Playlogic Entertainment (PLGC) 10QSB 2006 Q1 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

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

For the period ended:March 31, 2006

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

For the transition period from                    to                    

Commission File Number:0-49649

PLAYLOGIC ENTERTAINMENT, INC.

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

Delaware	23-3083371
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Concertgebouwplein 13, 1071 LL Amsterdam, The Netherlands	1071 LL
(Address of principal executive offices)	(Zip Code)

31-20-676-0304
(Issuer’s telephone number)

Check whether the issuer (1) has 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.þYesoNo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Class	Outstanding at May 4, 2006
Common Stock, par value $.001 per share	24,465,733 shares

Transitional Small Business Disclosure Format (check one): Yeso Noþ

PLAYLOGIC ENTERTAINMENT, INC.
FORM 10-QSB
CONTENTS

			Page No.
PART I — FINANCIAL INFORMATION
	Item 1.
		Financial Statements	F-1
		Consolidated Balance Sheets at March 31, 2006 (unaudited)	F-1
		Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three months ended March 31, 2006 and 2005	F-3
		Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2006 and 2005	F-4
		Notes to Consolidated Financial Statements	F-5
	Item 2.	Management’s Discussion and Analysis	4
	Item 3.	Controls and Procedures	9
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings	11
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	11
	Item 3.	Defaults Upon Senior Securities	12
	Item 4.	Submission of Matters to a Vote of Security Holders	12
	Item 5.	Other Information	12
	Item 6.	Exhibits
	Signatures
	Exhibit Index
	Certifications
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and 2005

(Unaudited)

	March 31,			March 31,
	2006			2005
ASSETS
Current Assets
Cash on hand and in bank	$	142,387		$	20,298
Accounts receivable Trade, net of allowance for doubtful accounts of approximately $21,418 and $-0-, respectively		2,389,341			539,860
Loans to affiliated companies		—			145,250
Value Added Taxes from foreign governments		203,980			155,046
Prepaid expenses and other		56,836			15,612
Total current assets		2,792,544			876,066
Property and Equipment — at cost
Computers and office equipment		1,404,534			1,390,290
Leasehold improvements		295,933			197,843
Software		291,433			46,011
		1,991,900			1,634,145
Less accumulated depreciation		(1,239,258	)		(1,051,311	)
Net property and equipment		752,642			582,834
Other assets
Capitalized software development costs		4,536,922			1,400,500
Other		869,608			—
Deferred tax asset		—			253,110
Total other assets		5,406,530			1,653,610
Total Assets	$	8,951,716		$	3,112,510

- Continued -

The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

F-1

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS — CONTINUED
March 31, 2006 and 2005

(Unaudited)

	March 31,			March 31,
	2006			2005
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Bank overdraft	$	1,507,481		$	703,097
Short-term loans payable		—			194,505
Software financing loans payable		—			259,340
Current maturities of long-term debt		36,306			38,901
Accounts payable — trade		2,542,378			2,007,181
Payroll taxes payable		1,516,568			357,016
Other accrued liabilities
Accrued wages and related personnel costs		218,744			364,242
Other		1,925,780			396,242
Deferred revenues		860,649			—
Loan from stockholders		48,408			9,788,505
Total Current Liabilities		8,656,314			14,109,029
Long-Term Liabilities
Long-term debt, net of current maturities		254,142			262,582
Total Liabilities		8,910,456			14,371,611
Commitments and contingencies
Stockholders’ Deficit
Preferred stock — $0.001 par value. 20,000,000 shares authorized. None issued and outstanding					—
Common stock — $0.001 par value. 100,000,000 shares authorized. 24,465,733 and 22,765,894 shares issued and outstanding, respectively		24,466			22,766
Common stock warrants		1,720,180			—
Additional paid-in capital		38,361,250			20,584,984
Currency translation adjustments		(1,607,260	)		(2,043,651	)
Accumulated deficit		(38,428,032	)		(29,823,200	)
		70,604			(11,259,101	)
Stock subscriptions receivable		(29,344	)		—
Total Stockholders’ Deficit		41,260			(11,259,101	)
Total Liabilities and Shareholders’ Deficit	$	8,951,716		$	3,112,510

The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

F-2

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three months ended March 31, 2006 and 2005

(Unaudited)

	Three months			Three months
	ended			ended
	March 31,			March 31,
	2006			2005
Revenues
Game software	$	2,719,610		$	532,138
Cost of Sales
Direct costs of production		1,761,625			123,077
Gross Profit		957,985			409,061
Operating expenses
Research and development		343,691			362,269
Selling and marketing		89,670			5,920
General and administrative		1,602,021			650,979
Depreciation		78,497			104,067
Total operating expenses		2,113,880			1,123,234
Loss from Operations		(1,155,895	)		(714,173	)
Other Income (Expense)
Interest expense		(76,827	)		(103,330	)
Foreign currency exchange gain (loss)		35,217			—
Loss before provision for income taxes		(1,197,505	)		(817,503	)
Provision for Income Taxes		—			217,514
Net Loss		(1,197,505	)		(559,990	)
Other comprehensive income
Foreign currency translation adjustment		(107,619	)		593,934
Comprehensive Loss	$	(1,305,124	)	$	33,944
Net loss per weighted-average share of common stock outstanding, computed on Net Loss - - basic and fully diluted	$	(0.05	)	$	(0.02	)
Weighted-average number of shares of common stock outstanding - basic and fully diluted		24,272,908			22,765,894

The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

F-3

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2006 and 2005

(Unaudited)

	Three months			Three months
	ended			ended
	March 31,			March 31,
	2006			2005
Cash Flows from Operating Activities
Net loss	$	(1,197,506	)	$	(559,990	)
Adjustments to reconcile net income to net cash provided by operating activities
Currency translation adjustment		(107,619	)		593,934
Realized loss on currency exchange		94,085			—
Depreciation		78,497			104,067
Bad debt expense		65,259			—
Deferred income taxes		—			(257,514	)
Management fees contributed as capital		25,000			—
(Increase) Decrease in Accounts receivable — trade and other		(1,248,449	)		(694,906	)
Prepaid expenses and other		770			257,206
Increase (Decrease) in Deferred revenues		850,920			—
Accounts payable — trade		(27,178	)		(1,180,412	)
Payroll taxes payable		(786,776	)		218,194
Other current liabilities		1,057,709			(282,489	)
Net cash used in operating activities		(1,195,288	)		(1,801,910	)
Cash Flows from Investing Activities
Cash paid for software development		(1,431,504	)		(226,103	)
Cash advanced for prepaid royalties to affiliated entities		—			(56,492	)
Cash paid to acquire property and equipment		(108,288	)		(59,220	)
Net cash used in investing activities		(1,539,792	)		(341,815	)
Cash Flows from Financing Activities
Increase (Decrease) in cash overdraft		(23,571	)		(229,920	)
Net activity on short term notes to third parties		—			(18,513	)
Net activity on software financing notes payable		—			(334,653	)
Principal payments on long-term debt		6,552			(26,237	)
Cash advanced by affiliated entities		495,743			—
Cash advanced or repaid to shareholder — net		(114,683	)		2,191,379
Proceeds from sales of common stock		1,178,065			—
Collections on stock subscriptions receivable		1,200,000			—
Proceeds from sales of pre-merger subsidiary common stock		—			559,741
Cash contributed by shareholder to support operations		—			—
Cash paid to acquire capital		(4,399	)		—
Net cash provided by financing activities		2,737,707			2,141,797
Increase (Decrease) in Cash and Cash Equivalents		2,627			(1,928	)
Cash and cash equivalents at beginning of period		139,760			22,226
Cash and cash equivalents at end of period	$	142,387		$	20,298
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period	$	76,827		$	103,330
Income taxes paid (refunded)	$	—		$	—
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Common stock issued to repay notes payable	$	918,652		$	—
Cost of acquiring capital paid with issuance of common stock	$	13,200		$	—

The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

F-4

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — ORGANIZATION AND DESCRIPTION OF BUSINESS

Playlogic Entertainment, Inc. (PEI) was incorporated on May 25, 2001 in accordance with the Laws of the State of Delaware as Donar Enterprises, Inc.

PEI’s initial business plan was to provide the conversion and filing of various documents prepared in accordance with either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, for small to mid-sized public companies with the U.S. Securities and Exchange Commission (SEC) electronically through EDGAR, the SEC’s Electronic Data Gathering, Analysis, and Retrieval system. The Company has never been affiliated with the SEC in any manner.

On February 27, 2002, PEI’s Registration Statement on Form SB-2 (SEC File No. 333-68702), registering 2,000,000 pre-reverse split shares to be sold at a price of $0.05 per share, was declared effective. Between July and December 2002, PEI sold an aggregate 656,000 pre-reverse split shares of stock under this Registration Statement.

In June 2004 and December 2004, respectively, PEI experienced separate changes in control and abandoned its business plan related to providing electronic filing services for small to mid-sized public companies and began a search to seek a suitable reverse acquisition candidate through acquisition, merger or other suitable business combination method.

On June 30, 2005, pursuant to a Securities and Exchange Agreement (Exchange Agreement) by and among PEI and Playlogic International N.V., a corporation formed under the laws of The Netherlands (Playlogic NV), and the shareholders of Playlogic NV (Playlogic NV Shareholders); the Playlogic NV Shareholders exchanged 100.0% of the issued and outstanding ordinary shares and preferred shares of Playlogic NV for an aggregate 21,836,930 shares of PEI’s common stock. As a result of this transaction, Playlogic NV became PEI’s wholly-owned subsidiary, now represents all of PEI’s commercial operations, and the Playlogic NV Shareholders control approximately 91.0% of the outstanding common stock of PEI, post-transaction.

Playlogic International N.V. was incorporated in the Netherlands in May 2002. Playlogic publishes interactive entertainment software for video game consoles, personal computers (PCs) and other handheld and mobile electronic devices developed by its internal studio and by third parties.

In subsequent notes, the consolidated entity is referred to as “Company”.

NOTE B — PREPARATION OF FINANCIAL STATEMENTS

The acquisition of Playlogic International N. V. on June 30, 2005, by Playlogic Entertainment, Inc. (formerly Donar Enterprises, Inc.) effected a change in control and was accounted for as a “reverse acquisition” whereby Playlogic International N. V. is the accounting acquiror for financial statement purposes. Accordingly, for all periods subsequent to the June 30, 2005 “reverse acquisition” transaction, the historical financial statements of the Company reflect the financial statements of Playlogic International N. V. since it’s inception and the operations of Playlogic Entertainment, Inc. (formerly Donar Enterprises, Inc.) subsequent to June 30, 2005.

The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has a year-end of December 31.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

F-5

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE B — PREPARATION OF FINANCIAL STATEMENTS — Continued

Management acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements filed with the U. S. Securities and Exchange Commission on its Annual Report on Form 10-KSB for the year ended December 31, 2005. The information presented within these interim financial statements may not include all disclosures required by generally accepted accounting principles and the users of financial information provided for interim periods should refer to the annual financial information and footnotes when reviewing the interim financial results presented herein.

In the opinion of management, the accompanying interim financial statements, prepared in accordance with the U. S. Securities and Exchange Commission’s instructions for Form 10-QSB, are unaudited and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending December 31, 2006.

For segment reporting purposes, the Company operated in only one industry segment during the periods represented in the accompanying financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole.

These financial statements reflect the books and records of Playlogic Entertainment, Inc. (formerly Donar Enterprises, Inc.), Playlogic International N.V. (a corporation domiciled in The Netherlands) and its wholly-owned subsidiary Playlogic Game Factory B.V. All significant intercompany transactions have been eliminated in combination. The consolidated entities are referred to as Company.

NOTE C — GOING CONCERN UNCERTAINTY

The Company is a global publisher of interactive software games designed for personal computers, and video game consoles and handheld platforms manufactured by Sony, Microsoft and Nintendo. Its principal sources of revenue are derived from publishing and distribution operations. Publishing revenues are derived from the sale of internally developed software titles or software titles developed by third parties. Operating margins in its publishing business are dependent upon its ability to continually release new, commercially successful products. Operating margins for titles based on licensed properties are affected by the company’s costs to acquire licenses. The company pursues a growth strategy by capitalizing on the widespread market acceptance of video game consoles, as well as the growing popularity of innovative action games that appeal to mature audiences.

The Company’s Playlogic NV subsidiary commenced operations in May 2002 and have recognized consolidated net operating losses of approximately¨5,170,464 ($6,445,397) in 2005, approximately¨16,193,241 ($20,162,853) in 2004, approximately¨6,091,914 ( $6,900,433) in 2003 and approximately¨2,096,983 ($2,199,924) in 2002. Although management expects to achieve profitable operations in the future, the Company may never achieve profitability. Additionally, if the Company does achieve profitability, it may not be able to maintain profitability on a consistent basis. Accordingly, our auditor has included an explanatory paragraph indicating that substantial doubt exists about Playlogic International’s ability to continue as a going concern.

F-6

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE C — GOING CONCERN UNCERTAINTY — Continued

While the Company has contracts in place with several third-party developers and is developing several titles through it’s Playlogic Game Factory B.V. subsidiary, and anticipates successful debuts of these titles; the market for interactive entertainment software is characterized by short product lifecycles and frequent introduction of new products. Many software titles do not achieve sustained market acceptance or do not generate a sufficient level of sales to offset the costs associated with product development. A significant percentage of the sales of new titles generally occur within the first three months following their release. Therefore, our profitability depends upon our ability to develop and sell new, commercially successful titles and to replace revenues from titles in the later stages of their lifecycles. Any competitive, financial, technological or other factor which delays or impairs our ability to introduce and sell our software could adversely affect our future operating results.

The Company’s continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis.

The Company anticipates future sales of equity securities to raise working capital to support and preserve the integrity of the corporate entity. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.

If no additional operating capital is received during the next twelve months, the Company will be forced to rely on existing cash in the bank and upon additional funds loaned by management and/or significant stockholders to preserve the integrity of the corporate entity at this time. In the event, the Company is unable to acquire advances from management and/or significant stockholders, the Company’s ongoing operations would be negatively impacted to the point that all operating activities are ceased.

While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach our goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps.

NOTE D — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Currency translation

The Company incurs expenses in both US Dollar and Euro transaction accounts. The Euro is the functional currency of the Company’s operating subsidiaries domiciled in The Netherlands. All transactions reflected in the accompanying financial statements have been converted into US Dollar equivalents.

For balance sheet purposes, at the end of any accounting cycle, the exchange rate at the balance sheet is used for all assets and liabilities. The utilized conversion rates are:

March 31, 2006	$	1.21020
December 30, 2005:	$	1.18290
March 31, 2005	$	1.29670
December 31, 2004:	$	1.36550

(Remainder of this page left blank intentionally)

F-7

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE D — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

1. Currency translation — continued

For revenues, expenses, gains and losses during a respective reporting period, an weighted average exchange rate for the respective reporting period is used to translate those elements. The Company’s management considers the Euro to be a stable currency. Accordingly, the Company calculates the weighted average exchange rate using the first day of the period being converted, the 15th of each respective month and the last day of each respective month in the reporting period. The exchange rates used for all revenues, expenses, gains and losses during the year-to-date periods ended, as noted, are:

March 31, 2006	$	1.20016
December 31, 2005:	$	1.24658
March 31, 2005	$	1.31927
December 31, 2004:	$	1.24514

2. Cash and cash equivalents

The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.

Cash overdrafts may occur from time-to-time depending upon management’s cash management policies.

3. Accounts receivable — trade

The Company’s current customers are located principally within Europe; however, the Company anticipates having customers throughout the world in future periods. The Company typically makes sales to most of its retailers and some distributors on unsecured credit, with terms that vary depending upon the customer’s credit history, solvency, credit limits and sales history. From time to time, distributors and retailers in the interactive entertainment software industry have experienced significant fluctuations in their business operations and a number of them have failed. The insolvency or business failure of any significant Company customer could have a material negative impact on the Company’s business and financial results.

Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible.

In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance.

4. Property and equipment

Property and equipment is recorded at cost and is depreciated on a straight-line basis, over the estimated useful lives (generally 3 to 10 years) of the respective asset. Major additions and betterments are capitalized and depreciated over the estimated useful lives of the related assets. Maintenance, repairs, and minor improvements are charged to expense as incurred.

5. Software development costs

Capitalized software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products. The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86 — “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. The Company also capitalizes internal software development costs and other content costs subsequent to establishing technological feasibility of a title. Amortization of such costs as a component of cost of sales is recorded on a title-by-title basis based on the greater of the proportion of current year sales to the total of current and estimated future sales for the title or the straight-line method over the remaining estimated useful life of the title. At each balance sheet date, the company evaluates the recoverability of capitalized software costs based on undiscounted future cash flows and charges to operations any amounts that are deemed unrecoverable.

F-8

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE D — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

5. Software development costs — continued

The Company’s agreements with third-party developers generally provide it with exclusive publishing and distribution rights and require it to make advance payments that are recouped against royalties due to the developer based on the contractual amounts of product sales, adjusted for certain costs.

6. Prepaid royalties

The Company capitalizes external software development costs (prepaid royalties) and other content costs subsequent to establishing technological feasibility of a title. Advance payments are amortized as royalties in cost of sales on a title-by-title basis based on the greater of the proportion of current year sales to the total of current and estimated future sales for that title or the contractual royalty rate based on actual net product sales as defined in the respective agreements. At each balance sheet date, the company evaluates the recoverability of advanced development payments and unrecognized minimum commitments not yet paid to determine the amounts unlikely to be realized through product sales. Advance payments are charged to cost of sales in the amount that management determines is unrecoverable in the period in which such determination is made or if management determines that it will cancel a development project.

7. Organization and reorganization costs

The Company has adopted the provisions of AICPA Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” whereby all organizational and initial costs incurred with the incorporation and initial capitalization of the Company were charged to operations as incurred.

8. Research and development expenses

Research and development expenses include the direct costs related to software and game development which are incurred prior to the establishment of technological feasibility of a specific game title or product. These costs are charged to operations as incurred.

9. Advertising expenses

The Company does not utilize direct solicitation advertising. All other advertising and marketing expenses are charged to operations as incurred.

10. Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. At March 31, 2006 and 2005, the deferred tax asset and deferred tax liability accounts, as recorded when material, are entirely the result of temporary differences. Temporary differences generally represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization and the anticipated utilization of net operating loss carryforwards to offset current taxable income..

11. Share-Based Payments

The Company utilizes the fair-value method of accounting for the payment for goods and/or services with the issuance of equity shares in lieu of cash.

12. Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements.

F-9

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE D — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

12.Earnings per share — continued

Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).

Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company’s net income (loss) position at the calculation date.

As of March 31, 2006 and 2005, the Company’s outstanding stock options and warrants are considered anti-dilutive due to the Company’s net operating loss position.

13.Revenue recognition

The Company evaluates the recognition of revenue based on the criteria set forth in SOP 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and U. S. Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as revised by SAB 104, “Revenue Recognition”. The Company evaluates revenue recognition using the following basic criteria:

     * Evidence of an arrangement: The Company recognizes revenue when it has evidence of an agreement with the customer reflecting the terms and conditions to deliver products.

* Delivery: Delivery is considered to occur when the products are shipped and risk of loss has been transferred to the customer.

* Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, the Company recognizes that amount as revenue when the amount becomes fixed or determinable.

* Collection is deemed probable: At the time of the transaction, the Company conducts a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if the Company expects the customer to be able to pay amounts under the arrangement as those amounts become due. If the Company determines that collection is not probable, it recognizes revenue when collection becomes probable (generally upon cash collection).

The Company defers revenues on sales which do not confirm to the above listed criteria until such time that the billed amount is either paid or any attached right-of-return expires/terminates.

14.New accounting pronouncements

In November 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The initial application of SFAS No. 151 is not expected to have a significant impact on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which addresses the accounting for employee stock options. SFAS 123(R) revises the disclosure provisions of SFAS 123 and supersedes APB 25. SFAS 123(R) requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in financial statements based on the estimated fair value of the awards. In March 2005, the Securities & Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107, “Share-Based Payment,” which summarizes the views of the SEC staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations, and is intended to assist in the initial implementation. SFAS(R) is effective for all companies that file as small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company is currently evaluating the provisions of SFAS 123(R) and its effect on its financial statements. The Company does not expect the adoption of this statement to have a material impact on its financial statements.

F-10

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE D — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

14.New accounting pronouncements — continued

In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets, an amendment of APB 29, Accounting for Nonmonetary Transactions.” This statement’s amendments are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, SFAS 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Provisions of this statement are effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations"(“FIN 47”), which is an interpretation of SFAS 143, “Accounting for Asset Retirement Obligations.” FIN 47 clarifies terminology within SFAS 143 and requires an entry to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial statements.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which will require entities that voluntarily make a change in accounting principle to apply that change retroactively to prior periods’ financial statements unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, “Accounting Changes” (“APB No. 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The provisions of SFAS No. 154 are not expected to affect the Company’s consolidated financial statements.

NOTE E — FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.

Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.

Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The company does not use derivative instruments to moderate its exposure to financial risk, if any.

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F-11

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE F — CONCENTRATIONS OF CREDIT RISK

The Company maintains its United States and Netherlands based cash accounts in financial institutions subject to certain governmental administered insurance coverage programs. The United States based accounts are covered by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, the Company is entitled to aggregate coverage of $100,000 per account type per separate legal entity per financial institution. Through December 31, 2005, and subsequent thereto, the Company maintained deposits in a United States financial institution and incurred no losses as a result of any unsecured bank balance through September 30, 2005 or subsequent thereto.

The Company is exposed to currency risks. The Company is particularly exposed to fluctuations in the exchange rate between the U.S. Dollar and the Euro, as it incurs manufacturing costs and prices its products in the Euro (the Company’s operating subsidiary’s functional currency) while a portion of its revenue is denominated in U.S. Dollars. A substantial portion of the company’s assets, liabilities and operating results are denominated in Euros, and a minor portion of its assets, liabilities and operating results are denominated in currencies other than the Euro. The Company’s consolidated financial statements are expressed in US Dollars. Accordingly, its results of operations are exposed to fluctuations in various exchange rates. As of the applicable balance sheet dates, the exposure was very limited, hence, no hedging activities were deemed necessary by management. In the Company’s exchange rate agreements, it uses fixed interest rates.

NOTE G — PROPERTY AND EQUIPMENT

Property and equipment consists of the following at March 31, 2006 and 2005, respectively:

	March 31,			March 31,
Estimated Life	2006			2005
Computers and office equipment	$	1,404,534		$1,390,2903-5 years
Leasehold improvements		295,933		197,843 initial lease term
Software		291,433		46,011 3-5 years
		1,991,900			1,634,145
Less accumulated depreciation		(1,239,258	)		(1,051,311	)
Net property and equipment	$	752,642		$	582,834

NOTE H — AMOUNTS DUE FROM RELATED PARTIES

In prior periods, the Company has advanced an aggregate $495,743 to Engine Software, an entity in which the Company held an approximate 47.5% equity interest, for software development. Effective December 31, 2005, the Company sold this interest to the management team of Engine Software and reclassified the advanced royalty payments to “capitalized software development costs”. As of January 1, 2006, the relationship with Engine Software is solely as an external software developer.

NOTE I — LONG-TERM DEBT

Long-term debt consists of the following at March 31, 2006 and 2005, respectively:

	March 31,			March 31,
	2006			2005
Note payable to a landlord for leasehold improvements. Payable in quarterly installments of approximately $8,871. Final maturity in 2013.	$	290,448		$	301,483
Less current maturities		(36,306	)		(38,901	)
Current portion	$	254,142		$	262,582

F-12

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE I — LONG-TERM DEBT — Continued

Future maturities of long-term debt are as follows:

Year ending
December 31,		Amount
	2006	$	35,487
	2007		35,487
	2008		35,487
	2009		35,487
	2010		35,487
	2011-2015		106,481
Totals		$	283,896

NOTE J — LOAN FROM STOCKHOLDERS

     Through March 31, 2006, various Company shareholders have advanced approximately $48,408 for working capital purposes. These loans bear interest at 7.0% and are due in August 2006.

NOTE K — INCOME TAXES

     The components of income tax (benefit) expense for each of the three month periods ended March 31, 2006 and 2005, respectively, are as follows:

	Three monthsThree months
	ended		ended
	March 31,		March 31,
	2006		2005
Domestic:
Current	$	—	$	—
Deferred		—		—
Foreign:
Current		—		—
Deferred		—		257,514
State:
Current		—		—
Deferred		—		—
Total	$	—	$	—

As of December 31, 2005, the Company has a net operating loss carryforward of approximately $400,000 to offset future for United States taxable income and approximately $25,400,000 to offset future Netherlands taxes. Subject to current United States regulations, the approximate $400,000 carryforward will begin to expire in 2020. The amount and availability of the net operating loss carryforwards may be subject to limitations set forth by the Internal Revenue Code and the Dutch Government. Factors such as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of the United States carryforwards.

F-13

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE K — INCOME TAXES — Continued

The Company’s income tax expense (benefit) for the years ended December 31, 2005 and 2004, respectively, differed from the statutory rate of 34% as noted below:

	Three months			Three months
	ended			ended
	March 31,			March 31,
	2006			2005
Statutory rate applied to loss before income taxes	$	(407,200	)	$	(190,400	)
Increase (decrease) in income taxes resulting from:
Foreign income taxes		387,400			190,400
State income taxes		—			—
Deferred income taxes — (257,514)
Other, including reserve for deferred tax asset and effect of graduated tax brackets		19,800			—
Total income tax expense (benefit)	$	—
$(257,514)

Temporary differences, consisting primarily of the timing of the utilization of net operating loss carryforwards, give rise to deferred tax assets as of December 31, 2005.

	March 31,
	2006
Net operating loss carryforwards $8,643,000
Less valuation allowance (8,643,000)
Net Deferred Tax Asset	$	—

NOTE L — COMMON STOCK TRANSACTIONS

On February 21, 2005, by written consent in lieu of meeting, stockholders representing 78.9% of the issued and outstanding shares of our common stock approved a recommendation of our Board of Directors to effect a one share for ten shares reverse stock split of our common stock, par value $.001 per share, with all fractional shares rounded down to the nearest whole share. The reverse split became effective on April 15, 2005. As a result of the reverse split, the total number of issued and outstanding shares of our common stock decreased from 9,289,647 shares to 928,964 shares, after giving effect to rounding for fractional shares. In the reverse split calculation, all fractional shares were rounded down to the nearest whole share. Holders of less than ten shares, prior to the reverse split, shall receive $0.30 per share as compensation. The effect of this action is reflected in the Company’s financial statements as of the first day of the first period.

On June 30, 2005, pursuant to a Securities and Exchange Agreement (Exchange Agreement) by and among the Company and Playlogic International N.V., a corporation formed under the laws of The Netherlands (Playlogic), and the shareholders of Playlogic (Playlogic Shareholders); the Playlogic Shareholders exchanged 100.0% of the issued and outstanding ordinary shares and preferred shares of Playlogic for an aggregate 21,836,924 shares of the Company’s common stock. As a result of this transaction, Playlogic became the Company’s wholly-owned subsidiary, now represents all of the Company’s commercial operations, and the Playlogic Shareholders control approximately 91.0% of the outstanding common stock of the Company, post-transaction.

F-14

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE L — COMMON STOCK TRANSACTIONS — Continued

In conjunction with the above discussed reverse stock split, all share references in the following paragraphs reflect the April 15, 2005 reverse split action.

On March 10, 2004, the Company issued 32,080 shares of restricted, unregistered common stock to Michael Tay, son of then-President and controlling shareholder, William Tay, as compensation for various services provided to the Company. This transaction was valued at approximately $16,040 (or $0.50 per reverse split share). The Company relied upon the exemptions provided by Section 4(2) of the Securities Act of 1933, as amended, for this transaction.

On April 22, 2004, the Company issued an aggregate 184,618 shares of common stock to William Tay as consideration of approximately $85,000 in accrued, but unpaid, officer compensation, reimbursement of trade accounts payable paid by Mr. Tay on behalf of the Company and in repayment of approximately $7,000 in unsecured advances made to the Company for working capital. The Company relied upon the exemptions provided by Section 4(2) of the Securities Act of 1933, as amended, for this transaction.

On June 1, 2005, the Company sold 100,000 shares of common stock to Timothy P. Halter, the Company’s former Chief Executive Officer and Director for gross proceeds of approximately $60,000, or $0.60 per share, pursuant to the exercise of a warrant granted on December 15, 2004 as consideration for an agreement for Mr. Halter agreeing to serve as an officer and director of the Company. This transaction was valued at less than the closing price of the Company’s common stock on the date of the transaction and resulted in a charge to operations of approximately $90,000.

On June 28, 2005, the Company sold 162,100 shares of its common stock to Johannes Wilhelmus Kluijtmans for aggregate consideration of $608,000, or approximately $3.75 per share. The sale was made pursuant to the terms of a Subscription Agreement, dated as of June 28, 2005, which agreement contained confidentiality and non-disclosure agreements and covenants. The sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144. The Company never utilized an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with the above-referenced sale.

On July 5, 2005, the Company sold 36,000 shares of its common stock to C. J. W. A. Komen for total consideration of $135,000, or approximately $3.75 per share. The sale was made pursuant to the terms of a Subscription Agreement, dated as of July 5, 2005, which agreement contained confidentiality and non-disclosure agreements and covenants. This transaction was valued at less than the closing price of the Company’s common stock on the date of the transaction and resulted in a charge to operations of approximately $63,000. The sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144. The Company never utilized an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with the above-referenced sale. As of December 31, 2005, approximately $29,344 of the subscription remains unpaid.

On December 28, 2005, the Company exchanged 255,181 shares of its common stock to Andrew van der Mark for the repayment of notes payable in the amount of approximately $918,652, or approximately $3.60 per share. The sale was made pursuant to the terms of a Subscription Agreement, dated as of December 28, 2005, which agreement contained confidentiality and non-disclosure agreements and covenants. This transaction was valued at less than the closing price of the Company’s common stock on the date of the transaction and resulted in a charge to operations of approximately $255,181. The sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144. The Company never utilized an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with the above-referenced sale.

F-15

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE L — COMMON STOCK TRANSACTIONS — Continued

On December 31, 2005, the Company sold 333,333 shares of its common stock to D. Swart for total consideration of $1,200,000, or approximately $3.60 per share. The sale was made pursuant to the terms of a Subscription Agreement, dated as of December 31, 2005, which agreement contained confidentiality and non-disclosure agreements and covenants. This transaction was valued at less than the closing price of the Company’s common stock on the date of the transaction and resulted in a charge to operations of approximately $466,666. The sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144. The Company never utilized an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with the above-referenced sale. As of December 31, 2005, $1,200,000 in proceeds was received in January 2006.

On December 31, 2005, the Company exchanged 404,669 shares of its common stock to W. P. Deegen for cash of approximately $1,825,192, or approximately $4.51 per share. The sale was made pursuant to the terms of a Subscription Agreement, dated as of December 31, 2005, which agreement contained confidentiality and non-disclosure agreements and covenants. This transaction was valued at less than the closing price of the Company’s common stock on the date of the transaction and resulted in a charge to operations of approximately $198,302. The sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144. The Company never utilized an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with the above-referenced sale.

In January 2006, the Company sold 111,048 restricted, unregistered shares of common stock to Mr. W. P. Deegen at $2.50 per share for total cash consideration of approximately $277,620. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

In January 2006, the Company sold 184,178 restricted, unregistered shares of common stock to Mr. D. Swart at $2.50 per share for total cash consideration of approximately $460,445. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

In March 2006, the Company sold 53,300 restricted, unregistered shares of common stock to Austerlitz Finance B.V. at $3.75 per share for a total cash consideration of $200,000. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144.

In March 2006, the Company sold the 30,000 restricted, unregistered shares of common stock Mrs Fock-van Ittersum at$4.00 per share for total cash consideration of approximately $120,000. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144.

In March 2006, the Company sold the 30,000 restricted, unregistered shares of common stock to R. H. M. van Hees Orthodontist Holding B.V. at$4.00 per share for total cash consideration of approximately $120,000. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that they are legended with reference to Rule 144.

In conjunction with the Austerlitz Finance, Fock-van Ittersum and van Hess transactions, the Company paid a commission to Cremer, the controlling shareholder of Austerlitz Finance B. V., of approximately $17,599, consisting of 3,300 shares of restricted, unregistered common stock valued at $4.00 per share and cash of approximately $4,399.

F-16

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE M — STOCK WARRANTS

As a result of the December 15, 2004 change in control and in consideration for agreeing to serve as an officer and director of the Company, Timothy P. Halter was granted a stock warrant to purchase up to 100,000 post-reverse split shares of the Company’s restricted, unregistered common stock at an effective price of $0.60 per share, pursuant to a Registration Statement on Form S-8 under the Securities Act of 1933, as amended. On June 1, 2005, Mr. Halter exercised all of the outstanding warrants for $60,000 cash.

Concurrent with the December 31, 2005 stock sales to D. Swart and W. P. Deegen, the Company issued an aggregate 570,000 warrants to purchase an equivalent number of shares at an exercise price of $5.00 per share. The warrants may be exercised starting on January 1, 2007 and expire on December 31, 2008.

Concurrent with January 31, 2006 stock sales to Mr. W. P. Deegen, and Mr. D. Swart we issued without any other consideration to be paid to Mr. W. P. Deegen warrants convertible into 55,542 shares of our common stock at a price of $5.00 per share, and to Mr. D. Swart warrants to purchase 92,089 shares of our common stock at an exercise price of $5.00 per share. The warrants may be exercised starting on February 1, 2007 and expire on January 31, 2009.

Concurrent with March 17, 2006 stock sales to Austerlitz Finance B.V , Mrs Fock-van Ittersum and R. H. M. van Hees Orthodontist Holding B.V., the Compamy issued to Austerlitz Finance B.V warrants convertible into 25,000 shares of our common stock at a price of $5.00 per share, to Mrs Fock-van Ittersum warrants to purchase 15,000 shares of common stock at an exercise price of $5.00 per share and to R. H. M. van Hees Orthodontist Holding B.V. warrants to purchase 15,000 shares of common stock at an exercise price of $5.00 per share.. These warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

The following table presents warrant activity through March 31, 2006:

				Weighted
				Average
	Number of			Exercise
	Shares			Price
Balance at December 31, 2004		100,000		$	0.60
Issued		570,000		$	5.00
Exercised		(100,000	)	$	0.60
Balance at December 31, 2005		570,000		$	5.00
Issued		204,263		$	5.00
Expired		—
Exercised		—
Balance at March 31, 2006		774,263		$	5.00

The weighted average exercise price of all issued and outstanding warrants at March 31, 2006 is approximately $5.00.

For purposes of computing the imputed fair value of each warrant issued is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended December 31, 2005 and the three months ended March 31, 2006: dividend yield of 0%, expected volatility of 61.2 (based on the volatility of the Company’s peer group); a risk-free interest rate of approximately 4.50%, and an expected life of three years.

F-17

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE M — STOCK WARRANTS — Continued

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock warrants have characteristics significantly different from those of traded warrants, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its warrants.

NOTE N — STOCK OPTIONS

Pursuant to an employment agreement, the Company granted Maarten Minderhood, in-house General Counsel, 40,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 10,000 shares of the options will vest on September 1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010.

Pursuant to an employment agreement, the Company granted Dominique Morel, Chief Technology Officer, 100,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 25,000 shares of these options will vest on October1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010.

Pursuant to an employment agreement, the Company granted Jan Willem Kohne, Chief Financial Officer, 250,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 62,500 shares of these options will vest on October 1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010.

A summary of our stock options for the three months ended March 31, 2006 and for the two years ended December 31, 2005 and 2004, respectively, is as follows:

		Weighted average
		price per share
Options outstanding at January 1, 2004	—		—
Issued	—		—
Exercised	—		—
Expired/Terminated	—		—
Options outstanding at December 31, 2004	—		—
Issued	390,000	$	3.50
Exercised	—		—
Expired/Terminated	—		—
Options outstanding at December 31, 2005	390,000
Issued	—		—
Exercised	—		—
Expired/Terminated	—		—
Options outstanding at March 31, 2006	390,000

The weighted average exercise price of all issued and outstanding options at December 31, 2005 is approximately $3.50.

The Company has adopted the provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123) and charges the intrinsic value of granted stock options to expense as of each respective grant date. Accordingly, approximately $70,773 has been charged to operations for the intrinsic value of granted stock options.

F-18

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE N — STOCK OPTIONS — Continued

For purposes of computing the charge to operations required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended December 31, 2005: dividend yield of 0%, expected volatility of 61,2% (based upon the actual volatility of the Company’s peer group), a risk-free interest rate of approximately 4.5%, and an expected life of three (3) years.

The weighted-average fair value of options covering approximately 390,000 shares of common stock granted during the year ended December 31, 2005 for which the exercise price was equal to the market price on the grant date was $2.22 and the weighted-average exercise price was $3.50.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

NOTE O — COMMITMENTS AND CONTINGENCIES

Security agreement

Playlogic Game Factory B.V., on August 31, 2004, signed a security agreement in favor of the Dutch Tax Authorities for the amount $98,394 concerning Engine Software B.V.

Transactions with related parties

During Calendar 2005, Sloterhof Investments N.V., an entity controlled by the Company’s Chief Executive Officer, reimbursed Playlogic International, N. V. for approximately $1,121,000 in expenses incurred in connection with the previously discussed reverse merger — share exchange transaction with the Company.

Office leases

The Company leases it’s executive offices located at Concertgebouwplein 13 in Amsterdam from Mr. Prof. Dr. D. Valerio. This lease agreement which expires on March 31, 2007. This lease agreement contains an extension option, which if exercised, will extend the expiration date to March 31, 2012. The lease requires annual payments of approximately $81,363 (o59,628.52) per year, to be paid in quarterly installments.

Our subsidiary, Playlogic Game Factory, B. V., previously operated in leased offices. located at Hoge Mosten 16-24 in Breda, from Kantoren Fonds Nederland B.V. pursuant to a lease agreement which expires on February 28, 2007. The lease requires annual payments of approximately $85,327 (o62,534) per year. Due to space limitations, Playlogic Game Factory, B. V. has abandoned this property and is no longer using this location, by an official notice to the landlord. The landlord has granted the Company permission to sublease this property; however, to date, the Company has not found an interested party to date. The Company has accrued the total obligation due to the landlord under the original terms of the lease as of the abandonment date.

F-19

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE O — COMMITMENTS AND CONTINGENCIES — Continued

Office leases — continued

Our subsidiary, Playlogic Game Factory, B. V., leases offices located at Hambroeklaan 1 in Breda from Neglinge BV pursuant to a lease agreement which expires on October 1, 2013. This lease agreement contains an extension option, which if exercised, will extend the expiration date to October 1, 2018. At the execution of this lease agreement, the landlord committed itself to invest approximately $409,350 (o300,000) in leasehold improvements which are scheduled to be repaid by Playlogic Game Factory B.V. over a 10 year period. The lease requires annual payments of approximately$40,935 (o30,000) per year, payable in quarterly installments.

On June 1, 2005, the Company entered into a new lease agreement for new corporate offices at Amstelveenseweg 639-710 in Amstelveen. The lease requires annual payments of approximately$272.90 (o200.00) per square meter for rent and $34.00 (o25.00) per square meter for service costs. Payment starts July 2006 for approximately¹/2 of the leased premises (approximately 750 square meters) and in January 2007, payment will start on the second¹/2 of the leased premises (approximately 750 square meters). Payment of the service costs for each of the 750 square meter segments began at the execution of the lease agreement. The lease expires in June 2011.

Future non-cancellable lease payments on the above leases for office space are as follows:

Year ending
December 31,	Amount
2006	$	581,359
2007		673,033
2008		645,272
2009		645,272
2010		645,272
2011-2015		1,475,076
Totals	$	4,665,284

Transportation leases

The Company leases 23 automobiles for certain officers and employees pursuant to the terms of their individual employment agreements under operating lease agreements. These agreements are for terms of 3 to 4 years and begin to expire in 2006. The leases require monthly aggregate payments of approximately $24,760.

Future non-cancellable lease payments on the above leases for automobile leases are as follows:

Year ending
December 31,	Amount
2006	$	208,292
2007		131,480
2008		84,349
2009		44,892
Totals	$	469,013

Employment agreements

Willem M. Smit, the Company’s Chief Executive Officer, has agreed to not receive any cash compensation until such time that the Company achieves positive cash flows from operations. However, the Company does reimburse Mr. Smit for his business related expenses and provides him with an automobile. As Mr. Smit provides executive management and oversight services to the Company, an amount of $100,000 is imputed as the value of his services and recorded as additional contributed capital to the Company.

F-20

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE O — COMMITMENTS AND CONTINGENCIES — Continued

Employment agreements — continued

On February 1, 2002, we entered into an employment agreement with Rogier M. Smit, to be the Company’s Executive Vice President and Managing Director of Playlogic Game Factory B.V. The agreement is for an indefinite period; but, may be terminated by the Company upon three (3) months notice and one (1) additional month per year of service or by Rogier Smit upon three (3) months notice. Rogier Smit’s starting salary was $9,427 (o7,500) per month. On July 1, 2005, the base salary was increased to $15,009 (o11,000) per month. In addition to his salary, Mr. Smit is entitled to a company car. Pursuant to the agreement, Rogier Smit is also subject to confidentiality, non-competition and invention assignment requirements. Rogier Smit is the son of Willem Smit.

In January 2005, the Company entered into an employment agreement with Stefan Layer, our Chief Operating Officer and Vice President of Marketing and Sales, effective April 1, 2005. Pursuant to the terms of the agreement, Mr. Layer is responsible for our marketing, sales and licensing. This agreement is for an indefinite period, but can be terminated by the Company upon six (6) months notice or by Mr. Layer upon three (3) months notice. Mr. Layer’s starting salary is approximately $15,009 (o11,000) per month. In addition to his salary, Mr. Layer is entitled to an annual bonus equal to 1% of our net profit of the net consolidated year figures after taxes. However, during the first two years of his employment (the period from April 2005 to April 2006 and the period from April 2006 to April 2007), the amount of profit sharing to which Mr. Layer is entitled will be no less than $7,641 (o5,600) per month. Additionally, Mr. Layer received 364,556 shares of the Company’s common stock at a nominal value of $0.068 (o0.05) per share which were transferred to Mr. Layer by Sloterhof Investments, N. V., a company controlled by Willem Smit, the Company’s Chief Executive Officer. This transaction was recorded as compensation expense to Mr. Layer and as additional contributed capital. These shares are subject to a two year lock up period. After the lock up period, Mr. Layer will be permitted to sell up to 50% of his shares each year. If Mr. Layer terminates the employment agreement or is dismissed, the shares he still owns must be sold back to us at nominal value. Pursuant to the agreement, Mr. Layer is also subject to confidentiality, non-competition and invention assignment requirements.

In August 2005, the Company entered into an employment agreement with Dominique Morel to be the Company’s Chief Technology Officer. This agreement is for an indefinite period but can be terminated by the Company upon six (6) months notice or by Mr. Morel upon three (3) months notice. Mr. Morel’s starting salary will be $14,008.50 (o11,000) per month. Under this agreement, as approved by the Company’s Board of Directors, Mr. Morel shall be entitled to participate in a long term incentive plan of Playlogic in force from time to time. Options to be granted during the first year of this agreement will consist of a minimum of 100,000 shares at an exercise price of $3.50 per share. Pursuant to the agreement, Mr. Morel is also subject to confidentiality, non-competition and invention assignment requirements.

On October 1, 2005, the Company entered into an employment agreement with Jan Willem Kohne to be the Company’s Chief Financial Officer. This agreement is for an indefinite period, but can be terminated by the Company upon six (6) months notice or by Mr. Kohne upon three (3) months notice. Mr. Kohne’s starting salary will be approximately $15,055 (o11,034) per month, and the Company paid a signing bonus of approximately $48,480 (o40,000) upon execution of this agreement. Pursuant to the agreement, Mr. Kohne was granted 250,000 options to purchase shares of common stock of the Company at an exercise price of $3.50 per share. These options vest in increments of 62,500 shares on each of the agreement anniversary dates, starting on October 1, 2007. Mr. Kohne is also subject to confidentiality, non-competition and invention assignment requirements.

In addition to the above detailed discussions, the Company has approximately 50 other employees which are based in the Netherlands and have executed employment agreements with the Company pursuant to the Law of the Netherlands. Substantially all of these employment contracts run for an indefinite period of time. As to these non executive employees, the Company may terminate the employment upon a two-month notice, and the employee may terminate the employment upon a one-month notice. The Company is obliged to continue to pay the stated base salary and fringe benefits to our employees during the notice period. The Company typically pays an annual base salary and allow our staff certain benefits. Our employees are entitled to 26 vacation days a year and approximately 23 of our employees are entitled to a company car. Two of our senior non-Dutch executives are entitled to receive allowances for housing, and home leave travel cost.

F-21

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

NOTE O — COMMITMENTS AND CONTINGENCIES — Continued

Employment agreements — continued

Further, under Dutch law, the Company is obligated to any employee, in the event of illness, 100% of his base salary from the first day of illness reporting for a maximum period of 52 weeks, calculated from this first day of illness. After the lapse of the period of 52 weeks, the Company is obligated to pay 70% of the base pay during a period with a maximum of 52 weeks counted from the first day of the 53rd week following the date of illness reporting. We currently do not have any pension plan or other retirement schedule. The cost associated with employers contribution to the Dutch social security system are per employee in the range of 15% of annual base pay.

In the event of the termination of all employees, the Company will pay all non-senior executive personnel, on average, the required two month notice amounts and the six (6) senior executives the six month notice amounts plus the requisite Netherlands social security payments for an estimated total of approximatelyo900,000 (or approximately $1,065,000).

Software development contracts

The Company has entered into six (6) separate software development contracts with unrelated entities. These contracts require periodic payments of agreed-upon amounts upon the achievement of certain developmental milestones, as defined in each individual contract. All of these contracts have completion deadlines of less than one (1) year from the contract execution and will require an aggregate funding liability of approximately $4,480,000 through completion.

Litigation

On December 15, 2005, Playlogic International N.V. (Plaintiff) filed a motion to institute proceedings against Digital Concepts DC Studios Inc. Montreal (Defendant) and South Peak Interactive LLC North Carolina (Defendant) with the Superior Court of the Province of Quebec District of Montreal Canada. Playlogic claims damages in the amount of Canadian $9,262,640 in view of the alleged unlawful termination by DC Studios of a Letter of Intent under which DC Studios granted us exclusive worldwide publishing rights of State of Emergency 2, a title to be released in first half of 2006. The Company sued South Peak in these proceedings as the second defendant because South Peak, in violation of a clear letter of demand issued by us to them, has entered into a publishing agreement with DC Studios with respect to the game titled “State of Emergency 2”.

The Company is also involved in a number of minor legal actions incidental to its ordinary course of business.

With respect to the above matters, the Company believes that it has adequate legal claims or defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s future financial position or results of operations.

F-22

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F-23

Item 2. Management’s Discussion and Analysis

Forward-Looking Statements

          The Information in this registration statement contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements, other than statements of historical fact, made in this registration statement are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

          The following discussion and analysis should be read in conjunction with our financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Our Business

          Playlogic is a publisher of interactive entertainment software for consoles, such as video games for Sony’s PlayStation2, Microsoft’s Xbox and Nintendo’s Game Cube, PCs, next generation consoles and handheld, such as Nintendo’s Game Boy, Nintendo DS, and PSP and mobile devices. As a publisher, we are responsible for distribution, sales and marketing of our products. We seek to publish high quality products developed both by our studio in Breda, The Netherlands, called Playlogic Game Factory, and by external developers with whom we have contractual relationships.

          Various studios throughout the world develop games which we publish. One of these studios is our subsidiary, Playlogic Game Factory B.V., located in The Netherlands. Other independent studios in various countries develop our games under development contracts. These development contracts generally provide that we pay the studio an upfront payment, which is an advance on future royalties, earned and a payment upon achievement of various milestones. In addition, we license the rights to our existing titles to other studios who then develop those titles for other platforms.

          Different studios and developers frequently contact us requesting financing and publishing their games. We evaluate each of these offers based on several factors, including sales potential (primarily based on past performance by the studio or developer), technology used, game play, graphics and sounds.

     We select which games we develop based on our analysis of consumer trends and behavior and our experience with similar or competitive products. Once we select a game to develop, we then assign a development studio, based upon its qualifications, previous experience and prior performance. Once developed, we distribute our games in both the U.S. and abroad through existing distribution channels with experienced distributors. We generally aim to release our titles simultaneously across a range of hardware formats in order to spread development risks and increase sales potential, with a minimum increase in development time and resources.

Release Schedule

Game	Studio	Platform	Expected Release Date
Completed Games
Alpha Black Zero	Khaeon (NL)	PC	Released
Airborne Troops	Widescreen Games (F)	PS2, PC	Released
Cyclone Circus	Playlogic Game Factory (NL)	PS2	Released

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Game	Studio	Platform		Expected Release Date
Xyanide	Overloaded (NL)	Mobile Phones		Released
World Racing 2	Synetic (D)	PS2, Xbox, PC		Released(i)
Knights of the Temple 2	Cauldron (SK)	PS2, Xbox, PC		Released(i)
Gene Troopers	Cauldron (SK)	PS2, Xbox, PC		Released(i)
Under Development
Xyanide	Playlogic Game Factory (NL)	Xbox		Q2 2006
Age of Pirates: Caribbean Tales	Akella (Russia)	PC	��	Q2 2006
Ancient Wars: Sparta	World Forge (Russia)	PC		Q3/Q4 2006
StateShift Racing	Engine Software (NL)	PSP		Q4 2006
Xyanide Resurrection	Playlogic Game Factory (NL)	PSP		Q4 2006
P.R.I.S.M. — Threat Level: Red	Rebellion (UK)	PC		Q4 2006
Wizard of Funk	Playlogic Game Factory (NL)	PC		Q4 2006
Infernal	Metropolis	PC		Q4 2006
Infernal	Metropolis	Next Gen		Q2/3 2007(ii)
Age of Pirates: Captain Blood	Akella	Next Gen		Q2/3 2007(ii)
Red Bull Break Dance Game	To be announced	Various		2007

(i)	Europe only. US publishing and distribution agreement signed.
(ii)	Final decision on Next Gen options to be made.

Management’s Overview of Historical and Prospective Business Trends

          Increased Console Installed Base.As consumers purchase the current generation of consoles, either as first time buyers or by upgrading from a previous generation, the console installed base increases. As the installed base for a particular console increases, we believe we will generally able to increase our unit volume. However, since Microsoft introduced its Xbox 360 and because consumers anticipate the next generation of consoles of Sony and Nintendo, unit volumes often decrease.

          Software Prices.As current generation console prices decrease, we expect more value-oriented consumers to become part of the interactive entertainment software market. We believe that hit titles will continue to be launched at premium price points and will maintain those premium price points longer than less popular games. However, as a result of a more value-oriented consumer base, and a greater number of software titles being published, we expect average software prices to gradually come down, which we expect to negatively impact our gross margin. To offset this, as the installed base increases, total volume of software sales are expected to increase, compensating for the lower margins on software sales.

          Increasing Cost of Titles.Hit titles have become increasingly more expensive to produce and market as the platforms on which they are played continue to advance technologically and consumers demand continual improvements in the overall game play experience. We expect this trend to continue as we require larger production teams to create our titles, the technology needed to develop titles becomes more complex, we continue to develop and expand the online gaming capabilities included in our products and we develop new methods to distribute our content via the Internet. Any increase in the cost of licensing third-party intellectual property used in our products would also make these products more expensive to publish.

Uncertainties and Other Risk Factors that May Affect our Future Results and Financial Condition

          In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-KSB for the year ended December 31, 2005, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-KSB are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. The risk factor below was disclosed on the Form 10-KSB and has been updated in connection with this Form 10-QSB filing.

          We are dependent on financing by third parties, and if we are not able to obtain the necessary financing for our operations, our business will be significantly harmed, and we may need to cease operations.

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          The Company’s management believes that in order to satisfy its working capital requirements through the second quarter of 2006, it will need to obtain additional financing from third parties. If the Company does not obtain any necessary financing in the future, we may need to cease operations. There can be no assurance that sufficient funds will be available to us to allow us to cover the expenses related to such activities.

          A significant portion of our revenues is derived from a limited number of titles. If we fail to develop new, commercially successful titles, our business may be harmed.

          For the quarterly period ended March 31, 2006, World Racing 2, Knights of the Temple II and Gene Troopers accounted for approximately 80% of our revenues. Our future titles may not be commercially viable. We also may not be able to release new titles within scheduled release times or at all. If we fail to continue to develop and sell new, commercially successful titles, our revenues and profits may decrease substantially and we may incur losses.

Critical Accounting Policies

General

        The unaudited condensed consolidated financial statements of the company have been prepared in accordance with the instructions to Regulation S-B. Accordingly, the financial statements do not include all information and disclosures necessary for a presentation of the company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the company’s financial position, results of operations and cash flows. The results of operations for any interim periods are not necessarily indicative of the results for the full year. The unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto contained in this prospectus.

Estimates

          The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting periods. The most significant estimates and assumptions relate to the recoverability of prepaid royalties, capitalized software development costs and intangibles, inventories, realization of deferred income taxes and the adequacy of allowances for doubtful accounts. Actual amounts could differ significantly from these estimates.

Accounts receivable

          Accounts receivable are shown after deduction of a provision for bad and doubtful debts where appropriate.

Software Development Costs

          Capitalized software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products. We account for software development costs in accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable.

          We utilize both internal development teams and third-party software developers to develop our products.

          We capitalize internal software development costs and other content costs subsequent to establishing technological feasibility of a title. Amortization of such costs as a component of cost of sales is recorded on a title-by-title basis based on the greater of the proportion of current year sales to the total of current and estimated future sales for the title or the straight-line method over the remaining estimated useful life of the title. At each balance sheet date, we evaluate the recoverability of capitalized software costs based on undiscounted future cash flows and charge to cost of sales any amounts that are deemed unrecoverable. Our agreements with third-party developers generally provide us with the intellectual property rights and exclusive publishing and distribution rights and require

6

us to make advance payments that are recouped against royalties due to the developer based on the contractual amounts of product sales, adjusted for certain costs.

          We capitalize external software development costs (prepaid royalties) and other content costs subsequent to establishing technological feasibility of a title.

          Advance payments are amortized as royalties in cost of sales on a title-by-title basis based on the greater of the proportion of current year sales to the total of current and estimated future sales for that title or the contractual royalty rate based on actual net product sales as defined in the respective agreements. At each balance sheet date, we evaluate the recoverability of advanced development payments and unrecognized minimum commitments not yet paid to determine the amounts unlikely to be realized through product sales. Advance payments are charged to cost of sales in the amount that management determines is unrecoverable in the period in which such determination is made or if management determines that it will cancel a development project.

Revenue Recognition

     We evaluate the recognition of revenue based on the criteria set forth in SOP 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as revised by SAB 104, “Revenue Recognition”. We evaluate revenue recognition using the following basic criteria:

• Evidence of an arrangement: We recognize revenue when we have evidence of an agreement with the customer reflecting the terms and conditions to deliver products.

• Delivery: Delivery is considered to occur when the products are shipped and risk of loss has been transferred to the customer.

• Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we recognize that amount as revenue when the amount becomes fixed or determinable.

• Collection is deemed probable: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer.

• Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection).

Product Revenue

          Product revenue, including sales to resellers and distributors, is recognized when the above criteria are met. We reduce product revenue for estimated customer returns by distributing our products through experienced distributors with whom we had previously worked.

New Accounting Pronouncements

          In November 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The initial application of SFAS No. 151 is not expected to have a significant impact on the Company’s financial position or results of operations.

          In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards No. 123R (revised 2004), ‘‘Share-Based Payment’’ which revised Statement of Financial Accounting Standards No. 123, ‘‘Accounting for Stock-Based Compensation’’. This statement supersedes Opinion No. 25, ‘‘Accounting for Stock Issued to Employees.’’ The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such

7

transactions be recognized in the statement of operations. The revised statement has been implemented by the Company effective January 1, 2006.

          Effective January 1, 2006, the Company adopted FAS No. 123R utilizing the modified prospective method. FAS No. 123R requires the recognition of stock-based compensation expense in the financial statements. Under the modified prospective method, the provisions of FAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of FAS 123, ‘‘Accounting for Stock Based Compensation’’, shall be recognized in net earnings in the periods after the date of adoption. Stock based compensation consists primarily of stock options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. Stock options generally vest over three years. Compensation expense for stock options is recognized over the period for each separately vesting portion of the stock option award.

          The fair value for options issued prior to January 1, 2006 was estimated at the date of grant using a Black Scholes option-pricing model.

          In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets, an amendment of APB 29, Accounting for Nonmonetary Transactions.” This statement’s amendments are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, SFAS 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Provisions of this statement are effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial statements.

          In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), which is an interpretation of SFAS 143, “Accounting for Asset Retirement Obligations.” FIN 47 clarifies terminology within SFAS 143 and requires an entry to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial statements.

          In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which will require entities that voluntarily make a change in accounting principle to apply that change retroactively to prior periods’ financial statements unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, “Accounting Changes” (“APB No. 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The provisions of SFAS No. 154 are not expected to affect the Company’s consolidated financial statements.

Results of Operations

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005.

          Net sales. Net sales for the three months ended March 31, 2006 were $2,719,610 as compared to $532,138 for the three months ended March 31, 2005. This increase in revenue is primarily the result of the release of 3 new games during the fourth quarter of 2005. $1,799,433 (66%) of the revenues for the three months ended March 31, 2006 was from Europe, and $920,177 (34%) was from the US. All of these revenues were derived from Playlogic’s game distributors.

          Gross Profit. Gross profit totaled $957,985 for the three months ended March 31, 2006. For the three months ended March 31, 2005, gross profit totaled $409,061. This increase in gross profit is primarily the result of an increase in net sales.

          Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses totaled $1,691,691, for the three months ended March 31, 2006. For the three months ended March 31,

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2005, selling, general and administrative expenses totaled $656,899. This represents an increase of $1,034,792 or 157%. This increase in selling, general and administrative expenses is in line with the growth of the company, increased line-up and related cost of personnel.

          Research and Development. Research and development expenses totaled $343,691 for the three months ended March 31, 2006. For the three months ended March 31, 2005, research and development totaled $362,269. This represents a decrease of $18,577, or 5%. This slight decrease is due to a higher portion of our research and development expenses being capitalized.

          Depreciation. Depreciation expenses totaled $78,497 for the three months ended March 31, 2006. For the three months ended March 31, 2005, the depreciation expense totaled $104,067. The decrease of $25,570 or 25% was caused by fixed assets being fully depreciated that were not yet replaced.

          Interest Expense. Interest expense totaled $76,827 for the three months ended March 31, 2006. For the three months ended March 31, 2005, interest expense totaled $103,330. This represents a decrease of $26,503, or 25%. This decrease in interest expense is primarily the result of debt holders converting their loans into ordinary shares of Playlogic International.

          Net Loss. Our net loss was $1,197,505 for the three months ended March 31, 2006. For the three months ended March 31, 2005, net loss totaled $559,990. The increase of the net loss is primarily the result of higher selling, marketing, general and administrative expenses associated with the growth of our business. This increase in expenses is only partly offset by increased gross profit during the first quarter of 2006.

          Other comprehensive income. Other comprehensive income represents the change of the Currency Translation Adjustments balance during the reporting period. The Currency Translation Adjustments balance that appears in the stockholders’ equity section is cumulative in nature and is a consequence from translating all assets and liabilities at current rate whereas the stockholders’ equity accounts are translated at the appropriate historical rate and revenues and expenses being translated at the weighted-average rate for the reporting period. The Change in currency translation adjustments was $(107,619) for the three months ended March 31, 2006 and $593,934 for the three months ended March 31, 2005.

Liquidity and Capital Resources

March 31, 2006

          As of March 31, 2006, we had $142,387 of cash on hand.

          In order to cover its working capital requirements through the second quarter of 2006, the Company needs to obtain additional financing from third parties. The Company is currently in negotiation with several parties in this respect. If the Company does not obtain any necessary financing in the future, it may need to cease operations.

          We expect our capital requirements to increase over the next several years as we continue to develop new products both internally and through our third-party developers, increase marketing and administration infrastructure, and embark on in-house business capabilities and facilities. Our future liquidity and capital funding requirements will depend on numerous factors, including, but not limited to, the cash generation from the released games, the cost of hiring and training production personnel who will produce our titles, the cost of hiring and training additional sales and marketing personnel to promote our products, and the cost of hiring and training administrative staff to support current management.

Off Balance Sheet Arrangements

          We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Item 3. Controls and Procedures.

     As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded

9

that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

          There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

          On December 15, 2005, Playlogic International N.V. (plaintiff) filed a motion to institute proceedings against Digital Concepts DC Studios Inc. Montreal (defendant) and South Peak Interactive LLC North Carolina (defendant) with the Superior Court of the Province of Quebec District of Montreal Canada. Playlogic claims damages in the amount of Canadian $9,262,640 in view of the alleged unlawful termination by DC Studios of a Letter of Intent under which DC Studios granted us exclusive worldwide publishing rights of State of Emergency 2, a title to be released in first half of 2006. We sued South Peak in these proceedings as the second defendant because South Peak, in violation of a clear letter of demand issued by us to them, has entered into a publishing agreement with DC Studios with respect to the State of Emergency 2.

          The Company is involved in a number of minor legal actions incidental to its ordinary course of business.

          With respect to the above matters, the Company believes that it has adequate legal claims or defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s future financial position or results of operations.

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

     Each issuance set forth below was made in reliance upon the exemptions from registration requirements under Section 4(2) of the Securities Act of 1933, as amended. When appropriate, we determined that the purchasers of securities described below were sophisticated investors who had the financial ability to assume the risk of their investment in our securities and acquired such securities for their own account and not with a view to any distribution thereof to the public. Where required by applicable law, the certificates evidencing the securities bear legends stating that the securities are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

Shares

NAME	SHARES		DATE
W.P. Deegen		111,048	January 31, 2006
D. Swart		184,178	January 31, 2006
Austerlitz Finance B.V.		53,300	March 17, 2006
I. Fock-van Ittersum		30,000	March 17, 2006
R.H.M. van Hees Orthodontist Holding B.V.		30,000	March 17, 2006

In January 2006, we sold 111,048 restricted shares of our common stock par value $ .001 to Mr. W.P. Deegen at a price of $2.50 for a total consideration of $277,620.

In January 2006, we sold the 184,178 restricted shares of our common stock par value $.001 to Mr. D. Swart at a price of $2.50 per share for a total consideration of $460,445.

In March, we sold the 53,300 restricted shares restricted shares of our common stock par value $.001 to Austerlitz Finance B.V. at a price of $3.75 per share for a total consideration of $200,000.

In March we sold the 30,000 restricted shares restricted shares of our common stock par value $.001 to I. Fock-van Ittersum at a price of $4.00 per share for a total consideration of $120,000.

In March, we sold the 30,000 restricted shares restricted shares of our common stock par value $.001 to R.H.M. van Hees Orthodontist Holding B.V. at a price of $4.00 per share for a total consideration of $ 120,000.

Options and Warrants

Options

          None.

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Warrants

The tables below set forth the warrants we issued in the first quarter of 2006.

NAME	WARRANTS		DATE
W.P. Deegen		55,542	January 31, 2006
D. Swart		92,089	January 31, 2006
Austerlitz Finance BV		25,000	March 17, 2006
I.Fock-van Ittersum		15,000	March 17, 2006
R.H.M. van Hees Orthodontist Holding B.V.		15,000	March 17, 2006

Concurrent with the stock sales to Mr. W. P. Deegen and Mr. D. Swart on January 31, 2006, we issued without any other consideration to be paid to Mr. W.P. Deegen warrants convertible into 55,542 shares of our common stock at an exercise price of $5.00 per share, and to Mr. D. Swart warrants to purchase 92,089 shares of our common stock at an exercise price of $5.00 per share. The warrants may be exercised starting on February 1, 2007 and expire on January 31, 2009.

Concurrent with the stock sales to Austerlitz Finance BV, Mrs I. Fock-van Ittersum and R.H.M. van Hees Orthodontist Holding B.V. on March 17, 2006, we issued without any other consideration to be paid to Austerlitz Finance BV warrants convertible into 25,000 shares of our common stock at a price of $5.00 per share, and to Mrs Fock-van Ittersum warrants to purchase 15,000 shares of our common stock at an exercise price of $5.00 per share and to R.H.M. van Hees Orthodontist Holding B.V. warrants to purchase 15,000 shares of our common stock at an exercise price of $5.00 per share. The warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

Issuer Purchase of Equity Securities

          None.

Item 3. Defaults Upon Senior Securities.

          None.

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

          None.

Item 5. Other Information.

          None.

Item 6. Exhibits.

          The exhibits are listed in the Exhibit Index appearing at page 13 herein.

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SIGNATURES

          In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Playlogic Entertainment, Inc.
		(Registrant)
Date: May 22, 2006	By:	/s/ Willem M. Smit
		Willem M. Smit
		Chief Executive Officer
Date: May 22, 2006	By:	/s/ Jan Willem Kohne
		Jan Willem Kohne
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

PLAYLOGIC ENTERTAINMENT, INC.

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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