INFINIUM LABS INC (Form Type: 10QSB, Filing Date: 05/23/2005)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period from January 1, 2005 to March 31, 2005

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

For the transition period from ____________ to ____________

Commission File Number: 000-50535

INFINIUM LABS, INC.

(Exact name of small business issuer as specified in its charter)

Delaware	65-1048794
(State or other jurisdiction Identification No.)	(IRS Employer of incorporation or organization)

2033 Main Street, Suite 309, Sarasota, Florida	34237
(Address of Principal Executive Offices)	(Zip Code)

(941) 556-8000

Issuer’s telephone number, including area code

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 [ ] No

As of May 4, 2005, we currently have outstanding 156,902,567 shares of our common stock and have 339 shareholders of record as confirmed by our transfer agent, Corporate Stock Transfer.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

SEC 2334 (8-03) Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

INDEX

PART I - Financial Information		Page

Item 1	Financial Statements	3

Item 2	Management’s Discussion and Analysis or Plan of Operations	38

Item 3	Controls and Procedures	56

PART II - Other Information

Item 1	Legal Proceedings	57

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3	Defaults upon Senior Securities	64

Item 4	Submission of Matters to a Vote of Security Holders	64

Item 5	Other Information	64

Item 6	Exhibits and Reports on Forms 8-K	65

Signatures		69

Certifications		70

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2005

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONTENTS


PAGE	3	Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004

PAGE	4	Consolidated Statements of Operations for the Three Months Ended March 31, 2005, for the Three Months Ended March 31, 2004 and for the Period from December 9, 2002 (Inception) through March 31, 2005 (Unaudited)

PAGES	5 - 9	Consolidated Statement of Changes in Stockholders’ Deficiency for the Period from December 9, 2002 (Inception) through March 31, 2005 (Unaudited)

PAGES	10	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005, for the Three Months Ended March 31, 2004 and for the Period from December 9, 2002 (Inception) through March 31, 2005 (Unaudited)

PAGES	11 - 37	Notes to Consolidated Financial Statements (Unaudited)

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Balance Sheets

ASSETS
		March 31, 2005 (Unaudited)			December 31, 2004
Current Assets:
Cash	$	1,988		$	4,102
Restricted Cash		-			894,910
Prepaid Expenses		22,244			-
Other Receivable		1,465			407
Total Current Assets		25,697			899,419

Property and Equipment, Net		432,170			475,122

Other Assets:
Deposits		5,250			5,440
Intangible asset, net (Note 2)		242,001			256,495
Total Other Assets		247,251			261,935

Total Assets	$	705,118		$	1,636,476

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

Current Liabilities:
Accounts payable	$	3,845,770		$	4,583,885
Accrued interest expense		473,666			301,415
Other accrued expense		117,783			105,000
Accrued payroll and payroll taxes		1,151,834			834,682
Promissory notes, net (Note 2)		7,730,875			7,298,348

Total Current Liabilities		13,319,928			13,123,330

Commitments and Contingencies		-			-

Stockholders’ Deficiency:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding		-			-
Common stock, $0.0001 par value, 600,000,000 shares authorized, 143,087,397 and 121,090,655 shares issued and outstanding, respectively (Note 3)		14,309			12,109
Additional paid-in capital (Note 3)		37,457,617			24,523,917
Subscription receivable		(22,517	)		(22,517	)
Accumulated deficit during development stage		(50,064,219	)		(36,000,363	)

Total Stockholders’ Deficiency		(12,614,810	)		(11,486,854	)

Total Liabilities and Stockholders’ Deficiency	$	705,118		$	1,636,476

See accompanying Notes to Consolidated Financial Statements.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Statements of Operations

(Unaudited)

		For the Three Months Ended March 31, 2005			For the Three Months Ended March 31, 2004			For the Period from December 9, 2002 (Inception) to March 31, 2005

Operating Expenses:
Development costs	$	-		$	507,810		$	3,536,204
Advertising		132,969			48,776			1,721,525
Salary expense		1,044,252			445,110			7,821,128
Professional fees		582,188			986,147			4,286,791
Consultants		1,342,499			3,143,187			11,448,866
Impairment of assets		-			-			352,299
General and administrative		552,146			1,023,207			4,783,052
Total Operating Expenses		3,654,054			6,154,237			33,949,865
Net Loss from Operations		(3,654,054	)		(6,154,237	)		(33,949,865	)

Other Income (Expense):
Other income		-			-			1,934
Loss on sale of equipment		-			-			(448	)
Loss on conversion of notes		(8,476,455	)		-			(8,476,455	)
Interest expense		(1,933,347	)		(83,745	)		(7,639,385	)
Total Other Income (Expense)		(10,409,802	)		(83,745	)		(16,114,354	)

Loss before Income Taxes		(14,063,856	)		(6,237,982	)		(50,064,219	)

Income Taxes		-			-			-

Net Loss	$	(14,063,856	)	$	(6,237,982	)	$	(50,064,219	)

Per Common Share

Loss per common share - basic and diluted	$	(0.11	)	$	(0.07	)	$	(0.59	)

Weighted average - basic and diluted		132,026,521			89,826,588			84,866,796

See accompanying Notes to Consolidated Financial Statements.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Statement of Stockholders’ Deficiency

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

(Unaudited)

	Preferred Stock				Common Stock					Additional Paid-In			Accumulated Deficit During Development			Stock Subscriptions
		Shares		Amount		Shares		Amount		Capital			Stage			Receivable			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		-		-		-		-		-			(598,948	)		-			(598,948	)

Balance, December 31, 2003		-		-		69,115,900		6,911		2,702,348			(2,869,077	)		(163,517	)		(323,335	)

Recapitalization of Global Business Resources		-		-		16,156,000		1,615		(1,615	)		-			-			-

Shares issued for cash ($0.25 per share)		-		-		6,650,000		665		1,661,835			-			-			1,662,500

Shares issued for cash ($0.257 per share)		-		-		-		-		-			-			141,000			141,000

Shares issued with note payable ($0.78 per share)		-		-		560,000		56		433,944			-			-			434,000

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

See accompanying Notes to Consolidated Financial Statements.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Statement of Stockholders’ Deficiency

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

(Unaudited)

	Preferred Stock			Common Stock			Additional Paid-In	Accumulated Deficit During Development	Stock Subscriptions
		Shares	Amount		Shares	Amount	Capital	Stage	Receivable	Total

Shares issued with note payable ($1.42 per share)		-	-		200,000	20	283,980	-	-	284,000

Shares issued with note payable ($1.475 per share)		-	-		100,000	10	147,490	-	-	147,500

Shares issued with note payable ($1.13 per share)		-	-		60,000	6	67,794	-	-	67,800

Shares issued with note payable ($1.43 per share)		-	-		33,000	3	47,187	-	-	47,190

Shares issued with note payable ($1.475 per share)		-	-		511,000	51	753,674	-	-	753,725

Shares issued for loan default penalty ($1.475 per share)		-	-		74,999	8	110,616	-	-	110,624

Shares issued for loan default penalty ($1.13 per share)		-	-		75,000	8	84,742	-	-	84,750

Shares issued for loan default penalty ($1.475 per share)		-	-		80,000	8	117,992	-	-	118,000

Shares issued for loan default penalty ($1.56 per share)		-	-		603,038	61	942,487	-	-	942,548

Shares issued for loan default penalty ($1.47 per share)		-	-		955,312	96	1,404,213	-	-	1,404,309

Shares issued for cash ($2.50 per share)		-	-		40,000	4	99,996	-	-	100,000

Shares issued for legal settlement ($1.455 per share)		-	-		53,332	5	77,560	-	-	77,565

Shares issued for cash ($2.00 per share)		-	-		100,000	10	199,990	-	-	200,000

See accompanying Notes to Consolidated Financial Statements.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Statement of Stockholders’ Deficiency

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

(Unaudited)

	Preferred Stock			Common Stock			Additional Paid-In	Accumulated Deficit During Development	Stock Subscriptions
		Shares	Amount		Shares	Amount	Capital	Stage	Receivable	Total

Shares issued to consultants for services ($1.44 per share)		-	-		830,000	83	1,195,117	-	-	1,195,200

Shares issued to consultants for services ($1.475 per share)		-	-		100,000	10	147,490	-	-	147,500

Shares issued to consultants for services ($1.60 per share)		-	-		279,260	28	446,788	-	-	446,816

Shares issued to consultants for services ($0.92 per share)		-	-		440,000	44	404,756	-	-	404,800

Beneficial conversion of promissory notes at $0.75 per share		-	-		-	-	71,275	-	-	71,275

Shares issued for loan guaranty ($1.04 per share)		-	-		800,000	80	831,920	-	-	832,000

Shares issued to consultants ($1.13 per share)		-	-		1,000,000	100	1,129,900	-	-	1,130,000

Shares issued to consultants for services ($0.64 per share)		-	-		21,460	2	13,732	-	-	13,734

Shares issued to consultants for services ($0.61 per share)		-	-		200,000	20	121,980	-	-	122,000

Shares issued to consultants for services ($0.60 per share)		-	-		36,000	4	21,416	-	-	21,420

Shares issued to consultants for services ($0.60 per share)		-	-		1,933,224	193	1,162,251	-	-	1,162,444

Shares issued to employees ($0.33 per share)		-	-		300,000	30	98,970	-	-	99,000

Shares issued for cash ($0.25 per share)		-	-		1,900,400	190	474,910	-	-	475,100

See accompanying Notes to Consolidated Financial Statements.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Statement of Stockholders’ Deficiency

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

(Unaudited)

	Preferred Stock			Common Stock					Additional Paid-In	Accumulated Deficit During Development		Stock Subscriptions
		Shares	Amount		Shares		Amount		Capital	Stage		Receivable		Total

Shares issued to employees ($0.32 per share)		-	-		1,790,000		179		565,321	-		-		565,500

Shares issued to employees ($0.22 per share)		-	-		5,199,967		520		1,136,579	-		-		1,137,099

Shares issued to executives ($0.22 per share)		-	-		1,100,000		110		240,432	-		-		240,542

Shares issued to consultants for services ($0.21 per share)		-	-		3,885,410		388		811,753	-		-		812,141

Shares issued with notes payable ($0.42 per share)		-	-		1,750,000		175		734,825	-		-		735,000

Shares issued to consultants for services ($0.28 per share)		-	-		1,350,000		135		377,365	-		-		377,500

Shares issued for interest ($0.18 per share)		-	-		375,000		38		67,462	-		-		67,500

Shares issued for services ($0.25 per share)		-	-		150,000		15		37,485	-		-		37,500

Shares issued for cash ($0.16 per share)		-	-		1,649,635		165		263,910	-		-		264,075

Beneficial conversion of promissory notes at $0.10 per share		-	-		-		-		318,500	-		-		318,500

Fair value of warrants issued in conjunction with promissory notes ranging from $0.10 per share to $1.00 per share		-	-		-		-		2,025,000	-		-		2,025,000

Shares contributed in kind		-	-		(1,191,450	)	(119	)	119	-		-		-

Net loss, December 31, 2004		-	-		-		-		-	(33,131,286	)	-		(33,131,286	)

Balance, December 31, 2004		-	-		121,090,655		12,109		24,523,917	(36,000,363	)	(22,517	)	(11,486,854	)

See accompanying Notes to Consolidated Financial Statements.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Statement of Stockholders’ Deficiency

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

(Unaudited)

	Preferred Stock				Common Stock					Additional Paid-In		Accumulated Deficit During Development			Stock Subscriptions
		Shares		Amount		Shares		Amount		Capital		Stage			Receivable			Total
Shares issued to Director for services ($1.59 per share)		-		-		40,000		4		63,596		-			-			63,600

Shares issued to consultants for services ($0.87 per share)		-		-		125,179		13		108,916		-			-			108,929

Shares issued to convert note payable ($1.18 per share)		-		-		7,043,750		704		8,310,921		-			-			8,311,625

Shares issued to consultants for services ($0.54 per share)		-		-		1,200,000		120		647,880		-			-			648,000

Shares issued to convert note payable ($0.365 per share)		-		-		4,925,291		493		1,797,238		-			-			1,797,731

Shares issued to consultants for services ($0.32 per share)		-		-		1,722,453		172		558,675		-			-			558,847

Shares issued to employees ($0.25 per share)		-		-		225,000		22		56,228		-			-			56,250

Shares issued to convert note payable ($0.122 per share)		-		-		5,815,069		582		711,336		-			-			711,918

Shares issued to consultant for services ($0.32 per share)		-		-		100,000		10		31,990		-			-			32,000

Shares issued to Director for services ($0.34 per share)		-		-		800,000		80		271,920		-			-			272,000

Beneficial conversion of promissory notes		-		-		-		-		375,000		-			-			375,000

Net loss for the three months ended March 31, 2005		-		-		-		-		-		(14,063,856	)		-			(14,063,856	)

BALANCE, MARCH 31, 2005		-	$	-		143,087,397	$	14,309	$	37,457,617	$	(50,064,219	)	$	(22,517	)	$	(12,614,810	)

See accompanying Notes to Consolidated Financial Statements.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Consolidated Statement of Cash Flows

(Unaudited)

		For the Three Months Ended March 31, 2005			For the Three Months Ended March 31, 2004			For the Period from December 9, 2002 (Inception) to March 31, 2005
Cash Flows from Operating Activities:
Net loss	$	(14,063,856	)	$	(6,237,982	)	$	(50,064,219	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		57,445			12,766			231,793
Impairment of assets		-			-			352,299
Loss on disposal of assets		-			-			448
Common stock issued for services		1,683,376			2,679,585			11,387,366
Common Stock issued to employees		56,250			-			2,098,391
Common stock issued for legal settlements		-			-			175,900
Common stock issued for interest		319,818			-			3,047,549
Common stock issued for loan guarantee		-			-			832,000
Loss on conversion of notes payable		8,476,455			-			8,476,455
Amortization of interest expense		1,422,527			56,750			3,598,115
Changes in operating assets and liabilities:
Decrease (increase) in current assets:
Other receivables		(1,057	)		130,350			(1,464	)
Deposits		190			(71,534	)		(5,250	)
Prepaid expense		(22,244	)		(921,523	)		(22,244	)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses		(235,928	)		1,148,769			5,589,054
Net Cash Used in Operating Activities		(2,307,024	)		(3,202,819	)		(14,303,807	)

Cash Flows from Investing Activities:
Purchase of property and equipment		-			(172,843	)		(970,467	)
Sale of property and equipment		-			-			11,755
(Increase) decrease in restricted cash		894,910			-			-
Net Cash Provided (Used) in Investing Activities		894,910			(172,843	)		(958,712	)

Cash Flows from Financing Activities:
Repayments of notes payable		-			(375,000	)		(1,075,000	)
Proceeds from stockholder		-			-			4,940
Payments to stockholder		-			(4,940	)		(4,940	)
Proceeds from sale of common stock, net		375,000			2,016,500			9,106,747
Promissory note		1,035,000			2,046,000			7,232,760
Net Cash Provided by Financing Activities		1,410,000			3,682,560			15,264,507

NET INCREASE (DECREASE) IN CASH		(2,114	)		306,898			1,988

CASH AT BEGINNING OF PERIOD		4,102			45,852			-

CASH AT END OF PERIOD	$	1,988		$	352,750		$	1,988

Supplemental Disclosure of Cash Flow Information:

Cash paid for interest	$	18,750		$	26,995		$	533,838

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

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

During the first quarter of 2005, the Company issued 15,837,210 shares of common stock to convert three notes payable aggregating $2,025,000.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

(A) Organization

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

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

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

Accordingly, the financial statements include the following:

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

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

(B) Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.

It is management’s opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.

(C) Use of Estimates

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

(D) Consolidation

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

(E) Research and Development Costs

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

(F) Property and Equipment

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

(G) Income Taxes

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

(H) Loss Per Share

Basic and diluted net loss per common share is computed based upon the weighted average common shares outstanding as defined by statement of Financial Accounting Standards “SFAS” No. 128, “Earnings per Share.” For the three months ended March 31, 2005, the three months ended March 31, 2004, and the period from December 9, 2002 (Inception) through March 31, 2005, the effect of common share equivalents was anti-dilutive and not included in the calculation of diluted net loss per common share.

(I) Advertising

Advertising costs are expensed either in the periods in which those costs are incurred or the first time the advertising takes place. For the three months ended March 31, 2005, the three months ended March 31, 2004 and the period from December 9, 2002 (Inception) to March 31, 2005 the company incurred advertising costs of $132,969, $48,776 and $1,721,525, respectively.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

(J) Business Segments

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

(K) Recent Accounting Pronouncements

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

(L) Cash and Cash Equivalents

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

(M) Concentration of Credit Risk

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

(N) Fair Value of Financial Instruments

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

(O) Stock Based Compensation

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

(P) Long-Lived Assets, Goodwill and Intangible Assets

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

NOTE 2 NOTES PAYABLE

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

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

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

On April 7, 2004, the Company borrowed $500,000 under a 15% promissory note which was initially payable on December 15, 2004 and subsequently became payable on March 31, 2005 per a conversion option agreement dated November 10, 2004 that entitles the note holder to convert the amount of the note into shares of stock at a per share price of $0.10; in addition, the note holder is entitled to a Stock Purchase Warrant for 200% of the number of shares obtained in the conversion at a warrant exercise price of $0.10. The note is secured with the assets of the Company. On March 22, 2005, the note was paid in full via a Conversion Agreement which converted the entire amount of the note into common stock at a per share price of $0.10 and the Company issued 11,630,138 warrants exercisable at $0.10 per share. The Company recognized a loss on the conversion of $130,411.

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

On May 7, 2004, the Company borrowed $250,000 under a 15% promissory note which was initially payable on September 15, 2004 and was extended to April 30, 2005 per a conversion option agreement dated November 10, 2004 that entitles the note holder to convert the amount of the note into shares of stock at a per share price of $0.10. In addition, the note holder is entitled to a Stock Purchase Warrant for 200% of the number of shares obtained in the conversion at a warrant exercise price of $0.10. As additional consideration, the Company issued to the holder 100,000 shares of common stock having a fair value of $147,500. The shares were treated as a discount to the note and the discount is being amortized over the life of the note. The note is secured with the assets of the Company. The principal and accrued interest due on this note as of March 31, 2005 was $288,116 and the entire amount of the note was converted into common stock during May 2005 (see Note 9).

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

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

On June 21, 2004, the Company borrowed $1,500,000 under a 15% promissory note, which was payable no later than June 22, 2005. As additional consideration, the Company issued the holder 60,000 shares of common stock having a fair value of $67,800. The shares were treated as a discount to the note and the discount is being amortized over the life of the note. As consideration for the Chief Executive Officer’s personal guaranty of note, the Company compensated the Chief Executive Officer $50,000. The principal and accrued interest due on this note as of March 31, 2005 was $1,565,000 and the entire amount of the note was converted into common stock on April 11, 2005 (see Note 9).

On July 28, 2004, the Company borrowed $500,000 under a 15% promissory note which is payable on July 28, 2005. As consideration for a Director's personal guaranty of note, the Company issued the Director 800,000 shares of common stock having a fair value of $832,000. The principal and accrued interest due on this note as of March 31, 2005 was $549,846.

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

On January 28, 2005, the Company borrowed $135,000 under a 17% promissory note, which is payable no later than March 29, 2005. This note is currently in default.

On January 31, 2005, the Company borrowed $175,000 under a 15% convertible promissory note, which is payable no later than May 10, 2005. The note is convertible into 1,000,000 million shares of common stock and the Company recognized beneficial conversion on the promissory note of $175,000. The beneficial conversion was treated as a discount to the note and the discount is being amortized over the life of the note. This note is currently in default.

On January 31, 2005, the Company borrowed $100,000 under a 15% convertible promissory note, which is payable no later than May 10, 2005. The note is convertible into 1,000,000 million shares of common stock and the Company recognized beneficial conversion on the promissory note of $100,000. The beneficial conversion was treated as a discount to the note and the discount is being amortized over the life of the note. This note is currently in default.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

On February 3, 2005, the Company borrowed $100,000 under a 15% convertible promissory note, which is payable no later than May 10, 2005. The note is convertible into 1,000,000 million shares of common stock and the Company recognized beneficial conversion on the promissory note of $100,000. The beneficial conversion was treated as a discount to the note and the discount is being amortized over the life of the note. This note is currently in default.

On March 9, 2005, the Company borrowed $400,000 under a 10% promissory note, which is payable no later than May 9, 2005. This note is currently in default.

On March 21, 2005, the Company borrowed $200,000 under a 17% promissory note, which is payable no later than May 20, 2005.

Notes payable - face value	$	9,487,260
Notes payable - discount		1,756,385

	$	7,730,875

The discount from the face value of the promissory notes is being amortized over the life of the promissory notes as additional interest expense. During the three month period ended March 31, 2005, the three month period ended March 31, 2004 and the period from December 9, 2002 (Inception) to March 31, 2005, the Company has recorded interest expense from the discounts of $1,422,527, $56,750 and $3,598,115, respectively.

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

NOTE 3 STOCKHOLDERS’ DEFICIENCY

(A) Stock Issued for Cash

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

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

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

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

During 2004, the Company issued 1,900,400 shares of common stock for $475,100 ($0.25 per share). In connection with this transaction, the Company issued 2,022,900 warrants to purchase common stock exercisable at a price of $0.25. The warrants are fully exercisable at any time for a period of five years after the closing date of the sale. None of the warrants were executed, forfeited or expired in 2005. Therefore, all 2,022,900 warrants were outstanding and exercisable as of March 31, 2005.

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

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

(B) Stock Issued for Services

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

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

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

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

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

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

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

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

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

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

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

On January 4, 2005, the Company issued 40,000 shares of common stock to a Director for services with a fair value of $63,600 ($1.59 per share). This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

During January 2005, the Company issued 125,179 shares of common stock for consulting services with a fair value of $108,929 ($0.87 per share). This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

On January 28, 2005, the Company issued 1,200,000 shares of common stock for consulting services with a fair value of $648,000 ($0.54 per share). This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

On March 10, 2005, the Company issued 100,000 shares of common stock for consulting services with a fair value of $32,000 ($0.32 per share). This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

On March 11, 2005, the Company issued 800,000 shares of common stock to a Director for services with a fair value of $272,000 ($0.34 per share). This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

During March 2005, the Company issued 1,722,453 shares of common stock for consulting services with a fair value of $558,847 ($0.32 per share). This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

On March 28, 2005, the Company issued 225,000 shares of common stock to employees with a fair value of $56,250 ($0.25 per share) as compensation. This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

(C) Stock Issued for Legal Settlement

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

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

(D) Stock Issued for Cash with Notes Payable

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

(F) Stock Issued Under Loan Default Provisions

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

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

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

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

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

(G) Stock Issued for Conversion of Notes Payable

On January 6, 2005, the Company issued 7,043,750 shares of common stock to convert a note payable with a fair value of $704,375 ($0.10 per share). The Company recognized a loss of $7,607,250 ($1.08 per share) on the conversion of this note. This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

On February 11, 2005, the Company issued 4,925,291 shares of common stock to convert a note payable with a fair value of $1,058,938 ($0.215 per share). The Company recognized a loss of $738,793 ($0.15 per share) on the conversion of this note. This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

On March 22, 2005, the Company issued 5,815,069 shares of common stock to convert a note payable with a fair value of $581,507 ($0.10 per share). The Company recognized a loss of $130,412 ($0.022 per share) on the conversion of this note. This transaction was exempt from registration under Section 4(2) of the Securities Act because it did not involve a public offering.

(H) In Kind Contribution

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

(I) Stock Dividend

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

(J) Stock Split

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

(K) Stock Issued in Reverse Merger

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

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

(L) Obligation to Reserve Stock

As of March 31, 2005, the Company had an obligation to reserve 46,656,000 shares of common stock issuable upon conversion of debentures. In addition, as of March 31, 2004, the Company had outstanding options and warrants totaling 45,824,901 shares of common stock.

(M) Amendment to Articles of Incorporation

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

NOTE 4 INCOME TAXES

Income tax expense (benefit) is summarized as follows:

		Three Months Ended March 31, 2005		Three Months Ended March 31, 2004		December 9, 2002 (Inception) through March 31, 2005
Current:
Federal	$	-	$	-	$	-
State		-		-		-
Deferred - Federal and State		-		-		-

Income tax expense (benefit)	$	-	$	-	$	-

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

		Three Months Ended March 31, 2005			Three Months Ended March 31, 2004			December 9, 2002 (Inception) through March 31, 2005

U.S. Federal income tax expense (benefit)	$	(4,781,711	)	$	(2,120,914	)	$	(17,021,834	)
Effect on net operating loss carryforward		4,781,711			2,120,914			17,021,834

	$	-		$	-		$	-

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

		March 31, 2005 (Unaudited)			December 31, 2004
Deferred tax assets:
Net operating loss carryforward	$	17,021,834		$	12,240,123
Total gross deferred tax assets		17,021,834			12,240,123
Less valuation allowance		(17,021,834	)		(12,240,123	)

Net deferred tax assets	$	-		$	-

At March 31, 2005, the Company had a net operating loss carryforward of $50,064,219 for U.S. Federal income tax purposes available to offset future taxable income expiring through 2025. The net change in the valuation allowance during the three months ended March 31, 2005 was an increase of $4,781,711.

NOTE 5 COMMITMENTS AND CONTINGENCIES

(A) Distribution Agreements

Riverdeep, Inc.

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Total	$	225,000

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

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

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

The Company is currently in default of this agreement.

Codemasters Software Company Ltd.

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

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

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

Total	$	50,000

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Atari, Inc.

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

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

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

Total	$	500,000

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

Eidos Inc.

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

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

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

Total	$	125,000

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

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

Enlight Inc.

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Total	$	10,000

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

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

(B) Development Agreement

The company has a development agreement in place with BIOSTAR for the Phantom Game Receiver mainboard and graphics adapter. Terms are: $156,000 due at signing; $78,000 due before ship of pilot production units from Biostar; $78,000 due on acceptance of pilot units. The end design product will be wholly owned by the company. This work is ongoing. From December 9, 2002 (inception) through March 31, 2005, $312,000 of expenses have been accrued and reported on the accompanying financial statements. No payments have been made to Biostar.

(C) Litigation

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

SBI-USA, LLC

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

A default to the suit was entered against Timothy Roberts on January 5, 2005, but no default judgment has been entered. A motion to set aside the default was filed on February 7, 2005 and set to be heard on March 21, 2005. The complaint was settled in full via a $55,000 payment to SBI-USA, LLC on April 4, 2005. As of March 31, 2005, the Company has accrued expenses of $55,000 for this settlement.

KB Networks, Inc., Kyle Bennett and Steve Lynch

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

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

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

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

In re Certain Fax Blasts

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

Infinium Labs, Inc., Timothy M. Roberts and Robert Shambro v. Digital Interactive Streams, Inc. and Royal O’Brien, Case No. 2004-CA-8193-NC in the Circuit Court for Sarasota County, Florida.

The Complaint was filed on August 29, 2004. The basis of the Complaint is that the Defendants, DiStream and O’Brien, breached an Agreement of Settlement dated August 3, 2004.

The Agreement of Settlement was to settle DiStream and O’Brien’s claims against Infinium, Roberts and Shambro filed in the Circuit Court for Duval County, Florida in Case No. 2004-CA-28840-CV-B. The Agreement of Settlement provided that Infinium would pay DiStream $500,000 at prescribed times between August 16, 2004 and January 31, 2005 and would pay DiStream 1,000,000 warrants to purchase common stock. The Agreement also provided that both parties agreed to cease and desist disseminating disparaging or otherwise unfavorable remarks against the other. The first payment of $50,000 was due on August 16, 2004. On August 13, 2004, Infinium sent DiStream the first installment of $50,000. However, on August 14, 2004, DiStream and O’Brien substantially and materially breached the Settlement Agreement (and also a Non-Disclosure Agreement) by having Infinium’s Phantom prototype console delivered to the QuakeCon 2004 Conference where O’Brien appeared on stage with the Phantom prototype console, raised a huge hammer over his head as if to smash the Phantom prototype to bits in front of hundreds of cheering fans at the conference and allowed someone else to smash and destroy the console. The context for this part of the Quakecon Conference was to criticize Infinium and its product and appearing on stage in this context was an overt act of disparagement of Infinium and unfavorable to its product.

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

Infinium has filed a four count Complaint against DiStream and O’Brien. Count III asks the Court to enter a declaratory judgment establishing that Plaintiffs are discharged from performing under the Settlement Agreement because DiStream and O’Brien disseminated disparaging conduct and remarks at the Quakecon 2004 Conference and published this disparagement in front of hundreds of attendees, portraying DiStream and O’Brien’s disdain for the Infinium product and that this was a material breach of the Agreement discharging Infinium from having to perform under the Settlement Agreement.

A counterclaim has been filed by DiStream and O’Brien for damages under the Settlement Agreement, i.e., for failing to pay the first installment of $50,000 on August 16, 2004, the balance of the payments totaling $500,000 and failure to tender the 1,000,000 warrants.

The pleadings have been finalized. The parties are in the process of attempting to take depositions, although DiStream and O’Brien’s counsel are presently taking the position that they do not have to come to Sarasota where the case is pending to submit themselves to deposition. The Company has not reserved any amount as of March 31, 2005 for this litigation.

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

(D) Licenses

We have entered into agreements with a number of publishers to provide content for our Phantom Game Service. These agreements provide that we pay an advance to each publisher, which is recoupable by us against future royalties payable to these publishers under their respective agreements. We currently owe an aggregate of $885,000 to these publishers pursuant to these agreements and if we fail to pay these advances, these agreements may be terminated.

NOTE 6 STOCK OPTIONS AND WARRANTS

(A) Stock Options Issued Under Qualified Stock Option Plan

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

INFINIUM LABS, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

During the three months ended March 31, 2005, the Company granted 0 stock options to employees. During 2004, the Company granted 18,505,000 stock options to certain employees during the year ended December 31, 2004. The Company applies APB Opinion No. 25 and related interpretations in accounting for stock options issued to employees. Accordingly, no compensation cost has been recognized for options issued to employees. Had compensation cost been determined based on the fair market value at the grant date, consistent with SFAS 123, the Company’s net income (loss) would have changed to the pro-forma amounts indicated below.

			Three Months Ended March 31, 2005			Three Months Ended March 31, 2004			December 9, 2002 (Inception) through March 31, 2005
Net loss available to common shareholders	As Reported	$	(14,063,856	)	$	(6,237,982	)	$	(50,064,219	)
	Pro Forma	$	(14,063,856	)	$	(6,237,982	)	$	(57,182,969	)

Basic and diluted loss per share	As Reported	$	(0.11	)	$	(0.07	)	$	(0.59	)
	Pro Forma	$	(0.11	)	$	(0.07	)	$	(0.67	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The cost of the options was calculated based on the amount of vested shares as the vesting period is the same as the service period of the options (3 years). Based on the common stock share price, the weighted average shares equal the primary EPS on the income statement for the three months ended March 31, 2005, the three months ended March 31, 2004 and from December 9, 2002 (Inception) through March 31, 2005 of $(0.11), $(0.07) and $(0.59), respectively.

A summary of the status of Company’s fixed stock option plan as of March 31, 2005 and December 31, 2004 is presented below:

	March 31, 2005 (Unaudited)			December 31, 2004
Fixed Options	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price

Outstanding at beginning of period	-	$	-	-	$	-
Cancelled	-	$	-	-	$	-
Granted	18,505,000	$	1.43	18,505,000	$	1.43
Forfeited	3,355,000	$	1.43	3,355,000	$	1.43
Expired	-	$	-	-