##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 0-17204
 
 INFINITY ENERGY RESOURCES, INC.
  Delaware
    
    20-3126427(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 
 (720) 932-7800
 None
 Common Stock
 þ o
 o þ
 o þ




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TABLE OF CONTENTS
 PART I Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Comprehensive Income (Loss)
    
    
    5Consolidated Statement of Changes in Stockholders Equity
    
    
    6Consolidated Statements of Cash Flows
    
    
    7Notes to Unaudited Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26PART II Other InformationItem 1. Legal Proceedings
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27Signatures
    
    
    28Exhibits
    
    
    29Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive Officer and Principal Financial OfficerCalculation of the Maximum Notes Balance
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
  September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,736
    
    
    $
    3,052Accounts receivable, less allowance for doubtful accounts of $85
(2005 and 2004)
    
    
    4,744
    
    
    
    3,494Note receivable
    
    
    
    
    
    
    1,581Inventories
    
    
    524
    
    
    
    286Prepaid expenses and other
    
    
    759
    
    
    
    654Total current assets
    
    
    15,763
    
    
    
    9,067Property and equipment, at cost, net of accumulated depreciation
    
    
    10,658
    
    
    
    8,764Oil and gas properties, using full cost accounting, net of accumulated
depreciation, depletion and amortizationProved
    
    
    47,470
    
    
    
    28,792Unproved
    
    
    21,099
    
    
    
    15,595Intangible assets, at cost, net of accumulated amortization
    
    
    2,474
    
    
    
    1,497Other assets, net
    
    
    272
    
    
    
    333Total assets
    
    $
    97,736
    
    
    $
    64,048LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Note payable and current portion of long-term debt
    
    $
    457
    
    
    $
    284Accounts payable
    
    
    2,558
    
    
    
    4,001Accrued liabilities
    
    
    3,589
    
    
    
    4,274Accrued interest
    
    
    888
    
    
    
    223Current portion of asset retirement obligations
    
    
    279
    
    
    
    Total current liabilities
    
    
    7,771
    
    
    
    8,782Long-term liabilities:Production taxes payable
    
    
    323
    
    
    
    469Asset retirement obligations, less current portion
    
    
    1,069
    
    
    
    635Long-term debt, less current portion
    
    
    25,386
    
    
    
    11,330Subordinated convertible notes payable
    
    
    
    
    
    
    14,010Total liabilities
    
    
    34,549
    
    
    
    35,226Commitments and contingenciesStockholders equity:Common stock, par value $.0001, authorized 75,000,000 shares,
issued and outstanding 13,501,988 (2005) and 10,628,196 (2004)
shares
    
    
    1
    
    
    
    1Additional paid-in-capital
    
    
    80,829
    
    
    
    43,363Accumulated deficit
    
    
    (17,643
    )
    
    
    (14,542
    )Total stockholders equity
    
    
    63,187
    
    
    
    28,822Total liabilities and stockholders equity
    
    $
    97,736
    
    
    $
    64,048
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Oilfield services
    
    $
    5,899
    
    
    $
    4,843
    
    
    $
    15,416
    
    
    $
    10,382Oil and gas
    
    
    2,906
    
    
    
    1,763
    
    
    
    6,554
    
    
    
    4,836Total revenue
    
    
    8,805
    
    
    
    6,606
    
    
    
    21,970
    
    
    
    15,218Cost of revenue:Oilfield services
    
    
    3,029
    
    
    
    2,359
    
    
    
    7,548
    
    
    
    5,636Oil and gas production expenses
    
    
    1,053
    
    
    
    498
    
    
    
    2,503
    
    
    
    1,336Oil and gas production taxes
    
    
    284
    
    
    
    207
    
    
    
    653
    
    
    
    558Total cost of revenue
    
    
    4,366
    
    
    
    3,064
    
    
    
    10,704
    
    
    
    7,530Gross profit
    
    
    4,439
    
    
    
    3,542
    
    
    
    11,266
    
    
    
    7,688General and administrative expenses
    
    
    1,496
    
    
    
    1,352
    
    
    
    4,132
    
    
    
    4,178Depreciation, depletion,
amortization and accretion
    
    
    2,184
    
    
    
    1,161
    
    
    
    5,567
    
    
    
    3,523Operating income (loss)
    
    
    759
    
    
    
    1,029
    
    
    
    1,567
    
    
    
    (13
    )Other income (expense):Financing costs:Interest expense
    
    
    (790
    )
    
    
    (328
    )
    
    
    (1,725
    )
    
    
    (917
    )Amortization of loan discount
and costs
    
    
    (489
    )
    
    
    (397
    )
    
    
    (1,195
    )
    
    
    (1,467
    )Early extinguishment of debt
    
    
    
    
    
    
    (4
    )
    
    
    (1,276
    )
    
    
    (208
    )Impairment of note receivable
    
    
    
    
    
    
    
    
    
    
    (396
    )
    
    
    Gain (loss) on sales of assets
    
    
    2
    
    
    
    2,787
    
    
    
    (89
    )
    
    
    2,748Other
    
    
    (119
    )
    
    
    34
    
    
    
    13
    
    
    
    111Total other income (expense)
    
    
    (1,396
    )
    
    
    2,092
    
    
    
    (4,668
    )
    
    
    267Net income (loss) before income taxes
    
    
    (637
    )
    
    
    3,121
    
    
    
    (3,101
    )
    
    
    254Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (637
    )
    
    $
    3,121
    
    
    $
    (3,101
    )
    
    $
    254Net income (loss) per share:Basic
    
    $
    (0.05
    )
    
    $
    0.33
    
    
    $
    (0.24
    )
    
    $
    0.03Diluted
    
    $
    (0.05
    )
    
    $
    0.29
    
    
    $
    (0.24
    )
    
    $
    0.03Weighted average shares outstanding:Basic
    
    
    13,453,246
    
    
    
    9,399,290
    
    
    
    12,745,252
    
    
    
    9,330,546Diluted
    
    
    13,453,246
    
    
    
    11,600,675
    
    
    
    12,745,252
    
    
    
    9,514,622
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (UNAUDITED)
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    (637
    )
    
    $
    3,121
    
    
    $
    (3,101
    )
    
    $
    254Reclassifications, net of tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98Comprehensive income (loss)
    
    $
    (637
    )
    
    $
    3,121
    
    
    $
    (3,101
    )
    
    $
    352
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (UNAUDITED)
  Additional
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance, December
31, 2004
    
    
    10,628,196
    
    
    $
    1
    
    
    $
    43,363
    
    
    $
    (14,542
    )
    
    $
    28,822Issuance of common
stock upon the
exercise of options
and warrants
    
    
    857,556
    
    
    
    
    
    
    
    4,707
    
    
    
    
    
    
    
    4,707Conversion of 8%
subordinated
convertible notes
and accrued
interest into
common stock
    
    
    517,296
    
    
    
    
    
    
    
    2,524
    
    
    
    
    
    
    
    2,524Conversion of 7%
subordinated
convertible notes
and accrued
interest into
common stock
    
    
    1,498,940
    
    
    
    
    
    
    
    11,656
    
    
    
    
    
    
    
    11,656Issuance of
warrants to
purchase 2,163,493
common shares
    
    
    
    
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    8,250Beneficial
conversion feature
of senior secured
notes
    
    
    
    
    
    
    
    
    
    
    10,329
    
    
    
    
    
    
    
    10,329Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,101
    )
    
    
    (3,101
    )Balance, September
30, 2005
    
    
    13,501,988
    
    
    $
    1
    
    
    $
    80,829
    
    
    $
    (17,643
    )
    
    $
    63,187
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  For the Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    (3,101
    )
    
    $
    254Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation, depletion, amortization and
accretion
    
    
    5,567
    
    
    
    3,523Amortization of loan discount and costs
    
    
    1,195
    
    
    
    1,467Non-cash early extinguishment of debt cost
    
    
    1,052
    
    
    
    208Impairment of note receivable
    
    
    396
    
    
    
    (Gain) loss on sales of assets
    
    
    89
    
    
    
    (2,748
    )Unrealized loss on derivative instruments
    
    
    118
    
    
    
    Change in operating assets and liabilities:Increase in accounts receivable
    
    
    (1,271
    )
    
    
    (1,835
    )(Increase) decrease in inventories
    
    
    (238
    )
    
    
    101Increase in prepaid expenses and other
    
    
    (105
    )
    
    
    (81
    )Decrease in accounts payable
    
    
    (1,443
    )
    
    
    (708
    )Increase (decrease) in accrued liabilities
    
    
    (272
    )
    
    
    1,429Net cash provided by operating activities
    
    
    1,987
    
    
    
    1,610Cash flows from investing activities:Capital
expenditures  exploration and production
    
    
    (26,256
    )
    
    
    (5,832
    )Capital
expenditures  oilfield services
    
    
    (2,960
    )
    
    
    (632
    )Acquisitions
 exploration and production
    
    
    
    
    
    
    (516
    )Acquisitions
 oilfield services, net of cash
acquired
    
    
    
    
    
    
    (1,188
    )Proceeds
from sale of fixed assets  exploration
and production
    
    
    133
    
    
    
    156Proceeds
from sale of fixed assets  oilfield
services
    
    
    20
    
    
    
    4,334Increase in other assets
    
    
    
    
    
    
    (93
    )Proceeds from note receivable
    
    
    1,204
    
    
    
    12Net cash used in investing activities
    
    
    (27,859
    )
    
    
    (3,759
    )Cash flows from financing activities:Proceeds from notes payable
    
    
    434
    
    
    
    295Proceeds from borrowings on long-term debt
    
    
    39,500
    
    
    
    5,845Proceeds from issuance of common stock
    
    
    4,707
    
    
    
    4,095Debt and equity issuance costs
    
    
    (2,540
    )
    
    
    (30
    )Repayment of notes payable
    
    
    (255
    )
    
    
    (486
    )Repayment of long-term debt
    
    
    (9,290
    )
    
    
    (5,882
    )Net cash provided by financing activities
    
    
    32,556
    
    
    
    3,837Net increase in cash and cash equivalents
    
    
    6,684
    
    
    
    1,688Cash and cash equivalents, beginning of period
    
    
    3,052
    
    
    
    727Cash and cash equivalents, end of period
    
    $
    9,736
    
    
    $
    2,415
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
 For the Nine Months EndedSeptember 30,2005
    
    
    2004Supplemental cash flow disclosures:Cash paid for interest, net of amounts capitalized
    
    $
    678
    
    
    $
    270Non-cash transactions:Conversion of subordinated convertible notes and
accrued interest to common stock
    
    
    14,180
    
    
    
    Issuance of warrants in conjunction with the
issuance of debt  recorded as debt discount
    
    
    8,250
    
    
    
    Beneficial conversion feature recognized in
conjunction with the issuance of debt  recorded
as debt discount
    
    
    10,329
    
    
    
    Property and equipment acquired through seller
financed debt, net
    
    
    
    
    
    
    183Issuance of common stock to partially repay
related party debt
    
    
    
    
    
    
    500Issuance of 7% Convertible Subordinated Notes in
lieu of cash interest payment
    
    
    
    
    
    
    391
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
 Nature of Operations
   Basis of Presentation
    Oil and Gas Properties
  9




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As ofSeptember 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Proved oil and gas properties
    
    $
    64,330
    
    
    $
    41,210Unproved oil and gas properties
    
    
    21,099
    
    
    
    15,595Total
    
    
    85,429
    
    
    
    56,805Less accumulated depreciation, depletion,
amortization and ceiling write-downs
    
    
    (16,860
    )
    
    
    (12,418
    )Net capitalized costs
    
    $
    68,569
    
    
    $
    44,387
   Income Taxes
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Note 2  Derivative Instruments and Hedging Activities
 Accounting for Derivative Instruments and
Hedging Activities
  Effective Dates
    
    Bbls per Day
    
    Floor Price
    
    Ceiling PriceMay 1,
2005  December 31, 2005
    
    
    50
    
    
    $
    50.00
    
    
    $
    65.70January 1, 2006  June 30, 2006
    
    
    50
    
    
    $
    50.00
    
    
    $
    64.40October 1, 2005  December 31,
2006
    
    
    50
    
    
    $
    52.50
    
    
    $
    74.00
  Note 3  Stock Options
 Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Net income (loss) as reported
    
    $
    (637
    )
    
    $
    3,121
    
    
    $
    (3,101
    )
    
    $
    254Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (1,913
    )
    
    
    (175
    )
    
    
    (3,122
    )
    
    
    (1,703
    )Pro forma net income (loss)
    
    $
    (2,550
    )
    
    $
    2,946
    
    
    $
    (6,223
    )
    
    $
    (1,449
    )Net income (loss) per share as reported:Basic
    
    $
    (0.05
    )
    
    $
    0.33
    
    
    $
    (0.24
    )
    
    $
    0.03Diluted
    
    $
    (0.05
    )
    
    $
    0.29
    
    
    $
    (0.24
    )
    
    $
    0.03Pro forma net income (loss) per share:Basic
    
    $
    (0.19
    )
    
    $
    0.31
    
    
    $
    (0.49
    )
    
    $
    (0.16
    )Diluted
    
    $
    (0.19
    )
    
    $
    0.28
    
    
    $
    (0.49
    )
    
    $
    (0.16
    )
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Note 4  Long-Term Debt
  As ofSeptember 30,
    
    
    December 31,2005
    
    
    2004(dollars in thousands)Senior Secured Notes, net of discount of
$16,198 at September 30, 2005
    
    $
    23,302
    
    
    $
    8% Subordinated Convertible Notes
    
    
    
    
    
    
    2,4937% Subordinated Convertible Notes
    
    
    
    
    
    
    11,517$25,000 Development Credit Facility with
U.S. Bank
    
    
    
    
    
    
    5,000Various revolving credit and term loans
with LaSalle Bank
    
    
    
    
    
    
    3,582Note payable to seller (for a 50%
interest in an airplane)
    
    
    2,203
    
    
    
    2,326Other
    
    
    338
    
    
    
    70625,843
    
    
    
    25,624Less current portion
    
    
    (457
    )
    
    
    (284
    )Long-term debt
    
    $
    25,386
    
    
    $
    25,340
 Senior Secured Notes Facility
     12




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Note Payable to Seller
  8% Convertible Subordinated Notes
   7% Convertible Subordinated Notes
   $25,000,000 Development Credit Facility
  13




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Revolving Credit and Term Loans
  Capitalized Interest
  Note 5  Fair Value of Financial Instruments
  Note 6  Earnings Per Share
  For the Three Months Ended September 30,2005
    
    
    2004Per
    
    
    
    
    
    
    
    
    
    
    PerNet
    
    
    
    
    
    
    Share
    
    
    Net
    
    
    
    
    
    
    ShareLoss
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    AmountBasic EPS:Net income (loss) and
share amounts
    
    $
    (637
    )
    
    
    13,453,246
    
    
    $
    (0.05
    )
    
    $
    3,121
    
    
    
    9,399,290
    
    
    $
    0.33Dilutive Securities:8% Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    541,6547% Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203
    
    
    
    1,434,858Stock Options and Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224,873Diluted EPS:Net income (loss) and
share amounts
    
    $
    (637
    )
    
    
    13,453,246
    
    
    $
    (0.05
    )
    
    $
    3,376
    
    
    
    11,600,675
    
    
    $
    0.29
 For the Nine Months Ended September 30,2005
    
    
    2004Per
    
    
    
    
    
    
    
    
    
    
    PerNet
    
    
    
    
    
    
    Share
    
    
    Net
    
    
    
    
    
    
    ShareLoss
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    AmountBasic EPS:Net income (loss) and
share amounts
    
    $
    (3,101
    )
    
    
    12,745,252
    
    
    $
    (0.24
    )
    
    $
    254
    
    
    
    9,330,546
    
    
    $
    0.03Dilutive Securities:8% Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7% Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock Options and Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,076Diluted EPS:Net income (loss) and
share amounts
    
    $
    (3,101
    )
    
    
    12,745,252
    
    
    $
    (0.24
    )
    
    $
    254
    
    
    
    9,514,622
    
    
    $
    0.03
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Note 7  Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
 For the Nine Months EndedSeptember 30,2005
    
    
    2004(in thousands)Asset retirement obligations at
beginning of period
    
    $
    635
    
    
    $
    521Accretion expense
    
    
    43
    
    
    
    15Liabilities incurred
    
    
    30
    
    
    
    19Liabilities settled
    
    
    (199
    )
    
    
    Revisions of estimates
    
    
    839
    
    
    
    Asset retirement obligations at end of
period
    
    
    1,348
    
    
    
    555Less: current portion of asset
retirement obligations
    
    
    (279
    )
    
    
    (
    )Asset retirement obligations, less
current portion
    
    $
    1,069
    
    
    $
    555
 Note 8  Sale of Note Receivable
  15




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
   FORWARD-LOOKING STATEMENTS
  
    
    potential expansion of the oilfield services business through acquisitions;
    
    expected capital expenditures and cash flow for the fourth quarter of 2005;
    
    plans to raise external financing to finance a portion of 2005 activities;
    
    increased activity in the oilfield services business;
    
    planned increases in acreage position;
    
    Infinitys business strategy and anticipated trends in Infinitys business and its future results of operations;
    
    the ability of Infinity to make and integrate acquisitions and the completion of the
negotiation and acquisition of offshore licenses in Nicaragua;
    
    planned exploration, drilling and completion activities;
    
    the costs and results of dewatering operations, including drilling water disposal wells;
    
    demand for oilfield services;
    
    the availability of financing on acceptable terms;
    
    the impact of governmental regulation; and
    
    the timing of engineering and environmental impact studies and permitting.
  
    
    fluctuations in oil and natural gas prices and production;
    
    availability of drilling rigs, completion services and other support equipment;
    
    incorrect estimations of required capital expenditures;
    
    uncertainties inherent in estimating quantities of oil and gas reserves and projecting
future rates of production and timing thereof;
    
    delays or difficulties in exploration, exploitation and development activities;
    
    increases in the cost of oil and gas drilling, completion and production and in materials, fuel and labor costs;
 16




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##### Table of Contents




    
    the availability, conditions and timing of required government approvals and third party
financing, including failure to satisfy the maximum notes balance requirements under the
senior secured notes facility;
    
    a decline in demand for Infinitys oil and gas production or oilfield services;
    
    delays in environmental and permitting factors; and
    
    changes in general economic conditions.
 Overview of Exploration and Production Activity
  
    
    Commenced production from the Fort Worth Basin in North central Texas and the Sand
Wash Basin in Northwest Colorado;
    
    Made capital additions of approximately $28.8 million, including $8.4 million of
leasehold additions (primarily in Texas);
    
    Achieved a 31% increase in proved oil and gas reserve quantities to 12,068 MMcfe,
including extensions and discoveries of 5,156 MMcfe; and
    
    Achieved a 134% increase to $55.5 million in the standardized measure of discounted
future net cash flow from proved oil and gas properties.
   For the Three
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30,
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Production:Natural gas (MMcf)
    
    
    249.3
    
    
    
    265.5
    
    
    
    680.2
    
    
    
    735.4Crude oil (thousands of barrels)
    
    
    19.1
    
    
    
    8.5
    
    
    
    47.7
    
    
    
    26.1Total (MMcfe)
    
    
    364.1
    
    
    
    316.7
    
    
    
    966.6
    
    
    
    891.7Financial Data (thousands of dollars):Total revenue
    
    $
    2,906
    
    
    $
    1,763
    
    
    $
    6,554
    
    
    $
    4,836Production expenses
    
    
    1,053
    
    
    
    498
    
    
    
    2,503
    
    
    
    1,336Production taxes
    
    
    284
    
    
    
    207
    
    
    
    653
    
    
    
    558Financial Data per Unit ($  per Mcfe):Total revenue
    
    $
    7.98
    
    
    $
    5.57
    
    
    $
    6.78
    
    
    $
    5.42Production expenses
    
    
    2.89
    
    
    
    1.57
    
    
    
    2.59
    
    
    
    1.50Production taxes
    
    
    0.78
    
    
    
    0.65
    
    
    
    0.68
    
    
    
    0.63
  17




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##### Table of Contents



Overview of Oilfield Service Operations
  
    
    record third quarter and nine month revenue of $5.9 million and $15.4 million, respectively;
    
    subsidiary level gross profit of approximately $7.9 million; and
    
    subsidiary level income before taxes of approximately $4.5 million.
   Oilfield Service Statistics  ($ in thousands)
 Three Months Ended September 30,2005
    
    
    2004
    
    
    Change% Chg.Jobs
    
    
    Revenue
    
    
    Jobs
    
    
    Revenue
    
    
    Jobs
    
    
    In Jobs
    
    
    RevenueJob TypeCementing
    
    
    983
    
    
    $
    2,958
    
    
    
    1,084
    
    
    $
    2,812
    
    
    
    (101
    )
    
    
    (9.3
    %)
    
    $
    146Acidizing
    
    
    487
    
    
    
    513
    
    
    
    447
    
    
    
    461
    
    
    
    40
    
    
    
    8.9
    %
    
    
    52Fracturing
    
    
    338
    
    
    
    2,406
    
    
    
    228
    
    
    
    1,809
    
    
    
    110
    
    
    
    48.2
    %
    
    
    597Other
    
    
    
    
    
    
    220
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    188Discounts
    
    
    
    
    
    
    (198
    )
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    
    
    
    
    73Total
    
    
    
    
    
    $
    5,899
    
    
    
    
    
    
    $
    4,843
    
    
    
    
    
    
    
    
    
    
    $
    1,056
 Nine Months Ended September 30,2005
    
    
    2004
    
    
    Change% Chg.Jobs
    
    
    Revenue
    
    
    Jobs
    
    
    Revenue
    
    
    Jobs
    
    
    In Jobs
    
    
    RevenueJob TypeCementing
    
    
    2,503
    
    
    $
    7,078
    
    
    
    2,269
    
    
    $
    5,867
    
    
    
    234
    
    
    
    10.3
    %
    
    $
    1,211Acidizing
    
    
    1,414
    
    
    
    1,396
    
    
    
    905
    
    
    
    978
    
    
    
    509
    
    
    
    56.2
    %
    
    
    418Fracturing
    
    
    919
    
    
    
    6,875
    
    
    
    531
    
    
    
    4,073
    
    
    
    388
    
    
    
    73.1
    %
    
    
    2,802Other
    
    
    
    
    
    
    632
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    568Discounts
    
    
    
    
    
    
    (565
    )
    
    
    
    
    
    
    (600
    )
    
    
    
    
    
    
    
    
    
    
    35Total
    
    
    
    
    
    $
    15,416
    
    
    
    
    
    
    $
    10,382
    
    
    
    
    
    
    
    
    
    
    $
    5,034
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##### Table of Contents



2005
Operational and Financial Objectives
 Exploration and Production
    
    
    The availability of the capital resources required to fund the activity;
    
    The availability of third party contractors for drilling rigs and completion
services (although the Company has had up to three rigs under contract and operating
during the fourth quarter); and
    
    The approval by regulatory agencies of applications for permits to drill in a timely
manner.
 Oilfield Services
  
    
    expand the services that are provided;
    
    expand the area that is serviced; and
    
    gain market share by providing services complementary to Consolidateds existing services.
  Corporate Activities
  Results of operations for the three months ended September 30, 2005 compared to the three months
ended September 30, 2004
 Net Income (Loss)
  19




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Revenue
  Cost of Revenue
  Gross Profit
  General and Administrative Expenses
  Depreciation, Depletion, Amortization and Accretion
  Other Income (Expense)
  20




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##### Table of Contents



Results of operations for the nine months ended September 30, 2005 compared to the nine months
ended September 30, 2004
 Net Income (Loss)
  Revenue
  Cost of Revenue
  Gross Profit
  General and Administrative Expenses
  Depreciation, Depletion, Amortization and Accretion
  21




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Other Income (Expense)
  Liquidity and Capital Resources
      Senior Secured Notes Facility
  22




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Outlook for 2005
      23




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Critical Accounting Policies and Estimates
  
    
    Remaining proved oil and gas reserves (reserve estimates),
    
    Timing of our future drilling activities,
    
    Accruals of operating costs, capital expenditures in progress, and revenue,
    
    Estimated useful life of equipment utilized in the oilfield service business,
    
    Estimated timing and cost related to asset retirement obligations,
    
    Estimated realizability of deferred tax assets,
    
    Estimated fair value of debt and warrants issued during the period.
 Recently Issued Accounting Pronouncements
     24




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Commodity Risk
    Delivery Dates
    
    MMBtu Per Day
    
    
    Fixed PriceApril 1, 2004  March 31, 2005
    
    
    2,000
    
    
    $
    4.40April 1, 2005  March 31, 2006
    
    
    2,000
    
    
    $
    4.15
   Effective Dates
    
    Bbls per Day
    
    
    Floor Price
    
    
    Ceiling PriceMay 1,
2005  December 31, 2005
    
    
    50
    
    
    $
    50.00
    
    
    $
    65.70January 1, 2006  June 30, 2006
    
    
    50
    
    
    $
    50.00
    
    
    $
    64.40October 1, 2005  December 31,
2006
    
    
    50
    
    
    $
    52.50
    
    
    $
    74.00
   Interest Rate Risk
  25




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ITEM 4. CONTROLS AND PROCEDURES
   26




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##### Table of Contents



PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   For
    
    Against
    
    Abstain6,903,033
    
    252,543
    
    46,477
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act)99.1
    
    Calculation of the Maximum Notes Balance at September 30, 2005 under the Senior
Secured Notes Facility dated January 13, 2005
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SIGNATURES
  Signature
    
    Capacity
    
    Date/s/ James A. Tuell
    
    President and Chief Executive Officer
    
    November 10, 2005James A. Tuell
    
    (Principal
Executive Officer)/s/ Timothy A. Ficker
    
    Vice President and Chief Financial
    
    November 10, 2005Timothy A. Ficker
    
    Officer
(Principal Financial andAccounting Officer)
 28




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EXHIBIT INDEX
 31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act)99.1
    
    Calculation of the Maximum Notes Balance at September 30, 2005 under the Senior
Secured Notes Facility dated January 13, 2005