10KSB 1 v076028_10ksb.htm Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-KSB

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

For the fiscal year ended December 31, 2006

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

For the transition period from to


  PHANTOM ENTERTAINMENT, INC.
(Name of small business issuer in its charter)

 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
65-1048794
(I.R.S. Employer
Identification No.)
 
222 Grace Church St., Suite 302
Port Chester, NY 10573
(Address of principal executive offices) (Zip Code)
 
(866) 452-9883 (Issuer’s telephone number)
 
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
 
Common Stock, $.001 par value per share
(Title of each class)

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

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  o
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes  o No x

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

At May 15, 2007, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, was $1,799,433.

The number of shares issued and outstanding of our company’s common stock at May 15, 2007 was 1,799,433,415
 
DOCUMENTS INCORPORATED BY REFERENCE: None

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


 

 
PHANTOM ENTERTAINMENT, INC.
 
2006 FORM 10-KSB ANNUAL REPORT
 
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
PART I
 
1
 
 
 
Item 1.
Description of Business
1
 
 
 
Item 2.
Description of Property
13
 
 
 
Item 3.
Legal Proceedings
13
 
 
 
Item 4.
Submission of Matters to a Vote of Security Holders
 15
 
 
 
PART II
 
16
 
 
 
Item 5.
Market for Common Equity and Related Stockholder Matters
 16
 
 
 
Item 6.
Management’s Discussion and Analysis or Plan of Operation
20
 
 
 
Item 7.
Financial Statements
 25
 
 
 
Item 8.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
25
 
 
 
Item 8A.
Controls and Procedures
26
 
 
 
Item 8B.
Other Information
 26
 
 
 
PART III
 
26
 
 
 
Item 9.
Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act
 
26
 
 
 
Item 10.
Executive Compensation
29
 
 
 
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
31
 
 
 
Item 12.
Certain Relationships and Related Transactions, and Director Independence
33
 
 
 
Item 13.
Exhibits
36
 
 
 
Item 14.
Principal Accountant Fees and Services
38


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

As used in this Annual Report on Form 10-KSB (the “Annual Report”), "we," "us," "our," "Phantom" and "our Company" refer to Phantom Entertainment, Inc. and our subsidiaries, unless the context otherwise requires.
ITEM 1.  DESCRIPTION OF BUSINESS
 
General Overview

Phantom Entertainment has developed and is manufacturing and marketing the Phantom Lapboard, a combination wireless keyboard, laser mouse and hard surface that enables users to work or play games from any comfortable setting. After establishing sales and distribution of the Phantom Wireless Lapboard, we may seek to develop and market 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. We have entered into major, multi-product licensing agreements with Ione Technology Inc., a worldwide leading manufacturer and marketer of input devices, to manufacture and distribute the Phantom® Wireless Lapboard and Phantom® Wireless Laser Mouse under Ione’s brand name throughout Asia and through Ione’s distributors in the US and Europe in return for royalty and design fees. We anticipate we will begin to receive revenue from these agreements in the 4th quarter of 2007.

The agreements allow Ione Technology to market an Ione wireless lapboard and Ione wireless laser mouse as a combo package and as stand-alone products through Ione’s distributors in the US, Europe in markets throughout Asia including:

·    
Taiwan
·    
China
·    
Hong Kong
·    
Japan
·    
South Korea
·    
Thailand
·    
Philippines
·    
Indonesia
·    
Viet Nam
·    
Laos
·    
Cambodia
·    
Burma
·    
Malaysia
·    
Singapore
·    
India
·    
Bangladesh
·    
Sri Lanka

We have received a purchase order from Alienware® - the leading manufacturer of high-performance desktop, notebook, media center and professional systems - to manufacture and supply the Phantom® Wireless Lapboard and Phantom® Wireless Laser Mouse for Alienware’s Media Center PCs and its PC gear product line. We anticipate we will begin to receive revenue from Alienware in the 4th quarter of 2007.

We have entered a distribution and sales agreement with Global Marketing Partners to serve the E-Commerce and retail markets throughout the United States. The agreement will aggregate sales of the Phantom Wireless Lapboard through Global Marketing Partner’s distribution channel with Ingram Micro Inc. (NYSE: IM), the world's largest technology distributor and a leading technology sales, marketing and logistics company. We anticipate we will begin to receive revenue from this agreement in the 4th quarter of 2007.
 
1

 
We have entered a sales agreement with Westex Europe NV to serve the E-Commerce, retail and OEM industrial markets throughout Europe. Westex Europe NV, a sales organization for high technology products and solutions, will target original equipment manufacturers (OEMs), value-added resellers (VARS), systems builders and E- commerce retailers in Europe.

In August 2006, we launched a new website and online store to support the marketing and sales of the Phantom Lapboard. The website can be found at www.phantom.net. We have a backlog of online orders for the Phantom Lapboard. Credit card payments will not be charged until the Phantom Lapboard ships. We anticipate we will begin to receive revenue from online orders in the 4th quarter of 2007.

Our ability to generate revenue from the Phantom brand is dependent on our ability to successfully manufacture and market the Phantom Wireless Lapboard under Phantom’s brand name throughout North America and Europe. While we anticipate launching sales and distribution of the Phantom Wireless Lapboard in September 2007, delays may occur and given our limited resources, we need immediate additional capital to manufacture the Phantom Wireless Lapboard as well as to fund general operations.

Phantom Lapboard

Currently our business activities are almost entirely dedicated to manufacturing and marketing of the Phantom Wireless Lapboard. The Phantom Wireless Lapboard includes wireless technology, ergonomic design, one-touch features, programmable keys and a wireless high performance 1200 dpi laser mouse. The Lapboard’s innovative design features a keyboard that rotates 360 degrees to accommodate left or right handed users and inclines on a 22 degree angle with a hard surface below for the Phantom Laser Mouse.
 
Marketing Overview and Media coverage

In October 2006, we hired Wiredset Digital Agency for online marketing and branding of its Phantom Lapboard and Game Service. The New York agency, best-known for creative online and mobile solutions, was selected for its expertise and success in the online marketing of entertainment and media companies. In 2006, online marketing efforts produced the following online coverage:
 
Third Party & Blog Marketing

Objective: News Items/Blog Posts - Discussing the Phantom Lapboard

• CrunchGear,
• Gamasutra
• ESB Brain Wave
• Krunker
• Technophobic
• PC Gamer Podcast
• TechBlog
• Engadget
• Slash Gear
• Gizmodo
• Gizmodo UK
• Daily Tech
• I4U
• Gaming Nexus
• Tek News
• Gadget Life
• Tech lime
• Game Zone
• Tech Report
• Firing Squad
• Overclockers Club
• Raptor’s Blog
• Game Planet
• Kotaku
• Wired
• Ubergizmo
• Macworld
• Gadgets Fosfor
• PGNX
• Untangled Life
• New Launches
• 2DayBlog
• Anything & Everything
• GadMag (German)
• BizToolbelt
• Mobile Mag
• Free Load
• Nerd Approved
• Techno Toy
• Ichigo:Noterat (Not English)
• Digital Drops

2

 
The Phantom Wireless Lapboard and Phantom Wireless Laser Mouse were featured products in the MTV, Digitallife and Daily Lounge 2006 online holiday gift guides.

Online Video 2.0 Channels:

Objective: Syndicate Phantom promo video across the online video channels.
• YouTube
• MySpace - http://www.myspace.com
• Google - http://video.google.com
• Yahoo! - http://video.yahoo.com
• Microsoft Soapbox - http://soapbox.msn.com
• iFilm - http://www.ifilm.com
• Daily Motion - http://www.dailymotion.com
• Grouper - http://www.grouper.com
• Bolt - http://www.bolt.com
• Blip.tv - http://www.blip.tv
• Vimeo - http://www.vimeo.com
• Vsocial - http://www.vsocial.com
• Clipshack - http://www.clipshack.com
• Eyespot - http://www.eyespot.com
• Metacafe - http://www.metacafe.com
• Castpost - http://www.castpost.com
• Revver - http://www.revver.com
• Vidilife - http://www.vidilife.com

Web 2.0 Marketing:

Objective: Make Phantom assets and web links accessible on Web 2.0 social networks to maximize visibility in Web. 2.0 search and their respective sites.
 
• OnlyWire - http://www.onlywire.com

Tradeshow Marketing
 
The Phantom® Wireless Lapboard was viewed by thousands of consumers, retailers, distributors and consumer electronic followers at tradeshows.

·    
the Games Convention (GC 2006) August 24-27, at the Leipzig Fair Exhibition Centre in Leipzig, Germany.

·    
the 2006 DigitalLife, Ziff Davis Media's leading consumer electronics and entertainment event, October 12-15, at the Jacob Javits Center in New York City.

·    
the seventh annual Electronic House Expo November 15-17, at the Long Beach Convention Center in Long Beach, California.

Marketing Objectives & Strategies

Our objective is to increase awareness and build buzz for Phantom Lapboard launch. The Phantom Lapboard is designed with a gamer in mind, and is intended to transform the way gamers think about computer keyboards. To do this, we intend to intercept 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.

3

 
Viral Marketing

Viral marketing is sometimes used to describe a version 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 appealing 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 due to the ease of executing the marketing campaign, relative low-cost (compared to direct mail), good targeting, and the high and rapid response rate. The main strength of viral marketing is its ability to obtain a large number of interested people at a low cost.

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

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

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

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, such as E3 at Blizzard booth, gaming tournaments, etc. With respect to leveraging contract and content partnerships, we intend to utilize all of our pre-existing relationships and forge new relationships in order to increase sales of the Phantom Lapboard. Such relationships are likely to include vendors in the games industry.

Distribution Strategy

In August 2006, we launched a new website and online store to support the marketing and sales of the Phantom Lapboard. The website can be found at www.phantom.net. We may establish other sales and marketing distribution channels through brick and mortar retailers. “Brick and mortar retail customers” typically refer to customers of companies that have a physical presence (for example, a building made of “bricks and mortar”) and offer face-to-face consumer experiences, as opposed to an Internet-only presence.

We have received a purchase order from Alienware® - the leading manufacturer of high-performance desktop, notebook, media center and professional systems - to manufacture and supply the Phantom® Wireless Lapboard and Phantom® Wireless Laser Mouse for Alienware’s Media Center PCs and its PC gear product line.

We have entered a distribution and sales agreement with Global Marketing Partners to serve the E-Commerce and retail markets throughout the United States. The agreement will aggregate sales of the Phantom Wireless Lapboard through Global Marketing Partner’s distribution channel with Ingram Micro Inc. (NYSE: IM), the world's largest technology distributor and a leading technology sales, marketing and logistics company.

We have entered a sales agreement with Westex Europe NV to serve the E-Commerce, retail and OEM industrial markets throughout Europe. Westex Europe NV, a sales organization for high technology products and solutions, will target original equipment manufacturers (OEMs), value-added resellers (VARS), systems builders and E- commerce retailers in Europe.

We may establish additional retail partner programs designed to generate recurring revenue streams for retailers from the sale of the Phantom Lapboard. Retailers may receive a percentage of the sales revenue.
 
4

 
Competition

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

Intellectual Property

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 December 31, 2006, we had a total of 6 pending domestic patent applications with the US Patent and Trademark Office, entitled:
 
 
(1)
Method And Apparatus For Backlighting Of A Keyboard For Use With A Game   Device Application Filed August 2, 2004
 
 
(2)
Method For Automatic Patching Of A Sparsely Streamed Application Filed September 29, 2004
 
 
(3)
Modified Keyboard And Systems Containing The Keyboard Application   Filed May 6, 2005
 
 
(4)
Multi-Mode Pointing Device And Systems And Methods Using The Pointing   Device Application Filed May 6, 2005
 
 
(5)
Multiposition Multilevel User Interface System   Application Filed   May 6, 2005
 
 
(6)
System For Securely Booting A Computer Device   Application Filed   July 6, 2005
 
The Phantom Lapboard and Game Service that we hope to re-focus resources on if we are successful with the Phantom Lapboard, may also utilize proprietary firmware and/or software that we develop in order to enhance the gamer’s experience.

We are pursuing federal registration of our trademarks and service marks in the United States with the U.S. Patent and Trademark Office. As of December 31, 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

As of May 14, 2007, we had 3 full-time employees, one who is in engineering and development and 2 of whom are general and administrative personnel. There is no collective bargaining agreement in place.
 
5

 
RISK FACTORS

RISKS RELATED TO OUR BUSINESS AND COMPANY

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

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

We incurred a loss from operations of $4,454,583 for the year ended December 31, 2006 and a loss from operations of $12,236,530 for the year ended December 31, 2005. Our monthly burn rate is approximately $200,000 per month and, accordingly, we will need to raise approximately $2,400,000 over the next 12 months in order to sustain our current operations. We reduced our staff during the first quarter of 2006 and adjusted associated payroll, benefits, and rent for our corporate headquarters accordingly. With these modifications, we made the aforementioned estimate of our monthly burn rate. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we will continue to incur losses. Additionally, 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. We need additional financing and there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain sufficient funds from operations or external sources would require us to curtail or cease operations.

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

In their report dated May 15, 2007, our independent auditors stated that our financial statements for the year ended December 31, 2006 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of cash flow constraints, a working capital deficit of $18,344,236, an accumulated deficit of $73,550,242 at December 31, 2006, recurring losses from operations and the default on $2,242,276 of notes payable at December 31, 2006. We continue to experience net losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. Our continued net losses and stockholders’ deficit increases the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.

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

We will need to obtain additional funding in order to:

·
fund product development and launch of our Phantom Lapboard;

·
finance additional growth and working capital requirements;
 
6

 
·
respond to competitive pressures; and

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

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

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

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

·
Expand our current operating activities;

·
fund sales and marketing activities;

·
manufacture inventory; and

·
incur capital expenditures.

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

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

As disclosed on Form 8-K filed with the SEC on April 19, 2006 and November 6, 2006, we have an agreement with Itron Technology, Inc., a third-party manufacturer, for the production of the Phantom Lapboard. We expect to rely on sole suppliers for a number of key components for the Phantom Lapboard. We will not control the time and resources that these third parties devote to our business. We cannot be certain that these parties will perform their obligations as expected or that any revenue, cost savings, or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform their obligations in a timely manner, we may be delayed or prevented from commercializing our Phantom Lapboard. Because our relationships with these parties are expected to be non-exclusive, they may also support products and services that compete directly with us, or offer similar or greater support to our competitors. Any of these events could require us to undertake unforeseen additional responsibilities or devote additional resources to commercialize our Phantom Lapboard. This outcome would harm our ability to compete effectively and achieve increased market acceptance and brand recognition.

7

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

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

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

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

OUR PHANTOM LAPBOARD, WHILE COSTLY TO DEVELOP, MAY FAIL TO GAIN MARKET ACCEPTANCE, IN WHICH CASE 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 THEREFORE WE MAY NOT MAKE SALES AND COULD POTENTIALLY GO OUT OF BUSINESS.

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

If we misjudge the market for our Phantom Lapboard, we may not be successful in achieving meaningful revenue, which may lead us to go out of business.
 
8

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

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

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

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

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

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

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

We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. The steps we have taken may not prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.
 
9

 
We may license in the future elements of our trademarks, trade dress and similar proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by these business partners, such partners may take actions that could materially and adversely affect the value of our proprietary rights or our reputation. Our proprietary rights may not be viable or of value in the future since the validity, enforceability and scope of protection of certain proprietary rights is uncertain and still evolving.
 
THE COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES AND ITS INTERNAL CONTROLS OVER FINANCIAL REPORTING WERE INEFFECTIVE THROUGH DECEMBER 2005 BECAUSE OF NOT PROPERLY ACCOUNTING FOR SUFFICIENT LOSS CONTINGENCY ACCRUALS TO COVER POSSIBLE MONETARY PENALTIES AND INTEREST RELATING TO OUR FAILURE TO FILE CERTAIN PAYROLL AND WITHHOLDING TAX RETURNS AND TO SATISFY REQUIRED WITHHOLDING AND PAYROLL TAX OBLIGATIONS. ALTHOUGH WE RESTATED OUR FINANCIAL STATEMENTS IN DECEMBER 2005, IF WE ARE UNABLE TO GENERALLY MAINTAIN THE EFFECTIVENESS OF OUR DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS, WE WILL NOT BE ABLE TO PROVIDE RELIABLE FINANCIAL STATEMENTS WHICH WOULD MAKE ANY INVESTMENT IN OUR COMPANY SPECULATIVE AND RISKY.

As of December 31, 2006, our principal executive officer and interim principal financial officer evaluated the effectiveness of our disclosure controls and procedures and the effectiveness of our internal controls over financial reporting and concluded that our disclosure controls and procedures and our internal controls over financial reporting were ineffective, as of the end of the periods covered by such report, so as to insure that all of the information required to be reported in our periodic reports was recorded, processed, summarized, and reported, within the time periods specified in the Commission's rules and forms. This was concluded as we were unable to record and properly report sufficient loss contingency accruals to cover possible monetary penalties and interest relating to our failure to file certain payroll and withholding tax returns and to satisfy required withholding and payroll tax obligations. While management is focused on improving our company’s Disclosure Controls to ensure timely and proper reporting, there can be no assurance that other items do not currently exist, or will not occur in the future, that reflect ineffective Disclosure Controls as of the Evaluation Date. Management concluded that the failure to properly account for and disclose the sufficient loss contingency accruals to cover possible monetary penalties and interest relating to our failure to file certain payroll and withholding tax returns and to satisfy required withholding and payroll tax obligations, was a material weakness in our disclosure controls and procedures and our internal controls over financial reporting.

In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control over financial reporting that occurred during the year ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Beginning in September 2005, the Company hired new staff to handle finance and legal matters as well as a new Chief Executive Officer but we are not able to confirm that the work performed by this staff improved any potential weaknesses in internal controls and the finance and legal employees were subsequently terminated in December 2006. The Company has not processed any payroll since December 2006 and intends to contract a company specializing in payroll processing to ensure any future payroll processed is fully and accurately reported and that all applicable payroll taxes are fully and accurately paid on a timely basis. The Company still maintains outside finance and legal consultants to assist where appropriate and when funding is available. With additional financing the Company will round out its staff in order to better comply with controls and procedures regulated under the Exchange Act. As a part of this process, the Company has reviewed its accounting treatment of certain convertible debt instruments under FAS 133 and EITF 00-19 and as a result has restated its financial statements from December 31, 2004 through March 31, 2006.

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

10

 
THERE IS NO ASSURANCE OF AN ESTABLISHED PUBLIC TRADING MARKET IN OUR COMMON STOCK, WHICH WOULD ADVERSELY AFFECT THE ABILITY OF INVESTORS IN OUR COMPANY TO SELL THEIR SECURITIES IN THE PUBLIC MARKETS.
 
Although our common stock trades on the Over-the-Counter Bulletin Board (the “OTCBB”), a regular trading market for the securities may not be sustained in the future. The NASD has enacted recent changes that limit quotations on the OTCBB to securities of issuers that are current in their reports filed with the Securities and Exchange Commission. The effect on the OTCBB of these rule changes and other proposed changes cannot be determined at this time. The OTCBB is an inter-dealer, Over-The-Counter market that provides significantly less liquidity than the NASD’s automated quotation system (the “NASDAQ Stock Market”). Quotes for stocks included on the OTCBB are not listed in the financial sections of newspapers as are those for The Nasdaq Stock Market. Therefore, prices for securities traded solely on the OTCBB may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price. Market prices for our common stock will be influenced by a number of factors, including:
 
·                           the issuance of new equity securities;
 
·                           changes in interest rates;
 
·                          competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
·                           variations in quarterly operating results;
 
·                           change in financial estimates by securities analysts;
 
·                           the depth and liquidity of the market for our common stock;
 
·                           investor perceptions of our company and the technologies industries generally; and
 
·                           general economic and other national conditions.

THE LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK.

Our common stock is currently traded on a limited basis on the OTCBB under the symbol “PHEI.OB” The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our common stock is thus subject to volatility. In the absence of an active trading market:
 
·                           investors may have difficulty buying and selling or obtaining market quotations;
 
·                           market visibility for our common stock may be limited; and
 
·                           a lack of visibility for our common stock may have a depressive effect on the market for our common stock.

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.
 
11

 
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.
 
IF WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE PRICE OF OUR  COMMON STOCK MAY BE ADVERSELY AFFECTED. 

Our internal controls over financial reporting may have weaknesses and conditions that need to be addressed, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, our management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal controls over financial reporting, disclosure of our management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of the Company’s internal controls over financial reporting may have an adverse impact on the price of our common stock.

UPON SUCH TIME AS OUR STOCK IS ACTIVELY TRADED, STANDARDS FOR COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 ARE UNCERTAIN, AND IF WE FAIL TO COMPLY IN A TIMELY MANNER, OUR BUSINESS COULD BE HARMED AND OUR STOCK PRICE COULD DECLINE.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of the assessment by our independent registered public accountants. The requirement of an annual assessment of our internal control over financial reporting currently already applies to our company, and the attestation of the assessment by our independent registered public accountants will first apply to our annual report for fiscal year ended December 31, 2007. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of the assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

WE HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR STOCK.
 
We have never paid cash dividends on our stock and do not anticipate paying cash dividends on our stock in the foreseeable future. The payment of cash dividends on our stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay cash dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates
12

 
ITEM 2.  DESCRIPTION OF PROPERTY

 
ITEM 3.  LEGAL PROCEEDINGS

Beshara v. Infinium Labs Corporation, No. 2005 CA 005103 NC. In May 2005, Beshara sued us in the Circuit Court for Sarasota County, Florida, alleging default of a promissory note and seeking damages of approximately $1,400,000.00. On October 25, 2005, we settled accrued interest through October 31, 2005, together with reasonable attorneys’ fees, in the amount of $384,192 through issuance of 7,114,667 shares of our stock. On March 17, 2006, we entered into a conversion agreement with Beshara in order to reduce a portion of the outstanding principal and interest with 40,000,000 shares of common stock (as of May 22, 2006). In September 2006, the parties amended the promissory note to add for conversion of debt into equity. As of September 30, 2006, the remaining principal on the debt is approximately $986,449. So long as Beshara continues to convert debt into equity the foregoing action shall be abated.

Black Rocket Euro RSCG, LLC v. Phantom Entertainment, Inc., No. 2005 CA 5008 NC. In May 2005, Black Rocket sued us in the Circuit Court for Sarasota County, Florida, alleging breach of contract and seeking damages in the amount of $95,272.00. Due to an administrative error, our attorney neglected to file a notice of appearance and on January 25, 2006, Black Rocket obtained a default judgment in the amount of $104,629. We have recorded $104,629 as well as $4,977 in accrued interest, as of September 30, 2006, in accounts payable.

CDW Corporation v. Infinium Labs Corporation, No. 05-M1-131484. In May 2005, CDW sued us in the Circuit Court of Cook County, Illinois, alleging that the Company placed orders for goods, failed to pay for such orders and thus breached the contract and seeking damages in the amount of $26,958. Due to financial constraints, we may not be able to replace local counsel. On February 7, 2006, the court entered judgment for $26,958 and we have recorded $27,932, including interest through September 30, 2006, in accounts payable.

GMR Marketing, LLC, v. Phantom Entertainment, Inc., No. 20050CA-10535NC. In January 2006, GMR sued us in the District Court of Florida, Sarasota County, alleging that it rendered advertising services and that the Company failed to pay for such services thereby breaching the contract. GMR sought damages in the amount of $107,544. Due to an error with our Florida counsel an answer to the complaint was not filed and on February 1, 2005 GMR received a default judgment in the amount of $107,883. Through September 30, 2006, the Company has recorded a total of $114,284, including interest, in accounts payable. On October 25, 2006, the parties entered into a settlement agreement whereby the Company agreed to pay GMR $71,000 no later than December 20, 2006 in exchange for a full release of all previous claims.
 
Longview Special Finance, Inc. v. Phantom Entertainment, Inc., No. 06 CV 1772. In March 2006, Longview sued us in United States District in the Southern District of New York alleging breach of contract and requesting, in part, issuance of all remaining shares requested in prior conversion notices. The March complaint contained various errors. The parties entered into a negotiated settlement related to a portion of Longview’s claims on April 7, 2006. Under the terms of the agreement, the Company converted a portion of Longview’s requested conversion request and Longview agreed to dismiss the aforementioned matter in May 2006 and standstill on any further request for conversion or bring any additional claim on with respect to the Company’s failure to reserve adequate shares for Longview or deliver shares under a conversion. Although the Company has materially performed, Longview has not dismissed the action. In November 2006, Plaintiff submitted an amended complaint with similar claims and requested a hearing, currently scheduled for late November, on its request for an injunction.  The Company intends to respond vigorously to these claims and file counterclaims as well. On March 30, 2007, the Company and the Holders completed the settlement of the Action and entered into a Settlement Agreement (the “Agreement”) dated as of March 22, 2007 with the Holders pursuant to which the Company agreed to issue 425,000,000 shares of free-trading common stock to the Holders in exchange for the Holders agreeing to enter into general releases and to petition the Court to dismiss the Action with prejudice. On March 30, 2007, the Court so ordered the adoption of the Agreement and general releases were executed and delivered by the parties. See Current Report on Form 8-K filed with the SEC on April 3, 2007.

Merrill Lynch, Pierce, Fenner & Smith v. Phantom Entertainment, Inc., No. 06-2-05618-3 SEA. In February 2005, we entered into a Stipulation and Order for Entry of Judgment with Merrill Lynch pertaining to our default in rent of $127,312 due under our lease with Merrill Lynch (for our former corporate headquarters). The foregoing matter was adjudicated in the Superior Court for the State of Washington, in and for the County of King. In partial consideration of the entry of the judgment the lease, originally set to expire in August 2006, terminated on February 28, 2006 with no further monetary obligations. Subsequent to the entry of the order the parties entered into a settlement agreement that provided for a payment schedule of $5,000 per month with a final balloon payment due in July 2006. The Company intended on using proceeds from an SB-2 registration, but was unable to do so after the SB-2 was withdrawn on May 23, 2006. The Company was in default on the settlement agreement when it failed to make the balloon payment by July 31, 2006. In September 2006, Merrill Lynch assigned its rights to enforce the settlement agreement, and all other rights, to Fred Niedrich, a third party. On September 20, 2006, the parties entered into a new settlement agreement whereby the total debt due of $118,289 was settled for $100,000 pursuant to 3(a)(10) of the Securities Act of 1933.
 
13


Morley and Campbell v. Timothy Roberts and Phantom Entertainment, Inc., No. D-1-GN-06-000851. In April 2006, Morley and Campbell sued Timothy Roberts individually and the Company in the District Court, 200 Judicial District, Travis County, Texas for breach of contract in failing to perform the remainder of an Asset Purchase Agreement and Assignment of Rights between plaintiffs and Roberts. The total claim is for $30,000. Phantom is defending itself vigorously in this suit and has retained local counsel in order to do so. No contingency has been accrued as of September 30, 2006. As of the date of this Annual Report, the plaintiff has not pursued any further remedies, and the Company believes that the action has been dropped.

M. Tyler Boles v. Phantom Entertainment, Inc., No. V06-30. In January 2006, M. Tyler Boles sued us in the General District Court for Nelson County, Delaware, alleging a claim for money and seeking damages in the amount of $1,200. A judgment was entered in March 2006 for $1,254 and we have recorded $1,300, including interest through September 30, 2006, in accounts payable.

Oracle USA, Inc. v. Phantom Entertainment, Inc. , No. C05-5049. In December 2005, Oracle USA sued us in the United States District Court, Northern District of California, San Francisco Division, alleging that the Company placed orders for software, failed to pay for such orders and thus breached the contract and seeking damages in the amount of $198,818. In March 2006 judgment was entered against the Company in the aforementioned court for $199,068 and, as of September 30, 2006, this amount has been recorded in accounts payable.

Ronald Westman v. Phantom Entertainment, Inc. , No. 2006 CA 010711 NC. In November 2006, Ronald Westman filed an action in the Circuit Court for Sarasota County, Florida. The Company has not been served with the summons and complaint and, therefore, can not provide any further detail. 

SBI USA, LLC v. Phantom Entertainment, Inc., No. 05CC10694. In November 2005, SBI USA, LLC, sued us in the Superior Court of California, Orange County, alleging breach of contract and seeking damages in the amount of $58,000. Judgment was entered against the Company in the aforementioned court in April 2006 for $55,000 and we have recorded $59,213, including interest through September 30, 2006, in accounts payable.
 
Walter Dorwin Teague Associates v. Phantom Entertainment, 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 and we have recorded $55,734, including interest through September 30, 2006, in accounts payable. Teague & Associates was retained in 2004 to assist and support various industrial design requirements associated with hardware for the Phantom Game Service. The Company defaulted on its payment obligations and this resulted in the associated arbitration award.

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

Timothy M. Roberts, the Company's Chairman of the Board of Directors, received a “Wells Notice” from the SEC in 2005. The Wells Notice was received by Mr. Roberts in a personal capacity. This Wells Notice was issued in connection with the SEC’s investigation relating to “phony fax scams” in which several penny stocks, including ours, were promoted to potential investors and resulted in charges filed by the SEC against two stock promoters. Under the SEC's procedures, the Wells Notice indicates that the staff of the SEC intends to recommend that the SEC bring a civil enforcement action against Mr. Roberts alleging violations of federal securities laws. Recipients of Wells Notices have the opportunity to respond to the SEC staff before any formal recommendation is made.
 
14

 
In May 2006, Mr. Roberts, in his personal capacity, was served with a complaint from the SEC in the matter entitled Securities and Exchange Commission vs. Timothy M. Roberts in the US District Court for the Middle District of Florida, Orlando Division, pursuant to which the SEC alleges that Mr. Roberts made false statements with regard to the Company’s prospects while at the same time selling his shares of the Company’s common stock for personal gain through his alleged participation in a “phony fax scam”. The SEC seeks judgment against Mr. Roberts enjoining him from future violations of securities laws, requiring that he disgorge any gain or benefit he received from past violations, and imposing penalties for the violations. Further, the SEC seeks a judgment prohibiting Mr. Roberts from serving in the future as an officer or director of a public company and from participating in any offering of “penny stocks”. While the Board of Directors has currently agreed to indemnify Mr. Roberts’ legal expenses specifically related to this matter, no accrual has been made as of September 30, 2006. On May 9, 2007, the Board of Directors agreed to authorize and directed the Company to (i) fully indemnify Mr. Roberts against the nature of the action arising out of the SEC Complaint and (ii) enter into a settlement agreement whereby the total debt due of $2,062.50 was to be settled for the same amount pursuant to 3(a)(10) of the Securities Act of 1933. On the same date, the Company entered into the aforementioned settlement agreement.

John Fife v. Phantom Entertainment, Inc. , No. 2006 CA 012309 NC. In December 2006, John Fife filed an action in the Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors agreed to authorize and directed the Company to enter, and the Company entered, into a settlement agreement whereby the total debt due of $166,000.00 was settled for the same amount pursuant to 3(a)(10) of the Securities Act of 1933.

Phantom Investors LLC v. Phantom Entertainment, Inc. , No. 2005 CA 001211 NC. In February 2005, Phantom Investors LLC filed an action in the Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors agreed to authorize and directed the Company to enter, and the Company entered, into a settlement agreement whereby the amount agreed to by the parties was settled pursuant to 3(a)(10) of the Securities Act of 1933.

Federal Insurance Company v. Phantom Entertainment, Inc. , No. 2006 CA 005201 NC. In June 2006, Federal Insurance Company filed an action in the Circuit Court for Sarasota County, Florida. The Company intends to vigorously defend itself in this action.

The Motley Fool Inc. v. Phantom Entertainment, Inc. , No. 2006 CA 002132 NC. In March 2006, The Motley Fool Inc., filed an action in the Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors agreed to authorize and directed the Company to enter, and the Company entered, into a settlement agreement whereby the amount agreed to by the parties was settled pursuant to 3(a)(10) of the Securities Act of 1933.

Centerpointe Property LLC v. Phantom Entertainment, Inc., No. 2006 CA 001216 NC. In February 2006, Centerpointe Property LLC filed an action in the Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors agreed to authorize and directed the Company to enter, and the Company entered, into a settlement agreement whereby the amount agreed to by the parties was settled pursuant to 3(a)(10) of the Securities Act of 1933.

Beshara Edward C v. Phantom Entertainment, Inc., No. 2006 CA 000206 NC. In January 2006, Edward Beshara filed an action in the Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors agreed to authorize and directed the Company to enter, and the Company entered, into a settlement agreement whereby the amount agreed to by the parties was settled pursuant to 3(a)(10) of the Securities Act of 1933.

Beshara James v. Phantom Entertainment, Inc., No. 2005 CA 011388 NC. In November 2005, James Beshara filed an action in the Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors agreed to authorize and directed the Company to enter, and the Company entered, into a settlement agreement whereby the amount agreed to by the parties was settled pursuant to 3(a)(10) of the Securities Act of 1933.

Beshara Edward C and Beshara Sharon M v. Phantom Entertainment, Inc., No. 2005 CA 010933 NC. In November 2005, Edward Beshara and Sharon Beshara filed an action in the Circuit Court for Sarasota County, Florida. Subsequently, the Board of Directors agreed to authorize and directed the Company to enter, and the Company entered, into a settlement agreement whereby the amount agreed to by the parties was settled pursuant to 3(a)(10) of the Securities Act of 1933.

GMR Marketing, LLC, v. Phantom Entertainment, Inc., No. 20050CA-010535 NC. In October 2005, GMR filed an action in the Circuit Court of Florida, Sarasota County.

Tops Staffing Services v. Phantom Entertainment, Inc., No. 2005 CC 5829 NC. In 2005, Tops Staffing Services filed an action in the Circuit Court for Sarasota County, Florida. On January 26, 2007, plaintiff obtained a Final Default Judgment against the Company.

John W. Anderson and Adam Goldblatt v. Phantom Entertainment, Inc. In 2007, John W. Anderson and Adam Goldblatt filed an action in the Superior Court for Seattle County, Washington. On January 30, 2007, plaintiff obtained a Default Judgment against the Company for unpaid compensation and related damages in the aggregate amount of 106,109.19.

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We may become involved in material legal proceedings in the future. 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on March 15, 2007 beginning at 10:00 a.m., local time, at Tampa Airport Marriott Hotel, Tampa International Airport, Tampa, FL.

There were present in person or by proxy 852,541,059 shares of common stock, of a total of 1,184,234,723 shares of common stock entitled to vote.

774,358,297 shares were voted in favor to amend our Certificate of Incorporation to increase the number of authorized shares of common stock of the Company from 1,200,000,000 shares to 2,400,000,000 shares.

828,300,885 shares were voted in favor of the appointment of Kempisty & Company as our independent auditors for the fiscal year ending December 31, 2007.
 
15

PART II
ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock

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

The following quotations reflect the high and low for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The high and low bid prices of our common stock for the periods indicated below are as follows:
 
Quarter Ended
 
High
 
Low
 
12/31/06
 
$
0.01
 
$
0.003
 
09/30/06
 
$
0.01
 
$
0.009
06/31/06
 
$
0.03
 
$
0.009
03/31/06 
 
$
0.46
 
$
0.012
12/31/2005
 
$
0.04
 
$
0.001
 
09/30/2005
 
$
0.12
 
$
0.04
 
06/30/2005
 
$
0.28
 
$
0.09
 
03/31/2005
 
$
1.60
 
$
0.24
 

HOLDERS

As of March 21, 2007, we had approximately 350 holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Corporate Stock Transfer, Denver, Colorado, (303) 282-4800.

COMMON STOCK

We are authorized to issue up to 2,400,000,000 shares of common stock, par value $.0001 per share. As of May 15, 2007, approximately 1,799,433,415 shares of our common stock are issued and outstanding.

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

Dividend Policy

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

Recent Unregistered Sales of Securities

The following unregistered securities have been issued by us since January 1, 2006 and have not been previously disclosed in our Quarterly Reports on Form 10-Q or in our Current Reports on Form 8-K:
 
16

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

On 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.

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, we will receive $5,450,000 in proceeds.

On February 15, 2006, we issued 372,414 shares of common stock to a consultant with a fair market value of $5,400 ($.0145 per share).

On March 8, 2006, we issued an aggregate of 19,999,999 shares of common stock to certain of our debenture holders from our December 2004 Securities Purchase Agreement upon a partial conversion of their debentures. The fair market value was $153,080 ($0.07654 per share). We recognized a loss of $34,021 on these conversions.

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

On March 10, 2006, we issued 2,195,905 shares of common to a vendor for settlement of claims and associated legal fees with a fair market value of $52,702 ($.024 per share). We recognized a gain of $2,673 on this settlement. The shares were issued under a court ordered settlement pursuant to 3(a)(10) under the Securities Act of 1933.

On March 16, 2006, we issued 243,243 shares of common stock to a consultant with a fair market value of $4,500 ($.0185 per share).

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

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

During October 2006, the Company issued 69,172,000 shares of common stock in partial settlement of principal and interest aggregating $315,535 ($0.0046 per share). Principal in the amount of $301,967 and interest in the amount of $13,568 was converted and no gain or loss was recognized.

During November 2006, the Company issued 49,728,000 shares of common stock in partial settlement of principal and interest aggregating $203,589 ($0.0041 per share). Principal in the amount of $199,751 and interest in the amount of $3,838 was converted and no gain or loss was recognized.

During November 2006, the Company issued 20,000,000 shares of common stock in full settlement of a note and accrued interest. The fair value was $102,000 ($0.0051 per share). Principal and interest in the amount of $102,158 was converted and a $158 gain was recognized.

During November 2006, the Company issued 19,940,582 shares of common stock in full settlement of a note and accrued interest. The fair value was $97,709 ($0.0049 per share) and no gain or loss was recognized.

During November 2006, the Company issued 1,849,568 shares of common stock in partial settlement of principal. Principal in the amount of $4,836 ($0.0026 per share) was converted and no gain or loss was recognized.

All of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Phantom Entertainment, Inc., or executive officers of Phantom Entertainment, Inc., and transfer was restricted by Phantom Entertainment, Inc., in accordance with the requirements of the Securities Act of 1933, as amended. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
None.

Equity Compensation Plan Information
 
The following table set forth the information as of December 31, 2006 with respect to compensation plans under which equity securities of the Company are authorized for issuance:
 
Plan Category
 
Number of Shares to
Be Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
 
Number of Shares
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Shares
Reflected in
Column (a))
(c)
 
 
 
 
 
 
 
 
 
Equity Compensation plans approved by stockholders
 
0
 
N/a
 
0
 
Equity Compensation plans not approved by stockholders
 
392,000,000
 
N/a
 
392,000,000
 
Total 
 
392,000,000
 
N/a
 
392,000,000
 

Our 2006 and 2005 Stock Compensation Plans
 
The purpose of each of our 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation Plans-A through -D is to help us retain executive and non-executive employees, consultants, professionals, and service providers who provide services to the Company in connection with, among other things, the Company's obligations as a publicly-held reporting company. In addition, we expect to benefit from the added interest that the awardees will have in our welfare as a result of their ownership or increased ownership of our common stock. The Board of Directors will select who will receive awards and the amount and nature of such awards.

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

Awards authorized under the each of our 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation Plans-A through -D consist of shares of our common stock. Such awards may be subject to forfeiture in the event of premature termination of engagement, failure to meet certain performance objectives, or other conditions, as may be determined by the Board of Directors.
 
Each of the 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation Plans-A through -D is administered by the Board of Directors. Subject to the express terms and conditions of the 2006 Stock Compensation Plans and 2005 Stock Compensation Plans, the Board of Directors has full power to make Awards, to construe or interpret the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for its administration. Except as otherwise provided in the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans, the Board of Directors may also determine which persons shall be granted Awards, the nature of the Awards granted, the number of shares subject to Awards and the time at which Awards shall be made. Such determinations will be final and binding.

The only class of stock subject to an Award is common stock. We have an aggregate of 260,000,000 shares of common stock reserved for issuance under the 2006 Stock Compensation Plans of which an aggregate of 260,000,000 are issued an outstanding. We have an aggregate of 132,000,000 shares of common stock reserved for issuance under the 2005 Stock Compensation Plans of which an aggregate of 132,000,000 are issued an outstanding.

In the event that our outstanding shares of Common Stock are increased, decreased or changed or converted into other securities by reason of merger, reorganization, consolidation, recapitalization, stock dividend, extraordinary cash dividend or other change in our corporate structure affecting the stock, the number of shares that may be delivered under the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans and the number and/or the purchase price of shares subject to outstanding Awards under the 2005 Stock Compensation Plans may be adjusted at the sole discretion of the Board of Directors to the extent that the Board of Directors determines to be appropriate, provided, however, that the number of shares subject to any Awards will always be a whole number.

The 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans will expire ten years after their approval by the Board, but the Board of Directors may terminate the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans at any time prior to that date and Awards granted prior to such termination may extend beyond such date. Termination of the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans will not alter or impair, without the consent of the Awardee, any of the rights or obligations of any Award made under the 2005 Stock Compensation Plans.

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

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

In the event of a participant's retirement, permanent disability or death, or in cases of special circumstances, the Board of Directors may waive any or all of the remaining restrictions and limitations imposed under the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans with respect to any Awards.

Restrictions on Transferability. These Shares of stock may not be sold, exchanged, transferred, pledged, hypothecated, or otherwise disposed of until such time as any stated restrictions lapse. The Board of Directors, in its absolute discretion, may impose such restrictions on the transferability of the Awards granted in the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans as it deems appropriate. Any such restrictions shall be set forth in the Agreement with respect to such Awards and may be referred to on the certificates evidencing shares issued pursuant to any such Award. Shares of restricted stock will be evidenced by a certificate that bears a restrictive legend.
 
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ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Some of the information in this Annual Report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:
 
 
·
discuss our future expectations;
 
·
contain projections of our future results of operations or of our financial condition; and
·
state other "forward-looking" information.
 
We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."

Overview

Phantom Entertainment has developed and is manufacturing and marketing the Phantom Lapboard, a combination wireless keyboard, laser mouse and hard surface that enables users to work or play games from any comfortable setting. After establishing sales and distribution of the Phantom Wireless Lapboard, we may seek to develop and market 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. We have entered into major, multi-product licensing agreements with Ione Technology Inc., a worldwide leading manufacturer and marketer of input devices, to manufacture and distribute the Phantom® Wireless Lapboard and Phantom® Wireless Laser Mouse under Ione’s brand name throughout Asia and through Ione’s distributors in the US and Europe in return for royalty and design fees. We anticipate we will begin to receive revenue from these agreements in the 4th quarter of 2007.

We have received a purchase order from Alienware® - the leading manufacturer of high-performance desktop, notebook, media center and professional systems - to manufacture and supply the Phantom® Wireless Lapboard and Phantom® Wireless Laser Mouse for Alienware’s Media Center PCs and its PC gear product line. We anticipate we will begin to receive revenue from Alienware in the 4th quarter of 2007.

We have entered a distribution and sales agreement with Global Marketing Partners to serve the E-Commerce and retail markets throughout the United States. The agreement will aggregate sales of the Phantom Wireless Lapboard through Global Marketing Partner’s distribution channel with Ingram Micro Inc. (NYSE: IM), the world's largest technology distributor and a leading technology sales, marketing and logistics company. We anticipate we will begin to receive revenue from this agreement in the 4th quarter of 2007.

We have entered a sales agreement with Westex Europe NV to serve the E-Commerce, retail and OEM industrial markets throughout Europe. Westex Europe NV, a sales organization for high technology products and solutions, will target original equipment manufacturers (OEMs), value-added resellers (VARS), systems builders and E- commerce retailers in Europe.

In August 2006, we launched a new website and online store to support the marketing and sales of the Phantom Lapboard. The website can be found at www.phantom.net. We have a backlog of online orders for the Phantom Lapboard. Credit card payments will not be charged until the Phantom Lapboard ships. We anticipate we will begin to receive revenue from online orders in the 4th quarter of 2007.

Our ability to generate revenue from the Phantom brand is dependent on our ability to successfully manufacture and market the Phantom Wireless Lapboard under Phantom’s brand name throughout North America and Europe. While we anticipate to launch sales and distribution of the Phantom Wireless Lapboard in September 2007, delays may occur and given our limited resources, we need immediate additional capital to manufacture the Phantom Wireless Lapboard as well as to fund general operations.

Currently our business activities are almost entirely dedicated to manufacturing and marketing of the Phantom Wireless Lapboard. The Phantom Wireless Lapboard includes wireless technology, ergonomic design, one-touch features, programmable keys and a wireless high performance 1200 dpi laser mouse. The Lapboard’s innovative design features a keyboard that rotates 360 degrees to accommodate left or right handed users and inclines on a 22 degree angle with a hard surface below for the Phantom Laser Mouse.

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Plan of Operations

We have incurred recurring losses from operations since inception. Our loss from operations for the year ended December 31, 2006 was $4,454,583, as compared to our loss from operations for the year ended December 31, 2005 of $12,236,530. At December 31, 2006, we had a working capital deficit of $18,344,236 and accumulated net losses since inception of $73,550,242. In their report on our audited financial statements for the year ended December 31, 2006, our independent auditors expressed substantial doubt about our ability to continue as a going concern.


Purchase of property and equipment
 
$
990,467
 
 
     
Development costs (costs net applicable payables)
   
2,336,375
 
 
     
Advertising (expenses net applicable payables)
   
1,294,778
 
 
     
Salary expense (expense net shares issued for employee services and wages/taxes payable)
   
5,925,926
 
 
     
Consultants and professional fees (expenses net shares issued for services and applicable payables)
   
1,781,164
 
 
     
General and administrative (expenses net non cash expenses [i.e. depreciation] and applicable payables)
   
3,811,916
 
 
     
Cash repayments of notes payable
   
1,075,000
 
 
     
Cash interest payments
   
534,093
 
 
     
Total cash utilized
 
$
17,749,719
 
 
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On June 30, 2006, the Company borrowed $100,000 under an 8% promissory note. The note was funded in three tranches: $20,000 (due upon mutual execution of the note), $35,000 (due twenty-one days after mutual execution), and $45,000 (due forty-two days after mutual execution). The note is due no later than two months following the final traunche (estimated at one hundred and two days after mutual execution of the note). The obligation to issue the collateral was conditioned upon prior written request of the note holder prior to the associated funding and the execution of an escrow agreement with the note holder’s attorney. The Company agreed to grant the note holder three certificates to collateralize the note of 4,000,000 shares, 7,000,000 shares, and 9,000,000 shares of common stock. The note holder has not made any requests to escrow the collateral and has not established the aforementioned escrow agreement and, accordingly, the collateral has not been presented. As additional consideration for the note, the Company agreed to (i) re-price certain pre-existing warrants, (ii) issue 1,357,800 new warrants, with a fair value of $13,952 (which has been recorded as a derivative with the initial amount treated as a discount to the note and amortized over the term of the note), to parties designated by the note holder and (iii) issue, subject to full performance of the funding obligations by note holder, to note holder an additional 10,000,000 new warrants with a fair value of $86.048 (which has been recorded as a derivative with the initial amount treated as a discount to the note and amortized over the term of the note) . The new warrants described herein and expire in five years from the effective grant date and have an exercise price of $.015 per share. On November 30, 2006, the entire amount of the note and accrued interest was converted at a per share price of $0.0051. The Company recognized a $158 gain on the conversion.

On January 25, 2006, the Company borrowed $50,000 under a three year 5.25% unsecured promissory note with 5,000,000 warrants attached at an exercise price of $1.09. Pursuant to the SEC’s request, the associated registration statement was withdrawn on May 23, 2006. Accordingly, we were unable to obtain an effective registration and, as of June 23, 2006, were in default under the terms of the note. The note holder has accelerated the note, including a $15,000 penalty, which are due immediately. The note holder has also requested repayment for prepaid warrants of $285,000, but the Company disputes the associated claims with respect to these funds. At September 30, 2006, the outstanding balance on the note including interest and the penalty is $66,526. The note, interest and penalty are in default.

On January 1, 2006, the Company converted to a promissory note $91,775, issued to Timothy Roberts, a Director, of related unpaid expense reimbursements incurred while Mr. Roberts was employed as a full-time employee. The note is unsecured and bears an 8% rate of interest. On October 24, 2006, the entire amount of the note and accrued interest was converted at a per share price of $0.0049. The Company recognized no gain or loss on the conversion.

At December 31, 2006, we were in default on payment of promissory notes with a principal amount of $2,242,276. 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. On December 7, 2006, the Company issued Original Issue Discount Secured Notes in the aggregate principal amount of $250,000 to John Fife, an accredited investor, in three equal denominations for an aggregate purchase price of $150,000. The Notes mature on January 6, 2007, March 7, 2007 and June 7, 2007, respectively. The Notes do not bear interest; provided, however, default interest equal to 18% per annum is payable to the Mr. Fife upon an event of default, as defined in the Notes. Upon at least five, but no more than 10 business days advanced written notice, the Company has the right to prepay all or part of any outstanding amounts under the Notes without penalty at any time prior to the respective maturity dates.  The Notes are secured by a Stock Pledge Agreement dated as of December 7, 2006 between the Company and the Mr. Fife, wherein the Company agreed to pledge 129,000,000 shares of common stock (the “Collateral”) as security for (i) the performance of the Company of its obligations under the Notes, and (ii) the performance by Timothy Roberts, the Company’s Chairman of the Board of Directors, of his Guaranty delivered to the Holder on December 7, 2006. Pursuant to the Agreement, if on any weekly anniversary subsequent to the date of issuance of the Notes, the market value of the Collateral then held by in escrow does not equal or exceed 2.25 times the principal amount of the Notes, then the Pledgor shall deliver to the Holder, within 5 business days of such date, a certificate for additional Collateral equal to not less than 2.25 times the principal amount of the Notes. If the Company fails to deliver a certificate for additional Collateral to the Holder within 5 business days, the Company shall pay to the Holder, in cash, an amount equal to $250 per business day until such certificate is delivered.
 
As of December 31, 2006, we have recorded an aggregate of $5,924,900in debt discount, of which $5,924,900 was amortized as interest expense. 
 

Liquidity and Capital Resources

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

Unless and until we receive sufficient financing, we expect to continue to be forced to rely on issuances of common stock under similar arrangements in settlement of payroll and such other costs.
 
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Issuances of equity will dilute existing stockholder’s ownership and will have a depressive effect on our stock price, which will result in greater dilution for subsequent equity issuances and further downward pressure on our stock price.

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

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

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

Completing Development of the Phantom Lapboard - The Phantom Lapboard was originally intended for retail launch in 2004 and its design was based upon that premise. We are currently in the process of revising and updating the hardware to take advantage of newer technology to ensure that the product is technically compelling and that we are able to have an adequate supply of components. This includes changes to the mouse optical subsystem to a newer laser mechanism allowing users to utilize the mouse on a wider variety of surfaces. Users may operate the Phantom Lapboard from a tabletop which often has a reflective surface. The laser mechanism provides much broader compatibility with this type of surface. The Company believes that utilizing more recent components allows it the opportunity to have an adequate supply, but in no way “ensures” that it will have this supply. Prototypes of the Lapboard will be issued in the 2nd quarter of 2007 to wholesale buyers in the North American and European markets to determine forecasts for manufacturing the Lapboard. Wholesale buyers will be utilized through the sales channels of Global Partners Inc. U.S. and Westex N.V for the European sales channels.

Completing Development of the Lapboard Distribution Network - Working with our partners, Integrated Network Cable of St. Louis, Missouri, to provide logistics, warehousing/distribution and fulfillment services to support the marketing of the Phantom Lapboard and ShowMeCables, the e-commerce marketing division of Integrated Network Cable, will provide its e-commerce shopping cart to support the marketing and sales of the Phantom Lapboard.

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

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

STOCK-BASED COMPENSATION

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

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

IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS

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

INCOME TAXES

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

RESEARCH AND DEVELOPMENT COSTS

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

Estimating gains and losses from derivatives is one of our most critical accounting policies. This includes the gain / loss recognition   related to convertible debentures, which are convertible into the Company’s stock at the option of the note holders.   These derivatives require a periodic valuation of their fair value and a corresponding recognition of gain / loss and liabilities associated with such derivatives. The recognition of derivative liabilities related to the issuance of debt convertible into shares of common stock is applied first to the proceeds of such issuance, at the date of issuance, and the excess of derivative liabilities over the proceeds is recognized as a loss on derivatives in the accompanying consolidated financial statements. Any subsequent increase or decrease in the fair value of the derivative liabilities is recognized as a gain / loss on derivatives.

24

 
Accounting for these instruments requires a determination of all of the embedded derivatives. Certain instruments may become derivatives once a Company is unable to assert it has enough authorized shares to satisfy conversion of all outstanding debt, warrants, options and all other stock obligations. Once identified, an estimate is made for the number of shares each derivative would convert into as of the date of valuation. Theses shares are then valued using a Black-Scholes model based on the assumptions around volatility along with the current stock price, conversion price, interest rate, dividend rate, and term to maturity. Once valued the amount is compared to the prior period with “gains / losses on derivatives” and related liability recorded in the current period. While we believe that the systems and procedures used by the Company do provide a sound basis for our estimates, actual results will differ from management’s estimates. The complexity of identifying and estimating derivative liabilities and corresponding gains / losses affects the amounts reported in our financial statements.
 
Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). The accounting provisions of FIN No.48 are effective for fiscal years beginning after December 15, 2006. The Company is currently assessing whether adoption of this Interpretation will have an impact on our financial position or results of operations.
 
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, which establishes a framework for reporting fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its financial statement.
ITEM 7.  FINANCIAL STATEMENTS

Our consolidated financial statements are included beginning on page F-1 immediately following the signature page to this Annual Report.
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On January 2, 2007, Webb & Company, P.A. (the "Former Accountant") was dismissed as the auditors for the Company. On January 3, 2007, the Company engaged Kempisty & Company (the "New Accountant"), as its independent certified public accountant. The Company's decision to engage the New Accountant was approved by its Board of Directors on January 2, 2007.

The reports of the Former Accountant on the financial statements of the Company for each of the two most recent fiscal years, did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles for the two most recent fiscal years and all subsequent interim periods, except that the Former Accountant's opinion in its report on the Company's financial statements expressed substantial doubt with respect to the Company's ability to continue as a going concern for the last two fiscal years.

During the Company's two most recent fiscal years and the subsequent interim period through the date of dismissal, there were no reportable events as the term described in Item 304(a)(1)(iv) of Regulation S-B.

During the Company's two most recent fiscal years and the subsequent interim period through the date of dismissal, there were no disagreements with the Former Accountant on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of the Former Accountant, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on these financial statements for those periods.

The Company did not consult with the New Accountant regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and no written or oral advice was provided by the New Accountant that was a factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issues.
25

 
Item 8A.  CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures
 
Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31, 2006, our Chief Executive Officer and Interim Chief Financial Officer has concluded that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Our Chief Executive Officer and Interim Chief Financial Officer also concluded that, as of December 31, 2006, our disclosure controls and procedures were [not] effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosure.

Through the filing of our annual report on Form 10-KSB for the year ended 2006, our Disclosure Controls were not effective in enabling us to record and properly report embedded conversion features and freestanding warrants pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” As such, in September 2006, the Company restated its 10-KSB for the years ended 2004 and 2005, all quarterly periods in 2005, and for the period ending March 31, 2006. The unaudited financial statements included on Form 10-QSB for the period ended June 30, 2006 reflect the correct accounting treatment for transactions suggesting treatment under EITF 05-04 and 00-19. 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures. 

(b) Changes in Internal Controls

During the year ended December 31, 2006, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

Item 8A.  CONTROLS AND PROCEDURES

Not applicable.
Item 8B.  OTHER INFORMATION

None.
PART III
ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The following table sets forth the names and ages of our executive officers and directors as of December 31, 2006.
 
Name
 
Age
 
Position
 
Director Since
Greg Koler
 
50
 
Chief Executive Officer, Interim Chief Financial Officer and Director
 
2006
Richard Angelotti
 
62
 
Director
 
2004
Timothy Roberts
 
36
 
Chairman of the Board of Directors
 
2004

The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:

26

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

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

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.

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 Phantom Entertainment 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.
  
Key Employees
 
TERRANCE TAYLOR From November 2003, to June 2004, Mr. Taylor served as Controller and Acting Chief Financial Officer of Phantom Entertainment, Inc., and as Controller of its predecessor, Infinium Labs Operating Corporation. From June 1999 to November 2003, Mr. Taylor served as controller at Wireless One Network, a cellular telephone operator in southwest Florida that was acquired by AT&T. From April 1998 to May 1999, Mr. Taylor served as Chief Financial Officer of Abaris Care, Inc., which operated 18 assisted living communities.

FAMILY RELATIONSHIPS

There are no family relationships among our executive officers and directors.
 
THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE  

Our Board of Directors is responsible for establishing broad corporate policies and for overseeing our overall management. In addition to considering various matters which require Board approval, the Board provides advice and counsel to, and ultimately monitors the performance of, our senior management.

The Board and our management strive to perform and fulfill their respective duties and obligations in a responsible and ethical manner. The Board performs annual self-evaluations. We have adopted a comprehensive Code of Business Conduct and Ethics for all directors, officers and employees.

During 2006, the Board of Directors met seven times. To the extent that a nominee was a member of the Board of Directors in 2006, each nominee for director attended 100% of the Board of Directors meetings. While we do not have a formal policy requiring members of the Board to attend the Special Meeting of Stockholders, we strongly encourage all directors to attend.

Committees of the Board

As of the date of this Annual Report, we do not have any committees within our board of directors. To date, none of our Directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-B. The Company lacks the financial resources to form audit and nominating committees. Notwithstanding, the Company is seeking to add new outside directors including a financial expert, as defined by Item 401(e) of Regulation S-B. 

27

 

Directors may receive, on an annual basis, common stock as awarded by our Board of Directors in consultation with the compensation committee.
 
Our Board of Directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. Other than indicated herein, no director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
 
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors.
 
Other than the management agreements and the advisory agreements discussed herein, we presently have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors.

Section 16(a) Beneficial Ownership Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity securities of our company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year ended December 31, 2006, and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended December 31, 2006, we believe that during the year ended December 31, 2006, our executive officers, directors and all persons who own more than ten percent of a registered class of our equity securities complied with all Section 16(a) filing requirements.
 
CODE OF ETHICS

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

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

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

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

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

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

Our Code of Business Conduct and Ethics requires, among other things, that all of our Company’s personnel shall be accorded full access to our Chief Financial Officer with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our Company’s personnel are to be accorded full access to our Company’s Audit Committee if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by the Chief Financial Officer or by any person who would be considered an “insider” for the purposes of our Company’s Insider Trading Compliance Policy by virtue of such person’s relationship to the Chief Financial Officer.
 
28

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

Terms of Office

Our directors are appointed for a one year term to hold office until the next annual general meeting of the holders of our Common Stock or until removed from office in accordance with our by-laws. Our officers are appointed by our board of directors and hold office until removed by our board of directors.
ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the cash compensation (including cash bonuses) paid or accrued and equity awards granted by us for years ended December 31, 2006 and 2005 to our Chief Executive Officer and our most highly compensated officers other than the Chief Executive Officer.
 
SUMMARY COMPENSATION TABLE
 
Name & Principal
Position
Year
Salary ($)
Bonus
($)
Stock
Awards($)
Option Awards
($)
Non-Equity
Incentive Plan Compensation
($)
Change in
Pension Value
and Non-Qualified
Deferred
Compensation
Earnings ($)
All Other
Compensation
($)
Total ($)
Timothy M. Roberts Chairman, Chief
2006
$327,000
Nil
Nil
Nil
Nil
Nil
Nil
$327,000
Executive Officer and Director(1)
2005
$142,594  2
Nil
Nil
Nil
Nil
Nil
Nil
 
$142,594
Greg Koler Chief Executive Officer
2006
$250,000  3
Nil
$45,716 *
Nil
Nil
Nil
Nil
$295,716
and Interim Chief Financial Officer(5)
2005
$29,487  6
Nil
Nil
Nil
Nil
Nil
Nil
$29,487
Kevin Bachus Former President and
2006
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Former Chief Operating Officer(7)
2005
$158,050  8
Nil
Nil
Nil
Nil
Nil
Nil
$158,050
Richard S. Skoba Former Executive (9)
2006
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Vice President of Sales
2005
$136,896  10
Nil
Nil
Nil
Nil
Nil
Nil
$136,896
Tyrol Graham Former Vice President
2006
$34,732
Nil
Nil
Nil
Nil
Nil
Nil
$34,732
Development (11)
2005
$217,333  12
Nil
Nil
Nil
Nil
Nil
Nil
$217,333
 
29


 * Amount represented stock-based compensation expense for fiscal year 2006 for awards of stock granted in 2006 under SFAS 123 R as discussed in Note 1(M), “Stock-Based Compensation” of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
1
Resigned as an officer of our company on August 15, 2005.
2
Includes 1,382,298 shares of S-8 stock issued in lieu of cash compensation.
3
Includes 30,000,000 shares of S-8 stock issued in lieu of cash compensation. $146,200 of this amount is currently payable but has been deferred.
4
Includes 500,000 shares of S-8 stock issued in lieu of cash compensation.
5
Appointed as an officer and director of our company on November 18, 2005.
6
For his role as a director and officer Mr. Koler was compensated solely in cash.
7
Resigned as an officer and director of our company on November 17, 2005.
8
Includes 1,212,960 shares of S-8 stock issued in lieu of cash compensation.
9
Resigned from our company on April 30, 2005.
10
includes 1,722,598 shares of S-8 stock issued in lieu of cash compensation.
11
Resigned from our company on February 24, 2006.
12
includes 4,719,739 shares of S-8 stock issued in lieu of cash compensation.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information with respect to grants of options to purchase our common stock to the named executive officers during the fiscal year ended December 31, 2006.

Option Awards
Stock Awards
Name
 
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Option
Exercise
Price
($)
Option
Expiration
Date
Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested
($)
Equity
Incentive
Plan Awards:
Number
of
Unearned
Shares,
Units or
Other Rights
That Have
Not
Vested
(#)
Equity
Incentive
Plan Awards:
Market or
Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
 
Director Compensation

The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made in the year end December 31, 2006.
 
Name
Fees Earned or
Paid in Cash
($)
Stock
Awards
($)
Option
Awards ($)
Non-Equity Incentive
Plan Compensation ($)
Change in Pension Value and
Nonqualified Deferred
Compensation Earnings
All Other
Compensation
($)
Total
($)
Greg Koler
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Timothy Roberts
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Richard Angelotti
$69,333 (1)
Nil
Nil
Nil
Nil
Nil
$69,333

1
The entire $69,333 is currently payable but has been deferred.

Employment Agreements

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

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

30

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

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

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

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

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 December 6, 2006 the Company entered into an employment agreement with Terrance Taylor, its Controller. Pursuant to the Employment Agreement, the Company will employ Mr. Taylor as its Treasurer and Controller for a period of 1 year commencing December 6, 2006, which will be automatically renewed for successive 1 year periods until written notice not to renew is delivered by either the Company or Mr. Taylor. Mr. Taylor will be paid an annual base salary of $150,000 (“Base Salary”). In addition, Mr. Taylor will be eligible to earn an annual cash bonus of up to $37,500 based on meeting performance objectives and bonus criteria. On April 17, 2007 the Company’s Board of Directors removed Mr. Taylor from his role as the Company’s Treasurer and, since that time, Mr. Taylor only serves in the capacity of the Company’s Controller.

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, 2006 provided for or contributed to by our company.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as to the shares of our common stock beneficially owned as of May 15, 2007 by (i) each person known to us to be the beneficial owner of more than 5% of our common stock; (ii) each director and nominee for director; (iii) each executive officer; and (iv) all of our directors and executive officers as a group. Unless otherwise indicated in the footnotes following the table, the persons as to whom the information is given had sole voting and investment power over the shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the address of each person shown is c/o Phantom Entertainment, Inc., 222 Grace Church St., Suite 302, Port Chester, NY 10573.

31

 
Principal Stockholders
Name and Address of
Beneficial Owner
 
Amount Beneficially Owned (1)
 
Percent of
Class (1)
Timothy M. Roberts
 
0
 
*
Greg Koler
 
29,000,000
 
1.61%
Richard Angelotti
 
28,291,182
 
1.57%
Golden Gate Investors, Inc. (2)
 
179,763,398
 
9.99%
All Officers and Directors as a group (3 persons)
 
57,291,182
 
3.18%


 
*Less than one percent.

(1) Based on 1,799,433,415 shares of common stock issued and outstanding as of May 15, 2007. 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 shares underlying debentures and common stock purchase warrants. 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 Golden Gate.

Equity Compensation Plan Information
 
The following table set forth the information as of December 31, 2006 with respect to compensation plans under which equity securities of the Company are authorized for issuance:
 
Plan Category
 
Number of Shares to
Be Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
 
Number of Shares
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Shares
Reflected in
Column (a))
(c)
 
 
 
 
 
 
 
 
 
Equity Compensation plans approved by stockholders
 
0
 
N/a
 
0
 
Equity Compensation plans not approved by stockholders
 
392,000,000
 
N/a
 
392,000,000
 
Total 
 
392,000,000
 
N/a
 
392,000,000
 

Our 2006 and 2005 Stock Compensation Plans
 
The purpose of each of our 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation Plans-A through -D is to help us retain executive and non-executive employees, consultants, professionals, and service providers who provide services to the Company in connection with, among other things, the Company's obligations as a publicly-held reporting company. In addition, we expect to benefit from the added interest that the awardees will have in our welfare as a result of their ownership or increased ownership of our common stock. The Board of Directors will select who will receive awards and the amount and nature of such awards.

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

Awards authorized under the each of our 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation Plans-A through -D consist of shares of our common stock. Such awards may be subject to forfeiture in the event of premature termination of engagement, failure to meet certain performance objectives, or other conditions, as may be determined by the Board of Directors.
 
32

 
Each of the 2006 Stock Compensation Plans-A through -C and 2005 Stock Compensation Plans-A through -D is administered by the Board of Directors. Subject to the express terms and conditions of the 2006 Stock Compensation Plans and 2005 Stock Compensation Plans, the Board of Directors has full power to make Awards, to construe or interpret the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for its administration. Except as otherwise provided in the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans, the Board of Directors may also determine which persons shall be granted Awards, the nature of the Awards granted, the number of shares subject to Awards and the time at which Awards shall be made. Such determinations will be final and binding.

The only class of stock subject to an Award is common stock. We have an aggregate of 260,000,000 shares of common stock reserved for issuance under the 2006 Stock Compensation Plans of which an aggregate of 260,000,000 are issued an outstanding. We have an aggregate of 132,000,000 shares of common stock reserved for issuance under the 2005 Stock Compensation Plans of which an aggregate of 132,000,000 are issued an outstanding.

In the event that our outstanding shares of Common Stock are increased, decreased or changed or converted into other securities by reason of merger, reorganization, consolidation, recapitalization, stock dividend, extraordinary cash dividend or other change in our corporate structure affecting the stock, the number of shares that may be delivered under the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans and the number and/or the purchase price of shares subject to outstanding Awards under the 2005 Stock Compensation Plans may be adjusted at the sole discretion of the Board of Directors to the extent that the Board of Directors determines to be appropriate, provided, however, that the number of shares subject to any Awards will always be a whole number.

The 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans will expire ten years after their approval by the Board, but the Board of Directors may terminate the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans at any time prior to that date and Awards granted prior to such termination may extend beyond such date. Termination of the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans will not alter or impair, without the consent of the Awardee, any of the rights or obligations of any Award made under the 2005 Stock Compensation Plans.

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

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

In the event of a participant's retirement, permanent disability or death, or in cases of special circumstances, the Board of Directors may waive any or all of the remaining restrictions and limitations imposed under the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans with respect to any Awards.

Restrictions on Transferability. These Shares of stock may not be sold, exchanged, transferred, pledged, hypothecated, or otherwise disposed of until such time as any stated restrictions lapse. The Board of Directors, in its absolute discretion, may impose such restrictions on the transferability of the Awards granted in the 2006 Stock Compensation Plans and the 2005 Stock Compensation Plans as it deems appropriate. Any such restrictions shall be set forth in the Agreement with respect to such Awards and may be referred to on the certificates evidencing shares issued pursuant to any such Award. Shares of restricted stock will be evidenced by a certificate that bears a restrictive legend.
 

Transactions with Related Persons, Promoters and Certain Control Persons 

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.

33

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

On July 28, 2004, we issued Richard Angelotti, a director, 800,000 shares of common stock as consideration for his personal guaranty of a promissory note payable secured by a real estate mortgage encumbering the director's residence. The note, effective on July 28, 2004 and expiring on July 27, 2005, was payable to Stephen A. Witzer, Trustee U/A dated February 7, 1985. The principal is for $500,000 with interest calculated at fifteen percent (15%) per annum, plus a five percent (5%) penalty, if applicable, for any late payment. In the event of an uncured default, the interest increases to eighteen percent (18%) per annum. On December 9, 2005, this promissory note was assigned by Witzer to Richard Angelotti. The terms of the promissory note were subsequently amended to provide that as of November 1, 2005, principal and accrued interest totaled $560,437. With respect to the revised principal, commencing November 2, 2005, simple interest at a rate of fifteen percent (15%) per annum will accrue on a monthly basis until December 31, 2006 (maturity date), at which time the entire remaining principal and all accrued and unpaid interest are due in full. On August 4, 2006, the Company issued 41,659,182 shares of common stock with a fair value of $624,887.73 ($.015 per share) to convert a promissory note held by Richard Angelotti, a Director, and accrued interest. No gain or loss was recognized on the conversion.

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

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

On December 8, 2004, we issued 300,000 shares of common stock with a fair value of $65,603 ($0. 2187 per share) in lieu of cash compensation to Kevin Bachus as our President and Chief Operating Officer.
 
On December 8, 2004, we issued 200,000 shares of common stock with a fair value of $43,735 ($0. 2187 per share) in lieu of cash compensation to Timothy Roberts, as CEO (Mr. Roberts was also the CFO and Chairman).

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

On January 27, 2005, we borrowed $300,000 from Timothy Roberts, our former CEO and a director of our company, under a 15% promissory note, which was payable no later than April 27, 2005. The note was subsequently transferred by Mr. Roberts to parties unaffiliated with us. On or about May 10 through 12, 2005, this note was assigned by Mr. Roberts to the following individuals with corresponding amounts: (1) Gerard D'Ariano, $100,000; (2) Fred Niedrich, $50,000; (3) Gary Fears, $50,000; and (4) John Landino, $100,000.In June 2005, the full principal and interest was settled in consideration for our issuance of 3,187,206 shares of common stock to the holders, valued at $318,721.
 
On March 11, 2005, we issued 800,000 shares of common stock with a fair value of $272,000 ($.34 per share) in lieu of cash compensation to Richard Angelotti, Director.
 
On May 10, 2005, we issued 250,000 shares of common stock with a fair value of $37,500 ($0.15 per share) in lieu of cash compensation to Kevin Bachus as our President and Chief Operating Officer.

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

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

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

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

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

34

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

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

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

On January 1, 2006, the Company converted $91,775 owed under employee expense reimbursements into a promissory note to Timothy Roberts, a former employee, and the current Chairman and a Director. The note is unsecured and bears an 8% rate of interest. During November 2006, the Company issued 19,940,582 shares of common stock in full settlement of the promissory note and accrued interest. The fair value was $97,709 ($0.0049 per share) and no gain or loss was recognized.

On January 11, 2006, Greg Koler, our Chief Executive Officer, was granted 1,000,000 shares of common stock under the terms of his employment agreement. As of December 31, 2006, such shares have not been issued.
 
On February 14, 2006, the company issued Greg Koler, our Chief Executive Officer, 1,021,239 of common stock with a fair market value of $18,382 ($.018 per share) for services performed by Mr. Koler, prior to November 18, 2005, in his capacity as an independent contractor prior to becoming the CEO.

On July 26, 2006, the Company issued 20,000,000 shares of common stock with a fair value of $330,000 ($.0165 per share) to Timothy Roberts, Chairman, for consulting services rendered in 2006 and to be rendered for the balance of 2006.

On November 9, 2006, we issued 20,000,000 shares of common stock with a fair value of $66,000 ($0.0033 per share) in lieu of cash compensation to Greg Koler, our Chief Executive Officer.

On November 17, 2006, we issued 9,000,000 shares of common stock with a fair value of $34,200 ($0.0038 per share) in lieu of cash compensation to Greg Koler, our Chief Executive Officer.

On November 21, 2006, we issued 1,000,000 shares of common stock with a fair value of $3,600 ($0.0036 per share) in lieu of cash compensation to Greg Koler, our Chief Executive Officer.

Transactions with Promoter

Immediately prior to the merger described above, Peter Goldstein, the promoter of Global Business Resources, Inc., surrendered to us 10,000,000 shares of our common stock in exchange for all of the issued and outstanding shares 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 .

Review, Approval or Ratification of Transactions with Related Persons
 
We believe that the terms of all of the above transactions are commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party on an arm’s length basis. Our policy requires that all related parties recuse themselves from negotiating and voting on behalf of our company in connection with related party transactions.

Parents

Not applicable

35

 
ITEM 13. EXHIBITS
 
Exhibit #
Exhibit Name
 
 
3.1
Certificate of Incorporation ( Incorporated by Reference to Exhibit 3.0 to Form SB-2 (Registration No. 333-67990) filed with the SEC on August 20, 2001 ).
 
 
3.2
Certificate of Amendment to Certificate of Incorporation (Incorporated by reference to Exhibit 3.2 to the Company's Form 10-KSB for the year ended December 31, 2003 ).
 
 
3.3
Certificate of Amendment to Certificate of Incorporation ( Incorporated by reference to Exhibit 3.3 to the Company's Form 10-KSB for the year ended December 31, 2003 ).
 
 
3.4
Certificate of Amendment to Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 1 to Definitive 14-A filed with the SEC on June 6, 2006)
   
3.5  
Bylaws (Incorporated by reference to Exhibit 3.4 to the Company's Form 10-KSB for the year ended December 31, 2003 ).
 
 
4.1
Company’s 2006 Executive Compensation Plan - A (Incorporated by reference to Exhibit 4.1 to Form S-8 filed with the SEC on November 9, 2006).
   
4.2
Company’s 2006 Employee Compensation Plan C (Incorporated by reference to Exhibit 4.2 to Form S-8 filed with the SEC on November 9, 2006).
   
 
36


10.1+
Employment agreement between the Company and Greg Koler dated January 11, 2006 (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on January 13, 2006).
 
 
10.2
Stockholder vesting agreement between the Company and Greg Koler dated January 11, 2006 (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on January 13, 2006).
 
 
10.3
Securities Purchase Agreement dated as of January 24, 2006 by and between Infinium Labs, Inc. and Golden Gate Investors, Inc. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on January 31, 2006).
 
 
10.4
Registration Rights Agreement dated as of January 24, 2006 by and between Infinium Labs, Inc. and Golden Gate Investors, Inc. (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on January 31, 2006).
 
 
10.5 
5¼% Convertible Debenture of Infinium Labs, Inc. dated as of January 24, 2006. (Incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the SEC on January 31, 2006 ).
 
 
10.6
Warrant to Purchase Common Stock of Infinium Labs, Inc. dated as of January 24, 2006 (Incorporated by reference to Exhibit 10.4 to the Form 8-K filed with the SEC on January 31, 2006).
 
 
10.7
Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated as of January 24, 2006 by and between Infinium Labs, Inc. and Golden Gate Investors, Inc. (Incorporated by reference to Exhibit 10.5 to the Form 8-K filed with the SEC on January 31, 2006 ).
 
 
10.8
8% Promissory Note between the Company and Timothy Roberts, dated January 1, 2006 (filed herewith).
 
 
10.9
Securities Purchase Agreement dated January 24, 2006 between the Company and Golden Gate Investors, Inc. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on January 31, 2006).
   
10.10
Registration Rights Agreement dated January 24, 2006 between the Company and Golden Gates Investors, Inc. (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on January 31, 2006).
   
10.11
5 ¼ % Convertible Debentures (Incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the SEC on January 31, 2006).
   
10.12
Warrant to Purchase Common Stock issued by the Company to Golden Gate Investors, Inc. (Incorporated by reference to Exhibit 10.4 to the Form 8-K filed with the SEC on January 31, 2006).
   
10.13
Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated January 24, 2006 between the Company and Golden Gate Investors, Inc.
   
10.14
Stockholder Vesting Agreement dated January 11, 2006 between the Company and Greg Koler (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on January 13, 2006).
   
10.15
Conversion Agreement dated August 4, 2006 between Phantom Entertainment, Inc. and Richard Angelotti (Incorporated by reference to Exhibit 10.3 to 10-QSB filed with the SEC on August 21, 2006).
   
10.15
Stock Purchase Warrant dated June 30, 2006 (Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed with the SEC on August 21, 2006).
   
10.16
Non-negotiable Promissory Note between the Company and Ronald Westman in the amount of $100,000 (Incorporated by reference to Exhibit 10.1 to Form 10-QSB filed with the SEC on August 21, 2006).
   
10.17
Manufacturing and Supply Agreement, dated November 6, 2006 between the Company and Itron Technology, Inc. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on November 8, 2006).
   
10.18
Amendment to Secured Debentures between the Company and James Beshara dated September 22, 2006 (Incorporated by reference to Exhibit 10.1 to Form 10-QSB filed with the SEC on November 20, 2006).
   
10.19
Conversion Agreement dated October 23, 2006 by the Company and Timothy Roberts (Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed with the SEC on November 20, 2006).
   
10.20
Original Issue Discount Secured Note dated December 7, 2006 in the aggregate face amount of $83,333 between Phantom Entertainment, Inc. and John Fife (Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on December 8, 2006).
 
37

 
10.21
Original Issue Discount Secured Note dated December 7, 2006 in the aggregate face amount of $83,333 between Phantom Entertainment, Inc. and John Fife (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on December 8, 2006).
   
10.22
Original Issue Discount Secured Note dated December 7, 2006 in the aggregate face amount of $83,333 between Phantom Entertainment, Inc. and John Fife (Incorporated by reference to Exhibit 10.3 to Form 8-K filed with the SEC on December 8, 2006).
   
10.23
Stock Pledge Agreement between the Company and John Fife, dated December 7, 2006 (Incorporated by reference to Exhibit 10.4 to Form 8-K filed with the SEC on December 8, 2006).
   
10.24
Guaranty dated December 7, 2006 by Timothy Roberts in favor of John Fife (Incorporated by reference to Exhibit 10.5 to Form 8-K filed with the SEC on December 8, 2006).
   
10.25
Employment Agreement between Phantom Entertainment, Inc. and Terrance Taylor dated December 4, 2006 (Incorporated by reference to Exhibit 10.6 to Form 8-K filed with the SEC on December 8, 2006).
   
 
10.26
Settlement Agreement dated March 22, 2007 between the Company and Longview Special Finance, Inc. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on April 3, 2007).
   
10.27
Product Licensing Agreements with Ione Technology Inc. with the effective date of the Agreements being July 1, 2007 (Incorporated by reference to Exhibits 10.1 and 10.2 to Form 8-K filed with the SEC on May 1, 2007).
   
21.1
List of Subsidiaries. (Filed herewith)
   
31.1
Certification by Chief Executive Officer and Interim Chief Financial Officer pursuant to Sarbanes-Oxley Section 302 (Filed herewith).
 
 
32.1
Certification by Chief Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Filed herewith).

The following table sets forth the aggregate fees billed or to be billed to us by Webb & Company, P.A., our former independent auditors for the fiscal year ended December 31, 2005 and the aggregate estimate fees to be billed to us by Kempisty & Company, our current independent auditors, for the fiscal year ended December 31, 2006:
 
2006
 
2005
 
Audit Fees
 
$
55,000
 
$
63,758
 
Audit-Related Fees
 
$
0
 
$
0
 
All Other Fees
 
 
 
 
 

The Company currently does not have a designated Audit Committee, and accordingly, the Company's Board of Directors' policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Company's Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
 
38

 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Annual Report on Form 10-KSB for the year ended December 31, 2006 to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
PHANTOM ENTERTAINMENT, INC.
 
 
 
 
 
 
Date:  May 18, 2007
By:  
/s/ Greg Koler
 
Name:   Greg Koler
 
Title:     Chief Executive Officer (Principal Executive Officer) and Interim Chief Financial Officer (Principal Accounting and Financial Officer)
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Annual Report on Form 10-KSB for the year ended December 31, 2006 to be signed on its behalf by the undersigned, thereunto duly authorized.

  SIGNATURE
 
 TITLE
 
DATE
 
 
 
 
 
/s/  Greg Koler
 
Chief Executive Officer and
 
May 18, 2007
Greg Koler
 
Interim Chief Financial Officer
 
 
 
 
 
 
 
/s/  Timothy Roberts
 
Chairman of the Board of Directors
 
May 18, 2007
Timothy Roberts
 
 
 
 
 
 
 
 
 
/s/  Richard Angelotti   
 
Director
 
May 18, 2007
Richard Angelotti
 
 
 
 

 
39

 

PHANTOM ENTERTAINMENT, INC.

(A DEVELOPMENT STAGE COMPANY)

FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 CONSOLIDATED AND 2005 (RESTATED)






 
PHANTOM ENTERTAINMENT, INC.
AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONTENTS

PAGE
F-1 - F-2
Reports of Independent Registered Public Accounting Firms
 
 
 
PAGE
F-3
Balance Sheet as of December 31, 2006  
 
 
 
PAGE
F-4
Consolidated Statements of Operations for the Year Ended December 31, 2006 and 2005 (Restated) and for the Period from December 9, 2002 (Inception) to December 31, 2006
 
 
 
PAGES
F-5 - F-21
Consolidated Statement of Changes in Stockholders’ Deficiency for the Period from December 9, 2002 (Inception) Through December 31, 2006
 
 
 
PAGE
F-22
Consolidated Statements of Cash Flows for the Year Ended December 31, 2006 and 2005 (Restated) and for the Period from December 9, 2002 (Inception) to December 31, 2006
 
 
 
PAGES
F-23 - F-68
Notes to Consolidated Financial Statements
 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Phantom Entertainment, Inc.
(A Development Stage Company)

We have audited the accompanying consolidated balance sheet of Phantom Entertainment, Inc. and Subsidiaries (A Development Stage Company) as of December 31, 2006 and the related statements of operations, changes in stockholders' deficiency and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The cumulative statements of operations, cash flows, and changes in stockholders' deficiency for the period December 9, 2002 (inception) to December 31, 2005 which were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the period December 9, 2002 (inception) to December 31, 2005 is based solely on the reports of the other auditors.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, and based on the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Phantom Entertainment, Inc. and Subsidiaries (A Development Stage Company) as of December 31, 2006, and the results of its operations and cash flows for the year ended December 31, 2006, and for the period December 9, 2002 (inception) to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10 to the financial statements, the Company has had recurring losses from inception of $73,550,242, has a working capital deficiency of $18,344,236, a stockholders' deficiency of $18,627,236, notes in default of $2,242,276 and used cash in operations from inceptionof $15,654,926. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Kempisty & Company CPA's PC

Kempisty & Company
Certified Public Accountants PC
New York, New York
May 18, 2007

 
F-1

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of:
Phantom Entertainment, Inc. f/k/a Infinium Labs, Inc.
(A Development Stage Company)

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

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

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

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


WEBB & COMPANY, P.A.

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


PHANTOM ENTERTATNMENT INC. AND SUBSIDARY
(A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheet


   
December 31, 2006
(Consolidated)
 
ASSETS
     
Current Assets:
     
Cash
 
$
57,051
 
Prepaid Expenses
   
1,000
 
Total Current Assets
   
58,051
 
 
       
Property and Equipment, Net
   
2,000
 
 
       
Total Assets
 
$
60,051
 
 
       
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
       
         
Current Liabilities:
       
Accounts payable
 
$
4,233,387
 
Due to developers
   
845,000
 
Accrued interest expense
   
1,435,569
 
Other accrued expense
   
220,994
 
Accrued payroll and payroll taxes (Note 8(F))
   
2,478,206
 
Derivatives (Note 5(B))
   
6,946,855
 
Promissory notes (Note 5(A)) 
   
2,242,276
 
Total Current Liabilities
   
18,402,287
 
 
       
Long Term Liabilities:
       
Deposits
   
285,000
 
Total Long Term Liabilities
   
285,000
 
         
Total Liabilities
   
18,687,287
 
         
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, 1,200,000,000 shares authorized, 1,052,576,151 shares issued and outstanding (Note 6)
   
105,258
 
Additional paid-in capital (Note 6)
   
54,840,265
 
Subscription receivable
   
(22,517
)
Accumulated deficit during development stage
   
(73,550,242
)
 
     
Total Stockholders’ Deficiency
   
(18,627,236
)
 
     
Total Liabilities and Stockholders’ Deficiency
 
$
60,051
 

See accompanying notes to consolidated financial statements

F-3

 
PHANTOM ENTERTATNMENT INC. AND SUBSIDARY
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Operations


   
For the Year Ended
December 31, 2006
Consolidated
 
For the Year Ended
December 31, 2005
Consolidated
 
For the Period from
December 9, 2002
(Inception to
December 31, 2006)
Consolidated
 
       
Restated - Note 2
     
Operating Expenses:
                   
Development costs
 
$
311,052
 
$
(13,927
)
$
3,833,329
 
Advertising
   
141,893
   
404,331
   
2,134,780
 
Salary expense
   
1,433,205
   
5,677,365
   
14,268,476
 
Professional fees
   
607,738
   
1,265,317
   
5,577,658
 
Consultants
   
957,800
   
3,111,392
   
14,011,213
 
Impairment of assets
   
18,000
   
502,090
   
872,389
 
General and administrative
   
984,895
   
1,289,962
   
6,505,763
 
Total Operating Expenses
   
4,454,583
   
12,236,530
   
47,203,608
 
Net Loss from Operations
   
(4,454,583
)
 
(12,236,530
)
 
(47,203,608
)
                     
Other Income (Expense):
                   
Other income / (expense)
   
(670
)
 
383
   
1,647
 
Gain / (Loss) on sale of equipment
   
22,126
   
(5,011
)
 
16,667
 
Gain / (Loss) on conversion of notes
   
(330,872
)
 
(10,671,647
)
 
(11,002,519
)
Gain / (Loss) on vendor settlement
   
(1,235
)
 
-
   
(1,235
)
Gain / (Loss) on stock issued for payroll taxes
   
(79,983
)
 
(62,269
)
 
(142,252
)
Interest expense
   
(1,259,226
)
 
(5,900,848
)
 
(12,866,112
)
Derivatives income (expense)
   
(3,257,349
)
 
38,730,224
   
(1,433,540
)
Payroll Tax Penalties & Interest
   
(163,154
)
 
(208,322
)
 
(919,290
)
Total Other Income (Expense)
   
(5,070,363
)
 
21,882,510
   
(26,346,634
)
                     
Income (Loss) before Income Taxes
   
(9,524,946
)
 
9,645,980
   
(73,550,242
)
                     
Income Taxes
   
-
   
-
   
-
 
Net Income (Loss)
 
$
(9,524,946
)
$
9,645,980
 
$
(73,550,242
)
 
                   
Per Common Share
                   
 
                   
Income (Loss) per common share - basic and diluted
 
$
(0.02
)
$
0.04
 
$
(0.29
)
                     
Income (Loss) per common share - basic and diluted
 
$
(0.02
)
$
0.03
 
$
(0.29
)
                     
Weighted average - basic
   
633,186,446
   
219,727,249
   
256,783,699
 
                     
Weighted average - diluted
   
633,186,446
   
405,579,272
   
256,783,699
 

See accompanying notes to consolidated financial statements
F-4

 
PHANTOM ENTERTAINMENT INC. AND SUBSIDARY
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Stockholders' Deficiency
For the Period December 9, 2002 (Inception) to December 31, 2006


   
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 (Restated - Note 2)
   
-
   
-
   
69,115,900
   
6,911
   
2,702,348
   
(2,945,074
)
 
(163,517
)
 
-
   
(399,332
)
                                                         
Recapitalization of Global Business Resources
   
-
   
-
   
16,156,000
   
1,615
   
(1,615
)
 
-
   
-
   
-
   
-
 
 
 
F-5

 

   
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 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
 
                                                         
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