UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File No. 0-17204

INFINITY, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)

1401 West Main Street, Suite C, Chanute, Kansas 66720

(Address of Principal Executive Offices, Including Zip Code)

(620) 431-6200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K, is not contained herein and will not 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-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Act).     Yes o          No þ

      The aggregate market value of voting and non-voting common equity held by non-affiliates as of June 30, 2004 was approximately $31,600,000 based upon a closing price of $3.87 per share as reported on the NASDAQ National Market. As of March 23, 2005, 12,632,927 of the Registrant’s $0.0001 par value Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2005 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report on Form 10-K.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

      This report on Form 10-K, including information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any statements containing the words “anticipate,” “intend,” “believe,” “estimate,” “project,” “expect,” “plan,” “should” or similar expressions are intended to identify such statement. Forward-looking statements include, among other items:

      Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the following and the risks described in “Risk Factors”:

PART I

GENERAL

      Infinity, Inc. (“Infinity,” or the “Company”) is an independent energy company engaged in the acquisition, exploration, development and production of natural gas and oil in the United States through our wholly-owned subsidiaries, Infinity Oil and Gas of Texas, Inc. (“Infinity-Texas”) and Infinity Oil & Gas of Wyoming, Inc. (“Infinity-Wyoming”). Our current operations are focused in the Fort Worth Basin of North Central Texas and in the Rocky Mountain region in the Greater Green River Basin in Southwest Wyoming and the Sand Wash and Piceance Basins in Northwest Colorado. Infinity is also pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea. In addition, we provide oilfield services in Eastern Kansas, Northeast Oklahoma and Northeast Wyoming through our wholly-owned subsidiary, Consolidated Oil Well Services, Inc. (“Consolidated”).

      From January 1, 2002 through December 31, 2004, we grew our production through exploration and development drilling exclusively in the Rocky Mountain region. During this period, we completed the drilling of 36 oil and gas wells with a success rate of 75% at our two projects in the Greater Green River Basin. Exploratory wells accounted for 25 wells, or 69%, of the total wells we drilled. Our total proved reserves as of December 31, 2004 were an estimated 9.2 billion cubic feet of gas equivalent (“Bcfe”) with a PV-10 Value (as defined below) of $24.0 million (after-tax PV-10 Value of $23.7 million). During 2004, we added approximately 2.8 Bcfe to proved reserves, produced approximately 1.2 Bcfe, and experienced negative revisions of approximately 1.1 Bcfe for a net increase of approximately 0.5 Bcfe.

      Subsequent to December 31, 2004 and through March 23, 2005, we have completed the drilling of an additional six wells (four in the Fort Worth basin, and one each in the Sand Wash and Greater Green River basin). Activities subsequent to December 31, 2004 in the Fort Worth, Sand Wash and Greater Green River Basins were not taken into account in the proved reserve estimate as of December 31, 2004, but may be reflected in future estimates.

      In accordance with our business strategy which is discussed below, we operate 100% of our projects with working interests that range between 50% and 100%.

      Our corporate office is located at 1401 West Main Street, Suite C, Chanute, Kansas 66720. Our telephone number is (620) 431-6200. Our website is http://www.infinity-res.com. The information on the website does not constitute part of this Annual Report on Form 10-K.

      On January 13, 2005, we entered into a securities purchase agreement (the “Senior Secured Notes Facility”) with affiliates of Promethean Asset Management, LLC and Angelo, Gordon & Co., L.P. (collectively, the “Buyers”), pursuant to which Infinity sold, and the Buyers purchased, $30 million aggregate principal amount of senior secured notes (the “Notes”) due January 13, 2009 and five-year warrants to purchase 924,194 shares of common stock at an exercise price of $9.09 per share and 732,046 shares of common stock at an exercise price of $11.06 per share (collectively, the “Warrants”). The Notes have an initial maturity of 48 months subject to extension for an additional twelve months upon the mutual agreement of Infinity and the Buyers. The Notes bear interest at 3-month LIBOR (London Interbank Offered Rate) plus 675 basis points, adjusted the first business day of each calendar quarter. The Notes are secured by essentially all of the assets of Infinity and its subsidiaries and are guaranteed by each of Infinity’s active subsidiaries. The Notes are redeemable by Infinity for cash at any time during the first year at 105% of par value, declining by 1% per year thereafter (101% during any extended maturity period), together with any accrued and unpaid interest. Under certain circumstances, Infinity has the option to repay the Notes with direct issuances of shares of registered common stock in lieu of cash.

      At quarterly intervals and over a three-year period, commencing in the third quarter of 2005, Infinity has the option to sell additional notes (the “Additional Notes”), along with additional warrants, in amounts of up to $15 million in any rolling twelve-month period and up to a maximum of $45 million. The Additional Notes would have an initial maturity of 42 months (54 months if the maturity of the Initial Notes is extended). The issuance of Additional Notes is subject to Infinity’s future satisfaction of various closing conditions. The ability to issue Additional Notes or the requirement to prepay Notes prior to maturity will depend upon a maximum Notes balance calculated quarterly based generally upon a combination of the financial performance of Consolidated and the SEC after-tax PV-10% value of our proved reserves.

      In connection with the issuance of the Notes and Warrants, Infinity also entered into a registrations rights agreement with the Buyers pursuant to which Infinity agreed to file a shelf registration statement covering resales of the ordinary shares issuable upon exercise of the Warrants.

      Infinity used approximately $9.2 million of the proceeds from the sale of the Notes and Warrants to repay all amounts outstanding pursuant to a Loan and Security Agreement between LaSalle Bank N.A. and Consolidated, a Credit Agreement between U.S. Bank National Association and Infinity-Wyoming, and certain other secured lending agreements, and those credit agreements have been terminated. Infinity is using the remainder of the proceeds to pay costs and expenses related to the sale of the Notes and Warrants and to fund its oil and gas exploration and development activities.

      In February 2005, we entered into a definitive agreement for the acquisition of approximately 24,500 gross and net acres in Comanche County in the Fort Worth Basin of Texas, subject to customary closing conditions. The agreement, as amended, also provides for a right of first refusal on all acres acquired by the seller in Comanche County. We expect to close the Comanche transaction on or before April 19, 2005. Upon closing, including acreage previously owned, Infinity-Texas will own and operate approximately 67,500 gross acres (approximately 56,300 acres net to Infinity’s interest) of leasehold in Erath, Hamilton and Comanche Counties, Texas. We believe the Comanche County acreage offers prospective vertical and horizontal drilling and production opportunities, targeting the Barnett Shale and Lower Marble Falls formations. The leased properties are located approximately 30 miles southwest of Infinity-Texas’ existing acreage in Erath and Hamilton Counties, Texas. Infinity-Texas agreed to drill at least one test well on the Comanche acreage during the next twelve months.

      Pursuant to requirements of the Senior Secured Notes Facility, on January 13, 2005, Infinity called for redemption the remaining $2.5 million of 8% Subordinated Convertible Notes due 2006 outstanding on February 28, 2005. During January and February 2005, the holders of all of the 8% subordinated convertible notes converted the debt and accrued interest into 517,296 shares of the Company’s common stock.

      Based on the volume weighted average stock price for Infinity’s common stock from February 18, 2005 to February 24, 2005 and pursuant to requirements of the Senior Secured Notes Facility, on February 25, 2005, Infinity called for redemption the remaining $8.2 million of 7% Subordinated Convertible Notes due 2007 outstanding on April 22, 2005 at a redemption price of 102.8% plus accrued and unpaid interest. During 2005, through March 23, the holders of $5,950,538 of 7% subordinated convertible notes have converted the debt and accrued interest into 783,779 shares of the Company’s common stock. Approximately $5.6 million of principal amount remains outstanding as of March 23, 2005. The Company has cash available to redeem the remaining 7% notes should they not be presented for conversion prior to the redemption date.

      Infinity-Texas is engaged in the acquisition, exploration, development and production of natural gas in the Fort Worth Basin of north central Texas. This subsidiary is a Delaware corporation with its headquarters located in Denver, Colorado.

      Infinity-Texas was formed in June 2004 to acquire, explore, develop and produce natural gas from the Barnett Shale formation and other producing formations in the Fort Worth Basin. The Barnett Shale is a marine shale formation that is natural gas bearing at depths believed to range from 1,000 to 8,500 feet and is believed to be ubiquitous across the Fort Worth Basin. Though this area has been well known for natural gas production for many years, improvements in fracture techniques and the employment of horizontal drilling in recent years have generally improved the economics of producing this reservoir. The reserve profile from productive wells drilled in the Barnett Shale region is shorter-lived compared to the typical reserve profile from wells drilled by Infinity-Wyoming in the Rocky Mountain region. In addition, the predominance of leases in the region relate to fee acreage and therefore have relatively few operating restrictions and regulations, as compared to the typically federally-owned leases in the Rocky Mountain region that involve a higher degree of operating restrictions and regulations.

      At December 31, 2004, Infinity-Texas had no proved reserves or production since no wells had been drilled, completed and hooked up for production at that point. During the three months ended December 31, 2004, Infinity-Texas drilled three gross (2.7 net) wells and completed one gross (0.9 net) well. Subsequent to December 31, 2004, Infinity-Texas has drilled an additional 2 wells (1.9 net) and completed four wells (3.7 net). It is anticipated that the initial wells will be connected to an existing third-party pipeline system during May 2005. Infinity-Texas operates all drilled wells and expects to operate future wells. Operating the oil and gas properties in which it owns an interest allows Infinity-Texas to exercise greater control over operating costs, capital expenditures and the timing of exploration, development and exploitation activities.

      Infinity-Wyoming is engaged in the acquisition, exploration, development and production of natural gas, condensate and crude oil in the Rocky Mountain region in Wyoming and Colorado. This subsidiary is a Wyoming corporation with its headquarters located in Denver, Colorado.

      Infinity-Wyoming was incorporated in January 2000 for the purpose of acquiring properties with the intent of exploring, developing and producing natural gas and coal bed methane. To date, we have developed our proven oil and gas reserves and increased production primarily through acquiring additional oil and gas leaseholds and drilling wells to exploit and develop tight sand properties.

      At December 31, 2004, Infinity-Wyoming had total estimated proved reserves of 9.2 Bcfe with a PV-10 Value of $24.0 million (after-tax PV-10 Value of $23.7 million). This valuation reflected average wellhead prices of $6.07 per thousand cubic feet (“Mcf”) of natural gas and $40.25 per barrel of crude oil at year-end.

      Approximately 97% of our proved oil and gas reserves were associated with tight sand properties on the Wamsutter Arch Pipeline Field in the Greater Green River Basin in Southwest Wyoming (the “Pipeline Field”). The balance of our proved reserves related to one proved undeveloped well location in the Sand Wash Basin in Colorado (the “Sand Wash Prospect”). The proved undeveloped location at the Sand Wash Prospect was drilling at December 31, 2004, was subsequently completed in early 2005, and had an initial flow rate of approximately 150 barrels of oil per day net to the company’s interest. Proved reserves at December 31, 2004 reflect only those quantities associated with a vertical wellbore.

      At December 31, 2004, Infinity-Wyoming operated all of the proved developed oil and gas locations. During the year ended December 31, 2004, Infinity-Wyoming drilled five gross (4.0 net) wells and completed three gross (2.0 net) of such wells. Infinity-Wyoming also completed an additional eight gross (and net) wells drilled during 2003 and prior. Subsequent to December 31, 2004, Infinity-Wyoming finished the drilling of three gross (and net) wells and completion of two of those wells, one each in the Sand Wash and Greater Green River Basins. Operating the oil and gas properties in which it owns an interest allows Infinity-Wyoming to exercise greater control over operating costs, capital expenditures and the timing of exploration, development and exploitation activities.

      During 2004, Infinity-Wyoming produced 1.2 Bcfe of gas, comprised of 1.0 Bcf of natural gas and 34,000 barrels of crude oil. Approximately 98% of this production was from the Pipeline Field and 2% of this production was from the Labarge Field in Big Piney area of the Greater Green River Basin in Wyoming (the “Labarge Field”). Total revenue from product sales totaled $6.3 million, comprised of natural gas sales of $4.9 million, or $5.12 per Mcf, and crude oil sales of $1.4 million, or $41.15 per barrel.

      Since 1999, Infinity has pursued an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea. Over such time period, the relationships which have been built with the Instituto Nicaraguense de Energia (“INE”) and the geological and geophysical research that was done allowed Infinity to become one of only six companies qualified to bid on offshore blocks in the first international bidding round held by INE in January 2003. Infinity was awarded the bid on 24 blocks of acreage, comprising approximately 1.4 million acres, in May 2003, and entered into negotiations with INE to finalize the initial exploration and production contract for the two underlying prospects (Tyra and Perlas). Infinity anticipates the completion of the negotiations and execution of the contract during 2005.

      Consolidated acquired assets necessary to provide oilfield services in Eastern Kansas and Northeast Oklahoma in January 1994. Consolidated expanded its operations into Northeast Wyoming during September 1999. Consolidated provides services associated with drilling and completion of oil and gas wells, including cementing, acidizing, fracturing, nitrogen pumping and water hauling. In April 2004, Consolidated expanded its presence in the Mid-Continent region with the acquisition of substantially all of the assets and liabilities of Blue Star Acid Services, Inc., a provider of acid and cementing services in Eastern and Central Kansas and North Central Oklahoma, for $1.2 million in cash and the assumption of $0.2 million in liabilities. In September 2004, Consolidated sold selected assets in Eastern Kansas, including real property and facilities in Chanute, Kansas, to an exploration and production company and customer for $4.1 million in cash. A wholly-owned subsidiary of Infinity, CIS Oklahoma, Inc. (“CIS”), owns the real property and facilities that we occupy in Ottawa and Thayer, Kansas; Bartlesville, Oklahoma; and Gillette, Wyoming and leases its Eureka facility.

BUSINESS STRATEGY

      Our principal objective is to create shareholder value through the execution of a business strategy, the key elements of which include:

      We intend to finance our business strategies through employment of cash on hand, free cash flow from our operations, net proceeds from the sales of assets, and through external debt and equity capital raised in public and private offerings. Essentially all of our assets serve as collateral under the Senior Secured Notes Facility, and as such, any disposition of material assets would require the approval of the Buyers.

RISK FACTORS

      We incurred a net loss in our fiscal years ended December 31, 2004, 2003 and 2002 of approximately $4.6 million, $9.9 million and $1.6 million, respectively. Our history of losses may impair our ability to obtain financing for drilling and other business activities at all or on favorable terms. It may also impair our ability to attract investors if we attempt to raise additional capital, to grow our business or for other business purposes, by selling additional debt or equity securities in a private or public offering.

      Our ability to achieve a profit from operations on a long-term basis will largely depend on whether we are successful in exploring for and producing oil and gas from our existing properties. We face the following potential risks in developing our oil and gas properties:

      Our future oil and gas revenue, operating results, profitability, future rate of growth and the carrying value of oil and gas properties will depend heavily on prevailing market prices for oil and gas. We expect the market for oil and gas to continue to be volatile for the foreseeable future. For the period from January 1, 2004 through December 31, 2004 we received revenue per barrel of oil as low as $33.35 in January 2004 and as high as $52.58 in October 2004. During that period, the Inside FERC, first of the month CIG Index, the pricing index on which our gas sales are based, fluctuated from a low of $4.17 per MMBtu or approximately $4.59 per Mcf in April 2004 to a high of $6.98 per MMBtu or approximately $7.68 per Mcf during November 2004. Based on fourth quarter 2004 production levels, each $1.00 decrease in the price of crude oil would reduce Infinity’s oil revenue by approximately $2,500 per month and if none of the gas produced were being sold under fixed price contracts, each $0.10 decrease in natural gas price would reduce Infinity’s gas revenue by approximately $7,500 per month.

      Revenue generated from oilfield services provided by Consolidated is indirectly affected by the price of oil and gas. Consolidated has historically experienced higher revenue in periods of high oil and gas prices and lower revenue in periods of low oil and gas prices.

      Most of our proved reserves are natural gas. Therefore, the volatility in the price of natural gas will have the greatest impact on our operations. Various factors beyond our control affect prices of oil and gas, including:

      These external factors and the volatile nature of the energy markets generally make it difficult to estimate future prices of oil and gas. Significant declines in oil and natural gas prices for an extended period may cause various negative effects on our business, including:

      A charge to earnings and book value would occur if there is a further ceiling write-down of the carrying value of Infinity’s oil and gas properties. Impairments can occur when oil and gas prices are depressed or unusually volatile. Once incurred, a ceiling write-down of oil and gas properties is not reversible at a later date when better industry conditions may exist. We review, on a quarterly basis, the carrying value of our oil and gas properties under the full cost accounting rules of the SEC. Under these rules, costs of proved oil and gas properties may not exceed the present value of estimated future net revenue adjusted for future cash flows related to asset retirement obligations from proved reserves, after giving effect to cash flow from hedges, discounted at 10%, net of taxes. Application of the ceiling test generally requires pricing future revenue at the unescalated prices in effect as of the end of each fiscal quarter, after giving effect to Infinity’s cash flow hedge positions, if any, and requires a write-down for accounting purposes if the ceiling is exceeded, even if prices were depressed for only a short period of time.

      At December 31, 2004, the carrying amount of oil and gas properties subject to amortization exceeded the full cost ceiling limitation by approximately $8,900,000 based upon a natural gas price of approximately $6.07 per Mcf and an oil price of approximately $40.25 per barrel in effect at that date. However, due to significant subsequent price increases to approximately $6.53 per Mcf of gas and $54.55 per barrel of oil at the March 15, 2005 measurement date, the Company was only required to record a ceiling writedown of $4,100,000 in the quarter and year ended December 31, 2004. In 2003, the Company recorded a ceiling writedown of $2,975,000. A decrease in oil or gas prices, which continue to remain volatile, an increase in production costs, a decrease in estimated gas production in future periods, or the reclassification of development costs to properties subject to depletion without an increase in associated proved reserves could result in a ceiling write-down during future periods.

      The prices to be received for the natural gas production from our Wyoming, Colorado and Texas properties will be determined mainly by factors affecting the regional supply of and demand for natural gas, which include the degree to which pipeline and processing infrastructure exists in the region. Based on recent experience, regional differences could cause a negative basis differential of between $0.30 per Mcf and $1.50 per Mcf in Wyoming between the published indices generally used to establish the price received for regional natural gas production and the actual price received by us for our natural gas production.

      To manage our exposure to price risks in the marketing of our natural gas, we enter into natural gas fixed price physical delivery contracts from time to time with respect to a portion of our current or future production. These transactions could limit our potential gains if natural gas prices were to rise substantially over the price established by the contracts. In addition, such transactions may expose us to the risk of financial loss in certain circumstances, including instances in which:

      Full exploration and development of Infinity’s properties could require drilling in excess of 1,000 production wells, 100 disposal wells to handle produced water, and the construction of 100 production facilities. This could require capital expenditures over time of in excess of $1 billion. Currently, our potential sources of financing for these activities are cash generated by operations, future sales of equity securities or subordinated debt securities, obtaining additional subordinated debt financing or the sale of additional senior secured debt securities under the terms of an existing securities purchase agreement. Under that agreement, we can borrow up to $15 million per twelve-month period for the next three years, commencing in the third quarter of 2005, depending on our satisfaction of certain closing conditions and on our maximum balance of notes outstanding, based generally on a combination of performance of Infinity’s oilfield service business and the after-tax PV-10 Value of Infinity’s proved reserves.

      Future cash flows and the availability of financing are subject to a number of variables, such as:

      Issuing equity securities to satisfy our financing or refinancing requirements could cause substantial dilution to existing shareholders. Debt financing could lead to:

      In order to reduce our capital needs, while continuing development of our oil and gas projects, we could enter into partnerships with another oil and gas company or companies in which we would maintain a carried or reduced working interest in the oil and gas properties. However, this would reduce our ownership and control over the projects and could significantly reduce our future revenue generated from gas production.

      If projected revenue were to decrease due to lower oil and natural gas prices, decreased production or other reasons, and if we were not able to obtain the necessary capital, our ability to execute development plans or maintain production levels could be limited.

      Our Senior Secured Notes Facility is secured by a pledge of substantially all of our natural gas and oil properties and oilfield services business assets, is guaranteed by our subsidiaries and contains covenants that limit additional borrowings, dividends to shareholders, the incurrence of liens, investments, sales or pledges of assets, changes in control and other matters. The Senior Secured Notes Facility also requires that specified financial ratios be maintained. The restrictions of our Senior Secured Notes Facility may have adverse consequences on our operations and financial results including:

      As of March 23, 2005, we had total long-term debt of approximately $37.8 million. Our level of debt could have important negative consequences to our business.

      We may not be able to refinance our debt or obtain additional financing, particularly in view of the restrictions imposed by our Senior Secured Notes Facility on our ability to incur other debt and the fact that substantially all of our assets are currently pledged to secure obligations under that facility. Our overall level of long-term debt and our difficulty in obtaining additional debt financing may have adverse consequences on our operations and financial results including:

      There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and their values. Actual production, revenue and reserve expenditures will likely vary from estimates.

      Estimates of oil and natural gas reserves are projections based on available geologic, geophysical, production and engineering data. There are uncertainties inherent in the manner of producing and the interpretation of this data as well as the projection of future rates of production and the timing of development

expenditures. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon a number of factors including:

      The most accurate method of determining proved reserve estimates is based upon a decline analysis method, which consists of extrapolating future reservoir pressure and production from historical pressure decline and production data. The accuracy of the decline analysis method generally increases with the length of the production history. Since our wells in Texas will begin producing this year, other (generally less accurate) methods such as volumetric analysis and analogy to the production history of wells of other operators in the same reservoir will be used, in conjunction with the decline analysis method to determine our estimates of proved reserves. As our wells are produced over time and more data is available, the estimated proved reserves will be redetermined on an annual basis and may be adjusted based on that data.

      Actual future production, gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable gas and oil reserves most likely will vary from our estimates. Any significant variance could materially affect the quantities and present value of our reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development and prevailing gas and oil prices. Our reserves may also be susceptible to drainage by operators on adjacent properties.

      In addition, investors should not construe the present value of future net cash flows as the current market value of the estimated oil and natural gas reserves attributable to our properties. The estimated discounted future net cash flows from proved reserves are based on prices and costs as of the date of the estimate, in accordance with applicable regulations, whereas actual future prices and costs may be materially higher or lower. Factors that will affect actual future net cash flows include:

      As a result of these and other factors, we will be required to periodically reassess the amount of our reserves, which may require us to recognize a ceiling write-down of our oil and gas properties. Such factors could cause us to write down the value of our properties in future periods.

      As of December 31, 2004, Infinity-Wyoming had approximately $6.9 million invested in unproved oil and gas properties not subject to amortization on its Labarge Field. During 2004, Infinity-Wyoming performed completion or recompletion operations on five wells in the Labarge Field.

      For the period ended December 31, 2005, or during 2006, a portion of the investment in unproved oil and gas properties may be reclassified to the full cost pool subject to depletion and the ceiling test, following our required periodic evaluation of the fair value of our unproved properties. The amount of any such reclassification could be significant. We could be required to write down a portion of the full cost pool of oil and gas properties subject to amortization upon reclassification of the unproved oil and gas property costs.

      The business of exploring for and developing oil and gas properties is an activity that involves a high degree of business and financial risk. Property acquisition decisions generally are based on assumptions about the quantity, quality, production costs, marketability, and sales price for the acreage or reserves being

acquired. Although available geological and geophysical information can provide information about the potential of a property, it is impossible to predict accurately the ultimate production potential, if any, of a particular property or well. Any decision to acquire a property is also influenced by our subjective judgment as to whether we will be able to locate the reserves, drill and equip the wells to produce the reserves, operate the wells economically, and market the production from the wells.

      Our operations are dependent upon the availability of certain resources, including drilling rigs, steel casing, water, chemicals, and other materials necessary to support our development plans and maintenance requirements. The lack of availability of one or more of these resources at an acceptable price could have a material adverse affect on our business.

      The successful completion of an oil or gas well does not ensure a profit on investment. A variety of factors may negatively affect the commercial viability of any particular well, including:

      In addition, market-related factors may cause a well to become uneconomic or only marginally economic, such as:

      The oil and natural gas business involves operating hazards, any of which could cause substantial losses, such as:

      As protection against operating hazards, we maintain insurance coverage against some, but not all, potential losses. This insurance has deductibles or self-insured retentions and contains certain coverage exclusions. Our insurance premiums can be increased or decreased based on the claims made by us under insurance policies. The insurance does not cover damages from breach of contract by us or based on alleged fraud or deceptive trade practices. Whenever possible, we obtain agreements from customers that limit our liability; however, insurance and customer agreements do not provide complete protection against losses and risks and losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance

coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operations.

      In addition, we may be liable for environmental damage caused by previous owners of property we own or lease. As a result, we may face substantial potential liabilities to third parties or governmental entities that could reduce or eliminate funds available for exploration, development or acquisitions or cause us to incur losses. An event that is not fully covered by insurance — for instance, losses resulting from pollution and environmental risks that are not fully insured — could cause us to incur material losses.

      In general, the volume of production from natural gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is, therefore, highly dependent on our level of success in finding or acquiring additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive. Recovery of our reserves, particularly undeveloped reserves, will require significant additional capital expenditures and successful drilling operations. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be impaired.

      Exploratory drilling involves numerous risks, including the risk that we will not find commercially productive natural gas or oil reservoirs. The cost of drilling, completing and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations, including:

      Our future drilling activities may not be successful, and we cannot be sure of our overall drilling success rate. Unsuccessful drilling activities would result in significant expenses being incurred without any financial gain.

      The marketability of gas production will depend in part on the availability, proximity and capacity of pipeline systems owned by third parties. We generally deliver natural gas through gas gathering systems and gas pipelines that we do not own under interruptible or short-term transportation agreements. The transportation of our gas may be interrupted due to capacity constraints on the applicable system, for maintenance or repair of the system. Our ability to produce and market natural gas on a commercial basis could be harmed by any significant change in the cost or availability of markets, systems or pipelines.

      Federal, state and local authorities extensively regulate the oil and gas industry and the drilling and completion of oil and gas wells. Legislation and regulations affecting the industry are under constant review for amendment or expansion, raising the possibility of changes that may adversely affect, among other things, the pricing, production or marketing of oil and gas and oilfield services. Noncompliance with statutes and regulations may lead to substantial penalties and the overall regulatory burden on the industry increases the cost of doing business and, in turn, decreases profitability. Federal, state and local authorities regulate various aspects of oil and gas drilling, service and production activities, including the drilling of wells through permit and bonding requirements, the spacing of wells, the unitization or pooling of oil and gas properties, environmental matters, safety standards, the sharing of markets, production limitations, plugging and abandonment, and restoration.

      Our operations are subject to complex and constantly changing environmental laws and regulations adopted by federal, state and local government authorities. Infinity estimates it will spend approximately $1.0 million to drill and equip one water disposal well to handle water produced from gas wells in 2005. It costs Infinity approximately $50,000 per year to operate each disposal well. In addition to the environmental costs that will be incurred by our oil and gas production operations, Consolidated will incur an estimated $50,000 in costs associated with operating within current environmental regulations this fiscal year. New laws or regulations, or changes to current requirements, could result in our incurring significant additional costs. We could face significant liabilities to government and third parties for discharges of oil, natural gas or other pollutants into the air, soil or water, and we could have to spend substantial amounts on investigations, litigation and remediation.

      Although we believe that we are in substantial compliance with all applicable laws and regulations, we cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, will not harm our business, results of operations and financial condition. Laws and regulations applicable to us include those relating to:

      Under these laws and regulations, we could be liable for:

      Any noncompliance with these laws and regulations could subject us to material administrative, civil or criminal penalties or other liabilities.

      Our oilfield service operations routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous substances. Our operations and facilities are subject to numerous environmental laws, rules and regulations, including laws concerning:

      Compliance with and violations of laws protecting the environment may become more costly. Sanctions for failure to comply with these laws, rules and regulations, many of which may be applied retroactively, may include:

      In the United States, environmental laws and regulations typically impose strict liability. Strict liability means that in some situations we could be exposed to liability for cleanup costs and other damages as a result of our conduct, even if such conduct was lawful at the time it occurred, or as a result of the conduct of prior operators or other third parties. Cleanup costs, natural resource damages and other damages arising as a result of environmental laws and regulations, and costs associated with changes in environmental laws and regulations, could be substantial. From time to time, claims have been made against us under environmental laws. Changes in environmental laws and regulations may also negatively impact other oil and natural gas exploration and production companies, which in turn could reduce the demand for our oilfield services.

      Large volumes of water produced from coalbed methane wells and discharged onto the surface in the Powder River Basin of Wyoming have drawn the attention of government agencies, gas producers, citizens and environmental groups which may result in new regulations for the disposal of produced water. Infinity intends to use injection wells to dispose of water into underground rock formations at certain of its fields and intends to discharge onto the surface where permissible. If our wells produce water of lesser quality than allowed under Colorado, Texas or Wyoming state law for surface discharge or injection into underground rock formations, Infinity could incur costs of up to $7.50 per barrel of water to dispose of the produced water. At December 2004 production rates, this would cost us an additional $100,000 per month in average water disposal costs. If our wells produce water in excess of the limits of its disposal facilities, we may have to drill additional disposal wells. Each additional disposal well could cost us up to $1.0 million.

      We operate in the highly competitive areas of oil and natural gas exploration, exploitation, acquisition, production and oilfield services with many other companies. We face intense competition from a large number of independent companies as well as major oil and natural gas companies in a number of areas such as:

      Many of our competitors have financial and technological resources substantially exceeding those available to us. Many oil and gas properties are sold in a competitive bidding process in which we may lack technological information or expertise or financial resources available to other bidders. We cannot be sure that we will be successful in acquiring and developing profitable properties in the face of this competition.

      Because of our small size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial, technical, operational and management resources. As we expand our activities and increase the number of projects we are evaluating or in which we participate, there will be additional demands on our financial, technical and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the recruitment and retention of experienced managers, geoscientists and engineers, could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute our business plan.

      The loss of key members of our management team, or difficulty attracting and retaining experienced technical personnel, could reduce our competitiveness and prospects for future success. Our success depends on the continued services of our executive officers and a limited number of other senior management and technical personnel. Loss of the services of any of these people could have a material adverse effect on our operations. We current