SB-2 1 v035174_sb2.htm

As filed with the Securities and Exchange Commission on February 13, 2006
An Exhibit List can be found on page II-11.
Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_____________________________
 
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________________

INFINIUM LABS, INC.
(Name of small business issuer in its charter)

 Delaware
7389
65-1048794
(State or other
(Primary Standard Industrial
(I.R.S. Employer
Jurisdiction of
Classification Code Number)
Identification No.)
Incorporation or
   
Organization)
   

1191 2ND Avenue, Suite 500
Seattle, WA 98101
(206) 393-3000
(Address and telephone number of principal executive offices and principal place of business)

Greg Koler, Chief Executive Officer and Interim Chief Financial Officer
INFINIUM LABS, INC.
1191 2ND Avenue, Suite 500
Seattle, WA 98101
(206) 393-3000
(Name, address and telephone number of agent for service)

Copies to:
Darrin Ocasio, Esq.
Eric A. Pinero, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)


APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
 
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ________

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. _________

 CALCULATION OF REGISTRATION FEE
 
Title of each class of securities to be registered
Amount to be registered (1)
Proposed maximum offering price per share
Proposed maximum aggregate offering price
Amount of registration fee
Common stock issuable upon conversion of debentures
49,000,000 (2)
$.02(3)
$980,000
$104.86
Common Stock issuable upon exercise of warrants
1,000,000 (4)
$1.09(5)
$1,090,000
$116.63
Total
50,000,000
   
$221.49
 
(1) Includes shares of our common stock, par value $0.001 per share, which may be offered pursuant to this registration statement, which shares are issuable upon conversion of convertible debentures and the exercise of warrants held by the selling stockholder. In addition to the shares set forth in the table, the amount to be registered includes a good faith estimate of the number of shares issuable upon conversion of the debentures. The amount to be registered also includes shares of common stock issuable upon exercise of the warrants, as such number may be adjusted as a result of stock splits, stock dividends and similar transactions in accordance with Rule 416. Should the conversion ratio of our convertible debentures result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary. In addition, should a decrease in the exercise price as a result of an issuance or sale of shares below the then current market price, result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary.

(2) Includes a good faith estimate of the shares underlying convertible debentures to account for market fluctuations.

(3) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on February 10, 2006, which was $.02 per share.

(4) Includes shares underlying warrants exercisable at $1.09 per share.

(5) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(g) under the Securities Act of 1933, using the exercise price of $1.09.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 13, 2006

INFINIUM LABS, INC.
50,000,000 SHARES OF
COMMON STOCK

This prospectus relates to the resale by the selling stockholder of up to 50,000,000 shares of our common stock, including up to 49,000,000 shares of common stock underlying convertible debentures, and up to 1,000,000 issuable upon the exercise of common stock purchase warrants. The convertible debentures are convertible into the number of our shares of common stock equal to the dollar amount of the debentures being converted multiplied by 110, less the product of the conversion formula multiplied by 100 times the dollar amount of the debenture being converted, which is divided by the conversion formula. The conversion formula for the convertible debentures is the lesser of (i) $0.10, (ii) eighty percent of the average of the three lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty percent of the volume weighted average price on the trading day prior to the conversion. The warrant is exercisable into 5,000,000 shares of common stock for a period of three years at an exercise price of $1.09 per share. The selling stockholder may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The selling stockholder may be deemed an underwriter of the shares of common stock, which it is offering. We will pay the expenses of registering these shares.

Our common stock is registered under Section 12(g) of the Securities Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the symbol "IFLB". The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on February 10, 2006, was $.02.

Investing in these securities involves significant risks. See "Risk Factors" beginning on page 5.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is _______, 2006.

The information in this Prospectus is not complete and may be changed. This Prospectus is included in the Registration Statement that was filed by Infinium Labs, Inc., with the Securities and Exchange Commission. The selling stockholder may not sell these securities until the registration statement becomes effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted.
 

Table Of Contents

Prospectus Summary
   
3
 
         
Risk Factors
   
5
 
         
Use of Proceeds
   
14
 
         
Market for Common Equity and Related Stockholder Matters
   
14
 
         
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
15
 
         
Description of Business
   
20
 
         
Description of Property
   
23
 
         
Legal Proceedings
   
23
 
         
Directors, Executive Officers, Promoters and Control Persons
   
24
 
         
Executive Compensation
   
27
 
         
Certain Relationships and Related Transactions
   
29
 
         
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
   
30
 
         
Security Ownership of Certain Beneficial Owners and Management
   
31
 
         
Description of Securities Being Registered
   
31
 
         
Indemnification for Securities Act Liabilities
   
32
 
         
Plan of Distribution
   
32
 
         
Selling Stockholder
   
34
 
         
Legal Matters
   
37
 
         
Experts
   
37
 
         
Available Information
   
37
 
         
Financial Statements
   
F-1
 


2

PROSPECTUS SUMMARY

The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the "risk factors" section, the financial statements and the notes to the financial statements.

INFINIUM LABS, INC.

We are developing and seeking to commercialize the Phantom Lapboard, a wireless, rotating custom keyboard/turntable with integrated mousepad. After establishing the Phantom Lapboard, we may seek to develop and commercialize the Phantom Game Service, a video game delivery system designed to allow consumers to search, preview and play a large selection of video games on demand via a broadband Internet connection. We have not yet generated any revenue from operations. Our ability to generate revenue in the future is dependent on our ability to successfully develop and commercialize the Phantom Lapboard.
 
For the three months ended September 30, 2005 and 2004, we generated no revenues and a net loss of $5,168,061 and $7,735,696, respectively. For the year ended December 31, 2004 and the two-month period ended December 31, 2003, we generated no revenues and a net loss of $33,819,787 and $674,945, respectively. As a result of our substantial need for working capital and other factors, our auditors in their report dated April 14, 2005, except for Note 2, 7, 8(G), 9, 10 as to which date is December 16, 2005, have expressed substantial doubt about our ability to continue as going concern.

Our principal offices are located at 1191 2ND Avenue, Suite 500, Seattle, Washington 98101 and our telephone number is (206) 393-3000. We are a Delaware corporation.

The Offering
 
Common stock offered by selling stockholder
Up to 50,000,000 shares, including up to 49,000,000 shares of common stock underlying convertible debentures in the amount of $50,000 and up to 1,000,000 issuable upon the exercise of common stock purchase warrants at an exercise price of $1.09 per share, based on current market prices and assuming full conversion of the convertible debentures and the full exercise of the warrants (includes a good faith estimate of the shares underlying convertible debentures and shares underlying warrants). This number represents 12.16% of our then current outstanding stock.
Common stock to be outstanding after the offering
Up to 461,209,612 shares assuming the full exercise of our warrants and conversion of our convertible debentures
Use of proceeds
We will not receive any proceeds from the sale of the common stock However, we will receive up to $1,090,000 upon exercise of 1,000,000 warrants by the selling stockholder being registered in this prospectus. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes. We received an aggregate of $50,000 in connection with the issuance of the convertible debenture to the selling stockholder. We used the $50,000 for the general working capital purposes.
Over-The-Counter Bulletin Board Symbol
IFLB

The above information regarding common stock to be outstanding after the offering is based on 411,209,612 shares of common stock outstanding as of February 9, 2006 and assumes the subsequent conversion of our issued convertible debentures and exercise of warrants by our selling stockholder.

 
3

On January 25, 2006, we completed a private placement pursuant to which we entered into a Securities Purchase Agreement with Golden Gate Investors, Inc. (“Golden Gate”) dated as of January 24, 2006, as amended by that certain Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated as of January 24, 2006, for the sale of (i) a $50,000 principal amount convertible debenture and (ii) a warrant to purchase 5,000,000 shares of our common stock. Golden Gate provided us with an aggregate of $130,000 in gross proceeds upon the execution of final definitive agreements. Upon notification that the registration statement (as described below) has been filed with the SEC by February 14, 2006, Golden Gate shall wire us $150,000. If the registration statement is filed later than February 14, 2006, Golden Gate shall wire us $50,000. These amounts shall represent a prepayment towards the exercise of the warrant.

The debenture bears interest at 5¼%, mature three years from the date of issuance, is convertible into our common stock, at Golden Gate’s option. The convertible debenture is convertible into the number of our shares of common stock equal to the dollar amount of the debenture being converted multiplied by 110, less the product of the conversion price multiplied by 100 times the dollar amount of the debenture being converted, which is divided by the conversion price. The conversion price for the convertible debenture is the lesser of (i) $0.10, (ii) eighty percent of the average of the three lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty percent of the volume weighted average price on the trading day prior to the conversion. Beginning in the first full month that the registration statement covering the shares of common stock underlying the debenture and warrant is declared effective by the Securities and Exchange Commission, Golden Gate is obligated to convert at least 5%, but no more than 10%, of the face value of the debenture per calendar month into shares of our common stock, so long as the shares are available, registered and freely tradable. If Golden Gate converts more than 5% of the face value of the debenture in any calendar month, the excess over 5% shall be credited against the next month’s minimum conversion amount. In the event that Golden Gate does not convert at least 5% of the face value of the debenture in any calendar month, Golden Gate shall not be entitled to collect interest on the debenture for that month and shall not be entitled to receive shares of our common stock issuable upon conversion of the debenture, provided that we provide Golden Gate with written notice of such failure to convert the minimum monthly conversion amount. However, in the event that our volume weighted average price is less than $.01, we will have the option to prepay the debenture at 130% rather than have the debenture converted. If we elect to prepay the debenture, Golden Gate may withdraw its conversion notice.

In addition, beginning in the first full month that the registration statement covering the shares of common stock underlying the debenture and warrant is declared effective by the Securities and Exchange Commission, Golden Gate is obligated to exercise the warrant concurrently with the submission of a conversion notice by Golden Gate with respect to the debenture, in the same percentage of the debenture being converted. If Golden Gate exercises more than 5% of the warrants in any calendar month, the excess over 5% shall be credited against the next month’s minimum exercise amount. In the event Golden Gate does not exercise the warrant concurrently with the conversion of the debenture, it shall not be entitled to receive shares of our common stock for the portion of the debenture being simultaneously converted. The warrant is exercisable into 5,000,000 shares of common stock at an exercise price of $1.09 per share. Accordingly, if all warrants are exercised by Golden Gate which we are registering in this prospectus, we will receive $1,090,000 in proceeds.

Golden Gate has contractually agreed to restrict its ability to convert its debenture or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of common stock.

In addition, on January 24, 2006, we entered into a Registration Rights Agreement with Golden Gate pursuant to which we are obligated to file a registration statement on Form SB-2 to effect the registration of our common stock issuable upon conversion of the debenture and exercise of the warrant as soon as practicable following the closing date. We are obligated to cause such registration statement to be declared effective no later than 150 days after the closing date.

We claim an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, Golden Gate was an accredited investor and/or qualified institutional buyer, Golden Gate had access to information about us and their investment, Golden Gate took the securities for investment and not resale, and we took appropriate measures to restrict the transfer of the securities.

See the "Selling Stockholders" and "Risk Factors" sections for a complete description of the convertible debentures.


4

RISK FACTORS

This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.

RISKS RELATING TO OUR BUSINESS:

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

We incurred net losses of $33,819,787 for the year ended December 31, 2004 and $674,945 for the two-month period ended December 31, 2003. Our monthly burn rate is approximately $250,000 per month and, accordingly, we will need to raise approximately $1,600,000 over the next 12 months in order to sustain our current operations. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we will continue to incur losses. We will continue to incur losses until we are able to market and sell our products. Our possible success is dependent upon the successful development and marketing of our products, as to which there is no assurance. Any future success that we might enjoy will depend upon many factors, including factors out of our control or which cannot be predicted at this time. These factors may include changes in or increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs, including costs of supplies, personnel and equipment, reduced margins caused by competitive pressures and other factors. These conditions may have a materially adverse effect upon us or may force us to reduce or curtail operations. In addition, we will require additional funds to sustain and expand our sales and marketing activities, particularly if a well-financed competitor emerges. Based on our current funding arrangement with Golden Gate, upon the effectiveness of this prospectus, which will allow Golden Gate to convert its convertible debenture and exercise its warrants and, in turn, provide us with funding, we do not anticipate that we will require additional funds to continue our operations for the next 9 months. In the event that our financing arrangement with Golden Gate is terminated or if we need additional financing, there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain sufficient funds from operations or external sources would require us to curtail or cease operations. Any additional equity financing may involve substantial dilution to our then existing shareholders.

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

In their report dated April 14, 2005, except for Note 2, 7, 8(G), 9, 10 as to which date is December 16, 2005, our independent auditors stated that our financial statements for the year ended December 31, 2004 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 constraint, an accumulated deficit of $36,764,861 at December 31, 2004 and recurring losses from operations. 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.

5

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

We will need to obtain additional funding in order to:

o
fund product development and launch of our Phantom Lapboard;

o
finance additional growth and working capital requirements;

o
respond to competitive pressures; and

o
respond to other opportunities or challenges as they arise.

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

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE ARE UNABLE TO ACCURATELY FORECAST OUR REVENUES, AND A SHORTFALL IN REVENUES COULD CAUSE A MATERIAL ADVERSE EFFECT IN OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.
 
We currently intend to increase our operating expenses substantially in order to, among other things:

o
expand our current operating activities;

o
fund sales and marketing activities;

o
manufacture inventory; and

o
incur capital expenditures.

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

6

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

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

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

We expect our Phantom Lapboard to be manufactured by a third party contract manufacturer. 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.

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

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

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

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

7

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

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

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

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

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

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

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

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

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

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

8

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

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

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

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

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

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

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

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.

9

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, 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 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, 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.

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 February 9, 2006, we had 411,209,612 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 5,000,0000 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.

10

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 February 10, 2006 of $0.02.

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

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

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

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

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

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.

11

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 5¼ % 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.

12

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.

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.

13

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholder. We will not receive any proceeds from the sale of shares of common stock in this offering. However, we will receive the sale price of any common stock we sell to the selling stockholder upon exercise of the warrants which we are registering in this prospectus in the amount up to $1,090,000 and we received an aggregate of $50,000 in connection with the issuance of the convertible debenture to the selling stockholder. We have used the $50,000 for the general working capital purposes. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the OTC Bulletin Board under the symbol "IFLB". For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
 
   
High Bid Price
 
Low Bid Price
 
First Quarter 2003
 
N/A
 
N/A
 
Second Quarter 2003
 
$1.26
 
$.001
 
Third Quarter 2003
 
$1.56
 
$ .00
 
Fourth Quarter 2003
 
$  .01
 
$ .01
 
           
First Quarter 2004
 
$2.50
 
$ .30
 
Second Quarter 2004
 
$2.02
 
$ .92
 
Third Quarter 2004
 
$1.81
 
$ .31
 
Fourth Quarter 2004
 
$1.45
 
$ .19
 
           
First Quarter 2005
 
$1.60
 
$ .24
 
Second Quarter 2005
 
$  .28
 
$ .09
 
Third Quarter 2005
 
$  .12
 
$ .04
 
Fourth Quarter 2005
 
$  .04
 
$ .001
 

HOLDERS

As of February 9, 2006, we had approximately 324 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.

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.

14

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Some of the information in this Form SB-2 contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:

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

We are developing and seeking to commercialize the Phantom Lapboard, a wireless, rotating custom keyboard/turntable with integrated mousepad. We have not yet generated any revenue from operations. Our ability to generate revenue in the future is dependent on our ability to successfully develop and commercialize the Phantom Lapboard.

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

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

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

15

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

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. 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.

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

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

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

Liquidity and Plan of Operations

We have incurred recurring losses from operations since inception. Our loss from operations for the year ended December 31, 2004 was $33,819,787 and our loss from operations for the nine-months ended September 30, 2005 was $25,973,923. At September 30, 2005, we had a working capital deficit of $11,012,265 and an accumulated deficit of $62,738,784. At December 31, 2004, we had a working capital deficit of $12,988,409 and an accumulated deficit of $36,764,861. In their report on our audited financial statements for the year ended December 31, 2004, our independent auditors expressed substantial doubt about our ability to continue as a going concern.

16

Our activities to date have been funded by equity and debt investments.  As of September, 2005, we had received approximately $3.6 million in equity investments and $13.5 million in debt and convertible debt financings.  As of December 31, 2004, we had received approximately $3.6 million in equity investments and $11.2 million in debt and convertible debt financings. At September 30, 2005, we were in default on payment of promissory notes aggregating $4,060,000 in principal amount, of which $1,400,000 is collateralized by a lien on our assets.  At December 31, 2004, we were in default on payment of a promissory note with a principal amount of $350,000. Our outstanding debt for borrowed money has generally been provided on a short-term basis, bears interest at rates ranging from 8% to 17% and, in many cases, was accompanied by the grant of common stock or warrants to purchase common stock, which contributed to the costs of the financings.  As of September 30, 2005, we have recorded an aggregate of $5,574,900 in debt discount, of which $5,085,338 was amortized as interest expense.   As of December 31, 2004, we have recorded an aggregate of $4,979,500 in debt discount, of which $2,175,588 was amortized as interest expense. In connection with financings aggregating $2.16 million in December 2004, we committed to pay penalties of 2% per month for each month after an agreed upon period (approximately three months) during which we fail to cause a resale registration statement covering the underlying shares to be declared effective by the Securities and Exchange Commission.  

We do not have sufficient cash to continue operations for the next 12 months and are in immediate need of additional capital to fund our plan of operation. We presently have no commitments for additional financing and may not be able to obtain such financing. To support our working capital needs pending receipt of sufficient financing, we are seeking to settle outstanding liabilities through issuance of equity, and anticipate continuing to grant common stock to fund payroll and certain other ongoing costs.  During the year ended December 31, 2004 and nine months ended September 30, 2005, we issued an aggregate of 19,215,321 and 59,968,478, respectively, shares of common stock in settlement of payroll and certain other ongoing costs, of which 12,118,601 and 39,168,478, respectively, shares were issued under a registration statement and are freely tradable.  Unless and until we receive sufficient financing, we expect to continue to be forced to rely on issuances of common stock under similar arrangements in settlement of payroll and such other costs.   Issuances of equity will dilute existing stockholder’s ownership and will have a depressive effect on our stock price, which will result in greater dilution for subsequent equity issuances and further downward pressure on our stock price.  If we are unable to obtain additional financing as and when needed, we will need to scale back and/or reprioritize our planned operations, our assets may be foreclosed upon by secured lenders and we may be forced to cease operations completely. 

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

Completing Development of the Phantom Lapboard - The Phantom Lapboard was originally intended for retail launch in 2004 and its design was based upon that premise. We are currently in the process of revising and updating the hardware to take advantage of newer technology to ensure that the product is technically compelling and that we are able to have an adequate supply of components.  We have engaged third parties to assist with product engineering and design work.  Due to working capital shortages, efforts by these groups on our behalf have been delayed. 
 
Completing Development of the Lapboard Distribution Network - Working with our partners we intend to finalize the design, testing and roll-out of Phantom Lapboard .

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

17

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.

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.

18

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.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an amendment of ARB No. 43, Chapter 4” SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,” SFAS No. 153, “Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29,” and SFAS No. 123 (revised 2004), “Share-Based Payment,” were recently issued. SFAS No. 151, 152, 153 and 123 (revised 2004) have no current applicability to the Company and have no effect on the financial statements.
 
19


BUSINESS

General Overview

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

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

Since inception through December 31, 2004, we have incurred aggregate losses of $36,764,861. Our loss from operations for year ended December 31, 2004 was $33,819,787; our loss from operations for the two months ended December 31, 2003 was $674,945. In addition, as of December 31, 2004, we had an accumulated deficit of $36,764,861 and for the three months ended September 30, 2005 and 2004, we generated no revenues and a net loss of $5,168,061 and $7,735,696, respectively. We need immediate additional capital to continue operations. Given our limited resources, and the delays experienced thusfar, we are not in a position to anticipate a completion date for development of our product or a launch date for the Phantom Lapboard.

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

20

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

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. 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.

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

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

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

Distribution Strategy

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

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

21

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.

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 February 9, 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
 
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 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 February 9, 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 February 9, 2006, we had 14 full-time employees, three of whom are in marketing, 8 of whom are in research and development and 6 of whom are general and administrative personnel. There is no collective bargaining agreement in place.

22

DESCRIPTION OF PROPERTIES

Our corporate headquarters are located in Seattle, Washington. We have leased 22,284 square feet of office in Seattle, Washington from which we oversee product development. Our lease for this space expires on August 30, 2006 and our monthly rent expense for this office space is $25,070. We are currently in default on the lease in the aggregate amount of approximately $127,000.  We are currently in negotiations with the landlord to leave the premises at the end of February 2006.  We intend to secure alternate corporate office space in Seattle, WA.

We believe that the facilities are well maintained. We also believe that these leased facilities are not unique and could be replaced, if necessary, when we leave the premises in February 2006.

LEGAL PROCEEDINGS

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 $26,958.24. Due to financial constraints, we may not be able to replace local counsel. We have recorded $25,737 in accounts payable related to vendor payments due CDW Corporation.
 
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. On January 25, 2006, Black Rocket obtained a default judgment in the amount of $104,629.25. We have recorded $95,272 in accounts payable related to vendor payments due Black Rocket Euro RSCG, LLC.

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. We expect to enter into a negotiated settlement with Beshara.   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.

Baytree Associates, Inc. v. Infinium Labs, Inc.,No. 2004 CA 11716 NC.  In December 2004, Baytree sued us in the Circuit Court for Sarasota County, Florida, alleging breach of contract and seeking damages in the amount of $54,391.95.  On October 7, 2005, an order granting Baytree’s motion for default judgment was entered in the aforementioned court. 

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.  We were served in February 2006 and plan to vigorously defend against this lawsuit.

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 currently are conducting discovery.

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.  Additionally, Timothy M. Roberts, our Chairman of the Board of Directors, has received a “Wells Notice” from the staff of the U.S. Securities and Exchange Commission (please see our 8-K filing on October 28, 2005 for more information).   We are unable to determine what, if any, actions may result from the ongoing investigation.

23

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. We will defend ourselves vigorously in this suit.

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 has indicated he will seek to set aside the order on grounds for medical reasons.

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. We expect to enter into a negotiated settlement with Motley Fool.

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. We will defend ourselves vigorously in this suit.

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.

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.

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.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following information sets forth the names of our officers and directors, their present positions with us, and their biographical information.

Name
Age
Office
Greg Koler
49
Chief Executive Officer and Interim Chief Financial Officer
Timothy Roberts
35
Chairman of the Board
Richard Angelotti
61
Director

Greg Koler, Chief Executive Officer and Interim Chief Financial Officer.

From January 2000 to December 2003, Mr. Koler was 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.

24

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.

Family Relationships
 
There are no family relationships between any of our directors or executive officers.

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.
 
ADAM GOLDBLATT became our General Counsel in September 2005.  Prior to joining us, Mr. Goldblatt was General Counsel and Corporate Secretary for Pacific Edge Software from 2001 through 2005, a start-up funded, in part, by Foundation Capital and Sequoia Capital.

Compliance with Section 16(a) of the Securities Exchange Act.

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, certain officers and persons holding 10% or more of our common stock to file reports regarding their ownership and regarding their acquisitions and dispositions of the Registrant's common stock with the Securities and Exchange Commission ("SEC"). Such persons are required by SEC regulations to furnish our company with copies of all Section 16(a) forms they file.

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

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

25

Code of Ethics

Our 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 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 personnel are to be accorded full access to our Board of Directors 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 Insider Trading Compliance Policy by virtue of such person’s relationship to the Chief Financial Officer.

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

Committees of the Board Of Directors

Due to financial constraints, aside from a compensation committee, we presently do not have an audit committee, nominating committee, an executive committee of our board of directors, stock plan committee or any other committee of our board of directors.

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.

26

EXECUTIVE COMPENSATION

The following tables set forth certain information regarding each of our most highly-compensated executive officers whose total annual salary and bonus for the fiscal year ending December 31, 2004, 2003 and 2002 exceeded $100,000:
 
SUMMARY COMPENSATION TABLE
 
   
Annual Compensation
Long Term Compensation 
 
 
 
 
 
 
Awards
Payouts
 
Name and Principal Position
Year
 
Salary
 
 
Bonus
 
Other Annual Compensation
 (1)
Securities Underlying Options/ SARs Granted (#)
Restricted Shares or Restricted Share Units
 
LTIP
Payouts
All Other Compensation
Timothy M. Roberts Chairman, Chief Executive Officer and Director
2004
2003
2002
$250,000
$2,500
Nil
1
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Kevin Bachus President and Chief Operating Officer
2004
2003
2002
$250,000
$16,667
Nil
2
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
2,100,000
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Richard S. Skoba Executive Vice President of Sales and Business Development
2004
2003
2002
$207,965
Nil
Nil
3
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
 

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


The following table sets forth for each of the executive officers certain information concerning stock options granted to them during fiscal 2004. We have never issued stock appreciation rights. We grant options that generally vest immediately at an exercise price equal to the fair market value of a share of common stock as determined by its closing price on the OTC Bulletin Board. The term of each option granted is generally five years from the date of grant. Options may terminate before their expiration dates if the optionee’s status as an employee is terminated or upon the optionee’s death or disability.

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
 
Exercise Price
($/Share)
 
Expiration Date
 
 
 
 
 
 
 
 
 
 
 
Not applicable.
   
0
   
0
%
$
0
   
--
 
Not applicable.
   
0
   
0
%
$
0
   
--
 
Not applicable.
   
0
   
0
%
$
0
   
--
 
Not applicable.
   
0
   
0
%
$
0
   
--
 
Not applicable.
   
0
   
0
%
$
0
   
--
 

27

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

No options were exercised during 2004.

Directors’ Compensation

Directors and executive officers receive, on an annual basis, incentive stock options to purchase shares of our common stock as awarded by our Board of Directors in consultation with the compensation committee. Issuances, if any, pursuant to the Company’s stock incentive plan are subject to shareholder consent which, to date, has not been provided.  
 
Our Board of Directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. Other than indicated herein, no director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
 
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers.
 
Other than the management agreements, the advisory agreements and the stock incentive plans discussed herein, we presently have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers. 

Employment Contract 

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.

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

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, 2004 provided for or contributed to by our company.

28

Stock Options


   
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)
 
Equity Compensation plans approved by shareholders
 
 0
 
0
 
0
 
                   
Equity Compensation plans not approved by shareholders
 
 0
 
0
 
0
 


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

On July 28, 2004, we issued a director 800,000 shares of common stock as consideration for the director's personal guaranty of a promissory note payable secured by a real estate mortgage encumbering the director's residence.   The note, effective on July 28, 2004 and expiring on July 27, 2005, is payable to Stephen A. Witzer, Trustee U/A dated February 7, 1985.  The principal is for $500,000 with interest calculated at fifteen percent (15%) per annum, plus a five percent (5%) penalty, if applicable, for any late payment.  In the event of an uncured default, the interest increases to eighteen percent (18%) per annum. 
 
On January 27, 2005, we borrowed $300,000 from Timothy Roberts, our former CEO and a director of our company, under a 15% promissory note, which was payable no later than April 27, 2005.  The note was subsequently transferred by Mr. Roberts to parties unaffiliated with us.  In June 2005, the full principal and interest was settled in consideration for our issuance of 3,187,206 shares of common stock to the holdres, valued at $318,721.
 
29

On December 9, 2005, this promissory note was assigned by Witzer to a director.  The terms of the promissory note were subsequently amended to provide that as of November 1, 2005, principal and accrued interest totaled $560,437.43.  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. 

On June 21, 2004, we compensated Timothy M. Roberts, our former Chief Executive Officer $50,000 as consideration for his personal guaranty at that time of a commercial promissory note payable secured by a real estate mortgage encumbering the his residence.  The note is for $1,500,000 with interest calculated at fifteen percent (15%) per annum up to the maximum amount allowed by law in the event of default.  The note also permits a late charge in the amount of five percent (5%). 
 
On August 18, 2005, we issued 5,000,000 shares of common stock to a Director with a fair value of $350,000 ($0.07 per share).

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).

TRANSACTIONS WITH PROMOTER

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

CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT

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

30

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial ownership of our common stock as of February 9, 2006:

1  
by each person who is known by us to beneficially own more than 5% of our common stock;
2  
by each of our officers and directors; and
3  
by all of our officers and directors as a group.

   
Amount and Nature of
Beneficial
Ownership (1)
 
Percentage
of Class 
 
 
 
 
 
 
 
Greg Koler
   
4,962,350
(2)
 
1.21
%
Timothy M. Roberts
   
21,648,628
   
5.27
%
               
Richard Angelotti
2080 Ringling Blvd
Sarasota, Florida 34237
   
5,593,000
   
1.36
%
All Officers and Directors as a group (3 persons)
   
32,203,978
   
7.84
%

*
Represents less than 1% of our Company’s outstanding stock
 
(1)
Based on 411,209,612 shares of common stock issued and outstanding as of February 9, 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 the date of this prospectus, such shares have not been issued.

DESCRIPTION OF SECURITIES BEING REGISTERED

COMMON STOCK

We are authorized to issue up to 600,000,000 shares of common stock, par value $.0001 per share. As of February 9, 2006, we had approximately 324 holders of our common stock and 411,209,612 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 therefor. 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 nonassessable.

We have engaged Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209, as independent transfer agent or registrar.

31

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Our Articles of Incorporation, as amended and restated, provide to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, that our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended and restated, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.

Our By Laws also provide that the Board of Directors may also authorize us to indemnify our employees or agents, and to advance the reasonable expenses of such persons, to the same extent, following the same determinations and upon the same conditions as are required for the indemnification of and advancement of expenses to our directors and officers. As of the date of this Registration Statement, the Board of Directors has not extended indemnification rights to persons other than directors and officers.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

PLAN OF DISTRIBUTION

The selling stockholder and any of its pledgees, donees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholder may use any one or more of the following methods when selling shares:

1  
ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser;
2  
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
3  
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
4  
an exchange distribution in accordance with the rules of the applicable exchange;
5  
privately-negotiated transactions;
6  
broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share;
7  
through the writing of options on the shares.
8  
a combination of any such methods of sale; and
9  
any other method permitted pursuant to applicable law.

The selling stockholder may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholder shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

The selling stockholder or its pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholder and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholder cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholder. The selling stockholder and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be "underwriters" as that term is defined under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

32

We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholder, but excluding brokerage commissions or underwriter discounts.

The selling stockholder, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. No selling stockholder has entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.

The selling stockholder may pledge its shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling stockholder and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholder or any other such person. In the event that the selling stockholder are deemed affiliated purchasers or distribution participants within the meaning of Regulation M, then the selling stockholder will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In regards to short sells, the selling stockholder is contractually restricted from engaging in short sells. In addition, if a such short sale is deemed to be a stabilizing activity, then the selling stockholder will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.

We have agreed to indemnify the selling stockholder, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholder or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.

If the selling stockholder notifies us that it has a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholder and the broker-dealer.

PENNY 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.

33

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.

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.
 
SELLING STOCKHOLDERS

The table below sets forth information concerning the resale of the shares of common stock by the selling stockholder. We will not receive any proceeds from the resale of the common stock by the selling stockholder. We will receive proceeds from the exercise of the warrants. Assuming all the shares registered below are sold by the selling stockholder, it will not continue to own any shares of our common stock.

The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.


Name
Total Shares of
Common Stock
Issuable Upon
Conversion of
Debentures
and/or Warrants
Total
Percentage
of Common
Stock,
Assuming
Full
Conversion
Shares of
Common Stock
Included in
Prospectus
(1)
Beneficial
Ownership
Before the
Offering*
Percentage of
Common Stock
Owned Before
Offering*
Beneficial
Ownership
After the
Offering
(4)
Percentage
of Common
Stock Owned
After
Offering
(4)
Golden Gate Investors Investors, Inc.(2)
50,000,000(3)
12.16%
Up to 50,000,000 shares of common stock
41,079,840
9.99%
-
-
 
* These columns represents the aggregate maximum number and percentage of shares that the selling stockholder can own at one time (and therefore, offer for resale at any one time) due to their 9.9% limitation.

**Less than 1%.

34

The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling stockholder has sole or shared voting power or investment power and also any shares, which the selling stockholder has the right to acquire within 60 days. The actual number of shares of common stock issuable upon the conversion of the convertible debentures is subject to adjustment depending on, among other factors, the future market price of the common stock, and could be materially less or more than the number estimated in the table.

(1) Includes a good faith estimate of the shares issuable upon conversion of the convertible debentures and exercise of warrants, based on current market prices. Because the number of shares of common stock issuable upon conversion of the convertible debentures is dependent in part upon the market price of the common stock prior to a conversion, the actual number of shares of common stock that will be issued upon conversion will fluctuate daily and cannot be determined at this time. Under the terms of the convertible debentures, if the convertible debentures had actually been converted on February 3, 2006, the conversion price would have been $.0111. The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon conversion of the convertible debentures and exercise of the related warrants by reason of any stock split, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securities Act of 1933. However the selling stockholder has contractually agreed to restrict their ability to convert their convertible debentures or exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of common stock as determined in accordance with Section 13(d) of the Exchange Act. Accordingly, the number of shares of common stock set forth in the table for the selling stockholder exceeds the number of shares of common stock that the selling stockholder could own beneficially at any given time through their ownership of the convertible debentures and the warrants. In that regard, the beneficial ownership of the common stock by the selling stockholder set forth in the table is not determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended.

(2) The selling stockholder is an unaffiliated third party. In accordance with rule 13d-3 under the Securities Exchange Act of 1934, Norman Lizt may be deemed a control person of the shares owned by the selling stockholder.

(3) Includes 49,000,000 shares of common stock underlying our $50,000 convertible debenture and 1,000,000 shares of common stock underlying common stock purchase warrants issued to Golden Gate Investors, Inc.

(4) Assumes that all securities registered will be sold, which does not represent all of the shares of common stock potentially issuable upon conversion of the convertible debenture held by Golden Gate at current market prices.

Terms of Convertible Debentures

On January 25, 2006, we completed a private placement pursuant to which we entered into a Securities Purchase Agreement with Golden Gate Investors, Inc. (“Golden Gate”) dated as of January 24, 2006, as amended by that certain Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated as of January 24, 2006, for the sale of (i) a $50,000 principal amount convertible debenture and (ii) a warrant to purchase 5,000,000 shares of our common stock. Golden Gate provided us with an aggregate of $130,000 in gross proceeds upon the execution of final definitive agreements. Upon notification that the registration statement (as described below) has been filed with the SEC by February 14, 2006, Golden Gate shall wire us $150,000. If the registration statement is filed later than February 14, 2006, Golden Gate shall wire us $50,000. These amounts shall represent a prepayment towards the exercise of the warrant.

The debenture bears interest at 5¼%, mature three years from the date of issuance, is convertible into our common stock, at Golden Gate’s option. The convertible debenture is convertible into the number of our shares of common stock equal to the dollar amount of the debenture being converted multiplied by 110, less the product of the conversion price multiplied by 100 times the dollar amount of the debenture being converted, which is divided by the conversion price. The conversion price for the convertible debenture is the lesser of (i) $0.10, (ii) eighty percent of the average of the three lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty percent of the volume weighted average price on the trading day prior to the conversion. Beginning in the first full month that the registration statement covering the shares of common stock underlying the debenture and warrant is declared effective by the Securities and Exchange Commission, Golden Gate is obligated to convert at least 5%, but no more than 10%, of the face value of the debenture per calendar month into shares of our common stock, so long as the shares are available, registered and freely tradable. If Golden Gate converts more than 5% of the face value of the debenture in any calendar month, the excess over 5% shall be credited against the next month’s minimum conversion amount. In the event that Golden Gate does not convert at least 5% of the face value of the debenture in any calendar month, Golden Gate shall not be entitled to collect interest on the debenture for that month and shall not be entitled to receive shares of our common stock issuable upon conversion of the debenture, provided that we provide Golden Gate with written notice of such failure to convert the minimum monthly conversion amount. However, in the event that our volume weighted average price is less than $.01, we will have the option to prepay the debenture at 130% rather than have the debenture converted. If we elect to prepay the debenture, Golden Gate may withdraw its conversion notice.

35

In addition, beginning in the first full month that the registration statement covering the shares of common stock underlying the debenture and warrant is declared effective by the Securities and Exchange Commission, Golden Gate is obligated to exercise the warrant concurrently with the submission of a conversion notice by Golden Gate with respect to the debenture, in the same percentage of the debenture being converted. If Golden Gate exercises more than 5% of the warrants in any calendar month, the excess over 5% shall be credited against the next month’s minimum exercise amount. In the event Golden Gate does not exercise the warrant concurrently with the conversion of the debenture, it shall not be entitled to receive shares of our common stock for the portion of the debenture being simultaneously converted. The warrant is exercisable into 5,000,000 shares of common stock at an exercise price of $1.09 per share. Accordingly, if all warrants are exercised by Golden Gate which we are registering in this prospectus, we will receive $1,090,000 in proceeds.

Golden Gate has contractually agreed to restrict its ability to convert its debenture or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of common stock.

Sample Conversion Calculation

The convertible debentures are convertible into the number of our shares of common stock equal to the dollar amount of the debentures being converted multiplied by 110, less the product of the conversion formula multiplied by 100 times the dollar amount of the debenture being converted, which is divided by the conversion formula. The conversion formula for the convertible debentures is the lesser of (i) $0.10, (ii) eighty percent of the average of the thee lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty percent of the volume weighted average price on the trading day prior to the conversion. For example, assuming conversion of $50,000 of debentures on February 3, 2006, a conversion price of $0.0111 per share, the number of shares issuable upon conversion would be:

($50,000 x 110) - ($.0111 x (100 x $50,000)) = 5,444,500 /$.0111 = 490,495,496

36

The following is an example of the amount of shares of our common stock that are issuable, upon conversion of the principal amount of our convertible debentures, based on market prices 25%, 50% and 75% below the market price, as of February 9, 2006 of $0.02.

 
 
Effective
Number
% of
% Below
Price Per
Conversion
of Shares
Outstanding
Market 
 Share 
Price 
 Issuable 
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%
         
 
LEGAL MATTERS

Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion with respect to the validity of the shares of common stock being offered hereby.

EXPERTS

Webb & Company, PA have audited, as set forth in their report thereon appearing elsewhere herein, our financial statements at December 31, 2004 and 2003 and for the year and two month period then ended that appear in the prospectus. The financial statements referred to above are included in this prospectus with reliance upon the auditors’ opinion based on their expertise in accounting and auditing.

AVAILABLE INFORMATION

We have filed a registration statement on Form SB-2 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Infinium Labs, Inc., filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.

We are subject to the informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at Judiciary Plaza, 100 F Street N.E., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at Judiciary Plaza, 100 F Street N.E., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC's Internet website at http://www.sec.gov.

37

INDEX TO FINANCIAL STATEMENTS

INFINIUM LABS, INC.

FINANCIAL STATEMENTS

 

For the Three Months Ended September 30, 2005 and September 30, 2004
     
       
Consolidated Balance Sheets
   
F-2
 
Consolidated Statements of Operations
   
F-3
 
Consolidated Statement of Stockholder’s Deficiency
   
F-4-14
 
Consolidated Statements of Cash Flow
   
F-15-16
 
Notes to Consolidated Financial Statements
   
F-17-48
 
         
For the Year Ended December 31, 2004 and December 31, 2003
       
         
Report of Independent Auditors
   
F-49
 
Balance Sheet
   
F-50
 
Statements of Operations
   
F-51
 
Statement of Changes in Stockholders’ Deficit
   
F-52-55
 
Statements of Cash Flow
   
F-56
 
Notes to Unaudited Financial Statements
   
F-57-78
 

 

F-1



 
INFINIUM LABS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheets
 
ASSETS
 
Current Assets:
 
September 30, 2005 (Unaudited)
 
December 31,   2004
 
Cash
 
$
5,140
 
$
4,102
 
Restricted Cash
   
-
   
894,910
 
Prepaid Expenses
   
34,786
   
66,589
 
Other Receivable
   
1,479
   
407
 
Total Current Assets
   
41,405
   
966,008
 
 
         
Property and Equipment, Net
   
336,993
   
475,122
 
 
         
Other Assets:
         
Deposits
   
9,125
   
5,440
 
Intangible asset, net
   
213,012
   
256,495
 
Total Other Assets
   
222,137
   
261,935
 
 
         
Total Assets
 
$
600,535
 
$
1,703,065
 
 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
 
         
Current Liabilities:
         
Accounts payable
 
$
2,476,627
 
$
3,598,885
 
Due to developers
   
845,000
   
985,000
 
Accrued interest expense
   
590,911
   
301,415
 
Other accrued expense
   
112,686
   
105,000
 
Accrued payroll and payroll taxes (Note 5E)
   
3,218,007
   
1,665,769
 
Promissory notes, net (Note 2)
   
3,810,439
   
7,298,348
 
 
         
Total Current Liabilities
   
11,053,670
   
13,954,417
 
 
         
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, 290,320,456 and 121,090,655 shares issued and outstanding, respectively (Note 3)
   
29,032
   
12,109
 
Additional paid-in capital (Note 3)
   
52,689,734
   
24,523,917
 
Subscription receivable
   
(22,517
)
 
(22,517
)
Deferred Compensation
   
(410,600
)
   
Accumulated deficit during development stage
   
(62,738,784
)
 
(36,764,861
)
 
         
Total Stockholders’ Deficiency
   
(10,453,135
)
 
(12,251,352
)
 
         
Total Liabilities and Stockholders’ Deficiency
 
$
600,535
 
$
1,703,065
 

See accompanying Notes to Consolidated Financial Statements.
 
F-2

INFINIUM LABS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Operations
(Unaudited)
 
 
 
For the Three Months Ended September 30, 2005
 
For the Three Months Ended September 30, 2004
 
For the Nine Months Ended September 30, 2005
 
For the Nine Months Ended September 30, 2004
 
For the Period from December 9, 2002 (Inception) to September 30, 2005
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Development costs
 
$
(1,808
)
$
503,265
 
$
(1,808
)
$
1,755,209
 
$
3,534,396
 
Advertising
   
29,453
   
472,605
   
256,633
   
1,041,539
   
1,845,189
 
Salary expense
   
2,426,170
   
1,833,282
   
4,741,193
   
4,340,147
   
11,899,099
 
Professional fees
   
183,510
   
414,815
   
859,395
   
2,013,581
   
4,563,998
 
Consultants
   
887,019
   
2,854,625
   
2,823,031
   
7,935,599
   
12,765,052
 
Impairment of assets
   
-
   
-
   
-
   
-
   
352,299
 
General and administrative
   
145,556
   
767,750
   
1,675,700
   
3,515,902
   
5,906,606
 
Total Operating Expenses
   
3,669,900
   
6,846,342
   
10,354,144
   
20,601,977
   
40,866,639
 
Net Loss from Operations
   
(3,669,900
)
 
(6,846,342
)
 
(10,354,144
)
 
(20,601,977
)
 
(40,866,639
)
 
                     
Other Income (Expense):
                     
Other income
   
293
   
-
   
383
   
-
   
2,317
 
Loss on sale of equipment
   
(2,532
)
 
-
   
(5,011
)
 
-
   
(5,459
)
Loss on conversion of notes
   
(52,974
)
 
-
   
(10,670,049
)
 
-
   
(10,670,049
)
Gain on vendor settlement
   
25,444
   
-
   
2,720
   
-
   
2,720
 
Interest expense
   
(1,142,020
)
 
(822,428
)
 
(4,414,981
)
 
(3,910,825
)
 
(10,121,019
)
Payroll Tax Penalty & Interest
   
(326,372
)
 
(66,926
)
 
(532,841
)
 
(86,746
)
 
(1,080,655
)
Total Other Income (Expense)
   
(1,498,161
)
 
(889,354
)
 
(15,619,779
)
 
(3,997,571
)
 
(21,872,145
)
 
                     
Loss before Income Taxes
   
(5,168,061
)
 
(7,735,696
)
 
(25,973,923
)
 
(24,599,548
)
 
(62,738,784
)
 
                     
Income Taxes
   
-
   
-
   
-
   
-
   
-
 
 
                     
Net Loss
 
$
(5,168,061
)
$
(7,735,696
)
$
(25,973,923
)
$
(24,599,548
)
$
(62,738,784
)
 
                     
Per Common Share
                     
 
                     
Loss per common share - basic and diluted
 
$
(.022
)
$
(.076
)
$
(.142
)
$
(.258
)
$
(.587
)
 
                     
Weighted average - basic and diluted
   
238,676,683
   
101,507,725
   
183,285,656
   
95,387,254
   
106,917,452
 

See accompanying Notes to 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 September 30, 2005
(Unaudited)
 
 
 
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
)
 
-
 
$
5
 
 
                                     
Stock issued for cash ($0.12 per share)
   
-
   
-
   
4,423,012
   
442
   
526,261
   
-
   
-
   
-
   
526,703
 
 
                                     
Stock issued for services ($0.3775 per share)
   
-
   
-
   
2,957,376
   
296
   
1,112,709
   
-
   
-
   
-
   
1,113,005
 
 
                                     
Net 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
)
 
-
   
467,389
 
 
                                     
Stock issued for signage rights ($0.3175 per share)
   
-
   
-
   
942,600
   
94
   
299,906
   
-
   
-
   
-
   
300,000
 
 
                                     
Stock issued for services ($0.3175 per share)
   
-
   
-
   
434,036
   
43
   
138,597
   
-
   
-
   
-
   
138,640
 
 
                                     
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
)
 
-
   
-
   
-
   
-
 
 
                                     
Shares issued for cash ($0.25 per share)
   
-
   
-
   
6,650,000
   
665
   
1,661,835
   
-
   
-
   
-
   
1,662,500
 
 
                                     
Shares issued for cash ($0.257 per share)
   
-
   
-
   
-
   
-
   
-
   
-
   
141,000
   
-
   
141,000
 
 
                                     
Shares issued with note payable ($0.78 per share)
           
560,000
   
56
   
433,944
           
-
   
434,000
 
 
                                     

See accompanying Notes to 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 September 30, 2005
(Unaudited)
 
 
 
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 for legal settlement ($1.475 per share)
           
66,668
   
7
   
98,328
           
-
   
98,335
 
 
                                     
Shares issued for services ($1.475 per share)
           
1,750,000
   
175
   
2,581,075
           
-
   
2,581,250
 
 
                                     
Shares issued with note payable ($1.47 per share)
           
7,500
       
11,025
           
-
   
11,025
 
 
                                     
Shares issued with note payable ($1.42 per share)
   
-
   
-
   
200,000
   
20
   
283,980
   
-
   
-
   
-
   
284,000
 
 
                                                     
Shares issued with note payable ($1.475 per share)
   
-
   
-
   
100,000
   
10
   
147,490
   
-
   
-
   
-
   
147,500
 
 
                                                     
Shares issued with note payable ($1.13 per share)
   
-
   
-
   
60,000
   
6
   
67,794
   
-
   
-
   
-
   
67,800
 
 
                                                     
Shares issued with note payable ($1.43 per share)
   
-
   
-
   
33,000
   
3
   
47,187
   
-
   
-
   
-
   
47,190
 
 
                                                     
Shares issued with note payable ($1.475 per share)
   
-
   
-
   
511,000
   
51
   
753,674
   
-
   
-
   
-
   
753,725
 
 
                                                     
Shares issued for loan default penalty ($1.475 per share)
   
-
   
-
   
74,999
   
8
   
110,616
   
-
   
-
   
-
   
110,624
 
 
                                                     
Shares issued for loan default penalty ($1.13 per share)
   
-
   
-
   
75,000
   
8
   
84,742
   
-
   
-
   
-
   
84,750
 
 
                                                     
Shares issued for loan default penalty ($1.475 per share)
   
-
   
-
   
80,000
   
8
   
117,992
   
-
   
-
   
-
   
118,000
 
 
                                                     
Shares issued for loan default penalty ($1.56 per share)
   
-
   
-
   
603,038
   
61
   
942,487
   
-
   
-
   
-
   
942,548
 
 
                                                     

See accompanying Notes to 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 September 30, 2005
(Unaudited)
 
 
 
 
 
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 for loan default penalty ($1.47 per share)
   
-
   
-
   
955,312
   
96
   
1,404,213
   
-
   
-
   
-
   
1,404,309
 
 
                                                     
Shares issued for cash ($2.50 per share)
   
-
   
-
   
40,000
   
4
   
99,996
   
-
   
-
   
-
   
100,000
 
 
                                                     
Shares issued for legal settlement ($1.455 per share)
   
-
   
-
   
53,332
   
5
   
77,560
   
-
   
-
   
-
   
77,565
 
 
                                                     
Shares issued for cash ($2.00 per share)
   
-
   
-
   
100,000
   
10
   
199,990
   
-
   
-
   
-
   
200,000
 
 
                                     
Shares issued to consultants for services ($1.44 per share)
   
-
   
-
   
830,000
   
83
   
1,195,117