Playlogic Entertainment (PLGC) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 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 Registrant as Specified in Its Charter)

Delaware	23-3083371
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Strawinskylaan 1041, WTC Amsterdam, C-Tower, 10th floor	1077 XX
(Address of principal executive offices)	(Zip Code)

Registrant's Telephone Number, Including Area Code: + 31-20-676-0304

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "accelerated filer," "large accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company ý

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

As of September 30, 2008, there were 46,391,275 shares of the Registrant's Common Stock outstanding.

PLAYLOGIC ENTERTAINMENT, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION			Page No.
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
	Item 4	Controls and Procedures	21
PART II -- OTHER INFORMATION
	Item 1.	Legal Proceedings	22
	Item 1A.	Risk Factors	22
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 3.	Defaults Upon Senior Securities	22
	Item 4.	Submission of Matters to a Vote of Security Holders	22
	Item 5.	Other Information	22
	Item 6.	Exhibits	22
	Signatures		23
	Exhibit Index		24
	Certifications		Attached

- 2 -

PART I -- FINANCIAL INFORMATION

  Item 1 -  Financial Statements

PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
				December 31, 2007
	September 30, 2008			Derived from audited
	Unaudited			statements
ASSETS
Current Assets
Cash and cash equivalents	$	306,561		$	349,464
Receivables
Trade, net of allowance for doubtful accounts		2,233,464			671,148
Officers		93,657			78,754
Value Added Taxes from foreign governments		57,878			50,620
Current portion of software development costs		5,770,720			6,244,843
Prepaid expenses and other receivables		1,204,266			892,855
Total current assets		9,666,546			8,287,684
Property and equipment, net of accumulated depreciation		1,246,878			753,768
Other assets
Software development costs, net of current portion		4,180,800			1,040,510
Restricted cash		215,295			-
Total other assets		4,396,095			1,040,510
Total Assets	$	15,309,519		$	10,081,962
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilites
Accounts and notes payable
Accounts payable	$	4,134,546		$	4,785,678
Note payable to bank		-			1,056,552
Note payable, other		-			397,845
Other current liabilities
Current maturities of long-term debt		43,059			44,205
Accrued liabilities		1,293,150			2,142,754
Deferred revenues		-			148,750
indebtedness to related party		1,004,710			589,400
Total current liabilities		6,475,465			9,165,184
Long-term debt, less current maturities		3,801,766			221,025
Total Liabilities		10,277,231			9,386,209
Shareholders' Equity
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.  46,391,276  shares issued and outstanding		46,391			38,533
Additional paid-in capital		61,175,541			54,081,832
Deferred Compensation-Employee Stock Options		538,339			374,571
Accumulated currency translation adjustments reserve		(4,032,594	)		(3,057,297	)
Accumulated deficit		(52,695,389	)		(50,741,886	)
Total Shareholders' Equity		5,032,288			695,753
Total Liabilities and Shareholders' Equity	$	15,309,519		$	10,081,962

See accompanying notes to unaudited condensed consolidated financial statements

- 3 -

PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	unaudited						unaudited
	Nine months ended September 30						Three months ended September 30
	2008			2007			2008			2007
Net revenues
Sales, net of returns and allowances	$	9,418,489		$	8,296,418		$	1,068,377		$	3,712,390
Cost of sales
Direct costs and license fees		(2,656,048	)		(2,189,280	)		(405,806	)		(1,522,440	)
Amortisation of software development costs		(2,120,432	)		(1,348,947	)		(397,642	)		(163,489	)
		(4,776,480	)		(3,538,227	)		(803,448	)		(1,685,929	)
Gross profit		4,642,009			4,758,191			264,929			2,026,461
Operating expenses
Research and development		301,031			448,962			125,589			82,207
Selling and marketing		573,585			929,346			166,399			398,723
General and administrative		4,123,612			2,760,234			1,683,894			1,025,392
Depreciation		284,234			193,381			127,829			40,757
Asset impairment charges		1,000,000			-			1,000,000			-
Total operating expenses		6,282,462			4,331,923			3,103,711			1,547,079
Profit/(loss) from operations		(1,640,453	)		426,268			(2,838,782	)		479,382
Other income/(expense)
gain on debt restructuring		-			850,411			-			377,000
Interest expense		(357,890	)		(1,054,659	)		(191,172	)		(169,535	)
Loan penalty expense		-			1,377,150						1,377,150
Realized and unrealized exchange profit		44,848			-			35,653			-
Profit before provision for income taxes		(1,953,495	)		1,599,170			(2,994,301	)		2,063,997
Provision for Income Taxes		-			-			-			-
Net Profit /(loss)		(1,953,495	)		1,599,170			(2,994,301	)		2,063,997
Net profit per weighted-average share of common stock outstanding, computed on Net Profit
- basic and fully diluted		(0.05	)		0.06			(0.07	)		0.07
Weighted-average number of shares of common stock outstanding
- basic and fully diluted		41,522,821			26,343,562			42,437,055			27,727,726

See accompanying notes to unaudited condensed consolidated financial statements

- 4 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
					Additional								Accumulated Other Comprehensive Loss
	Common stock				Paid-in			Deferred Compensation		Accumulated
	Shares		Par Value		Capital					deficit						Total
Balances at December 31, 2007		38,532,579	$	38,532	$	54,081,831		$	374,571	$	(50,741,892	)	$	(3,057,291	)	$	695,751
Common stock issued for cash		7,858,696		7,859		7,492,141											7,500,000
Capital contributed to support operations						75,000											75,000
Issuing costs						(963,431	)										(963,431	)
Stock options issued pursuant to Employee Compensation Plan								$	163,768								163,768
Discount on debt					$	490,000											490,000
Change in currency translation adjustment													$	(975,302	)		(975,302	)
Net result for the 9 months ended September 30, 2008										$	(1,953,497	)					(1,953,497	)
Balances at September 30, 2008		46,391,275	$	46,391	$	61,175,541		$	538,339	$	(52,695,389	)	$	(4,032,594	)	$	5,032,288

See accompanying notes to unaudited condensed consolidated financial statements

- 5 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Nine months ended September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit / (Loss)	$	(1,953,495	)		(464,828	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		284,234			152,624
Amortization of software development		2,120,432			613,507
Impairment of software development cost		1,000,000			-
Bad debt expense		19,893			-
Expense charges for stock options		163,767			(165,627	)
Management fees contributed as capital		75,000			50,000
Non-cash interest charge on warrants		98,000			8,800
Cash paid for software development		(6,267,998	)		(1,898,565	)
(Increase)/ Decrease in cash attributable to changes in operating assets and liabilities
Restricted cash		(227,852	)		-
Accounts receivable - trade and other		(1,691,741	)		65,543
Prepaid expenses and other		(363,140	)		(1,155,183	)
Increase / (Decrease) in
Deferred revenues		(153,344	)		(926,931	)
Accounts payable - trade		(557,807	)		611,074
Payroll taxes payable		(932,348	)		647,070
Other current liabilities		170,974			(21,235	)
Net cash used in operating activities	$	(8,215,425	)	$	(2,483,750	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid to acquire property and equipment		(826,784	)		(50,199	)
Net cash used in investing activities		(826,784	)		(50,199	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on bank line of credit		(1,089,186	)		(209,175	)
Net activity on short term notes		-			(851,116	)
Cash repaid on short term notes		(410,133	)		-
Principal payments on long-term debt		(22,785	)		(19,948	)
Cash received from shareholder loans		8,209,281			2,607,540
Cash repaid on shareholder loans		(3,850,500	)		-
Proceeds from sales of common stock		6,536,568			997,402
Net cash provided by financing activities		9,373,245			2,524,703
Effect of foreign exchange on cash		(373,941	)		2,196
Increase/(Decrease) in Cash		(42,904	)		(7,050	)
Cash at beginning of period		349,464			16,537
Cash at end of period	$	306,561		$	9,487
Supplemental disclosures of interest and income taxes paid
Interest paid during the period	$	-		$	-
Income taxes paid (refunded)		-			-
Supplemental disclosures of non-cash investing and financing activities
Common stock issued to repay notes payable	$	-		$	-
Cost of acquiring capital paid with issuance of common stock	$	923,000		$	-

See accompanying notes to unaudited condensed consolidated financial statements

- 6 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying condensed consolidated balance sheet as of December 31, 2007 has been derived from audited financial statements and the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  They do not include all of the information and footnotes for complete consolidated financial statements as required by GAAP.  In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on Form 10-KSBfor the year ended December 31, 2007.

The results of operations for the three and nine months ended September 30, 2008 and 2007 presented are not necessarily indicative of the results to be expected for the year.

There is no provision for dividends for the quarter to which this quarterly report relates.

Description of business  

Playlogic Entertainment, Inc. (“Playlogic,” the “Company” or “we”) develops and publishes interactive software games designed for video game consoles, handheld platforms and personal computers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2 (“PS2”), Sony PlayStation 3 (“PS3”), Nintendo Wii (“Wii”), and Microsoft Xbox 360 (“Xbox360”) console systems, Nintendo Game Boy Advance (“GBA”), Sony PlayStation Portable (“PSP”), and Nintendo Dual Screen (“NDS”) hand-held devices, and the personal computer (“PC”).

We develop and publish action/adventure, racing, simulation, first-person action, and other software games for casual players, game enthusiasts, children, adults, and mass-market consumers.   Our principal sources of revenue are derived from publishing operations.  Publishing revenues are derived from the sale of internally developed software titles or software titles developed by third parties.  Our publishing business involves the development, marketing, and sale of products directly through distributors or through licensing arrangements, under which we receive royalties.

We sell our products worldwide.

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 consolidated financial statements which present fairly the consolidated financial condition, results of operations and cash flows of the Company for the respective periods being presented

Going concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. At September 30, 2008, the Company had an accumulated deficit of approximately $52.6 million.  During the nine months ended September 30, 2008, the Company incurred a net loss of $3.0 million and negative operating cash flows of approximately $8.2 million. These circumstances raise uncertainties about the Company’s ability to continue as a going concern.

While the Company has contracts in place with several third-party developers and is developing titles through its Playlogic Game Factory B.V. subsidiary, and anticipates successful debuts of such 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 to six months following their release. Therefore, the Company’s profitability depends upon the Company’s 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 the Company’s ability to introduce and sell the Company’s software could adversely affect future operating results.

- 7 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 and its ability to raise debt and/or equity financing.

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 the Company’s 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.

No adjustment has been made in the accompanying financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.

Principles of consolidation

The consolidated  financial statements include the consolidated financial statements of Playlogic Entertainment, Inc. a Delaware corporation, Playlogic International N.V. (a corporation domiciled in The Netherlands) and its wholly-owned subsidiary Playlogic Game Factory B.V. (a corporation domiciled in The Netherlands).  All inter-company accounts and transactions have been eliminated in consolidation.

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

- 8 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation.

Currency translation

The accompanying unaudited condensed consolidated financial statements are reported in U.S. Dollars.  Accounts of foreign operations are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in income in the period in which they occur, except on inter-company balances considered to be long term. Transaction gains and losses on inter-company balances considered to be long term are recorded in other comprehensive income.

Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s items of other comprehensive income (loss) are foreign currency translation adjustments, which relate to investments that are permanent in nature and therefore do not require tax adjustments.

The Euro is the functional currency of our operating subsidiaries domiciled in The Netherlands. We translate Euro into US Dollars, in accordance with the following table:

Financial statement element	Applicable rate
Assets	Balance sheet date *
Liabilities	Balance sheet date *
Equity	Historical
Revenues	Annual average**
Expenses	Annual average**
Gains	Annual average**
Losses	Annual average**

____________

*$1.4353 at September 30, 2008

  $1.4735 at December 31, 2007

** Average for the 9 months ended September 30, 2008 - $1.5190

     Average for the 9 months ended September 30, 2007 - $1.3448

Earnings/(Loss) Per Share .

Basic earnings/(loss) per common share is computed by dividing net income(loss) by the weighted-average number of shares of common stock outstanding for the period. Basic earnings per share excludes the impact of unvested shares of restricted stock issued under the Company’s incentive stock compensation plan.  Diluted earnings per share reflects the potential impact of common stock options and unvested shares of restricted stock issued under the Company’s incentive stock compensation plan, and outstanding common stock purchase warrants. Diluted and basic earnings per share for the three and nine month ended September  30, 2008 and 2007 are the same because the impact of shares issuable under the incentive stock compensation plan and common stock purchase warrants is anti-dilutive after applying the treasury stock method, as is required by SFAS 128 Earnings per Share ..

Recently Issued Accounting Pronouncements

In 2008, the Securities and Exchange Commission (the “SEC”) adopted rule amendments that replace the category of “Small Business Issuers” with a broader category of “Smaller Reporting Companies.” Under these rules, a “Smaller Reporting Company” is a company with a public float less than $75,000,000 (measured at end of Q2). Companies that meet this definition are able to elect “scaled disclosure standards” on an item-by-item or “a-la-carte” basis. With this change, the SEC has streamlined and simplified reporting for many companies, and has not added any significant disclosure requirements.

- 9 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS 159.  SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value.  It is expected to expand the use of fair value measurements which is consistent with the Financial Accounting Standards Board’s long-term measurement objectives for accounting for financial instruments.  SFAS 159 is effective for our first fiscal year that begins after November 15, 2007, which is our fiscal year 2009 that begins in January 2008.  The Company is currently evaluating the impact of this statement to its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), ‘’Business Combinations’’, or SFAS No. 141R.  SFAS No. 141R will change the accounting for business combinations.  Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination.  SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009.  We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.  We are still assessing the impact of this pronouncement.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company believes that SFAS 160 should not have a material impact on the consolidated financial position or results of operations. 

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.

In May, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles", ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 will have no effect on the Company's financial position, results of operations or cash flows.

Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS No. 163 on its financial statements but does not expect it to have an effect on the Company's financial position, results of operations or cash flows.

In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years after December 15, 2008, and must be applied on a retrospective basis. Early adoption is not permitted. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.

- 10 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is assessing the potential impact of this FSP on the earnings per share calculation.

In June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted. The Company is assessing the potential impact of this EITF 07-5 on the financial condition and results of operations.

NOTE B - SOFTWARE DEVELOPMENT COSTS

The following table provides the details of software development costs as of September 30, 2008 and for the year ended December 31, 2007: 

	September 30, 2008 unaudited			December 31, 2007 (derived from audited statements)
Beginning balance	$	7,285,353		$	4,463,430
Additions		5,486,819			4,593,036
Amortization		(2,120,432	)		(2,386,223	)
Impairment		(1,000,000	)		(68,566	)
Foreign exchange		299,780			683,676
Ending balance		9,951,520			7,285,353
Less: current portion		(5,770,720	)		(6,244,843	)
Non-current portion	$	4,180,800		$	1,040,510

The amount of software development costs resulting from advance payments and guarantees to third-party developers was approximately $7.3 million at September 30, 2008. In addition, software development costs at September 30, 2008 included an amount of $4.0 million related to titles that have not been released yet.

The non-current portion of the capitalized software development costs is expected to be amortized in 2009 and further.

Impairment

Due to the worldwide economic developments during the three months September 30, 2008, management believes it is conservative to provide impairment of software development cost. Management has estimated the impact to amount to $1 million and has recorded that amount as an impairment charge for the three and nine months ended September 30, 2008.

- 11 -

  PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE C – RELATED PARTY TRANSACTIONS

Common stock 

On September 24, 2008, the Company sold 2,250,000 shares of its common stock to an accredited investor based in the Netherlands at $0.67 per share or gross proceeds of $1,500,000, pursuant to the terms of a subscription agreement dated September 24, 2008. The terms of the subscription agreement included warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrants may be exercised starting September 25, 2008 and expire on September 24, 2012.

On June 2008, the Company sold 2,608,696 shares of its common stock to an accredited investor based in the Netherlands at $ 1.15 per share or gross proceeds of $3,000,000, pursuant to the terms of a subscription agreement dated June 27, 2008.  The Company will pay a placement fee of 7% or $210,000, which has been recorded as a reduction of the gross proceeds.  The terms of the subscription agreement included warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The warrants may be exercised starting June 28, 2008 and expire on June 27, 2013.

On March 2008, the Company sold 3,000,000 shares of its common stock to an accredited investor based in the Netherlands at $ 1.00 per share or gross proceeds of $3,000,000, pursuant to the terms of a subscription agreement dated March 27, 2008. The Company has paid a total of $260,000 placement fee, which has been recorded as a reduction of the gross proceeds.  The terms of the subscription agreement included warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The warrants may be exercised starting March 28, 2008 and expire on March 27, 2013.

Stock option plan

On June 4, 2008, the Board of Directors has agreed to grant 1,140,000 options to key employees. This grant is in accordance with the 2006 approved Employee Stock Option Plan. The options have an exercise price of $2.00 per share. These options vest ratably over three years and will expire in 4 years.  The fair value of the options totaled $164,160 or $0.144 per share, of which $19,760 was recorded during the nine months ended September 30, 2008.

The fair value of options granted was estimated at the grant date using the Black-Scholes option-pricing model.  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.  The following table summarizes the assumptions and variables used to compute the weighted average fair value of stock option grants:

Risk-free interest rate	4.5%
Dividend yield	0%
Volatility factor	38.56%
Weighted-average expected life	4 Years

Loans from shareholders

On May 19, 2008, the Company entered into a bridge loan agreement with a principal shareholder based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 700,000 (or $ 1,105,000).  On September 24, 2008, the Company amended the terms of the agreement. The loan now bears interest at a rate of 1% per month. Interest will be paid on a monthly basis, the principle amount will be repaid before December 31, 2009.

On April 25, 2008, the Company entered into a bridge loan agreement with a shareholder based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 1,300,000 (or $ 2,051,000).  The bridge loan has been repaid by the Company on July 3, 2008.

- 12 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

On March 27, 2008, the Company entered into a long term loan agreement with two shareholders based in the Netherlands, pursuant to which the Company borrowed the principal amount of $4,000,000. The loan bears compound interest at a rate of 7% per annum and has a 2.5 year term. The interest will be paid on a monthly basis and repayment of the principal will be done in 8 quarterly installments, starting in the fourth quarter of 2008. Under this loan agreement, the Company pledged as a collateral all Intellectual Property (IP) owned by the Company. The Company has paid a placement fee of 1% on this loan ($40,000).

Concurrent with the loan agreement of March 27, 2008, the Company issued to these shareholders warrants to purchase 1,286,000 shares of the Company’s common stock at an exercise price of $1.20 per share. The warrants may be exercised starting March 28, 2008 and expire on March 27, 2013. The warrants will be exercised cashless and have a mandatory call clause when the stock price is $4.00.

The warrants have been valued based on the Black & Scholes model. In accordance with APB 14, we have recognized a discount on the long term debt amounting to $490,000 which will be amortized over the term of the loan.  During the nine months ended September 30, 2008, $98,000 was amortized as interest expense in the accompanying unaudited condensed consolidated financial statements.

Contributed capital

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 per annum (or $25,000 per quarter) is imputed as the value of his services and recorded as additional contributed capital to the Company.

Receivables due from officers

Effective January 1, 2006 the Company entered into a service agreement with Altaville Investments B.V., a company beneficially owned by its CEO Willem M. Smit. The Company pays for certain service among others housekeeping and cleaning services provided by Altaville to the Company an annual aggregate amount of approximately $ 50,000 which is paid in 4 quarterly installments.  There are $93,000 outstanding receivables due to our officer as of September 30, 2008.

NOTE D - - COMMITMENTS AND CONTINGENCIES

Litigation

On November 27, 2007, the District Court of Amsterdam found for the plaintiff (Playlogic) in the case of Playlogic Entertainment, Inc. vs. WorldForge/VisionVale Ltd.

The provisional judge of the District Court of Amsterdam concludes that all the copyrights to the game Ancient Wars: Sparta always belonged to Playlogic pursuant to the agreement with WorldForge / Visionvale and Burut. The judge ruled in Playlogic’s favor on all counts and WorldForge / Visionvale and Burut have to pay a penalty of  € 10,000 ($15,815) each time they state the contrary or refrain from publishing rectifications of former wrong statements.

Moreover the Company is involved in a few 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 consolidated financial position or results of operations.

Office leases

The Company has entered into a lease agreement with the World Trade Center in Amsterdam for a period of 5 years ending July 31, 2013. The lease requires annual payments of approximately $415,000 (€ 291,500) for the offices and $29,000 (€20,600) for parking spaces at the building, all payable in quarterly installments. The offices total approximately 8,000 square feet (or 900 square meter). This lease agreement contains an extension option, which if exercised by the Company, will extend the expiration date to July 31, 2018.The Company has negotiated a rent-free period with the WTC for the period up to December 31, 2008. First payments will start January 2009.  The Company recognized $65,000 in rent expense from this lease agreement during the three months ended September 30, 2008.

- 13 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Our wholly-owned 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 $470,000 (€300,000) 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 $430,000 (€300,000) per year, payable in quarterly installments.

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

September 30,
2008	$	215,000
2009		845,000
2010		845,000
2011		845,000
2012		845,000
Thereafter		650,000
Total	$	4,245,000

 Transportation leases

The Company leases 12 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. The leases require monthly aggregate payments of approximately $16,000.

Future minimum non-cancelable lease payments on the above transportation leases are as follows:

December 31,
2008	$	28,000
2009		34,000
2010		-
2011		-
2012		-
Thereafter		-
Total	$	62,000

Software development contracts

The Company has entered into eight (8) 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 $2.5 million through completion.

- 14 -

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE E - - SEGMENT INFORMATION AND REVENUE CONCENTRATIONS

The Company sells its products to wholesale distributors in various domestic and foreign markets. The following table shows the Company’s gross revenue composition:

	For the 9 months ended September 30,
	2008		2007
Europe and United Kingdom
Customer A *	-	0.0%	2,772,328	33.4%
Customer B	3,082,789	32.7%	1,676,799	20.2%
Customer C	684,678	7.3%	1,795,135	21.6%
Customer D	1,261,827	13.4%	652,853	7.9%
Customer E	1,460,156	15.5%	-	0.0%
Customer F	440,823	4.7%	-	0.0%
Others	1,740,881	18.5%	1,268,530	15.3%
	8,671,154	92.1%	8,165,645	98.4%
Asia
Others	32,970	0.4%	-	0.0%
	32,970	0.4%	-0	0.0%
United States & Canada
Customer A *	-	0.0%	-	0.0%
Customer G	714,365	7.6%	130,773	1.6%
others	-	0.0%	-	0.0%
	714,365	7.6%	130,773	1.6%
Total	9,418,489	100.0%	8,296,418	100.0%

* The Company entered into a license contract with Customer A, for global distribution of certain games. As the Company is located in Europe, the revenue has been allocated to Europe and UK. Part of this revenue should however be read as US market revenue.

 NOTE F - JOINT VENTURE

On July 2, 2008, the Company entered into a shareholders agreement with Virgin Play S.A. to setup a Joint Venture in the United Kingdom. The Company will have a 60% share in the Joint Venture, the remaining 40% will be owned by Virgin Play S.A.

The entity is named PlayV Ltd. (“PlayV” or “Joint-Venture”) and started operations mid September 2008. As of September 30, 2008, we did not have control over PlayV’s operations. We and Virgin Play plan to provide the agreed equity before the end of 2008 as the Joint-Venture will be fully operational during the fourth quarter of 2008. We plan to consolidate PlayV in the fourth quarter of 2008.

- 15 -

Item 2. Management’s Discussion and Analyses of Financial Condition and Results of Operation

Playlogic is a publisher of interactive entertainment products, such as video game software and other digital entertainment products. We publish for most major interactive entertainment hardware platforms, like Sony’s PlayStation 3,and Playstation2, Microsoft’s Xbox 360 and Nintendo’s Wii, PCs and handheld devices (such as Nintendo DS, and PSP) and mobile devices. Our principal sources of revenue are derived from publishing operations. Publishing revenues are derived from the sale of our digital entertainment products. We own most of the intellectual properties of our products, which we believe positions us to maximize profitability.

As a publisher, we are responsible for publishing, production, localization, QA and testing, PR and marketing, manufacturing and sales of our products. Playlogic’s products are sold to distributors who supply retailers worldwide. Furthermore, we sell directly to consumers through online distribution channels with various partners.

Development studios throughout the world help create the games which are published by Playlogic. One of these studios is our fully owned subsidiary, Playlogic Game Factory B.V., located in The Netherlands. Other independent studios in various countries develop our games under Software Development Agreements (SDA). These development contracts generally provide that we pay an advance on future royalties earned upon achievement of milestones successfully completed and delivered. In addition, we license the rights of existing Playlogic IP to other development studios who then adapt these products to the specifications and abilities of other (console) platforms.

Studios and developers contact us daily requesting financing and publishing of their games or concepts. We evaluate each of these offers based on several factors, including sales potential of concept or product, technology & tools used, track record and project management of the studio.

We select which games we develop based on our analysis of consumer buying 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 worldwide through existing distribution channels with global or local distributors. When appropriate we have the ability to release our titles simultaneously across a range of hardware formats to maximize overall sales for a particular product with a minimum augmentation in development time and resources.

We believe that greater online functionalities, applications and  digital distribution on the new platforms will improve revenue margins and encourage further industry growth. In addition, according to DFC Intelligence, new sales potential, revenue opportunities from wireless gaming, online console gaming, and in-game advertising are expected to grow from $1 billion in 2005 to $5 billion in 2009.

Industry Overview

Over the past two decades, the video game industry has advanced and become a valuable contributor to the entertainment consumption business. The estimated break-down of gamers in US households is 61% male and 39% female, with 47% of gamers between 13 and 24 years old, 30% between 25 and 39 years old; and 23% over 40 years old.

Worldwide, the video game market is projected to increase from $26.2 billion in 2004 to $46.5 billion in 2010, growing at an 11.4 percent compound annual rate. Asia Pacific, currently the largest market at $9.6 billion in 2004, is projected to maintain its dominance, growing at a 12.3 percent compound annual rate through 2010 to reach $17.4 billion. The United States has the second largest market and is expected to grow from $8.4 billion in 2005 to $13.0 billion in 2010, an 8.9 percent compounded annual according to Company Annual Reports of Crandell & Sidak. The combined US and European software markets will grow at a 13.5% CAGR over the 2006-2008 period. (WedBush Morgan).

The video game market reflects consumer spending on console games (including handheld games), personal computer (PC) games, online games, and wireless games. The category excludes spending on the hardware and accessories used to play the games.

With the launch of the Nintendo Wii and Sony PlayStation 3, the gaming industry had a record-breaking year in 2006. According to NPD Group's industry tracking sales figures, overall profits are up 19 percent, and the combined hardware, software, and accessories sales reached $12.5 billion in the U.S. alone, making it the highest grossing year in the video game industry to date.

Market Trends – Worldwide

The fastest-growing segment during the next five years, global video game spending will increase to $55.6 billion in 2008, at a 20.1 percent CAGR. (PricewaterhouseCoopers). By 2008, online and wireless will be major distribution channels, spurred by broadband penetration and new mobile phones that will be used as much for entertainment as for communication. The PC game market will shrink, and console game spending will grow as next generation consoles are introduced.

- 16 -

The video game market was in a transition year in 2005, awaiting the introduction of the next-generation consoles. Growth slumped to 3.3 percent, the slowest increase during the past five years. The next generation of consoles and recently introduced handheld games will spur the console/handheld market in the U.S., EMEA, Asia Pacific, and Canada, while PC games will continue to decline or see little growth in the U.S. and EMEA. The introduction of new wireless phones capable of downloading games will boost the wireless game market in the U.S., EMEA, Asia Pacific, and Canada. Overall, the video game market will expand at an 11.4 percent CAGR to $46 billion in 2010 from $27 billion in 2005.

Console Installed Base

Since the introduction of PlayStation 2 in 2000, the console has sold over 140 million units worldwide according to games industry. biz. The PlayStation 3 has been introduced to the market in the second half of 2006. Microsoft introduced its next generation console, the Xbox 360, in November 2005. Playlogic will continue development of PlayStation2 titles, because of their large installed base of over 120 million units.

Microsoft’s Xbox360 has sold 22.5 million units so far. As of September 30, 2008, Sony has shipped approximately 16.7 million Playstation 3 units worldwide.   Nintendo’s next generation console, called ‘Wii’ has sold more than 36 million units so far.

Nintendo Dual Screens (‘Nintendo DS’) and PlayStation Portable (‘PSP’) were both successfully introduced to the market. The sales volume of the Nintendo DS reached 85.3 million units by September 30, 2008, and PSP reached the sales volume of 39.8 million units sold.

PC Games

Playlogic will continue to also release PC games since, in comparison to next generation consoles games, these products are less expensive to develop, address a very wide target audience and contribute significant better margins. Furthermore Playlogic will focus on new successful platforms like the Nintendo DS and Nintendo Wii.

Consumer Facts

Thirty percent of most frequent game players are under eighteen years old while twenty-six percent of most frequent game players are between 18 and 35 years old. Forty-four percent of most frequent game players are over 35 years old. Forty percent of most frequent console game players are under eighteen years old while thirty-five percent of most frequent game players are between 18 and 35 years old. Twenty-five percent of most frequent console game players are over 35 years old. Thirty-eight percent of game players are women. Women age 18 or older represent a significantly greater portion of the game-playing population (30%) than boys age 17 or younger (23%).The average adult woman plays games 7.4 hours per week.  The average adult man plays 7.6 hours per week. Though males spend more time playing than do females, the gender/time gap has narrowed significantly.

Females are being significantly attracted to playing certain online multi-user video games that offer a more communal experience, and a small hardcore group of young females are playing aggressive games that are usually thought of as being "traditionally male" games. The most loyal fan-base is reported to be for large role-playing games  (Nielsen Active Gamer Study).

According to the ESRB almost 41% of video and PC gamers are women.

We believe the demographics of game players will widen, and be a major source of the growth of the industry. The first generation gamers are now in their 30s and are still playing games and new consumers enter the market, including children at the age of 6 to 8 and an increasing number of women players.

- 17 -

			(Expected) Release
Game	Studio	Platform	date to retail
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
Xyanide	Overloaded (NL)	Mobile Phones	Released
World Racing 2	Synetic (G)	PS2, Xbox, PC	Released
Knights of the Temple 2	Cauldron (SK)	PS2, Xbox, PC	Released
Gene Troopers	Cauldron (SK)	PS2, Xbox, PC	Released
Xyanide	Playlogic Game Factory (NL)	Xbox	Released (1)
Age of Pirates: Caribbean Tales	Akella (Russia)	PC	Released Q3 2006
Infernal	Metropolis (Poland)	PC	Released Q1 2007
Ancient Wars: Sparta	World Forge (Russia)	PC	Released Q2 2007
Xyanide Resurrection	Playlogic Game Factory (NL)	PSP	Released Q3 2007
Evil Days Of Luckless John	3A Entertainment (Great Britain)	PC	Released Q3 2007
Xyanide: Resurrection	Playlogic Game Factory (NL)	PS2	Released Q3 2007
Obscure 2	Hydravision (F)	PC	Released Q3 2007
Obscure 2	Hydravision (F)	PS2	Released Q3 2007
Obscure 2	Hydravision (F)	Wii	Released Q1 2008
Xyanide: Resurrection	Playlogic Game Factory (NL)	PC	Released Q1 2008
Dragon Hunters	Engine software (NL)	DS	Released Q1 2008
Aggression 1914	Buka (Russia)	PC	Released Q1 2008
Dimensity	Dagger Studio (Bulgaria)	PC	Released Q2 2008
Red Bull Break Dancing	Smack Down Productions (F)	DS	Released Q2 2008
Simon the Sorcerer 4	RTL /Silverstyle Studio (GER)	PC	Released Q2 2008
Worldshift	RTL Games (Germany)	PC	Released Q2 2008
Stateshift	Engine Software (NL)	PC	Released Q2 2008
Building & Co	Electrogames (F)	PC	Released Q3 2008
Under development
Vertigo	Icon Games Entertainment Ltd (GB)	PC, Wii	Q1 2009
Pool Hall Pro	Icon Games Entertainment Ltd (GB)	PC,  Wii	Q1 2009
Sudoku Ball Detective	White Bear (NL)	Wii/PC/DS	Q1 2009
Age of Pirates 2: City of abandoned ships	Akella (Russia)	PC	Q1 2009
Age of Pirates 2: City of abandoned ships	Akella (Russia)	Xbox360	Q1 2009
Undisclosed Title	Playlogic Game Factory (NL)	PS3, Xbox360, PC	Q1 2009
Infernal returns	Metropolis (Poland)	Xbox360	Q2 2009
Obscure 2	TBA	DS	Q2 2009
Undisclosed Title	TBA	DS, PC	Q2 2009
Undisclosed Title	TBA	Xbox360, PC	Q2 2009
TCFU	Engine Software (NL)	DS	Q3 2009
TCFU	Revisotronic	PC, PS2, Wii,	Q3 2009
Zooloretto	White Bear (NL)	PC, Wii, DS	Q3 2009
Undisclosed Title	TBA	Wii, DS	Q3 2009
Fairytale Fights	TBA	PS3, Xbox360, PC	Q4 2009
Undisclosed Title	TBA	PS3, Xbox360, PC	Q1 2010
The Strategist	Humagade/Canada	DS	Q2 2010

_______________

1       Released in the US only

*       working title

The games industry is currently in a transition period. The current and Next Gen consoles (Xbox360, PlayStation 3, Wii) and DS platforms have broadened the market, appealing to an even larger mass consumer audience than ever before, providing increased publishing opportunities. The investments in next generation platforms are however larger than for the previous generation platforms. Playlogic has created a healthy balance between games available for the current and the next generation platforms. To spread risk and broaden Playlogic’s portfolio, PC games and handheld titles are a substantial part of the line-up for the coming year.

- 18 -

Material agreements

During the nine months ended September 30, 2008, the Company entered into a number of publishing and distribution agreements.

Critical Accounting Policies and Estimates

Our most critical accounting policies, which are those that require significant judgment, include: capitalization and recognition of software development costs and licenses; share-based compensation and revenue recognition. In-depth descriptions of these can be found in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 (the “2007 Form 10-K”). There have been no material changes in our existing accounting policies from the disclosures included in our 2007 Form 10-K.

Recently Issued Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS 159.  SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value.  It is expected to expand the use of fair value measurements which is consistent with the Financial Accounting Standards Board’s long-term measurement objectives for accounting for financial instruments.  SFAS 159 is effective for our first fiscal year that begins after November 15, 2007, which is our fiscal year 2009 that begins in January 2008.  The Company is currently evaluating the impact of this statement to its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), ‘’Business Combinations’’, or SFAS No. 141R.  SFAS No. 141R will change the accounting for business combinations.  Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination.  SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009.  We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.  We are still assessing the impact of this pronouncement.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company believes that SFAS 160 should not have a material impact on the consolidated financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.

In May, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles", ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 will have no effect on the Company's financial position, results of operations or cash flows.

Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS No. 163 on its financial statements but does not expect it to have an effect on the Company's financial position, results of operations or cash flows.

In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years after December 15, 2008, and must be applied on a retrospective basis. Early adoption is not permitted. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.

- 19 -

In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is assessing the potential impact of this FSP on the earnings per share calculation.

In June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted. The Company is assessing the potential impact of this EITF 07-5 on the financial condition and results of operations.

Results of Operations

Nine Months Ended September 30, 2008 Compared to nine months ended September 30, 2007, and the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

Net sales . Net sales for the nine months ended September 30, 2008 were $9,418,489 as compared to $8,296,418 for the nine months ended September 30, 2007. This increase of $1,122,071 or 14% in revenue is primarily related to the release a number of new titles and titles on next generation platforms such as the Nintendo Wii. For the three months ended September 30 the net revenue was $1,068,377 in 2008 compared to $3,712,390 in the same period 2007. The decrease of  $2,644,013 or 71% is mainly due to the fact that we released 5 new titles in this quarter 2007, compared to only one title in 2008.

Gross Profit . Gross profit totaled $4,642,009 for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, gross profit totaled $4,758,191. This decrease in gross margin is due to the increase portfolio as well as a different split between license revenue and distribution revenue. Gross Profit as a percentage of sales can vary significantly from period to period due to the sales mix and the type of sales deals included. Furthermore, during 2008 we have published more on consoles like Nintendo DS, Wii, PS2. These platforms are more expensive regarding production and licensing. For the three months ended September 30 the gross profit was $264,929 in 2008 compared to $2,026,461  in the same period 2007. The decrease of $1,761,532 is due to the low number of new releases during the quarter and we have recognized straight line amortization for some of our games. 

Selling, Marketing, General and Administrative Expenses . Selling, marketing, general and administrative expenses totaled $4,697,197 for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, selling, general and administrative expenses totaled $3.689.580. This represents an increase of  $1,007,617. This increase in selling, general and administrative expenses is due to an increased number of FTE’s and therefore the need to change locations of headquarters. In the three months ended September 30, 2008 the Selling, Marketing, General & Administrative expenses amounted to $1,850,293 compared to $1,424,115 in 2007.  This represents an increase of $426,178 compared to prior year. This is mainly due to the move of the Company headquarters in May 2008 as well as an increased headcount.

Research and Development . Research and development expenses totaled $301,031 for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, research and development totaled $448,962. This represents a decrease of $147,931. This decrease is due to costs in relation to 3 rd party development activities being classified as Cost of Sales. Furthermore, our in-house studio is focusing on the development of a game to be released in Q4 2009. For the three months ended September 30, 2008, the Research and Development expenses amounted to $125,589 compared to $82,207 in the same period 2007.

Depreciation . Depreciation expenses totaled $284,234 for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, the depreciation expense totaled $193,381. The increase is due to new investments made due to the move of the Company’s headquarters. Mainly investments in leasehold improvement and furniture have been made. For the three months ended September 30, 2008 the depreciation amounted $127,829 compared to $40,757 in the same period 2007. This increase is due to the office move. We have invested over $700,000 in new furniture, leasehold improvement and equipment. Depreciation has started mid May, which caused higher expenses for the quarter.

Impairment of capitalized software development costs. Due to the worldwide economic developments during the three months ended September 30, 2008, management believes it is conservative to provide impairment of software development cost. Management has estimated the impact to amount to $1 million and has recorded that amount as an impairment charge for the three and nine months ended September 30, 2008.

Gain on debt restructuring. Gain on debt restructuring totaled $0 for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, gain on debt restructuring totaled $850,411. The gain relates to debt extinguishments with various creditors arranged during the first three months of last year. For 2008 we have not restructured any debt. The same applies for the three months period ended September 30, 2008 $0 compared to the same period in 2007 $377,000.

Interest Expense . Interest expense totaled $357,890 for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, interest expense totaled $1,054,659. This represents a decrease of $696,769. This decrease in interest expense is primarily due to the decrease of interest bearing short term loans during the year. During the year 2007 most loans were repaid or converted into equity. For the three months ended September 30, 2008 the interest expense amounted to $191,172 compared to $169,535 in the same period 2007. This slight increase is caused the fact that we recorded a discount on our long term debt. We expense $49,000 per quarter for this.

Net Result. Our net result was $(1,953,496) for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, the net profit totaled $1,599,170. The decrease in the net result is due to the recognition of a one time gain on interest, as well as a gain on debt restructuring in 2007. Furthermore, as described in this section, management has impaired capitalized software development costs for the amount of $1 million. For the three months ended September 30, 2008 the net result amounted to $(2,994,301) compared to a profit of $2,063,997 in the same period 2007. The decrease in the net result is also due to the recognition of a one time gain on interest, as well as a gain on debt restructuring in the third quarter of 2007 and the additional impairment charge in the third quarter of 2008.

- 20 -

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 $(975,297) for the nine months ended September 30, 2008 and $(582,442) for the nine months ended September 30, 2007.

Cash flow from operations. We showed a net loss of $1,953,496 for the nine months ended September 30, 2008, however the cash flow from operations shows $8,215,424  negative. The main reason for this is that we have spent approximately $6,3 million on investments in the development of games. Furthermore, accounts receivable has increased compared to December 31, 2007 and we have significantly reduced our backlog in taxes payable.

Liquidity and Capital Resources

As of September 30, 2008 our cash balance was $306,561. 

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.

Our net accounts receivable, after providing an allowance for doubtful accounts, at September 30, 2008 was $2,233,464.

Fluctuations in Quarterly Operating Results and Seasonality  

We have experienced fluctuations in quarterly operating results as a result of the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles; sequels or enhancements of existing titles; projected and actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us and our competitors; the accuracy of retailers’ forecasts of consumer demand; the size and timing of acquisitions; the timing of orders from major customers; and order cancellations and delays in product shipment. Quarterly comparisons of operating results are not necessarily indicative of future operating results.

 Item 3. Quantitative and Qualitative Disclosures about Market Risk

We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the relevant quarter end. Translation adjustments are included as a separate component of stockholders’ equity. For the six months ended June 30, 2008, our accumulated foreign currency translation adjustment loss was approximately $3.0 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of September 30, 2008 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the third quarter of 2008, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 21 -

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In June 2007, Playlogic Entertainment Inc. was sued in class action before the US district court in Manhattan, with respect to alleged damage as a result of copy protection software included in Age of Pirates – Caribbean Tales. We do not foresee any liability in this matter, as plaintiffs have clearly sued the wrong company and the wrong entity. Playlogic acts only as a publisher of the game and therefore is not liable for possible faults in production or distribution. Moreover, as far as any claim could be brought against Playlogic, it would be the Dutch subsidiary Playlogic International NV, with its statutory seat in Amsterdam, The Netherlands, that would have to be sued. As a consequence, the pending case should fail on both grounds and any new action against the Dutch subsidiary would have to be brought before the Dutch courts that are even more likely than the US courts to reject class actions like this.

Except as referred to above there were no new material legal proceedings or material developments to the pending legal proceedings that have been previously reported in Part I, Item 3 of our 2007 Form 10-K.  A full discussion of our pending legal proceedings is also contained in Part I, Item 1, “Notes to Unaudited Condensed Consolidated Financial Statements” of this Report.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 2 - Changes in Securities.

No response required.

Item 3 - Defaults Upon Senior Securities.

No response required.

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

No response required.

Item 5 - Other Information.

No response required.

Item 6. Exhibits

Exhibits:
31.1	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

- 22 -

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Playlogic International, Inc.
Date: November 14,  2008	By:	/s/ Willem M. Smit
		Willem M. Smit Chief Executive Officer

- 23 - -

Exhibit Index

Exhibits:
31.1	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

- 24 -