
              
              4.5
              
              $
              1.43
              
              
              5,184,862
              
              $
              1.43




Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of
                Exercise
                  Price
              
              Number
                Outstanding
                  at
                December
                  31, 2003
              
              Weighted
                  Average
                Remaining
                  Contractual Life
              
              Weighted
                  Average
                ExercisePrice
              
              Number
                  Exercisable at December 31, 2003
              
              Weighted
                  Average
                Exercise
                  Price$0.00
                  - 0.99
              
              
              –
              
              
              –
              
              $
              –
              
              
              –
              
              $
              –1.00
                  - 1.99
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              ––
              
              
              –
              
              $
              –
              
              
              –
              
              $
              –





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




F-27
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





Stock
      Purchase Warrants





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





December
                31, 2004
            
            December
                31, 2003
            
            October
                31, 2003Warrants
                for common stock issued to investors. The term of the warrants are
                five
                years expiring November 10, 2009. The warrants are exercisable at
                $0.25
                per share
            
            
            5,107,081
            
            
            –
            
            
            –Warrants
                for common stock issued to an investor. The term of the warrants
                are five
                years expiring November 10, 2009. The warrants are exercisable at
                $0.10
                per share.
            
            
            8,722,604
            
            
            –
            
            
            –Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring October 22, 2009. The warrants are exercisable at
                $0.50 per
                share.
            
            
            500,000
            
            
            –
            
            
            –Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring October 27, 2009. The warrants are exercisable at
                $0.50 per
                share.
            
            
            500,000
            
            
            –
            
            
            –Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $0.26667
                per share.
            
            
            5,437,487
            
            
            –
            
            
            –Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $0.75
                per share.
            
            
            5,437,487
            
            
            –
            
            
            –Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $1.00
                per share.
            
            
            5,437,487
            
            
            –
            
            
            –Warrants
                for common stock issued to note holders. The term of the warrants
                are five
                years expiring December 31, 2009. The warrants are exercisable at
                $0.10
                per share.
            
            
            4,687,485
            
            
            –
            
            
            –Total
            
            
            35,829,631
            
            
            -
            
            
            -




**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
      $36,764,861, has a working capital deficiency of $12,988,409, a stockholders
      deficiency of $12,251,352 and has a negative cash flow from operations of
      $11,996,783. This raises substantial doubt about its ability to continue as
      a
      going concern. The ability of the Company to continue as a going concern is
      dependent on the Company’s ability to raise additional capital and implement its
      business plan. The financial statements do not include any adjustments that
      might be necessary if the Company is unable to continue as a going
      concern.





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





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





The
      Company issued a director 800,000 shares of common stock as consideration for
      the director's personal guaranty of a $500,000 note payable secured by a real
      estate mortgage encumbering the director's residence. On
      January 27, 2005, the Company borrowed $300,000 from Timothy Roberts, the
      Company’s Chief Executive Officer, under a 15% promissory note, which is payable
      no later than April 27, 2005.  F-28
 **Table
            of Contents** **Index
              to Financial
              Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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





***(A)
      Notes Payable***





On
      January 27, 2005, the Company borrowed $300,000 Timothy Roberts, the Company’s
      Chief Executive Officer, under a 15% promissory note, which is payable no later
      than April 27, 2005.





On
      January 28, 2005, the Company borrowed $118,000 under a 15% promissory note,
      which is payable no later than April 30, 2005.




On
      January 31, 2005, the Company borrowed $175,000 under a 15% promissory note,
      which is payable no later than May 10, 2005.





On
      January 31, 2005, the Company borrowed $100,000 under a 15% promissory note,
      which is payable no later than May 10, 2005.





On
      February 3, 2005, the Company borrowed $100,000 under a 15% promissory note,
      which is payable no later than May 10, 2005.




On
      March
      9, 2005, the Company borrowed $400,000 under a 10% promissory note, which is
      payable no later than April 15, 2005.





On
      March
      21, 2005, the Company borrowed $200,000 under a 17% promissory note, which
      is
      payable no later than May 10, 2005.





***(B)
      Common Stock Issuances***





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





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





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





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





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





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




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





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




F-29
 **Table
          of Contents**


**Index
        to Financial
        Statements**


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Financial Statements**





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





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





***(D)
      Litigation***





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





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





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




F-30