**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
        10-KSB/A**







**(Amendment
        No. 1)**





**(Mark
      One)**


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


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


**OR**


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





**For
      the transition period from __________ to __________**





**Commission
      file number 0-24269**









**PHANTOM
        ENTERTAINMENT** **,
        INC.**


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


(Name
      of
      small business issuer in its charter)







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




**206-447-1443**
                (Issuer’s
                  telephone number)




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


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


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





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





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





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




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





State
      issuer’s revenues for its most recent fiscal year: $0 as of December 31,
      2005.




At
      May
      15, 2006, the aggregate market value of the voting and non-voting common equity
      held by non-affiliates computed by reference to the average bid and asked price
      of such common equity, was $8,578,501.




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





**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**





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














**INDEX**  ****


**Page**
                **Number**PART
                  IItem
                  1.
              Description
                  of Business
              3Item
                  2.
              Description
                  of Property
              13Item
                  3.
              Legal
                  Proceedings
              13Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              17PART
                  IIItem
                  5.
              Market
                  for Common Equity and Related Stockholder Matters
              15Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              17Item
                  7.
              Financial
                  Statements
              20Item
                  8.
              Changes
                  In and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              20Item
                  8A.
              Controls
                  and Procedures
              21Item
                  8B.
              Other
                  Information
              21PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act
              21Item
                  10.
              Executive
                  Compensation
              24Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management
              27Item
                  12.
              Certain
                  Relationships and Related Transactions
              28Item
                  13.
              Exhibits
              29Item
                  14.
              Principal
                  Accountant Fees and Services
              32




**EXPLANATORY
        NOTE**




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




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 1.




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. We have, however, updated the facing page of this report to reflect
        the
        name, address and telephone number of the Company’s current principal executive
        offices.




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







**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**





As
        of
        January 1, 2006, we are primarily focused on developing and seeking to
        commercialize the Phantom Lapboard, a wireless, rotating custom
        keyboard/turntable with integrated mousepad. Depending on the success rate
        for
        sales and associated revenue of the Phantom Lapboard during the introductory
        period of three to six months, we may seek to develop and commercialize the
        Phantom Game Service. We still retain assets with respect to the Phantom
        Game
        Service and when various milestones for the manufacturing of the Phantom
        Lapboard are completed we may shift more of our focus to the Phantom Game
        Service. The Phantom Game Service is anticipated to be the first end-to-end,
        on-demand game service for delivery to the living room.





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





Since
        inception through December 31, 2005, we have incurred aggregate net losses
        of
        $64,025,296. Our loss from operations for year ended December 31, 2005 was
        $12,236,530; our loss from operations for the year ended December 31, 2004
        was
        $27,604,817. In addition, as of December 31, 2005, we had an accumulated
        deficit
        of $64,025,296.





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





Development
        costs for 2005, 2004 and inception through December 31, 2005 were, respectively:
        ($13,927), $3,130,854 and 3,522,277.





In
      their
      report dated May16, 2006, our independent auditors have expressed substantial
      doubt about our ability to continue as a going concern in our financial
      statements for the year ended December 31, 2005. Our ability to continue as
      a
      going concern is an issue raised as a result of recurring losses from
      operations, a stockholders' deficit, and requirement for a significant amount
      of
      capital financing to proceed with our business plan.





**Phantom
      Lapboard**





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





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





3




**Media
      coverage**





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





**Marketing
      Objectives & Strategies**





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





**Viral
      Marketing**





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





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





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





We
        intend
        to utilize low cost guerilla event/stunts to demo the product, reward
        involvement and interest from core target groups and to draw media attention
        to
        the Phantom Lapboard introduction. We will schedule PR announcements and
        interviews at appropriate times and intend to introduce highly limited and
        targeted print and web advertising to support launch and key periods for
        advertising during the year such as the Game Developers Conference (GDC),
        the
        Electronics Expo (E3 Expo), graduation day and Father’s Day.





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





**Distribution
      Strategy**





We
        intend
        to market and sell the Phantom Lapboard direct to consumer through our Internet
        website. We may establish other sales and marketing distribution channels
        through brick and mortar retailers. “Brick and mortar retail customers”
typically refer to customers of companies that have a physical presence (for
        example, a building made of “bricks and mortar”) and offer face-to-face consumer
        experiences, as opposed to an Internet-only presence.





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





We
      do not
      have a direct sales force. As such, we intend to rely on direct to consumer
      sales on our Internet website and possibly on third parties to identify and
      help
      us secure retail channel distribution for the Phantom Lapboard. We anticipate
      that these third party arrangements will require us to pay commissions in
      respect of any revenue generated through retail partners identified and covered
      thereby.





4





**Competition**





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





**Intellectual
      Property Strategy**





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





With
      respect to patents, we intend to protect aspects of technologies associated
      with
      the make and use of the Phantom Lapboard through both design and utility patent
      applications in the United States and potentially in other countries in which
      we
      intend to market our products and services.





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




(1)
            **METHOD
                AND APPARATUS FOR BACKLIGHTING OF A KEYBOARD FOR USE WITH A
                GAME****DEVICE
                APPLICATION FILED AUGUST 2,
                2004**




(2)
            **METHOD
                FOR AUTOMATIC PATCHING OF A SPARSELY STREAMED APPLICATION
                FILED SEPTEMEBER 29,
                2004**




(3)
            **MODIFIED
                KEYBOARD AND SYSTEMS CONTAINING THE KEYBOARD
                APPLICATION****FILED
                MAY 6, 2005**




(4)
            **MULTI-MODE
                POINTING DEVICE AND SYSTEMS AND METHODS USING THE
                POINTING****DEVICE
                APPLICATION FILED MAY 6,
                2005**




(5)
            **MULTIPOSITION
                MULTILEVEL USER INTERFACE SYSTEM****APPLICATION
                FILED****MAY
                6, 2005**




(6)
            **SYSTEM
                FOR SECURELY BOOTING A COMPUTER DEVICE****APPLICATION
                FILED****JULY
                6, 2005**




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





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





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





**EMPLOYEES**





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





5




**RISK
      FACTORS**





**RISKS
      RELATED TO OUR BUSINESS AND COMPANY**





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





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





We
        incurred a loss from operations of $12,236,530 for the year ended
        December 31, 2005 and a loss from operations of $27,604,817 for the year
        ended December 31, 2004. Our monthly burn rate is approximately $300,000
        per
        month and, accordingly, we will need to raise approximately $3,600,000 over
        the
        next 12 months in order to sustain our current operations. We
        reduced our staff during the first quarter of 2006 and adjusted associated
        payroll, benefits, and rent for our corporate headquarters accordingly. With
        these modifications, we made the aforementioned estimate of our monthly burn
        rate. We
        cannot
        assure you that we can achieve or sustain profitability on a quarterly or
        annual
        basis in the future. If revenues grow more slowly than we anticipate, or
        if
        operating expenses exceed our expectations or cannot be adjusted accordingly,
        we
        will continue to incur losses. We will continue to incur losses until we
        are
        able to market and sell our products. Our possible success is dependent upon
        the
        successful development and marketing of our products, as to which there is
        no
        assurance. Any future success that we might enjoy will depend upon many factors,
        including factors out of our control or which cannot be predicted at this
        time.
        These factors may include changes in or increased levels of competition,
        including the entry of additional competitors and increased success by existing
        competitors, changes in general economic conditions, increases in operating
        costs, including costs of supplies, personnel and equipment, reduced margins
        caused by competitive pressures and other factors. These conditions may have
        a
        materially adverse effect upon us or may force us to reduce or curtail
        operations. In addition, we will require additional funds to sustain and
        expand
        our sales and marketing activities, particularly if a well-financed competitor
        emerges. Based on our current funding arrangement with Golden Gate, upon
        the
        effectiveness of a registration statement, which will allow Golden Gate to
        convert its convertible debenture and exercise its warrants and, in turn,
        provide us with funding, we do not anticipate that we will require additional
        funds to continue our operations for the next 12 months. In the event that
        our financing arrangement with Golden Gate is terminated or if we need
        additional financing, there can be no assurance that financing will be available
        in amounts or on terms acceptable to us, if at all. The inability to obtain
        sufficient funds from operations or external sources would require us to
        curtail
        or cease operations.





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





In
        their
        report dated May 16, 2006, our independent auditors stated that our financial
        statements for the year ended December 31, 2005 were prepared assuming that
        we
        would continue as a going concern. Our ability to continue as a going concern
        is
        an issue raised as a result of cash flow constraints, a working capital deficit
        of $16,144,960, an accumulated deficit of $64,025,296 at December 31, 2005,
        recurring losses from operations and the default on $3,486,759 of notes payable
        at December 31, 2005. We continue to experience net losses. Our ability to
        continue as a going concern is subject to our ability to generate a profit
        and/or obtain necessary funding from outside sources, including obtaining
        additional funding from the sale of our securities, increasing sales or
        obtaining loans and grants from various financial institutions where possible.
        Our continued net losses and stockholders’ deficit increases the difficulty in
        meeting such goals and there can be no assurances that such methods will
        prove
        successful.





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





We
      will
      need to obtain additional funding in order to:


·
              fund
                  product development and launch of our Phantom
                  Lapboard;
 
 ·
              finance
                  additional growth and working capital
                  requirements;


6




·
              respond
                  to competitive pressures; and
 
 ·
                  respond
                      to other opportunities or challenges as they
                      arise.




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





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





Because
        we have a limited operating history since our inception in December 9, 2002
        and
        have not generated an revenue since our inception, and because the PC accessory
        industry is characterized by rapidly changing technologies, evolving industry
        standards, frequent new product and service introductions, and changing customer
        demands, our costs may change dramatically over time which causes us to be
        unable to accurately forecast our revenues. For example, in the event that
        the
        cost to manufacture the Phantom Lapboard is higher than projected or our
        manufacturing costs increase dramatically, we may not be able to generate
        profit, which may cause us to go out of business.





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





·
            Expand
                our current operating activities;





·
            fund
                sales and marketing activities;





·
            manufacture
                inventory; and





·
            incur
                capital expenditures.





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





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





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





7





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





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





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





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





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





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





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





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





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





8




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





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





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





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





Our
        success will depend upon our senior management and technical personnel,
        particularly Greg Koler, our Chief Executive Officer and Interim Chief Financial
        Officer, and Tyrol Graham, our Vice President of Product Development. The
        Company has employment agreements with Messrs. Koler and Graham, but such
        agreements do not mitigate the risk associated with the loss of either party’s
        services. The loss of the services of this or other persons may cause us
        to go
        out of business. Our success also depends on our ability to attract and retain
        qualified technical, sales, marketing, customer support, financial and
        accounting, and managerial personnel. Competition for such personnel in the
        PC
        accessories industry can be intense, and we cannot be certain that we will
        be
        able to retain our key personnel or that we can attract, integrate or retain
        other highly qualified personnel in the future.





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





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





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





9




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





**WE
        ARE CURRENTLY IN DEFAULT ON CERTAIN OBLIGATIONS RELATING TO OUR DECEMBER
        2004
        SECURITIES PURCHASE AGREEMENT RELATING TO THE RESERVATION OF WARRANTS AND
        ISSUANCE OF SHARES REQUESTED IN DECEMBER 2005 FOR CONVERSION OF THE CONVERTIBLE
        DEBENTURES. ALTHOUGH THE INVESTORS HAVE NOT DELIVERED A NOTICE OF DEFAULT
        TO US
        TO COLLECT PENALTIES AND INTEREST IN THE AGGREGATE AMOUNT OF $707,024, NO
        ASSURANCE CAN BE GIVEN THAT WE WILL RESOLVE THIS MATTER OR THAT WE WILL NOT
        BE
        REQUIRED TO PAY PENALTIES. IF WE DO NOT RESOLVE THIS MATTER, IT COULD RESULT
        IN
        LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL
        ASSETS.**





We
        are
        currently in default on certain obligations relating to our December 2004
        Securities Purchase Agreement relating to the reservation of warrants and
        issuance of shares of our common stock requested by the investors in December
        2005 upon delivery of notices of conversion to us with respect to the
        convertible debentures. We negotiated a standstill agreement with all
        debtholders that remains in effect until June 30, 2006 and limits the number
        of
        shares we must deliver prior to June 30, 2006. However, we are in negotiation
        with certain parties representing all of the debtholders to workout payment
        of
        penalties and interest, and issuance of the remaining shares subject to the
        December 2005 conversion request. Although the investors have not delivered
        a
        notice of default to us to collect penalties and interest in the aggregate
        amount of $707,024, no assurance can be given that we will resolve this matter
        or that we will not be required to pay penalties.  If
        we do
        not resolve this matter, it could result in legal action against us, which
        could
        require the sale of substantial assets.





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





As
        of
        December 31, 2005, our interim principal executive officer and interim principal
        financial officer evaluated the effectiveness of our disclosure controls
        and
        procedures and the effectiveness of our internal controls over financial
        reporting and concluded that our disclosure controls and procedures and our
        internal controls over financial reporting were ineffective, as of the end
        of
        the periods covered by such report, so as to insure that all of the information
        required to be reported in our periodic reports was recorded, processed,
        summarized, and reported, within the time periods specified in the Commission's
        rules and forms, because we were not able to record and properly report
        sufficient loss contingency accruals to cover possible monetary penalties
        and
        interest relating to our failure to file certain payroll and withholding
        tax
        returns and to satisfy required withholding and payroll tax obligations.
        While
        management is focused on improving our company’s Disclosure Controls to ensure
        timely and proper reporting, there can be no assurance that other items do
        not
        currently exist, or will not occur in the future, that reflect ineffective
        Disclosure Controls as of the Evaluation Date. Management concluded that
        the
        failure to properly account for and disclose the sufficient loss contingency
        accruals to cover possible monetary penalties and interest relating to our
        failure to file certain payroll and withholding tax returns and to satisfy
        required withholding and payroll tax obligations, was a material weakness
        in our
        disclosure controls and procedures and our internal controls over financial
        reporting.





In
        connection with the evaluation referred to in the foregoing paragraph, we
        have
        identified no change in our internal control over financial reporting that
        occurred during the quarter ended December 31, 2005 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting. Beginning in September 2005, the Company hired
        new
        staff to handle finance and legal matters as well as a new Chief Executive
        Officer. The Company still maintains outside finance and legal consultants
        to
        assist where appropriate and when funding is available. With additional
        financing the Company will round out its staff in order to better comply
        with
        controls and procedures regulated under the Exchange Act. As a part of this
        process, the Company has reviewed its accounting treatment of certain
        convertible debt instruments under FAS 133 and EITF 00-19 and as a result
        has
        restated its financial statements from December 31, 2004 through the current
        period..





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




**RISKS
      RELATING TO OUR CURRENT FINANCING ARRANGEMENT**





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





As
        of May
        16, 2006, we had 541,789,024 shares of common stock issued and outstanding
        and
        convertible debentures outstanding that may be converted into an estimated
        489,604,317 shares of common stock at current market prices, and outstanding
        warrants to purchase 65,328,812 shares of common stock. In addition, the
        number
        of shares of common stock issuable upon conversion of the outstanding
        convertible debentures may increase if the market price of our stock declines.
        All of the shares, including all of the shares issuable upon conversion of
        the
        debentures and upon exercise of our warrants, may be sold without restriction.
        The sale of these shares may adversely affect the market price of our common
        stock.




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





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





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





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





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





Golden
      Gate is
      contractually required to exercise its warrants on a concurrent basis. The
      issuance of shares in connection with the exercise of the warrants and
      conversion of the convertible debentures results in the issuance of shares
      at an
      effective 20% discount to the trading price of the common stock prior to the
      conversion. The significant downward pressure on the price of the common stock
      as the selling stockholder converts and sells material amounts of common stock
      could encourage short sales by investors. This could place further downward
      pressure on the price of the common stock. The selling stockholder could sell
      common stock into the market in anticipation of covering the short sale by
      converting their securities, which could cause the further downward pressure
      on
      the stock price. In addition, not only the sale of shares issued upon conversion
      or exercise of debentures, warrants and options, but also the mere perception
      that these sales could occur, may adversely affect the market price of the
      common stock.




10




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




The
      issuance of shares upon conversion of the convertible debentures and exercise
      of
      warrants may result in substantial dilution to the interests of other
      stockholders since the selling stockholder may ultimately convert and sell
      the
      full amount issuable on conversion. Although the selling stockholder may not
      convert its convertible debentures and/or exercise their warrants if such
      conversion or exercise would cause them to own more than 9.99% of our
      outstanding common stock, this restriction does not prevent the selling
      stockholder from converting and/or exercising some of their holdings and then
      converting the rest of their holdings. In this way, the selling stockholder
      could sell more than this limit while never holding more than this limit. There
      is no upper limit on the number of shares that may be issued which will have
      the
      effect of further diluting the proportionate equity interest and voting power
      of
      holders of our common stock, including investors in this offering.





**IF
      WE ARE UNABLE TO ISSUE SHARES OF COMMON STOCK UPON CONVERSION OF THE CONVERTIBLE
      DEBENTURE FOR ANY REASON, WE ARE REQUIRED TO PAY PENALTIES TO GOLDEN GATE,
      REDEEM THE CONVERTIBLE DEBENTURE AT 130% AND/OR COMPENSATE GOLDEN GATE FOR
      ANY
      BUY-IN THAT IT IS REQUIRED TO MAKE.**





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





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





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





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





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





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





In
      January 2006, we
      entered into a Securities Purchase Agreement for the sale of an aggregate of
      $50,000 principal amount of convertible debentures, which are presently
      outstanding. The convertible debentures are due and payable, with 51⁄4 % interest,
      three years from the date of issuance, unless sooner converted into shares
      of
      our common stock. In addition, any event of default could require the early
      repayment of the convertible debentures at a price equal to 130% of the amount
      due under the debentures. We anticipate that the full amount of the convertible
      debentures, together with accrued interest, will be converted into shares of
      our
      common stock, in accordance with the terms of the convertible debentures. If
      we
      are required to repay the convertible debentures, we would be required to use
      our limited working capital and raise additional funds. If we were unable to
      repay the debentures when required, the debenture holders could commence legal
      action against us and foreclose on all of our assets to recover the amounts
      due.
      Any such action would require us to curtail or cease operations.





**RISKS
      RELATING TO OUR COMMON STOCK**





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





11




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





**OUR
      COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
      MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
      CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR
      STOCK.**





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




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




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




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




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




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




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




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




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





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




12





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





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




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





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




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





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





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





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





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





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





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





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





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





13




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





Walter
        Dorwin Teague Associates v. Infinium Labs, Inc., No.
        05-9-35846-2. In December 2005, Teague Associates entered an arbitration
        award
        in the Superior Court for King County, Washington. The judgment is for $51,843.
        Teague Associates was retained in 2004 to assist and support various industrial
        design requirements associated with hardware for the Phantom game service.
        The
        Company defaulted on its payment obligations and this resulted in the associated
        arbitration award.





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





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





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





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




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





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





14




**PART
      II**




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




**Market
      for Common Stock**





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





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




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





**HOLDERS**





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





**COMMON
      STOCK**





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





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





**Dividend
      Policy**





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





**Recent
      Unregistered Sales of Securities**





Unless
      otherwise stated or filed on a Form 8-K or 10-QSB in 2005, all of the
      below-referenced securities were issued in a transaction exempt from the
      Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section
      4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated
      thereunder (“Rule 506 Conditions”).   With respect to Rule 506
      Conditions:   (i) the securities were sold only to accredited
      investors; (ii) the securities were not offered by any form of general
      solicitation or general advertising; (iii) each investor had represented that
      such investor was acquiring the securities for such investor's own account
      for
      investment; and (iv) the securities were issued with restrictive
      legends.





15




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





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





On
        November 7, 2005, we settled a lawsuit by issuing 1,052,632 shares of common
        stock to the plaintiff in this matter with a fair market value of $23,158
        ($0.022 per share). An additional 82,143 shares of common stock were issued
        to
        the plaintiff’s attorney with a fair market value of $1,807 ($0.022 per share).
        The shares were issued under a court ordered settlement pursuant to 3(a)(10)
        under the Securities Act of 1933.





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





On
        December 30, 2005, we issued an aggregate of 16,000,000 shares of common
        stock
        to certain of our debenture holders from our December 2004 Securities Purchase
        Agreement upon a partial conversion of their debentures. The amount of 80,741
        was converted per the conversion terms of the note.. The various conversion
        prices were $0.004875 and $0.005650 per share. We recognized no gain or loss
        on
        these conversions.




16





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





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




·
            discuss
                our future expectations;


·
            contain
                projections of our future results of operations or of our financial
                condition; and


·
            state
                other "forward-looking"
                information.




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





**Overview**





We
        are
        developing and seeking to commercialize the Phantom Lapboard, a wireless,
        rotating custom keyboard/turntable with integrated mousepad . We have not
        yet
        generated any revenue from operations. Our ability to generate revenue in
        the
        future is dependent on our ability to successfully develop and commercialize
        the
        Phantom Lapboard. We still retain assets with respect to the Phantom Game
        Service and when various milestones for the manufacturing of the Phantom
        Lapboard are completed we may shift more of our focus to the Phantom Game
        Service.





With
        adequate financing, we will launch the Phantom Lapboard in 2006 for sale
        directly through our Internet website. The Phantom Lapboard is designed with
        a
        pc gamer in mind, and is intended to transform the way gamers think about
        computer keyboards. We anticipate we will need approximately $1.5 million
        to
        launch the Phantom Lapboard although this amount may be reduced depending
        on the
        size of the order(s) we request from the manufacturer.





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





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





**Plan
      of Operations**





We
        have
        incurred recurring losses from operations since inception. Our loss from
        operations for the year ended December 31, 2005 was $12,236,530. Our loss
        from
        operations for the year ended December 31, 2004 was $27,604,817. At December
        31,
        2005, we had a working capital deficit of $16,144,960 and accumulated net
        losses
        since inception of $64,025,296. In their report on our audited financial
        statements for the year ended December 31, 2005, our independent auditors
        expressed substantial doubt about our ability to continue as a going
        concern.





Our
        activities to date have been funded by equity and debt investments. As of
        December 31, 2005, we had received approximately $9,527,147 million in equity
        investments and $7,830,797 million in debt and convertible debt financings.
        The
        following is an account of how these funds have been
        utilized:


Purchase
                    of property and equipment
                
                $
                970,467Development
                    costs (costs net applicable payables)
                
                
                2,238,875Advertising
                    (expenses net applicable payables)
                
                
                1,264,152Salary
                    expense (expense net shares issued for employee services and
                    wages/taxes
                    payable)
                
                
                5,909,081Consultants
                    and professional fees (expenses net shares issued for services
                    and
                    applicable payables)
                
                
                1,713,159General
                    and administrative (expenses net non cash expenses [i.e. depreciation]
                    and
                    applicable payables)
                
                
                3,653,372Cash
                    repayments of notes payable
                
                
                1,075,000Cash
                    interest payments
                
                
                533,838Total
                    cash utilized
                
                $
                17,357,944




17





At
      December 31, 2005, we were in default on payment of promissory notes with a
      principal amount of $3,486,759. Our outstanding debt for borrowed money has
      generally been provided on a short-term basis, bears interest at rates ranging
      from 8% to 17% and, in many cases, was accompanied by the grant of common stock
      or warrants to purchase common stock, which contributed to the costs of the
      financings.





As
        of
        December 31, 2005, the Company currently owes an aggregate of $845,000 to
        these
        publishers pursuant to these agreements and, if we fail to pay these advances,
        these agreements may be terminated.





As
        of
        December 31, 2005, we have recorded an aggregate of $5,774,900 in debt discount,
        of which $5,774,900 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. This relates to the following financing
        arrangements:





On
        December 16, 2004, we closed a transaction pursuant to a Securities Purchase
        Agreement, dated as of December 13, 2004, with several accredited investors
        pursuant to which those accredited investors lent an aggregate principal
        amount
        of $1,160,000 to us in exchange for (i) 8% convertible debentures Series
        04-02
        in that aggregate principal amount, and (ii) Class 2004-A warrants to purchase
        5,437,487 shares of our common stock, Class 2004-B warrants to purchase
        5,437,487 shares of our common stock and Class 2004-C warrants to purchase
        5,437,487 shares of our common stock. The debentures bear interest at 8%
        per
        annum and mature on December 16, 2005. The debentures are convertible into
        shares of our common stock, par value $.0001 per share. As currently in effect,
        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.





On
        December 28, 2004, the Securities Purchase Agreement dated December 13, 2004
        and
        related Class A warrants, Registration Rights Agreement and debentures were
        amended. The material provisions are as follows:





Securities
        Purchase Agreement - If we complete the first tranche of a financing of no
        less
        than $12 million and in connection with such financing, retire or convert
        our
        debt (other than the convertible debentures), the conversion price of the
        debentures will be fixed at $0.10. In addition, the investors received an
        aggregate of 250,000 shares of common stock. The exercise price of the Class
        A
        warrants and the Conversion price of the Debentures were amended as set forth
        above.





On
        December 28, 2004, we closed a transaction pursuant to a Securities Purchase
        Agreement, dated as of December 23, 2004, with several accredited investors
        pursuant to which those accredited investors lent an aggregate principal
        amount
        of $1,000,000 to us in exchange for (i) 8% convertible debentures Series
        04-03
        in that aggregate principal amount, and (ii) Class 2004-A-2 warrants to purchase
        4,687,485 shares of our common stock. We will receive the net proceeds of
        this
        financing within 1 business day after a registration statement is filed covering
        these securities. The debentures bear interest at 8% per annum and mature
        one
        year from issuance. The debentures are convertible into shares of our common
        stock, par value $.0001 per share. The conversion price of the debentures
        means
        seventy-five percent of the lowest closing price during the five trading
        days
        ending on the trading day before the conversion date.





The
        warrants are exercisable until December 31, 2009. The per share exercise
        price
        of the warrants is $0.10. The timely and full fulfillment of our obligations
        pursuant to the debentures have been personally guaranteed by Timothy M.
        Roberts, our chief executive officer and a director. In connection with this
        financing, we will pay a finder's fee to West Hastings Limited in the amount
        of
        $80,000 and issued 200,000 warrants at an exercise price of $0.50.





On
        December 28, 2004, the Securities Purchase Agreement dated December 23, 2004
        and
        related warrants, Registration Rights Agreement and debentures were amended.
        The
        material provisions are as follows:




Securities
        Purchase Agreement - If we complete the first
        tranche of a financing of no less than $12 million and in connection with
        such
        financing, retire or convert our debt (other than the convertible debentures),
        the conversion price of the debentures will be fixed at $0.10.In addition,
        the
        investors received an aggregate of 500,000 shares of common stock. The exercise
        price of the Class A warrants and the Conversion price of the Debentures
        were
        amended as set forth above.





**Liquidity
      and Capital Resources**





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





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




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





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





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





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





**Completing
        Development of the Phantom Lapboard** - The
        Phantom Lapboard was originally intended for retail launch in 2004 and its
        design was based upon that premise. We are currently in the process of revising
        and updating the hardware to take advantage of newer technology to ensure
        that
        the product is technically compelling and that we are able to have an adequate
        supply of components. This includes changes to the mouse optical subsystem
        to a
        newer laser mechanism allowing users to utilize the mouse on a wider variety
        of
        surfaces. Users may operate the Phantom Lapboard from a tabletop which often
        has
        a reflective surface. The laser mechanism provides much broader compatibility
        with this type of surface. The Company believes that utilizing more recent
        components allows it the opportunity to have an adequate supply, but in no
        way
“ensures” that it will have this supply.





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





We
        have
        utilized the services of Synapse Product Development, on a time and materials
        basis, to assist with design elements of the Phantom Lapboard.





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


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




18




**Critical
      Accounting Policies**





STOCK-BASED
      COMPENSATION





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





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





IMPAIRMENT
      OF GOODWILL AND LONG-LIVED ASSETS





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





INCOME
      TAXES





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





RESEARCH
      AND DEVELOPMENT COSTS





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




DERIVATIVE
            LIABILITIES
 
 Estimating
            gains and losses from derivatives is one of our most critical accounting
            policies. This includes the gain / loss recognition **** related
            to convertible debentures, which are convertible into the Company’s stock at the
            option of the note holders. **** These
            derivatives require a
            periodic valuation of their fair value and a corresponding recognition
            of gain /
            loss and liabilities associated with such derivatives. The recognition
            of
            derivative liabilities related to the issuance of debt convertible into
            shares
            of common stock is applied first to the proceeds of such issuance, at
            the date
            of issuance, and the excess of derivative liabilities over the proceeds
            is
            recognized as a loss on derivatives in the accompanying consolidated
            financial
            statements. Any subsequent increase or decrease in the fair value of
            the
            derivative liabilities is recognized as a gain / loss on derivatives.
 
 Accounting
            for these instruments requires a determination of all of the embedded
            derivatives. Certain instruments may become derivatives once a Company
            is unable
            to assert it has enough authorized shares to satisfy conversion of all
            outstanding debt, warrants, options and all other stock obligations.
            Once
            identified, an estimate is made for the number of shares each derivative
            would
            convert into as of the date of valuation. Theses shares are then valued
            using a
            Black-Scholes model based on the assumptions around volatility along
            with the
            current stock price, conversion price, interest rate, dividend rate,
            and term to
            maturity. Once valued the amount is compared to the prior period with
“gains /
            losses on derivatives” and related liability recorded in the current period.
            While we believe that the systems and procedures used by the Company
            do provide
            a sound basis for our estimates, actual results will differ from management’s
            estimates. The complexity of identifying and estimating derivative liabilities
            and corresponding gains / losses affects the amounts reported in our
            financial
            statements.
  
 19




**Recent
      Accounting Pronouncements**





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





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





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





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





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





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





In
      connection with its audit for the most recent fiscal year ended October 31,
      2003
      and through January 5, 2004, there were no disagreements with Baumann, Raymondo
      & Company PA on any matter of accounting principles or practices, financial
      statement disclosure, or auditing scope or procedure, which disagreements if
      not
      resolved to the satisfaction of Baumann, Raymondo & Company PA would have
      caused Baumann, Raymondo & Company PA to make reference thereto in their
      report on the financial statements for such years. During the most recent fiscal
      year ended October 31, 2003 and through January 5, 2004 there were no reportable
      events as that term is defined in Item 304(a)(l)(v) of Regulation
      S-X.





On
      January 5, 2004, we engaged Webb & Company PA as our new principal
      independent accountant. The engagement was approved by the Board of Directors
      on
      January 5, 2004. We have not consulted with Webb & Company PA on the
      application of any accounting principles or proposed transactions, the type
      of
      audit opinion that might be given, any matter that was either the subject of
      a
      disagreement, as that term is defined in Item 304(a)(l)(iv) of Regulation S-K,
      or a reportable event, as that term is defined in Item 304(a)(l)(v) of
      Regulation S-K.




20





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




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




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





Through
        November 2005, our Disclosure Controls as of the Evaluation Date were not
        effective in enabling us to record and properly report sufficient loss
        contingency accruals to cover possible monetary penalties and interest relating
        to our failure to file certain payroll and withholding tax returns and to
        satisfy required withholding and payroll tax obligations. In December 2005,
        the
        Company restated all previous quarterly filing since inception as well amending
        its 2004 10-KSB. In
        2006,
        we determined that our Disclosure Controls as of the Evaluation Date were
        not
        effective in enabling us to record and properly report the gains and losses
        on
        derivative liabilities as related to our convertible debentures and warrants.
        In
        August 2006, the Company restated prior quarterly and annual filings from
        December 31, 2004 through March 31, 2006 to include these gains and losses
        on
        derivatives. While
        new management is focused on improving our company’s Disclosure Controls to
        ensure timely and proper reporting, there can be no assurance that other
        items
        do not currently exist, or will not occur in the future, that reflect
        ineffective Disclosure Controls as of the Evaluation Date




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





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





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





None.





**PART
      III**




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





The
      following table sets forth the names, ages and positions held with respect
      to
      each Director and Executive Officer of our Company during fiscal
      2005.




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





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




21




***Business
      Experience***




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





***Directors
      and Executive Officers***




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





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





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





TIMOTHY
      M. ROBERTS was the founder of our predecessor, Infinium Labs Operating
      Corporation, and has been our Chairman and a member of our board of directors
      since the merger of our subsidiary into Infinium Labs Operating Corporation.
      He
      was also the Chief Executive Officer and Chief Financial Officer from inception
      through August 15, 2005. Prior to founding Infinium Labs in December 2002,
      Mr.
      Roberts was Chairman and Chief Executive Officer for Broadband Investment Group
      from 1999 through 2000. Broadband Investment Group was a holding company which
      owned a portfolio of service companies which handled technology layers 1-7.
      Prior to that, he was Chairman and Chief Executive Officer for Intira
      Corporation from 1997 through 1999 of which Mr. Roberts was a co-founder, which
      provided network-based computing and communication services on an outsourced
      basis for its customers. Mr. Roberts was also a co-founder of broadband services
      provider Savvis Communications (NASDAQ SVVS). Mr. Roberts co-founded Savvis
      in
      1995 and left Savvis 2 years later to start Intira Corporation.





**Richard
      Angelotti, Director.**





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





***Key
      Employees***




TYROL
      R.
      GRAHAM became our Vice President of Product Development in February 2004. Prior
      to joining us, Mr. Graham was at Microsoft Corporation from 1991 through 1999.
      While at Microsoft, Ty worked on projects such as the Windows Hardware Quality
      Labs and DirectX. In 2000 Ty was a founder of Wildseed Ltd., a technology
      start-up funded in part by Ignition Partners. Mr. Graham resigned from our
      company on February 24, 2006.





***Family
      Relationships***




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




***Involvement
      In Certain Legal Proceedings***




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




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




22




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





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




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





**SECTION
      16(a) REPORTING**





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





**BOARD
      COMMITTEES**





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





**CODE
      OF ETHICS**





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





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





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





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





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





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





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




23




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





Terms
      of Office





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




**ITEM
      10. EXECUTIVE COMPENSATION**





**SUMMARY
      OF EXECUTIVE COMPENSATION**





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





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





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





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




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


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


24





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





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




**Name**
            
            **Number
                of**
              **Securities
                Underlying**
              **Options/
                SARs Granted (#)**
            
            **% of****Total**
              **Options/
                SARs Granted to**
              **Employees
                in**
              **Fiscal
                Year** **(1)**
            
            **Exercise
                Price**
              **($/Share)** **(2)**
            
            **Expiration
                Date**Not
                Applicable.
            
            
            0
            
            
            0
            %
            $
            0
            
            
            —Not
                Applicable.
            
            
            0
            
            
            0
            %
            $
            0
            
            
            —Not
                Applicable.
            
            
            0
            
            
            0
            %
            $
            0
            
            
            —




25




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





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





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





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





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





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





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





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





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





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





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




26




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





Other
      Compensation





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





**COMPENSATION
      OF DIRECTORS AND EXECUTIVE OFFICERS**




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




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




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




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




**Stock
      Options**




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




**Our
        2005 Stock Compensation Plans**




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





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





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




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





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





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





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





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





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





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





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





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





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





***Principal
      Stockholders***





The
      following table sets forth, as of May 16, 2006 certain information with respect
      to the beneficial ownership of our common stock by each stockholder known by
      us
      to be the beneficial owner of more than 5% of our common stock and by each
      of
      our current directors and executive officers. Each person has sole voting and
      investment power with respect to the shares of common stock, except as otherwise
      indicated. Beneficial ownership consists of a direct interest in the shares
      of
      common stock, except as otherwise indicated.




27




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





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




***Changes
      in Control***





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




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





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





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





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





On
      July
      28, 2004, we issued Richard Angelotti, a director, 800,000 shares of common
      stock as consideration for his personal guaranty of a promissory note payable
      secured by a real estate mortgage encumbering the director's residence. The
      note, effective on July 28, 2004 and expiring on July 27, 2005, was payable
      to
      Stephen A. Witzer, Trustee U/A dated February 7, 1985. The principal is for
      $500,000 with interest calculated at fifteen percent (15%) per annum, plus
      a
      five percent (5%) penalty, if applicable, for any late payment. In the event
      of
      an uncured default, the interest increases to eighteen percent (18%) per annum.
      On December 9, 2005, this promissory note was assigned by Witzer to Richard
      Angelotti. The terms of the promissory note were subsequently amended to provide
      that as of November 1, 2005, principal and accrued interest totaled $560,437.
      With respect to the revised principal, commencing November 2, 2005, simple
      interest at a rate of fifteen percent (15%) per annum will accrue on a monthly
      basis until December 31, 2006 (maturity date), at which time the entire
      remaining principal and all accrued and unpaid interest are due in
      full.





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





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





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




On
          December 8, 2004, we issued 200,000 shares of common stock with a fair
          value of
          $43,735 ($0. 2187 per share) in lieu of cash compensation to Timothy Roberts,
          as
          CEO (Mr. Roberts was also the CFO and Chairman).
 
 On
          December 8, 2004, we issued 100,000 shares of common stock with a fair
          market
          value of $21,866 ($0. 2187 per share) in lieu of cash compensation to Richard
          Angelotti, Director.
 
 On
          January 27, 2005, we borrowed $300,000 from Timothy Roberts, our former
          CEO and
          a director of our company, under a 15% promissory note, which was payable
          no
          later than April 27, 2005. The note was subsequently transferred by Mr.
          Roberts
          to parties unaffiliated with us. On or about May 10 through 12, 2005, this
          note
          was assigned by Mr. Roberts to the following individuals with corresponding
          amounts: (1) Gerard Dariano, $100,000; (2) Fred Niedrich, $50,000; (3)
          Gary
          Fears, $50,000; and (4) John Landino, $100,000.In June 2005, the full principal
          and interest was settled in consideration for our issuance of 3,187,206
          shares
          of common stock to the holders, valued at $318,721.
  On
          March
          11, 2005, we issued 800,000 shares of common stock with a fair value of
          $272,000
          ($.34 per share) in lieu of cash compensation to Richard Angelotti,
          Director.
  On
          May
          10, 2005, we issued 250,000 shares of common stock with a fair value of
          $37,500
          ($0.15 per share) in lieu of cash compensation to Kevin Bachus as our President
          and Chief Operating Officer.
 
 On
          June
          3, 2005, we issued 250,000 shares of common stock with a fair value of
          $25,000
          ($0.10 per share) in lieu of cash compensation to Kevin Bachus as our President
          and Chief Operating Officer.
 
 On
          June
          13, 2005, we issued 1,700,000 shares of common stock with a fair value
          of
          $221,000 ($0.13 per share) to Timothy Roberts. These shares were an
          indemnification to Mr. Roberts as the guarantor on a $400,000, 6% promissory
          note between the Company and Nite Capital. The note was collateralized
          with Mr.
          Roberts’ personal holdings of Company stock.
 
 On
          June
          22, 2005, we issued 500,000 shares of common stock with a fair value of
          $50,000
          ($0.10 per share) in lieu of cash compensation to Timothy Roberts, as our
          CEO
          (Mr. Roberts was also the CFO and Chairman).
 
 On
          August
          11, 2005, we issued 882,398 shares of common stock with a fair value of
          $61,768
          ($0.07 per share) in lieu of cash compensation to Timothy Roberts, as our
          CEO
          (Mr. Roberts was also the CFO and Chairman).
 
 On
          August
          11, 2005, we issued 712,960 shares of common stock with a fair value of
          $49,907
          ($0.07 per share) in lieu of cash compensation to Kevin Bachus as our President
          and Chief Operating Officer. Mr. Bachus became CEO, CFO and a Director
          on August
          15, 2005.
 
 On
          August
          11, 2005, we issued 296,297 shares of common stock with a fair value of
          $20,741
          ($0.07 per share) to Richard Angelotti, Director.
 
 On
          August
          18, 2005, we issued 5,000,000 shares of common stock to Richard Angelotti,
          with
          a fair value of $350,000 ($0.07 per share).
 
 On
        August
        18, 2005, we issued 10,000,000 shares of common stock to Timothy M. Roberts,
        our
        former Chief Executive Officer, with a fair value of $700,000 ($0.07 per
        share).
 
 On
          December 9, 2005, this the July 28, 2004 promissory note for $500,000 was
          assigned by Mr. Witzer to a Dick Angeloitti, a Director.  The terms of the
          promissory note were subsequently amended to provide that as of November
          1,
          2005, principal and accrued interest totaled $560,437.43.  With respect to
          the revised principal, commencing November 2, 2005, simple interest at
          a rate of
          fifteen percent (15%) per annum will accrue on a monthly basis until December
          31, 2006 (maturity date), at which time the entire remaining principal
          and all
          accrued and unpaid interest are due in full.
  **TRANSACTIONS
        WITH PROMOTER**
 
 Immediately
          prior to the merger described above, Peter Goldstein, the promoter of Global
          Business Resources, Inc., surrendered to us 10,000,000 shares of our common
          stock in exchange for all of the issued and outstanding 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 .
 28
  **ITEM
          13. EXHIBITS**
  Exhibit
                    #
                Exhibit
                    Name2.1
                Agreement
                    and Plan of Merger dated as of December 24, 2003 by and among
                    Global
                    Business Resources, Inc., Global Infinium Merger Sub, Inc., Infinium
                    Labs
                    Corporation and Peter J. Goldstein ( Incorporated by Reference
                    to Exhibit
                    2.1 to Form 8-K filed with the SEC on January 20,
                    2004).3.1
                Certificate
                    of Incorporation ( Incorporated by Reference to Exhibit 3.0 to
                    Form SB-2
                    (Registration No. 333-67990) filed with the SEC on August 20,
                    2001
                    ).3.2
                Certificate
                    of Amendment to Certificate of Incorporation (Incorporated by
                    reference to
                    Exhibit 3.2 to the Company's Form 10-KSB for the year ended December
                    31,
                    2003 ).3.3
                Certificate
                    of Amendment to Certificate of Incorporation ( Incorporated by
                    reference
                    to Exhibit 3.3 to the Company's Form 10-KSB for the year ended
                    December
                    31, 2003 ).3.4
                Bylaws
                    ( Incorporated by reference to Exhibit 3.4 to the Company's Form
                    10-KSB
                    for the year ended December 31, 2003 ).10.1
                Stock
                    Purchase Agreement dated as of January 22, 2004 between Infinium
                    Labs,
                    Inc. and SBI Brightline VI, LLC ( Incorporated by reference to
                    Exhibit 4.1
                    to Form 8-K filed with the SEC on January 26, 2004 ).10.2
                Stock
                    Purchase Agreement dated as of January 22, 2004 between Infinium
                    Labs,
                    Inc. and Infinium Investment Partners, LLC ( Incorporated by
                    reference to
                    Exhibit 4.1 to Form 8-K filed with the SEC on January 26, 2004
                    ).10.3
                Form
                    of Subscription Agreement between Infinium Labs, Inc. and certain
                    stockholders of Infinium Labs, Inc. ( Incorporated by reference
                    to Exhibit
                    4.3 to the Form 10-KSB for the year ended December 31, 2003
                    ).10.4
                12%
                    Secured Subordinated Debenture between the Company and Contare
                    Ventures,
                    LLC dated February 23, 2004 (Incorporated by reference to Exhibit
                    10.12 to
                    the Form 10-QSB filed with the SEC on August 23, 2004
                    ).10.5
                12%
                    Secured Subordinated Debenture between the Company and Gary Kurfirst,
                    dated February 23, 2004 (Incorporated by reference to Exhibit
                    10.9 to the
                    Form 10-QSB filed with the SEC on August 23, 2004 ).10.6
                15%
                    Secured Debenture between the Company and James Beshara, dated
                    March 29,
                    2004 (Incorporated by reference to Exhibit 10.4 to the Form 10-QSB
                    filed
                    with the SEC on August 23, 2004
                    ).
 
 29






10.7
            15%
                Secured Debenture between the Company and Ronald Westman, dated April
                7,
                2004 ( Incorporated by reference to Exhibit 10.11 to the Form 10-QSB
                filed
                with the SEC on August 23, 2004 ).10.8
            15%
                Secured Subordinated Debenture between the Company and James Beshara,
                dated May 3, 2004 ( Incorporated by reference to Exhibit 10.3 to
                the Form
                10-QSB filed with the SEC on August 23, 2004 ).10.9
            15%
                Secured Debenture between the Company and Ronald Westman, dated May
                7,
                2004 ( Incorporated by reference to Exhibit 10.1 to the Form 10-QSB
                filed
                with the SEC on August 23, 2004 ).10.10
            Pledge
                Agreement between Robert F. Shambro in favor of Phoenix Capital
                Opportunity Fund, dated May 12, 2004 ( Incorporated by reference
                from
                Exhibit 10.6 to the Form 10-QSB filed with the SEC on August 23,
                2004
                ).10.11
            Promissory
                Note between the Company and Sharon M. Beshara, dated May 18, 2004
                (Incorporated by reference from Exhibit 10.5 to the Form 10-QSB filed
                with
                the SEC on August 23, 2004 ).10.12
            15%
                Secured Subordinated Debenture between the Company and and SBI USA,
                LLC,
                dated May 28, 2004 ( Incorporated by reference from Exhibit 10.10
                to the
                Form 10-QSB filed with the SEC on August 23, 2004) .10.13
            Amended
                and restated convertible secured promissory note dated, June 16,
                2004,
                between the Company and Phantom Investors, LLC ( Incorporated by
                reference
                from Exhibit 10.2 to the Form 10-QSB filed with the SEC on August
                23,
                2004) .10.14
            Commercial
                Promissory Note between the Company and Video Associates, LLC, dated
                June
                2004 (Incorporated by reference from Exhibit 10.8 to the Form 10-QSB
                filed
                with the SEC on August 23, 2004) .10.15
            Employee
                Stock Ownership ( Incorporated by reference from Exhibit 10.13 to
                the Form
                10-QSB filed with the SEC on August 23, 2004) .10.16
            Promissory
                Note between the Company and Stephen A. Witzer, dated July 28, 2004
                (
                Incorporated by reference from Exhibit 10.14 of to the Form SB-2/A
                filed
                with the SEC on February 14, 2005) .10.17
            10%
                Secured Promissory Note between the Company and Hazinu Ltd., dated
                October
                20, 2004 (Incorporated by reference from Exhibit 4.2 of to Form 8-K
                filed
                with the SEC on October 29, 2004) .10.18
            10%
                Secured Promissory Note between the Company and JM Investors, LLC,
                Fenmore
                Holdings, LLC, Viscount Investments Limited and Congregation Mishkan
                Sholom, dated October 27, 2004 (Incorporated by reference from Exhibit
                4.6
                of to Form 8-K filed with the SEC on October 29, 2004)10.19
            Securities
                Purchase Agreement between the Company and JM Investors, LLC, Fenmore
                Holdings, LLC, Viscount Investments Limited and Congregation Mishkan
                Sholom dated December 13, 2004 (Incorporated by reference from Exhibit
                4.1
                to Form 8-K filed with the SEC on October 29, 2004) .10.20
            Registration
                Rights Agreement between the Company and JM Investors, LLC, Fenmore
                Holdings, LLC, Viscount Investments Limited and Congregation Mishkan
                Sholom dated December 13, 2004 (Incorporated by reference from Exhibit
                4.2
                to Form 8-K filed with the SEC on October 29, 2004).10.21
            8%
                Convertible Debenture between the Company and JM Investors, LLC,
                Fenmore
                Holdings, LLC, Viscount Investments Limited and Congregation Mishkan
                Sholom dated December 13, 2004 (Incorporated by reference from Exhibit
                4
                .3 to Form 8-K filed with the SEC on October 29, 2004)
                .10.22
            8%
                Convertible Debenture between the Company and accredited investors
                dated
                December 23, 2004 (Incorporated by reference to Form 8-K filed with
                the
                SEC on January 5, 2005) .10.23
            Pinnacle
                Marketing Agreement to serve as manufacturing representatives (
                Incorporated by reference from to Exhibit 10.21 to the Form 10-KSB
                filed
                with the SEC on April 20, 2005) .




30




10.24
            Summit
                Marketing Agreement to serve as manufacturing representatives
                (Incorporated by reference from to Exhibit 10.22 to the Form SB-2/A
                filed
                with the SEC on February 14, 2005 ).10.25
            Limelight
                Networks Agreement to serve as manufacturing representatives (Incorporated
                by reference from to Exhibit 10.24 to the Form SB-2/A filed with
                the SEC
                on February 14, 2005 ).10.26
            Chicony
                agreement to manufacture system hardware (Incorporated by reference
                from
                to Exhibit 10.25 to the Form SB-2/A filed with the SEC on February
                14,
                2005 ).10.27
            Saitek
                agreement to manufacture system hardware (Incorporated by reference
                from
                to Exhibit 10.26 to the Form SB-2/A filed with the SEC on February
                14,
                2005 ).10.28
            BIOSTAR®
                Microtech International Corp. agreement for engineering, industrial
                design
                and manufacturing (Incorporated by reference from to Exhibit 10.27
                to the
                Form SB-2/A filed with the SEC on February 14, 2005 ).10.29
            Teague
                agreement for engineering and industrial design ( Incorporated by
                reference from to Exhibit 10.28 to the Form SB-2/A filed with the
                SEC on
                February 14, 2005 ).10.30
            6%
                Promissory Note between the Company and Nite Capital L.P., dated
                March 9,
                2005 ( Incorporated by reference from Exhibit 10.39 to the Form 10-QSB
                filed with the SEC on May 23, 2005) .10.31
            17%
                Promissory Note between the Company and Ron Westman., dated March
                21, 2005
                ( Incorporated by reference from Exhibit 10.40 to the Form 10-QSB
                filed
                with the SEC on May 23, 2005) .10.32
            12%
                Promissory Note between the Company and Rob Shambro, dated April
                7, 2005 (
                Incorporated by reference from Exhibit 10.1 to the Form 10-QSB filed
                with
                the SEC on August 15, 2005) .10.33
            17%
                Promissory Note between the Company and Fred Niedrich, dated April
                29,
                2005 ( Incorporated by reference from Exhibit 10.2 to the Form 10-QSB
                filed with the SEC on August 15, 2005) .10.34
            17%
                Promissory Note between the Company and Fred Niedrich, dated June
                13, 2005
                ( Incorporated by reference from Exhibit 10.3 to the Form 10-QSB
                filed
                with the SEC on August 15, 2005) .10.35
            17%
                Promissory Note between the Company and James Breshara, dated June
                30,
                2005 ( Incorporated by reference from Exhibit 10.4 to the Form 10-QSB
                filed with the SEC on August 15, 2005) .10.36
            15%
                Promissory Note between the Company and Edward Breshara, dated September
                7, 2005 ( Incorporated by reference from Exhibit 10.1 to the Form
                10-QSB
                filed with the SEC on December 22, 2005) .10.37
            5%
                Promissory Note between the Company and Sharon Breshara, dated September
                7, 2005 ( Incorporated by reference from Exhibit 10.2 to the Form
                10-QSB
                filed with the SEC on December 22, 2005) .10.38
            5%
                Promissory Note between the Company and Fred Niedrich, dated September
                13,
                2005 ( Incorporated by reference from Exhibit 10.3 to the Form 10-QSB
                filed with the SEC on December 22, 2005) .10.39
            5%
                Promissory Note between the Company and Fred Niedrich, dated September
                19,
                2005 ( Incorporated by reference from Exhibit 10.4 to the Form 10-QSB
                filed with the SEC on December 22, 2005) .10.40
            %
                Promissory Note between the Company and Fred Niedrich, dated November
                1,
                2005 ( Incorporated by reference from Exhibit 10.5 to the Form 10-QSB
                filed with the SEC on December 22, 2005) .10.41
            %
                Promissory Note between the Company and Edward Breshara, dated November
                7,
                2005 ( Incorporated by reference from Exhibit 10.6 to the Form 10-QSB
                filed with the SEC on December 22, 2005) .10.42
            5%
                Assignment of Promissory Note between Stephen A. Witzer, Trustee
                and
                Director, Richard Angelotti, dated December 9, 2005 ( Incorporated
                by
                reference from Exhibit 10.7 to the Form 10-QSB filed with the SEC
                on
                December 22, 2005) .10.43
            Amendment
                to Promissory Note between the Company and Director, Richard Angelotti,
                dated December 9, 2005 ( Incorporated by reference from Exhibit 10.8
                to
                the Form 10-QSB filed with the SEC on December 22, 2005)
                .




31




10.44
              Employment
                  agreement between the Company and Tyrol Graham dated January 15,
                  2004 (
                  Incorporated by reference from to Exhibit 10.32 to the Form 10-KSB
                  filed
                  with the SEC on April 20, 2005 ).10.45
              Employment
                  agreement between the Company and Greg Koler dated January 11,
                  2006 (
                  Incorporated by reference from to Exhibit 10.1 to the Form 8-K
                  filed with
                  the SEC on January 13, 2006 ).10.46
              Stockholder
                  vesting agreement between the Company and Greg Koler dated January
                  11,
                  2006 ( Incorporated by reference from to Exhibit 10.2 to the Form
                  8-K
                  filed with the SEC on January 13, 2006 ).10.47
              Securities
                  Purchase Agreement dated as of January 24 , 2006 by and between
                  Infinium
                  Labs, Inc. and Golden Gate Investors, Inc. ( Incorporated by reference
                  from to Exhibit 10.1 to the Form 8-K filed with the SEC on January
                  31,
                  2006 ).10.48
              Registration
                  Rights Agreement dated as of January 24, 2006 by and between Infinium
                  Labs, Inc. and Golden Gate Investors, Inc. ( Incorporated by reference
                  from to Exhibit 10.2 to the Form 8-K filed with the SEC on January
                  31,
                  2006 ).10.49
              51⁄4%
                  Convertible Debenture of Infinium Labs, Inc. dated as of January
                  24, 2006.
                  ( Incorporated by reference from to Exhibit 10.3 to the Form 8-K
                  filed
                  with the SEC on January 31, 2006 ).10.50
              Warrant
                  to Purchase Common Stock of Infinium Labs, Inc. dated as of January
                  24,
                  2006 ( Incorporated by reference from to Exhibit 10.4 to the Form
                  8-K
                  filed with the SEC on January 31, 2006 ) .10.51
              Addendum
                  to Convertible Debenture, Warrant to Purchase Common Stock and
                  Securities
                  Purchase Agreement dated as of January 24, 2006 by and between
                  Infinium
                  Labs, Inc. and Golden Gate Investors, Inc. (Incorporated by reference
                  from
                  to Exhibit 10.5 to the Form 8-K filed with the SEC on January 31,
                  2006
                  ).10.52
              8% Promissory
                Note between the Company and Timothy Roberts, dated January 1, 2006
                (filed
                herewith).31.1
              Certification
                  by Chief Executive Officer and Chief Financial Officer pursuant
                  to
                  Sarbanes-Oxley Section 302 (filed herewith).32.1
              Certification
                  by Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. Section 1350 (filed
                  herewith).




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





Audit
      Fees. The aggregate fees billed by our auditors, for professional services
      rendered for the audit of the Company's annual financial statements for the
      years ended December 31, 2005 and December 31, 2004 and for the reviews of
      the
      financial statements included in the Company's Quarterly Reports on Form 10-QSB
      during those fiscal years were $63,758 and
      $53,625 respectively.





Audit-related
      Fees. None.





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




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




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


32


**SIGNATURES**
  In
          accordance with Section 13 or 15(d) of the Exchange Act, the registrant
          caused
          this Annual Report on Form 10-KSB for the year ended December 31, 2005
          to be
          signed on its behalf by the undersigned, thereunto duly
          authorized.
  **PHANTOM
                    ENTERTAINMENT, INC.**Date: 
                    September 26, 2006
                By:
                /s/ Greg
                    KolerName:  
                    Greg KolerTitle:     Chief
                    Executive Officer (Principal Executive Officer) and Interim Chief
                    Financial Officer (Principal Accounting and Financial
                    Officer)
  In
          accordance with Section 13 or 15(d) of the Exchange Act, the registrant
          caused
          this Annual Report on Form 10-KSB for the year ended December 31, 2005
          to be
          signed on its behalf by the undersigned, thereunto duly
          authorized.
 
 **SIGNATURE**
                
                **TITLE**
                
                **DATE****/s/*****Greg
                    Koler***
                
                Chief
                    Executive Officer and
                
                September
                    26, 2006Greg
                    Koler
                
                Interim
                    Chief Financial Officer**/s/*****Timothy
                    Roberts***
                
                Chairman
                    of the Board of Directors
                
                September
                    26, 2006Timothy
                    Roberts**/s/*****Richard
                    Angelotti*****
                
                Director
                
                September
                    26, 2006Richard
                    Angelotti







33





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**FINANCIAL
      STATEMENTS**





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








**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**CONTENTS**


PAGES
              F-1
              Reports
                  of Independent Registered Public Accounting FirmPAGE
              F-2
              Balance
                  Sheet as of December 31, 2004 (Consolidated) (Restated)PAGE
              F-3
              Statements
                  of Operations for the Year Ended December 31, 2005 (Consolidated)
                  (Restated) and 2004 (Restated) and for the Period from December
                  9, 2002
                  (Inception) to December 31, 2005 (Restated)PAGES
              F-4-F-19
              Statement
                  of Changes in Stockholders’ Deficiency for the Period from December 9,
                  2002 (Inception) Through December 31, 2005
                  (Restated)PAGES
              F-20
              Statements
                  of Cash Flows for the Year Ended December 31, 2005 (Consolidated)
                  (Restated) and 2004 (Restated) and for the Period from December
                  9, 2002
                  (Inception) to December 31, 2005 (Restated)PAGES
              F-22-F-52
              Notes
                  to Financial Statements









**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors of:





Infinium
      Labs, Inc.





(A
      Development Stage Company)





We
        have
        audited the accompanying consolidated balance sheet of Infinium Labs, Inc.
        and
        subsidiary (a development stage company) as of December 31, 2005 and the
        related consolidated statements of operations, changes in stockholders’
deficiency and cash flows for the years ended December 31, 2005 and 2004,
        and for the period from December 9, 2002 (inception) to December 31, 2005.
        These
        financial statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audit. The financial statements of Infinium Labs Corporation for the
        period
        December 9, 2002 (inception) to October 31, 2003, were audited by other auditors
        whose report dated December 11, 2003, except for Note F as to which the date
        is
        January 26, 2004, expressed an unqualified opinion on those
        statements.





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





In
        our
        opinion, the consolidated financial statements referred to above present
        fairly
        in all material respects, the financial position of Infinium Labs, Inc. and
        subsidiary (a development stage company) as of December 31, 2005, and the
        results of its operations and its cash flows for the years ended December
        31,
        2005 and 2004, and for the period from December 9, 2002 (inception) to December
        31, 2005, in conformity with accounting principles generally accepted in
        the
        United States of America.





The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 10 to
        the consolidated financial statements, the Company has had recurring losses
        from
        inception of $64,025,296, has a working capital deficiency of $16,144,960,
        a
        stockholders deficiency of $16,144,960, notes in default of $3,486,759 and
        used
        cash in operations from inception of $15,339,599. This raises substantial
        doubt
        about its ability to continue as a going concern. Management’s plans concerning
        this matter are also described in Note 10. The accompanying consolidated
        financial statements do not include any adjustments that might result from
        the
        outcome of this uncertainty.





WEBB
      & COMPANY, P.A.





Boynton
      Beach, Florida





May
        16,
        2006, except for Notes 1(P), 2(C), 5, 7, 8(A), 8(D), 9(B), 10, 11 and 12(C)
        as
        to which date is August 18, 2006.




F-1





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Balance Sheet**


**December
      31, 2005**


**Restated
      - Note 2**





**ASSETS****Current
                  Assets:**Cash
              
              $
              603Prepaid
                  Expenses
              
              
              7,071Total
                  Current Assets
              
              
              7,674**Total
                  Assets**
              
              $
              7,674**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIENCY****Current
                  Liabilities:**Accounts
                  payable
              
              $
              3,839,274Due
                  to developers
              
              
              845,000Accrued
                  interest expense
              
              
              846,137Other
                  accrued expense
              
              
              6,506Derivatives
                  (Note 5(B))
              
              
              4,179,316Accrued
                  payroll and payroll taxes (Note 8(F))
              
              
              2,364,205Promissory
                  Notes (Note 5(A))
              
              
              4,072,196**Total
                  Current Liabilities**
              
              
              16,152,634**Commitments
                  and Contingencies**
              
              
              -**Stockholders’
                  Deficiency:**Preferred
                  stock, $0.001 par value, 10,000,000 shares authorized, none issued
                  and
                  outstanding
              
              
              -Common
                  stock, $0.0001 par value, 600,000,000 shares authorized, 399,823,667
                  shares issued and outstanding (Note 6)
              
              
              39,982Additional
                  paid-in capital (Note 6)
              
              
              48,344,422Subscription
                  receivable
              
              
              (22,517
              )Deferred
                  Compensation
              
              
              (481,551
              )Accumulated
                  deficit during development stage
              
              
              (64,025,296
              )Total
                  Stockholders’ Deficiency
              
              
              (16,144,960
              )**Total
                  Liabilities and Stockholders’ Deficiency**
              
              $
              7,674




See
      Notes
      to Accompanying Consolidated Financial Statements




F-2




**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statements of Operations**


**Restated
      - Note 2**





**For
                  the Year**
                **Ended**
                **December
                  31, 2005**
              
              **For
                  the Year**
                **Ended**
                **December
                  31, 2004**
              
              **For
                  the Period from December 9, 2002 (Inception to December 31,
                  2005)****Operating
                  Expenses:**Development
                  costs
              
              $
              (13,927
              )
              $
              3,130,854
              
              $
              3,522,277Advertising
              
              
              404,331
              
              
              1,380,377
              
              
              1,992,887Salary
                  expense
              
              
              5,677,365
              
              
              6,985,422
              
              
              12,835,271Professional
                  fees
              
              
              1,265,317
              
              
              2,808,733
              
              
              4,969,920Consultants
              
              
              3,111,392
              
              
              9,082,345
              
              
              13,053,413Impairment
                  of assets
              
              
              502,090
              
              
              352,299
              
              
              854,389General
                  and administrative
              
              
              1,289,962
              
              
              3,864,787
              
              
              5,520,868Total
                  Operating Expenses
              
              
              12,236,530
              
              
              27,604,817
              
              
              42,749,025**Net
                  Loss from Operations**
              
              
              (12,236,530
              )
              
              (27,604,817
              )
              
              (42,749,025
              )**Other
                  Income (Expense):**Other
                  income
              
              
              383
              
              
              1,897
              
              
              2,317Gain
                  / (Loss) on sale of equipment
              
              
              (5,011
              )
              
              (448
              )
              
              (5,459
              )Gain
                  / (Loss) on conversion of notes
              
              
              (10,671,647
              )
              
              -
              
              
              (10,671,647
              )Gain
                  / (Loss) on stock issued for payroll taxes
              
              
              (62,269
              )
              
              -
              
              
              (62,269
              )Interest
                  expense
              
              
              (5,900,848
              )
              
              (5,688,042
              )
              
              (11,606,886
              )Gain
                    / (Loss) on derivatives
              
              
              38,730,224
              
              
              (36,906,415
              )
              
              1,823,809Payroll
                  Tax Penalties & Interest
              
              
              (208,322
              )
              
              (528,377
              )
              
              (756,136
              )Total
                  Other Income (Expense)
              
              
              21,882,510
              
              
              (43,121,385
              )
              
              (21,276,271
              )**Income
                  (Loss) before Income Taxes**
              
              
              9,645,980
              
              
              (70,726,202
              )
              
              (64,025,296
              )**Income
                  Taxes**
              
              
              -
              
              
              -
              
              
              -**Net
                  Income (Loss)**
              
              $
              9,645,980
              
              $
              (70,726,202
              )
              $
              (64,025,296
              )**Per
                  Common Share**Income
                  (Loss) per common share - basic
              
              $
              0.04
              
              $
              (0.70
              )
              $
              (0.48
              )Income
                  (Loss) per common share - diluted
              
              $
              0.03
              
              $
              (0.70
              )
              $
              (0.48
              )Weighted
                  average - basic
              
              
              219,727,249
              
              
              100,688,617
              
              
              133,897,292Weighted
                average - diluted
              
              
              405,579,272
              
              
              100,688,617
              
              
              133,897,292





See
      Notes
      to Accompanying Consolidated Financial Statements




F-3




**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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




**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional
                Paid-In**
            
            **Accumulated
                Deficit During Development**
            
            **Stock
                Subscriptions**
            
            **Deferred****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Stage**
            
            **Receivable**
            
            **Compensation**
            
            **Total**Stock
                issued to founders ($0.0004 per share)
            
            
            
            
            
            
            
            $
            58,189,728
            
            $
            5,819
            
            $
            12,703
            
            $
            
            
            $
            (18,517
            )
            
            
            
            $
            5Stock
                issued for cash ($0.12 per share)
            
            
            
            
            
            
            
            
            4,423,012
            
            
            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
            
            
            
            
            
            
            
            
            
            
            
            138,640




See
      Notes
      to Accompanying Consolidated Financial Statements




F-4





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional**
              **Paid-In**
            
            **Accumulated**
              **Deficit
                During**
              **Development**
            
            **Stock**
              **Subscriptions**
            
            **Deferred****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Stage**
            
            **Receivable**
            
            **Compensation**
            
            **Total**Net
                loss for the two months ended December 31, 2003
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (674,945
            )
            
            
            
            
            
            
            
            (674,945
            )Balance,
                December 31, 2003
            
            
            
            
            
            
            
            
            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
            )
            
            
            
            
            
            
            
            
            
            
            0Shares
                issued for cash ($0.25 per share)
            
            
            
            
            
            
            
            
            6,650,000
            
            
            665
            
            
            1,661,835
            
            
            
            
            
            
            
            
            
            
            
            1,662,500Shares
                issued for cash ($0.257 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            141,000
            
            
            
            
            
            141,000Shares
                issued with note payable ($0.78 per share)
            
            
            
            
            
            
            
            
            560,000
            
            
            56
            
            
            433,944
            
            
            
            
            
            
            
            
            
            
            
            434,000Shares
                issued for legal settlement ($1.475 per share)
            
            
            
            
            
            
            
            
            66,668
            
            
            7
            
            
            98,328
            
            
            
            
            
            
            
            
            
            
            
            98,335Shares
                issued for services ($1.475 per share)
            
            
            
            
            
            
            
            
            1,750,000
            
            
            175
            
            
            2,581,075
            
            
            
            
            
            
            
            
            
            
            
            2,581,250Shares
                issued with note payable ($1.47 per share)
            
            
            
            
            
            
            
            
            7,500
            
            
            
            
            
            11,025
            
            
            
            
            
            
            
            
            
            
            
            11,025Shares
                issued with note payable ($1.42 per share)
            
            
            
            
            
            
            
            
            200,000
            
            
            20
            
            
            283,980
            
            
            
            
            
            
            
            
            
            
            
            284,000Shares
                issued with note payable ($1.475 per share)
            
            
            
            
            
            
            
            
            100,000
            
            
            10
            
            
            147,490
            
            
            
            
            
            
            
            
            
            
            
            147,500




See
      Notes
      to Accompanying Consolidated Financial Statements




F-5





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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


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




See
      Notes
      to Accompanying Consolidated Financial Statements




F-6





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





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





See
      Notes
      to Accompanying Consolidated Financial Statements


F-7




**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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




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





See
      Notes
      to Accompanying Consolidated Financial Statements


F-8




**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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




**Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **Additional**
                **Paid-In**
              
              **Accumulated**
                **Deficit
                  During**
                **Development**
              
              **Stock**
                **Subscriptions**
              
              **Deferred****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Stage**
              
              **Receivable**
              
              **Compensation**
              
              **Total**Beneficial
                  conversion of promissory notes at $0.10 per share
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              318,500
              
              
              
              
              
              
              
              
              
              
              
              318,500Fair
                  value of warrants issued in conjunction with promissory notes ranging
                  from
                  $0.10 per share to $1.00 per share
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              295,000
              
              
              
              
              
              
              
              
              
              
              
              295,000Shares
                  contributed in kind
              
              
              
              
              
              
              
              
              (1,191,450
              )
              
              (119
              )
              
              119
              
              
              
              
              
              
              
              
              
              
              
              0Reclassification
                  of warrants to
                derivative
                  liability
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,353,617
              )
              
              
              
              
              
              
              
              
              
              
              (4,353,617
              )Net
                  loss, December 31, 2004
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (70,726,202
              )
              
              
              
              
              
              
              
              (70,726,202
              )Balance,
                  December 31, 2004 (Restated - Note 2)
              
              
              
              
              
              
              
              
              121,090,655
              
              
              12,109
              
              
              18,440,300
              
              
              (73,671,276
              )
              
              (22,517
              )
              
              
              
              
              (55,241,384
              )Shares
                  issued to Director for services
                  ($1.59 per share)
              
              
              
              
              
              
              
              
              40,000
              
              
              4
              
              
              63,596
              
              
              
              
              
              
              
              
              
              
              
              63,600Shares
                  issued to consultants for services
                  ($0.87 per share)
              
              
              
              
              
              
              
              
              125,179
              
              
              13
              
              
              108,916
              
              
              
              
              
              
              
              
              
              
              
              108,929Shares
                  issued to convert note payable ($1.18 per share)
              
              
              
              
              
              
              
              
              7,043,750
              
              
              704
              
              
              8,310,921
              
              
              
              
              
              
              
              
              
              
              
              8,311,625Shares
                  issued to consultants for services
                  ($0.54 per share)
              
              
              
              
              
              
              
              
              1,200,000
              
              
              120
              
              
              647,880
              
              
              
              
              
              
              
              
              
              
              
              648,000Shares
                  issued to convert note payable ($0.365 per share)
              
              
              
              
              
              
              
              
              4,925,291
              
              
              493
              
              
              1,797,238
              
              
              
              
              
              
              
              
              
              
              
              1,797,731Shares
                  issued to consultants for services
                  ($0.32 per share)
              
              
              
              
              
              
              
              
              1,722,453
              
              
              172
              
              
              558,675
              
              
              
              
              
              
              
              
              (19,665
              )
              
              539,182




See
      Notes
      to Accompanying Consolidated Financial Statements




F-9




**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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




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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-10




**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-11


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





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




See
      Notes
      to Accompanying Consolidated Financial Statements




F-12





**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





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




See
      Notes
      to Accompanying Consolidated Financial Statements




F-13


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-14


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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




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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-15


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-16


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-17


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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




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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-18


**INFINIUM
      LABS, INC. AND SUBSIDIARY**





**(A
      DEVELOPMENT STAGE COMPANY)**





**Consolidated
      Statement of Stockholders' Deficiency**





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





**Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **Additional**
                **Paid-In**
              
              **Accumulated**
                **Deficit
                  During**
                **Development**
              
              **Stock**
                **Subscriptions**
              
              **Deferred****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Stage**
              
              **Receivable**
              
              **Compensation**
              
              **Total**Deferred
                  compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              503,260
              
              
              503,260Fair
                  value of derivatives upon note payable
                  conversion
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              280,492
              
              
              
              
              
              
              
              
              
              
              
              280,492Net
                  loss, December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,645,980
              
              
              
              
              
              
              
              
              9,645,980**BALANCE,
                  December 31, 2005 (Restated - Note 2)**
              
              
              
              
              
              
              
              
              399,823,667
              
              $
              39,982
              
              $
              48,344,422
              
              $
              (64,025,296
              )
              $
              (22,517
              )
              
              (481,551
              )
              $
              (16,144,960
              )




See
      Notes
      to Accompanying Consolidated Financial Statements


F-19


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Consolidated
      Statements of Cash Flows**


**Restated
      - Note 2**





**For
                  the Year**
                **Ended**
                **December
                  31, 2005**
                **(Consolidated)**
              
              **For
                  the Year**
                **Ended**
                **December
                  31, 2004**
                **(Consolidated)**
              
              **For
                  the Period**
                **From**
                **December
                  9,****2002**
                **(Inception)
                  to**
                **December
                  31, 2005****Cash
                  Flows from Operating Activities:**Net
                  income (loss)
              
              $
              9,645,980
              
              $
              (70,726,202
              )
              $
              (64,025,296
              )Adjustments
                  to reconcile net income (loss) to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              208,547
              
              
              170,059
              
              
              382,895Impairment
                  of assets
              
              
              502,090
              
              
              352,299
              
              
              854,389Loss
                  on disposal of assets
              
              
              5,011
              
              
              448
              
              
              5,459Common
                  stock issued for services
              
              
              4,493,531
              
              
              8,452,305
              
              
              14,197,521Common
                  Stock issued to employees
              
              
              2,821,858
              
              
              2,042,141
              
              
              4,863,999Common
                  stock issued for legal settlements
              
              
              (175,900
              )
              
              175,900
              
              
              -Common
                  stock issued for interest
              
              
              1,243,314
              
              
              2,727,731
              
              
              3,971,045Common
                  stock issued for loan guarantee
              
              
              -
              
              
              832,000
              
              
              832,000Common
                  stock issued for vendor settlement
              
              
              1,020,353
              
              
              -
              
              
              1,020,353(Gain)/Loss
                  on vendor settlement
              
              
              (27,367
              )
              
              -
              
              
              (27,367
              )Loss
                  on conversion of notes payable
              
              
              10,671,647
              
              
              -
              
              
              10,671,647Legal
                  fees on conversion of notes payable
              
              
              40,131
              
              
              -
              
              
              40,131Legal
                  fees on vendor settlement
              
              
              28,483
              
              
              -
              
              
              28,483Amortization
                  of interest expense
              
              
              3,599,312
              
              
              2,150,588
              
              
              5,774,900(Gain)/Loss
                  on derivatives
              
              
              (38,730,224
              )
              
              36,906,415
              
              
              (1,823,809
              )Changes
                  in operating assets and liabilities:Decrease
                  (increase) in current assets:Prepaid
                  expenses and other receivables
              
              
              59,925
              
              
              (63,646
              )
              
              (7,071
              )Deposits
              
              
              5,440
              
              
              2,050
              
              
              -Increase
                  (decrease) in current liabilities:Accounts
                  payable
              
              
              240,389
              
              
              3,249,880
              
              
              3,839,274Due
                  to developers
              
              
              (140,000
              )
              
              985,000
              
              
              845,000Accrued
                  interest
              
              
              544,722
              
              
              294,634
              
              
              846,137Other
                  accrued expense
              
              
              (98,494
              )
              
              (15,850
              )
              
              6,506Accrued
                  payroll and payroll taxes
              
              
              698,436
              
              
              1,589,772
              
              
              2,364,205Net
                  Cash Used in Operating Activities
              
              
              (3,342,816
              )
              
              (10,874,476
              )
              
              (15,339,599
              )**Cash
                  Flows from Investing Activities:**Purchase
                  of property and equipment
              
              
              10,310
              
              
              (803,415
              )
              
              (960,157
              )Sale
                  of property and equipment
              
              
              5,660
              
              
              11,755
              
              
              17,415Increase
                  in restricted cash
              
              
              894,910
              
              
              (894,910
              )
              
              -Net
                  Cash Provided by (used) Investing Activities
              
              
              910,880
              
              
              (1,686,570
              )
              
              (942,742
              )**Cash
                  Flows from Financing Activities:**Repayments
                  of notes payable
              
              
              -
              
              
              (1,075,000
              )
              
              (1,075,000
              )Proceeds
                  from stockholder
              
              
              -
              
              
              -
              
              
              4,940Payments
                  to stockholder
              
              
              -
              
              
              -
              
              
              (4,940
              )Proceeds
                  from sale of common stock, net
              
              
              795,400
              
              
              7,737,690
              
              
              9,527,147Promissory
                  note
              
              
              1,633,037
              
              
              5,856,606
              
              
              7,830,797Net
                  Cash Provided by Financing Activities
              
              
              2,428,437
              
              
              12,519,296
              
              
              16,282,944NET
                  INCREASE (DECREASE) IN CASH
              
              
              (3,499
              )
              
              (41,750
              )
              
              603CASH
                  AT BEGINNING OF PERIOD
              
              
              4,102
              
              
              45,852
              
              
              -CASH
                  AT END OF PERIOD
              
              $
              603
              
              $
              4,102
              
              $
              603**Supplemental
                  Disclosure of Cash Flow Information:**Cash
                  paid for interest
              
              $
              18,750
              
              $
              508,308
              
              $
              533,838





See
      Notes
      to Accompanying Consolidated Financial Statements


F-20




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Consolidated
      Statements of Cash Flows**





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





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





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




See
      Notes
      to Accompanying Consolidated Financial Statements


F-21





**INF** **INIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**





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





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





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





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




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




Accordingly,
      the financial statements include the following:




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





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




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





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




***(C)
      Consolidation***




The
      accompanying December 31, 2005 and December 31, 2004 consolidated financial
      statements include the accounts of Infinium Labs, Inc. and its wholly owned
      subsidiary, Infinium Labs Operating Corporation. Intercompany transactions
      and
      balances have been eliminated in consolidation.




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




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




F-22





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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




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




***(F)
      Income Taxes***




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




**(G)
        Income / (Loss) Per Share**


Basic
          and
          diluted net income / (loss) per common share is computed based upon the
          weighted
          average common shares outstanding as defined by Statement of Financial
          Accounting Standards “SFAS” No. 128, “Earnings per Share.” For the year ended
          December 31, 2005 both basic and diluted EPS are:
 
 Income
                  (Numerator)
                
                
                Shares
                  (Denominator)
                
                
                Price
                    per ShareNet
                    Income
                
                $
                9,645,980**Basic
                    Income per common share**Income
                    available to common shareholders
                
                
                9,645,980
                
                
                219,727,249
                
                
                0.04Warrants
                
                
                
                
                
                13,653,121Convertible
                    debentures (net of tax)
                
                
                866,892
                
                
                172,198,902**Diluted
                    Income per common share**Income
                    available to common stockholders + assumed conversions
                
                $
                10,512,872
                
                
                405,579,272
                
                $
                0.03
 
 For
          the
          year ended December 31, 2004 and the period from December 9, 2002 (Inception)
          through December 31, 2005, the effect of common share equivalents was
          anti-dilutive and not included in the calculation of diluted net loss per
          common
          share. Warrants to purchase 14,329,874 shares of common stock at prices
          of
          $0.25, $0.50, $0.75 and $1.00 were outstanding at December 31, 2005 and
          were not
          included in the computation of diluted EPS because the warrants’ exercise prices
          were greater than the average market price of the common shares. These
          warrants
          expire between October 31, 2009 and December 31, 2009. At December 31,
          2004
          there were warrants to purchase 40,666,597 shares of common stock at prices
          of
          $0.10, $0.25, $0.50, $0.75 and $1.00 and were not included in the computation
          of
          diluted EPS because the effect was anti-dilutive.




***(H)
      Advertising***




Advertising
      costs are expensed either in the periods in which those costs are incurred
      or
      the first time the advertising takes place. For the year ended December 31,
      2005, the year ended December 31, 2004 and the period from December 9, 2002
      (Inception) to December 31, 2005, the Company incurred advertising costs of
      $404,331, $1,380,377, $1,992,887 respectively.




***(I)
      Business Segments***




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




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




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




F-23




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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




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




The
      Company considers all highly liquid temporary cash investments with an original
      maturity of three months or less to be cash equivalents.





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




The
      Company at times has cash in banks in excess of FDIC insurance limits and places
      its temporary cash investments with high credit quality financial institutions.
      At December 31, 2005, the Company had no cash in excess of FDIC insurance
      limits.




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




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




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




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





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




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





***(P)
      Derivative Liabilities***




The
          Company accounts for its embedded conversion features and freestanding
          warrants
          pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
          Activities" and EITF 00-19 “Accounting for Derivative Financial Instruments
          Indexed to, and Potentially Settled in, a Company’s Own Stock”, which require a
          periodic valuation of their fair value and a corresponding recognition
          of
          liabilities associated with such derivatives. The recognition of derivative
          liabilities related to the issuance of shares of common stock is applied
          first
          to the proceeds of such issuance, at the date of issuance, and the excess
          of
          derivative liabilities over the proceeds is recognized as other expense
          in the
          accompanying consolidated financial statements. The recognition of derivative
          liabilities related to the issuance of convertible debt is applied first
          to the
          proceeds of such issuance as a debt discount, at the date of issuance,
          and the
          excess of derivative liabilities over the proceeds is recognized as other
          expense in the accompanying consolidated financial statements. Any subsequent
          increase or decrease in the fair value of the derivative liabilities is
          recognized as other expense or other income, respectively.




F-24





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**





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





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





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





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





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





***(C)
      Derivatives and Corresponding Liability***


The
          Company determined that it failed to account for its embedded conversion
          features and freestanding warrants pursuant to: SFAS No. 133, "Accounting
          for
          Derivative Instruments and Hedging Activities" and EITF 00-19 “Accounting for
          Derivative Financial Instruments Indexed to, and Potentially Settled in,
          a
          Company’s Own Stock”, which require a periodic valuation of their fair value and
          a corresponding recognition of liabilities associated with such derivatives.
          This failure occurred for the year ended December 31, 2004 and the year
          ended
          December 31, 2005. These restated amounts are reflected in the financial
          statements at December 31, 2005.


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





Year
                  Ended
                December
                  31, 2005
                (As
                  Previously Reported)
              
              Amount of   Change
              
              Year
                  Ended
                December
                  31, 2005
                Ended
                (As
                  Restated)Statement
                  of OperationsGeneral
                  and administrative
              
              $
              2,220,324
              
              
              (930,362
              )
              $
              1,289,962Total
                  Operating Expenses
              
              
              13,166,892
              
              
              (930,362
              )
              
              12,236,530Net
                  loss from operations
              
              
              (13,166,892
              )
              
              930,262
              
              
              (12,236,530
              )Interest
                  expense
              
              
              (5,700,848
              )
              
              (200,000
              )
              
              (5,900,848
              )Derivative
                  income
              
              
              0
              
              
              38,730,224
              
              
              38,730,224Total
                  Other Income (Expense)
              
              
              (16,647,714
              )
              
              38,530,224
              
              
              21,882,510Net
                  income (loss)
              
              
              (29,814,606
              )
              
              39,460,586
              
              
              9,645,980Income
                  (Loss) per common share - basic
              
              $
              (0.14
              )
              $
              0.18
              
              $
              0.04Income
                (Loss) per
                common share - diluted
              
              $
              (0.14
              )
              $
              0.17
              
              $
              0.03




December
                  31, 2005
                (As
                  Previously Reported)
              
              Amount of   Change
              
              December
                  31, 2005
                (As Restated)Balance
                  SheetDerivatives
              
              $
              0
              
              
              4,179,316
              
              $
              4,179,316Total
                  current liabilities
              
              
              11,973,318
              
              
              4,179,316
              
              
              16,152,634Additional
                  paid-in capital
              
              
              55,077,909
              
              
              (6,733,487
              )
              
              48,344,422Accumulated
                  deficit during development stage
              
              
              (66,579,467
              )
              
              2,554,171
              
              
              (64,025,296
              )Total
                  Stockholders’ Deficiency
              
              $
              (11,965,644
              )
              $
              (4,179,316
              )
              $
              (16,144,960
              )





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
              )Derivative
                  expense
              
              
              0
              
              
              (36,906,415
              )
              
              (36,906,415
              )Total
                  Other Income (Expense)
              
              
              (5,686,593
              )
              
              (37,434,792
              )
              
              (43,121,385
              )Net
                  loss
              
              
              (33,131,286
              )
              
              (37,594,916
              )
              
              (70,726,202
              )Loss
                  per common share - basic and diluted
              
              $
              (0.33
              )
              $
              (0.37
              )
              $
              (0.70
              )




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




During
          2003, the Company entered into an agreement for the signage rights to a
          building
          located in Sarasota, Florida. The agreement called for the Company to issue
          942,600 shares of common stock in exchange for signage rights beginning
          April 1,
          2004 through May 31, 2009. The shares were valued at the recent cash offering
          price aggregating $300,000. The Company will amortize the cost over the
          life of
          the agreement. As of December 31, 2005, the Company has amortized $96,651
          of
          expense of the signage rights. The remaining value of $203,349 was impaired
          in
          December 2005 as a result of the Company’s decision to close the Sarasota,
          Florida office.
  **NOTE 4   
          PROPERTY AND EQUIPMENT**
 
 Property
          and equipment consisted of the following as of:
  **December
                    31, 2005**Office
                    equipment
                
                $
                91,087Computer
                    equipment
                
                
                347,603Computer
                    software
                
                
                357,922Office
                    furniture
                
                
                126,631Leasehold
                    improvements
                
                
                36,914960,157Less
                    accumulated depreciation
                
                
                (286,243
                )Less
                    sale of equipment
                
                
                (17,415
                )Less
                    loss on disposal of assets
                
                
                (5,459
                )Less
                    impairment
                
                
                (651,040
                )Property
                    & Equipment, Net
                
                $
                -
 
 Depreciation
          expense during the twelve months ended December 31, 2005, the twelve months
          ended December 31, 2004, and the period from December 9, 2002 (Inception)
          to
          December 31, 2005 was $155,400, $127,075 and $286,243, respectively. During
          2005
          and 2004, the Company recognized impairment of property and equipment of
          $298,741 and 352,299 respectively due to the restructuring of the offices
          in
          Seattle, Washington and Sarasota, Florida.




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





***(A)
      Notes Issued***





During
      2003, the Company received $275,000, net of offering costs of $25,000 in the
      form of a 20% secured convertible debenture that matures on February 28, 2004
      and is guaranteed by the Company's Chairman. The maximum borrowings available
      under the debenture agreement are $750,000. The debenture is secured by all
      of
      the Company's assets and is convertible in its entirety at the option of the
      holder into the Company's common stock at a conversion price of $1.00. There
      was
      no beneficial conversion recognized on the issuance of the convertible notes
      payable as the conversion price was equal to recent cash offering price. During
      February 2004, the entire convertible note was repaid with cash of $275,000.
      At
      December 31, 2005, the outstanding balance on the convertible debenture was
      $0.




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




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




F-25


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




On
        February 27, 2004, the Company borrowed $500,000 under a 12% secured
        subordinated debenture for a maximum term of 12 months. This note was settled
        on
        May 16, 2005 via a Settlement Agreement which converted the entire amount
        of the
        note into common stock at a per share price of $0.14. The Company recognized
        a
        loss on the conversion of $265,500.




On
        April
        7, 2004, the Company borrowed $500,000 under a 15% promissory note which
        was
        initially payable on December 15, 2004 and subsequently became payable on
        March
        31, 2005 per a conversion option agreement dated November 10, 2004 that entitles
        the note holder to convert the amount of the note into shares of stock at
        a per
        share price of $0.10; the conversion option was treated as a $216,000 discount
        to the debenture and the discount was amortized over the life of the conversion
        option agreement. In addition, the note holder is entitled to a Stock Purchase
        Warrant for 200% of the number of shares obtained in the conversion at a
        warrant
        exercise price of $0.10. As additional consideration, the Company issued
        to the
        holder 200,000 shares of common stock having a fair value of $284,000. The
        shares were treated as a discount to the note and the discount is being
        amortized over the life of the note. The note is secured with the assets
        of the
        Company. On March 22, 2005, the note was paid in full via a Conversion Agreement
        which converted the entire amount of the note into common stock at a per
        share
        price of $0.10. The Company recognized a loss on the conversion of interest
        for
        $130,411.




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




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




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




F-26




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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




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




On
        June
        4, 2004, the Company borrowed $825,000 under a 15% secured convertible
        promissory note, which was initially due no later than June 3, 2005 but the
        note
        was amended to be payable no later than January 15, 2005. As additional
        consideration, the Company issued the holder 511,000 shares of common stock
        having a fair value of $753,725. The shares were treated as a discount to
        the
        note and the discount is being amortized over the life of the note. The entire
        amount of the note was convertible into shares of common stock at a price
        of
        $0.75 per
        share
        and the Company recognized beneficial conversion on the promissory note of
        $71,275. The beneficial conversion was treated as a discount to the note
        and the
        discount is being amortized over the life of the note. The note is secured
        with
        the assets of the Company. On February 11, 2005, the note was settled via
        a
        Settlement Agreement which converted the entire amount of the note into common
        stock at a per share price of $0.215. The Company recognized a loss on the
        settlement of $738,794.





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




On
      July
      28, 2004, the Company borrowed $500,000 under a 15% promissory note which is
      payable on July 28, 2005. As consideration for a Director's personal guaranty
      of
      note, the Company issued the Director 800,000 shares of common stock having
      a
      fair value of $832,000. On November 1, 2005 the note and unpaid interest was
      assigned to a Director. On December 9, 2005 the note was amended to include
      accrued interest of $60,437 with simple interest due December 31, 2006. The
      principal and accrued interest on this note as of December 31, 2005 was
      $574,682.




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




F-27




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




On
      October 20, 2004, the Company entered into a Bridge Loan Agreement with Hazinu
      Ltd. pursuant to which the Lender advanced the principal amount of $300,000
      to
      the Company on October 21, 2004 in exchange for (i) a 10% secured promissory
      note in such principal amount, (ii) 500,000 shares of our common stock, and
      (iii) warrants to purchase 500,000 shares of our common stock at an exercise
      price of $0.50 per share. The value of the shares and warrants of $152,500
      and
      $147,500, respectively were treated as a discount to the note and the discount
      is being amortized over the life of the note. The note was due December 31,
      2004
      and during December 2004, the entire note was repaid with cash. At December
      31,
      2005, the outstanding balance on the convertible debenture was $0.





On
      October 27, 2004, the Company entered into a Bridge Loan Agreement with JM
      Investors, LLC, Fenmore Holdings, LLC, Viscount Investments Limited and
      Congregation Mishkan Sholom pursuant to which the Lenders advanced an aggregate
      principal amount of $300,000 to the Company on October 28, 2004 in exchange
      for
      (i) 10% secured promissory notes in such aggregate principal amount, (ii)
      500,000 shares of our common stock and (iii) warrants to purchase an aggregate
      of 500,000 shares of our common stock at an exercise price of $0.50 per share.
      The value of the shares and warrants of $152,500 and $147,500, respectively
      were
      treated as a discount to the note and the discount is being amortized over
      the
      life of the note. The note was due December 31, 2004 and during December 2004,
      the entire note was repaid with cash. At December 31, 2005, the outstanding
      balance on the convertible debenture was $0.




On
        December 13, 2004, the Company entered into a Bridge Loan Agreement with
        15
        various entities pursuant to which the Lenders advanced an aggregate principal
        amount of $1,160,000 to the Company on December 16, 2004 in exchange for
        (i) 8%
        secured promissory notes in such aggregate principal amount, (ii) 250,000
        shares
        of our common stock and (iii) warrants to purchase an aggregate of 16,312,461
        shares of our common stock at exercise prices ranging from $0.10 to $1.00
        per
        share. The value of the shares and warrants of $60,000 and $1,100,000,
        respectively were treated as a discount to the note and the discount is being
        amortized over the life of the note. The debentures are convertible into
        shares
        of common stock. The conversion price of the debentures is seventy-five percent
        of the lowest closing price during the five trading days ending on the trading
        day before the conversion date. On October 10, 2005 $20,000 of the note and
        $1,183 of accrued interest was converted through a settlement at a per share
        price of $0.029. The Company recognized a loss on the conversion of $1,300.
        On
        December 30, 2005 $59,074 of the note was converted per the conversion terms
        of
        the note at a per share price of $0.004875 and $0.005650. No gain or loss
        was
        recognized by the Company on the conversion. The note was due December 16,
        2005
        and is currently in default and accruing interest at a default rate of 18%.
        At
        December 31, 2005, the outstanding balance on the convertible note was
        $1,483,424.




On
        December 28, 2004, the Company entered into a Bridge Loan Agreement with
        14
        various entities pursuant to which the Lenders advanced an aggregate principal
        amount of $1,000,000 to the Company on January 6, 2005 in exchange for (i)
        8%
        secured promissory notes in such aggregate principal amount, (ii) 500,000
        shares
        of our common stock and (iii) warrants to purchase an aggregate of 4,4687,485
        shares of our common stock at an exercise price of $0.10 per share. The value
        of
        the shares and warrants of $370,000 and $630,000, respectively were treated
        as a
        discount to the note and the discount is being amortized over the life of
        the
        note. The debentures are convertible into shares of common stock. The conversion
        price of the debentures is seventy-five percent of the lowest closing price
        during the five trading days ending on the trading day before the conversion
        date. On October 10, 2005 $137,500 of the note and $8,875 of accrued interest
        was converted through a settlement at a per share price of $0.029. The Company
        recognized a loss on the conversion of $8,664. On December 30, 2005 $21,667
        of
        the note was converted per the conversion terms of the note at a per share
        price
        of $0.004875. No gain or loss was recognized by the Company on the conversion.
        The note was due December 28, 2005 and is currently in default and accruing
        interest at a default rate of 18%. At December 31, 2005, the outstanding
        balance
        on the convertible note was $1,145,359.





On
        January 27, 2005, the Company borrowed $300,000 from Timothy Roberts, the
        Company’s Chairman, under a 15% promissory note, which was payable no later than
        April 27, 2005. On or about May 10 through 12, 2005, this note was assigned
        by
        Mr. Roberts to the following parties (1) Gerard Dariano, $100,000; (2) Fred
        Niedrich, $50,000; (3) Gary Fears, $50,000; and (4) John Landino, $100,000.
        This
        note was settled on June 13, 2005 via a Settlement Agreement which converted
        the
        entire amount of the note into common stock at a per share price of $0.10.
        The
        Company recognized a loss on the conversion of $95,616.




F-28




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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




On
        January 31, 2005, the Company borrowed $175,000 under a 15% convertible
        promissory note, which is payable no later than May 10, 2005. The note is
        convertible into 1,000,000 million shares of common stock and the Company
        recognized beneficial conversion on the promissory note of $175,000. The
        beneficial conversion was treated as a discount to the note and the discount
        is
        being amortized over the life of the note. In addition, the note holder is
        entitled to a Stock Purchase Warrant for 200,000 shares of common stock at
        a
        warrant exercise price of $0.10 per share. On June 10, 2005, the entire amount
        of the note was converted at a per share price of $0.10. The Company recognized
        a loss on the conversion of $3,416 as related to the conversion of
        interest.




On
        January 31, 2005, the Company borrowed $100,000 under a 15% convertible
        promissory note, which is payable no later than May 10, 2005. The note is
        convertible into 1,000,000 million shares of common stock and the Company
        recognized beneficial conversion on the promissory note of $100,000. The
        beneficial conversion was treated as a discount to the note and the discount
        was
        amortized over the life of the note. In addition, the note holder is entitled
        to
        a Stock Purchase Warrant for 200,000 shares of common stock at a warrant
        exercise price of $0.10 per share. On June 10, 2005, the entire amount of
        the
        note was converted at a per share price of $0.10. The Company recognized
        a loss
        on the conversion of $3,309 as related to the conversion of
        interest.




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




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




On
        March
        21, 2005, the Company borrowed $200,000 under a 17% promissory note, which
        was
        payable no later than May 20, 2005. As additional consideration, the note
        holder
        is entitled to an increase in the note holder’s previously existing Stock
        Purchase Warrant coverage from 150% to 200% of the number of shares obtained
        in
        the conversion at a warrant exercise price of $0.10 related to the note holder’s
        notes dated April 7, 2004 and May 7, 2004. The increased warrant coverage
        was
        treated as a $200,000 discount to the debenture and the discount is being
        amortized over the life of the note. This note was settled on June 10, 2005
        via
        a Conversion Agreement which converted the entire amount of the note into
        common
        stock at a per share price of $0.10. The Company recognized a loss on the
        conversion of $62,263 as related to the conversion of interest.  In
        conjunction with the conversion, the Company issued 6,226,359 warrants at
        an
        exercise price of $0.10 per share.




On
        April
        7, 2005, the Company borrowed $300,000 under a 12% promissory note, which
        was
        payable no later than August 5, 2005. On September 15, 2005, the entire amount
        of the note was settled pursuant to 3(a)(10) of the Securities Act of 1933
        at a
        per share price of $0.05. The Company recognized a loss on the conversion
        of
        $13,277.




On
        April
        29, 2005, the Company borrowed $200,000 under a 17% convertible promissory
        note,
        which was payable no later than July 28, 2005. The entire amount of the note
        was
        convertible into shares of common stock at a price of $0.10 per share. The
        beneficial conversion was treated as a $200,000 discount to the note and
        the
        discount was amortized over the life of the note. As additional consideration,
        400,000 warrants were issued to the note holder with an exercise price of
        $.10
        per share. These warrants expire on April 29, 2008. On September 15, 2005,
        the
        entire amount of the note was settled pursuant to 3(a)(10) of the Securities
        Act
        of 1933 at a per share price of $0.05. The Company recognized a loss on the

        conversion of $12,693.




On
        June
        13, 2005, the Company borrowed $68,000 under a 17% convertible promissory
        note,
        which was payable no later than August 12, 2005. The entire amount of the
        note
        was convertible into shares of common stock at a price of $0.10 per share.
        The
        beneficial conversion was treated as a $20,400 discount to the note and the
        discount was amortized over the life of the note. On September 15, 2005,
        the
        entire amount of the note was settled pursuant to 3(a)(10) of the Securities
        Act
        of 1933 at a per share price of $0.05. The Company recognized a loss on the
        conversion of $4,315.





On
        June
        30, 2005, the Company borrowed $100,000 under a 17% promissory note, which
        is
        unsecured and was payable no later than September 28, 2005. On August 11,
        2005,
        the entire amount of the note was settled pursuant to 3(a)(10) of the Securities
        Act of 1933 at a per share price of $0.05. The Company recognized no gain
        or
        loss on the conversion.




F-29




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




On
        September 7, 2005, the Company borrowed $50,000 under a 15% promissory note,
        which is unsecured and was payable no later than November 7, 2005. On November
        16, 2005, the entire amount of the note was settled pursuant to 3(a)(10)
        of the
        Securities Act of 1933 at a per share price of $0.015. The Company recognized
        a
        loss on the conversion of $6,757.




On
        September 7, 2005, the Company borrowed $50,000 under a 15% promissory note,
        which is unsecured and was payable no later than November 7, 2005. On November
        16, 2005, the entire amount of the note was settled pursuant to 3(a)(10)
        of the
        Securities Act of 1933 at a per share price of $0.015. The Company recognized
        a
        loss on the conversion of $6,757.





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





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





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





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





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




Notes
                  payable - face value - current
              
              $
              4,072,196





The
        discount from the face value of the promissory notes is being amortized over
        the
        life of the promissory notes as additional interest expense. During the twelve
        month period ended December 31, 2005, the twelve month period ended December
        31,
        2004 and the period from December 9, 2002 (Inception) to December 31, 2005,
        the
        Company has recorded interest expense from the discounts of $3,599,312,
        $2,150,588 and $5,774,900, respectively.





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





***(B)
      Derivative Liabilities***





In
        connection with the December 2004 Financings aggregating $2.16 million, we
        committed to pay penalties of 2% per month for each month after an agreed
        upon
        period (approximately three months) during which we fail to cause a resale
        registration statement covering the underlying shares to be declared effective
        by the Securities and Exchange Commission.   On December 16,
        2004, we closed a transaction pursuant to a Securities Purchase Agreement,
        dated
        as of December 13, 2004, with several accredited investors pursuant to which
        those accredited investors lent an aggregate principal amount of $1,160,000
        to
        us in exchange for (i) 8% convertible debentures Series 04-02 in that aggregate
        principal amount, and (ii) Class 2004-A warrants to purchase 5,437,487 shares
        of
        our common stock, Class 2004-B warrants to purchase 5,437,487 shares of our
        common stock and Class 2004-C warrants to purchase 5,437,487 shares of our
        common stock.   The debentures bear interest at 8% per annum and
        mature on December 16, 2005. T he
        conversion price of the debentures means seventy-five percent of the lowest
        closing price during the five trading days ending on the trading day before
        the
        conversion date . Each
        of
        the warrants is exercisable until December 31, 2009, except that after the
        effective date of the registration statement which we have agreed to file
        for
        the resale of the lenders' shares, we may accelerate the expiration date
        of the
        Class B and Class C warrants to a date at least 3 trading days after the
        lender's receipt of that notice. The initial per share exercise prices of
        the
        warrants are: Class A - $.10; Class B - $0.75; and Class C - $1.00.
  The timely and full fulfillment of our obligations pursuant to the
        debentures has been personally guaranteed by Timothy M. Roberts, our Chairman
        and a director.   In connection with this financing, we paid a
        finder's fee to West Hastings Limited in the amount of $92,800 and issued
        232,000 warrants at an exercise price of $0.50.





On
        December 28, 2004, the Securities Purchase Agreement dated December 13, 2004
        and
        related Class A warrants, Registration Rights Agreement and debentures were
        amended. The material provisions are as follows:   Securities Purchase
        Agreement - If we complete the first tranche of a financing of no less than
        $12
        million and in connection with such financing, retire or convert our debt
        (other
        than the convertible debentures), the conversion price of the debentures
        will be
        fixed at $0.10. In addition, the investors received an aggregate of 250,000
        shares of common stock.





On
        December 28, 2004, we closed a transaction pursuant to a Securities Purchase
        Agreement, dated as of December 23, 2004, with several accredited investors
        pursuant to which those accredited investors lent an aggregate principal
        amount
        of $1,000,000 to us in exchange for (i) 8% convertible debentures Series
        04-03
        in that aggregate principal amount, and (ii) Class 2004-A-2 warrants to purchase
        4,687,485 shares of our common stock. The debentures bear interest at 8%
        per
        annum and mature one year from issuance. The conversion price of the debentures
        means seventy-five percent of the lowest closing price during the five trading
        days ending on the trading day before the conversion
        date.




The
        warrants are exercisable until December 31, 2009. The per share exercise
        price
        of the warrants is $0.10.   The timely and full fulfillment of our
        obligations pursuant to the debentures have been personally guaranteed by
        Timothy M. Roberts, our chief executive officer and a director.   In
        connection with this financing, we will pay a finder's fee to West Hastings
        Limited in the amount of $80,000 and issued 200,000 warrants at an exercise
        price of $0.50.


On
        December 28, 2004, the Securities Purchase Agreement dated December 23, 2004
        and
        related warrants, Registration Rights Agreement and debentures were amended.
        The
        material provisions are as follows:


Securities
        Purchase Agreement - If we complete the first tranche of a financing of no
        less
        than $12 million and in connection with such financing, retire or convert
        our
        debt (other than the convertible debentures), the conversion price of the
        debentures will be fixed at $0.10.In addition, the investors received an
        aggregate of 500,000 shares of common stock.


The
        debentures include certain features that are considered embedded derivative
        financial instruments, such as the conversion feature, events of default
        and a
        variable liquidated damages clause. These features are described below, as
        follows:





The
        debentures’ conversion feature is identified as an embedded derivative and has
        been bifurcated and recorded on the Company's balance sheet at its fair value;





The
        SPA
        contains certain events of default including not having 150% of the number
        of
        shares of Common Stock issuable as may be required to satisfy the conversion
        rights of the Holders of principal on all Unconverted Debentures outstanding
        at
        any time plus the number of shares issuable upon exercise of all outstanding
        Warrants held by all Holders as of such date, which is identified as an embedded
        derivative and has been bifurcated and recorded on the Company's balance
        sheet
        at its fair value;





In
        conjunction with the debentures, the Company issued warrants to purchase
        21,431,946 shares of common stock. The accounting treatment of the derivatives
        and warrants requires that the Company record the warrants at their fair
        values
        as of the inception date of the agreement, which totaled $9,280,565.





The
        initial fair value assigned to the embedded derivatives and warrants was
        $14,463,615. The Company recorded the first $1,730,000 of fair value of the
        derivatives and warrants to debt discount which will be amortized to interest
        expense over the term of the debenture. The Company recorded an amortization
        expense for the year ended December 31, 2005, the year ended December 31,
        2004
        and from December 9, 2002 (Inception) through December 31, 2005 of $2,104,110,
        $55,890 and $2,160,000, respectively.





The
        market price of the Company's common stock significantly impacts the extent
        to
        which the Company may be required or may be permitted to convert the
        unrestricted and restricted portions of the debenture into shares of the
        Company's common stock. The lower the market price of the Company's common
        stock
        at the respective times of conversion, the more shares the Company will need
        to
        issue to convert the principal and interest payments then due on the debenture.
        If the market price of the Company's common stock falls below certain
        thresholds, the Company will be unable to convert any such repayments of
        principal and interest into equity, and the Company will be forced to make
        such
        repayments in cash. The Company's operations could be materially adversely
        impacted if the Company is forced to make repeated cash payments on the
        debenture.





In
        summary, the year ended December 31, 2005, the year ended December 31, 2004
        and
        from December 9, 2002 (Inception) through December 31, 2005, the Company
        recorded a gain/(loss) on derivatives of $20,282,457, $(22,499,401) and
        $(2,216,944), respectively, as a result of the financing described above
        in
        accordance with guidance provided in EITF 00-19:





Additionally,
        as a result of the issuance of the debenture with such terms, there is no
        explicit number of shares that are to be delivered upon satisfaction of
        conversion, the Company is unable to assert that it had sufficient authorized
        and unissued shares to settle such note. Accordingly, all of the Company's
        previously issued and outstanding instruments, such as warrants and options
        as
        well as those issued in the future, would be classified as liabilities as
        well,
        effective with the issuance of the convertible promissory note. Absent other
        transactions which would warrant the same accounting treatment, the Company
        will
        discontinue the recognition of derivative liabilities once it can assert
        that it
        has a sufficient amount of authorized and unissued shares to settle its
        obligations which can be settled in shares.





As
        of
        December 31, 2005 and December 31, 2004 the fair value of all other outstanding
        warrants was, $312,863 and $18,760,630, respectively. The difference of
        $18,447,767 was recorded as a gain on derivatives as provided for in EITF
        00-19.




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





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




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




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




F-30


**INFINIUM
        LABS, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **Notes
        to Consolidated Financial Statements**
  During
        2003, the Company issued 1,748,380 shares of common stock for $545,717 ($0.28
        per share), net of offering costs of $11,239.
  During
        2003, the Company issued 420,768 shares of common stock for $66,672 ($0.16
        per
        share).
  During
        2004, the Company issued 6,650,000 shares of common stock for $1,662,500
        ($0.25
        per share).
 
 During
        2004, the Company issued 40,000 shares of common stock for cash of $100,000
        ($2.50 per share).
  During
        2004, the Company issued 1,900,400 shares of common stock for $475,100 ($0.25
        per share). In connection with this transaction, the Company issued 2,022,900
        warrants to purchase common stock exercisable at a price of $0.25. The warrants
        are fully exercisable at any time for a period of five years after the closing
        date of the sale. None of the warrants were executed, forfeited or expired
        in
        2005. Therefore, all 2,022,900 warrants were outstanding and exercisable
        as of
        March 31, 2005.
  On
        August
        26, 2004, the Company issued 100,000 shares of common stock for $200,000
        ($2.00
        per share).
  During
        2004, the Company issued 1,649,635 shares of common stock for $264,075 ($0.16
        per share).
  ***(B)
        Stock Issued for Services***
 
 During
        2002, the Company issued 2,957,376 shares of common stock for software
        development services valued for financial accounting purposes at $1,113,005
        ($0.3775 per share) based upon recent cash offering prices.
  During
        2003, the Company issued 434,036 shares of common stock for software development
        services valued for financial accounting purposes at $138,640 ($0.3175 per
        share) based upon recent cash offering prices.
  During
        2003, the Company issued 942,600 shares of common stock for signature rights
        valued for financial accounting purposes at $300,000 ($0.3175 per share)
        based
        upon recent cash offering prices.
  During
        2004, the Company issued 1,750,000 shares of common stock for software
        development and consulting services with a fair value of $2,581,250 ($1.475
        per
        share).
  During
        2004, the Company issued 279,260 shares of common stock for services with
        a fair
        value of $446,816 ($1.60 per share).
  During
        2004, the Company issued 830,000 shares of restricted common stock for services
        to three consultants having a fair value of $1,195,200 ($1.44 per
        share).
  During
        2004, the Company issued 440,000 shares of restricted common stock for services
        with a fair value of $404,800 ($.92 per share).
 
 During
        2004, the Company issued 100,000 shares of our restricted common stock for
        services with a fair value of $147,500 ($1.475 per share).
 
 During
        2004, the Company issued 1,933,224 shares to consultants for services with
        a
        fair value of $1,162,444 ($0.60 per share).
 
 On
        July
        28, 2004, as consideration for the Director's personal guaranty of a note
        payable the Company issued the Director 800,000 shares of common stock having
        a
        fair value of $832,000 ($1.04 per share). These shares issued to the Director
        were restricted shares of common stock and, therefore, were not tradable
        at the
        time of issuance. These shares of common stock issued to the Director may
        become
        unrestricted on July 28, 2005.
  F-31


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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





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





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





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





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





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





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




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





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





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





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





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





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





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




F-32




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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





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





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





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




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





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





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





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




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





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





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





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





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





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





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


F-33




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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


F-34




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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


F-35




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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




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





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





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





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





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





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





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





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





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





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





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




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





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




F-36




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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




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





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





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





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





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





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





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





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





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




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





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




F-37


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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




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





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





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





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





On
        January 6, 2005, the Company issued 7,043,750 shares of common stock to convert
        a note payable with a fair value of $8,311,625 ($1.18 per share). The note
        and
        accrued interest totaled $704,375 which was converted into equity at $0.10
        per
        share. The Company recognized a loss of $7,607,250 ($1.08 per share) on the
        conversion of this note.





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





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





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





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





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





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





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




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





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





F-38




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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





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




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





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





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





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





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





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





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





***(I)
      In Kind Contribution***





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





***(J)
      Stock Dividend***





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




F-39


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




***(K)
      Stock Split***




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




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





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





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





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





As
        of
        December 31, 2005, the Company had an obligation to reserve 206,179,066 shares
        of common stock issuable upon conversion of debentures. In addition, as of
        December 31, 2005, the Company had outstanding warrants totaling 60,328,812
        shares of common stock.




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




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


**NOTE 7**    **INCOME
          TAXES**
 
 Income
          tax expense (benefit) is summarized as follows:
  **Year
                    Ended December 31,**
                  **2005**
                
                **Year
                    Ended December 31,**
                  **2004**
                
                **December
                    9, 2002 (Inception) through December 31, 2005**Current:Federal
                
                $
                -
                
                $
                -
                
                $
                -State
                
                
                -
                
                
                -
                
                
                -Deferred
                    - Federal and State
                
                
                -
                
                
                -
                
                
                -Income
                    tax expense (benefit)
                
                $
                -
                
                $
                -
                
                $
                -
 
 The
          Company's tax expense differs from the "expected" tax expense as
          follows:
  **Year
                    Ended December 31,**
                  **2005**
                
                **Year
                    Ended December 31,**
                  **2004**
                
                **December
                    9, 2002 (Inception) through December 31, 2005**U.S.
                    Federal income tax expense (benefit)
                
                $
                (6,515,075
                )
                $
                (12,543,111
                )
                $
                (20,166,418
                )Effect
                    on net operating loss carryforward
                
                
                6,515,075
                
                
                12,543,111
                
                
                20,166,418$
                -
                
                $
                -
                
                $
                -


F-40




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




The
          tax
          effects of temporary differences that give rise to significant portions
          of
          deferred tax assets and liabilities are as follows:
  **December
                    31, 2005**
                
                **December
                    31, 2004**Deferred
                    tax assets:Net
                    operating loss carry forward
                
                $
                20,166,418
                
                $
                13,651,343Total
                    gross deferred tax assets
                
                
                20,166,418
                
                
                13,651,343Less
                    valuation allowance
                
                
                (20,166,418
                )
                
                (13,651,343
                )Net
                    deferred tax assets
                
                $
                -
                
                $
                -
  At
          December 31, 2005, the Company had a net operating loss carry forward of
          $53,591,331 for U.S. Federal income tax purposes available to offset future
          taxable income expiring through 2025. The net change in the valuation allowance
          during the year ended December 31, 2005 was an increase of
          $6,515,075.




**NOTE 8
      COMMITMENTS AND CONTINGENCIES**





***(A)
      Distribution Agreements***





**Riverdeep,
      Inc** .




Infinium
      signed a distribution agreement with Riverdeep, Inc. ("Riverdeep") dated October
      23, 2003 that will allow Infinium to market Riverdeep's catalog of award-winning
      video games and edutainment software on the Phantom Game System. The agreement
      expires on March 30, 2006 and authorizes Infinium to distribute Riverdeep's
      products, via the Phantom Game Service or pre-load, onto the Phantom Game
      Receiver. The titles will be available to subscribers of the Phantom Game
      Service on both a pay-per-play and pay-to-own basis.





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




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


F-41




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





As
      the
      Company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the payments for
      the guaranteed license fees, the company has expensed the guaranteed license
      fees as incurred. From December 9, 2002 (inception) through December 31, 2005,
      $225,000 of guaranteed license fees had been accrued and reported on the
      accompanying financial statements.





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





The
      Company is currently in default of this agreement.





**Codemasters
      Software Company Ltd.**




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





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




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





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





As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2005, $50,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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




F-42





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




**Atari,
      Inc.**




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





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




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





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





As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2005, $500,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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




**Eidos
      Inc.**




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




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




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





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




F-43





**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2005, $125,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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




**Enlight
      Inc.**




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





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




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





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





As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2005, $10,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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




**Vivendi
      International**




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


F-44




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




As
      the
      company has not commenced sales of the game system and there is no definitive
      way to determine the future economic benefit associated with the advance
      payments, the company has expensed the advance royalty payments as incurred.
      From December 9, 2002 (inception) through December 31, 2005, $175,000 of
      guaranteed license fees had been accrued and reported on the accompanying
      financial statements.





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




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




***(B)
      Development Agreement***





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





***(C)
      Leases***





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





Year
                  Ending December 31,2006
              
              
              245,0352007
              
              
              194,0112008
              
              
              205,4272009
              
              
              87,577Thereafter
              
              
              -Total
              
              $
              732,050





The
      Florida lease provides for a renewal option of 5 years at a rental rate equal
      to
      the last year of the initial term with an increase equal to the Consumer Price
      Index not to exceed 5%. Rent expense for the year ended December 31, 2005,
      the
      year ended December 31, 2004, and the period from December 9, 2002 (Inception)
      to December 31, 2005 was $572,107, $373,590 and $949,557,
      respectively.




***(D)
      Litigation***





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




F-45




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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





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





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





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





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





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




F-46




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





Walter
        Dorwin Teague Associates v. Infinium Labs, Inc., No.
        05-9-35846-2. In December 2005, Teague Associates entered an arbitration
        award
        in the Superior Court for King County, Washington. The judgment is for $51,843.
        Teague Associates was retained in 2004 to assist and support various industrial
        design requirements associated with hardware for the Phantom game service.
        The
        Company defaulted on its payment obligations and this resulted in the associated
        arbitration award.





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





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





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





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





***(E)
      Licenses***





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


F-47


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




***(F)
      Payroll Taxes***





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




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





***(G)
      Employment Agreements***





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





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





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





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





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





**NOTE 9
      STOCK OPTIONS AND WARRANTS**





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





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




F-48


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**







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




Stock
      Purchase Warrants





For
        the
        year ended December 31, 2005, the Company granted warrants to
        purchase 19,662,215 shares of common stock in conjunction with notes
        payable issued and notes payable settlements. The fair values of the warrants
        were recorded as $1,800,889 as provided for in EITF
        00-19.




**December
                  31,**
                **2005**
              
              **December
                  31,**
                **2004**Warrants
                  for common stock issued to a note holder. The term of the warrants
                  are
                  five years expiring November 10, 2009. The warrants are exercisable
                  at
                  $0.10 per share
              
              
              5,873,288
              
              
              4,404,966Warrants
                  for common stock issued to a note holder. The term of the warrants
                  are
                  five years expiring November 10, 2009. The warrants are exercisable
                  at
                  $0.10 per share.
              
              
              11,630,138
              
              
              8,722,604Warrants
                  issued with subscription agreements. The term of the warrants are
                  five
                  years expiring November 10, 2009 and are exercisable at $0.10 per
                  share.
              
              
              678,900
              
              
              678,900Warrants
                  issued with subscription agreements. The term of the warrants are
                  five
                  years expiring November 10, 2009 and are exercisable at $0.25 per
                  share.
              
              
              1,344,000
              
              
              1,344,000Warrants
                  issued with subscription agreements. The term of the warrants are
                  five
                  years expiring November 10, 2009 and are exercisable at $0.10 per
                  share.
              
              
              3,084,181
              
              
              3,084,181Warrants
                  issued in conjunction with convertible notes. The term of the warrants
                  are
                  five years expiring December 31, 2009 and are exercisable at $0.50
                  per
                  share.
              
              
              232,000
              
              
              232,000Warrants
                  issued in conjunction with convertible notes. The term of the warrants
                  are
                  five years expiring December 31, 2009 and are exercisable at $0.50
                  per
                  share.
              
              
              200,000
              
              
              200,000Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring October 22, 2009. The warrants are exercisable at
                  $0.50 per
                  share.
              
              
              500,000
              
              
              500,000Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring October 27, 2009. The warrants are exercisable at
                  $0.50 per
                  share.
              
              
              500,000
              
              
              500,000Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              5,437,487
              
              
              5,437,487Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $0.75
                  per share.
              
              
              5,437,487
              
              
              5,437,487Warrants
                  for common stock issued to note holders. The term of the warrants
                  are five
                  years expiring December 31, 2009. The warrants are exercisable
                  at $1.00
                  per share.
              
              
              5,437,487
              
              
              5,437,487Warrants
                  for common stock issued to note holder. The term of the warrants
                  is three
                  years expiring February 4, 2008. The warrants are exercisable at
                  $0.10 per
                  share.
              
              
              200,000
              
              
              -Warrants
                  for common stock issued to note holder. The term of the warrants
                  is three
                  years expiring February 4, 2008. The warrants are exercisable at
                  $0.10 per
                  share.
              
              
              200,000
              
              
              -Warrants
                  for common stock issued to note holder. The term of the warrants
                  is three
                  years expiring February 4, 2008. The warrants are exercisable at
                  $0.10 per
                  share.
              
              
              100,000
              
              
              -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
              
              
              4,687,485Warrants
                  for common stock issued to note holder. The term of the warrants
                  is three
                  years expiring April 29, 2008. The warrants are exercisable at
                  $0.10 per
                  share.
              
              
              400,000Warrants
                  for common stock issued to an investor. The term of the warrants
                  are five
                  years expiring June 10, 2010. The warrants are exercisable at $0.10
                  per share.
              
              
              6,226,359
              
              
              -Warrants
                  for common stock issued to an investor. The term of the warrants
                  is three
                  years expiring September 19, 2008. The warrants are exercisable
                  at $0.10
                  per share.
              
              
              8,160,000
              
              
              -Total
              
              
              60,328,812
              
              
              40,666,597




F-49


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




**NOTE 10**    **GOING
      CONCERN**





As
        reflected in the accompanying financial statements, the Company is in the
        development stage with no sales and has recurring net losses from inception
        of
        $64,025,296, has a working capital deficiency of $16,144,960, a stockholders’
deficiency of $16,144,960 and has a negative cash flow from operations of
        $15,339,599 from inception and notes payable in default of $3,486,759. This
        raises substantial doubt about its ability to continue as a going concern.
        The
        ability of the Company to continue as a going concern is dependent on the
        Company’s ability to raise additional capital and implement its business plan.
        The financial statements do not include any adjustments that might be necessary
        if the Company is unable to continue as a going concern.




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





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





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





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





On
        July
        28, 2004, we issued Richard Angelotti, a director, 800,000 shares of common
        stock as consideration for his personal guaranty of a promissory note payable
        secured by a real estate mortgage encumbering the director's residence. The
        note, effective on July 28, 2004 and expiring on July 27, 2005, was payable
        to
        Stephen A. Witzer, Trustee U/A dated February 7, 1985. The principal is for
        $500,000 with interest calculated at fifteen percent (15%) per annum, plus
        a
        five percent (5%) penalty, if applicable, for any late payment. In the event
        of
        an uncured default, the interest increases to eighteen percent (18%) per
        annum.
        On December 9, 2005, this promissory note was assigned by Witzer to Richard
        Angelotti. The terms of the promissory note were subsequently amended to
        provide
        that as of November 1, 2005, principal and accrued interest totaled $560,437.
        With respect to the revised principal, commencing November 2, 2005, simple
        interest at a rate of fifteen percent (15%) per annum will accrue on a monthly
        basis until December 31, 2006 (maturity date), at which time the entire
        remaining principal and all accrued and unpaid interest are due in
        full.





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





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





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





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





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





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




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





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





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





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





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





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





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





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





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





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





On
        December 9, 2005, this the July 28, 2004 promissory note for $500,000 was
        assigned by Mr. Witzer to a Dick Angeloitti, a Director.  The terms of the
        promissory note were subsequently amended to provide that as of November
        1,
        2005, principal and accrued interest totaled $560,437.43.  With respect to
        the revised principal, commencing November 2, 2005, simple interest at a
        rate of
        fifteen percent (15%) per annum will accrue on a monthly basis until December
        31, 2006 (maturity date), at which time the entire remaining principal and
        all
        accrued and unpaid interest are due in full.





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





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





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





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




F-50


**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**




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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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


F-51




**INFINIUM
      LABS, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**Notes
      to Consolidated Financial Statements**





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





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





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





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





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





During
        April 2006, the Company issued 15,000,000 shares of common stock in partial
        conversion of notes and accrued interest. Principal and interest in the amount
        of $123,164 was converted per the conversion terms of the note. The various
        conversion prices were $0.004875, $0.005650, $0.0114825 and $0.013022 per
        share
        and a loss of $3,890 was recognized on the conversion of
        interest.





During
        May 2006, the Company issued 15,000,000 shares of common stock in partial
        conversion of notes. Principal in the amount of $131,303 was converted per
        the
        conversion terms of the note. The various conversion prices were $0.004875,
        $0.005650, $0.0114825 and $0.013022 per share.





***(B)
      Notes Payable***





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





**(C)
      Related Party Transactions**





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





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





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




***(D)
      Itron***





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




F-52