UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington,
D.C. 20549




FORM
10-K




|X| ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934




FOR
THE FISCAL YEAR ENDED:  DECEMBER 31, 2008




|_| TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


FROM THE TRANSITION PERIOD FROM ______ TO ______




COMMISSION
FILE NUMBER: 000-49649









PLAYLOGIC
ENTERTAINMENT, INC.


(Name of
Small Business Issuer in Its Charter)




Delaware
              23-3083371(State
      or other Jurisdiction of
              (I.R.S.
      EmployerIncorporation
      or Organization)
              Identification
      No.)





World Trade Centre C-Tower 10th
      Floor
                Strawinskylaan 1041 Amsterdam The
      Netherlands
              1077 XX(Address
      of Principal Executive Offices)
              (Zip
      Code)




Registrant’s
telephone number:  (011)
31-20-676-0304




Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.    Yes ý  No 





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes  Noý




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.YesýNo




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.     




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
definition of "accelerated filer, large accelerated filer and smaller reporting
company" in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer  
            
            Accelerated
      filer  
            
            Non-accelerated
      filer  
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting companyý




Indicate
by check mark whether the registrant is a shell company (as defined in the
Rule 12b-2 of the Act).    Yes    Noý




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the Registrant's most recently completed second fiscal
quarter was approximately $46,718,123.




As of
March 31, 2009, there were 46,743,450 shares of the Registrant's common stock
outstanding.




-
1 -








PLAYLOGIC
ENTERTAINMENT ANNUAL REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





TABLE
OF CONTENTS





PART
      I
                              
                              PageItem
      1.
                              Business
                              3Item
      1A.
                              Risk
      Factors
                              11Item
      2.
                              Property
                              18Item
      3.
                              Legal
      Proceedings
                              18Item
      4.
                              Submission
      of Matters to a Vote of Security Holders
                              19PART
      IIItem
      5.
                              Market
      for Registrant’s Common Equity, Related Shareholder Matters and Small
      Business Issuer Purchases of Equity Securities
                              19Item
      6.
                              Management’s
      Discussion and Analysis
                              22Item
      7.
                              Financial
      Statements
                              22Item
      8.
                              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                              27Item
      9.
                              Directors
      and Executive Officers of the Registrant; Compliance with Section 16(a) of
      the Exchange Act
                              27Item
      9A.
                              Controls
      and Procedures
                              27Item
      9B.
                              Other
      Information
                              27PART
      IIIItem
      10.
                              Executive
      Compensation
                              28Item
      11.
                              Security
      Ownership of Certain Beneficial Owners and  Management and Related
      Shareholder Matters
                              32Item
      12.
                              Certain
      Relationships and Related Transactions
                              35Item
      13.
                              Exhibits
      and Financial Statement Schedules
                              35Item
      14.
                              Principal
      Accounting Fees and Services
                              35Item
      15.
                              Exhibits
                              36





-
2 -




PART
I


ITEM
1. BUSINESS




Caution
Regarding Forward-Looking Information




Certain
statements contained in this Annual Report including, without limitation,
statements containing the words "believes", "anticipates", "expects" and words
of similar import, constitute forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.




Such
factors include, among others, the following: international, national and local
general economic and market conditions: demographic changes; the ability of the
Company to sustain, manage or forecast its growth; the ability of the Company to
successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business  disruptions;
the ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous
filings.




Given
these uncertainties, readers of this Annual Report and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.




Background




Playlogic
Entertainment, Inc. was incorporated in the State of Delaware in May 2001, when
its name was Donar Enterprises, Inc. Initially, our plan was to engage in the
business of converting and filing registration statements, periodic reports and
other forms of small to mid-sized companies with the U.S. Securities and
Exchange Commission electronically through EDGAR. We had limited operations
until June 30, 2005, when we entered into a share exchange agreement with
Playlogic International N.V., a corporation formed under the laws of The
Netherlands that commenced business in 2002, and its shareholders. Pursuant to
this agreement, the former shareholders of Playlogic International became the
owners of over approximately 91% of our common stock, as described below.
Playlogic International has become our wholly-owned subsidiary and represents
all of our commercial operations.




On June
30, 2005, we entered into a share exchange agreement with Playlogic
International N.V. and Playlogic International's shareholders whereby all of the
Playlogic International shareholders exchanged all of their ordinary shares
(which are substantially similar to shares of common stock of a U.S. company)
and priority shares (which are substantially similar to shares of preferred
stock of a U.S. company) of Playlogic International for 21,836,924 shares of our
common stock. Pursuant to the share exchange agreement, the former shareholders
of Playlogic International received approximately 91.0% of our outstanding
common stock. Of the 21,836,924 shares of Playlogic Entertainment issued in the
share exchange, 1,399,252 were placed in escrow with the Company’s stock
transfer agent, Securities Transfer Corporation, as escrow agent. Following
review by our auditors and our filing of the financial statements of the first
quarter of 2006 these 1,399,252 shares in escrow were released to Halter
Financial Group, Inc. and its affiliates or their assigns.




On August
2, 2005, Donar Enterprises Inc. merged with and into a wholly owned subsidiary
named Playlogic Entertainment, Inc. In connection with the merger, Donar's name
was changed to Playlogic Entertainment, Inc. Playlogic Entertainment, Inc. was
formed specifically for the purpose of effecting the name change.





In this
annual report, "Playlogic Entertainment," the "Company," "we," "us" and "our"
refer to Playlogic Entertainment, Inc. and, unless the context otherwise
indicates, our subsidiary Playlogic International N.V. and/or its subsidiary
Playlogic Game Factory B.V.




General




Our
principal business office is located at the World Trade Centre, C-Tower 10th Floor,
Strawinskylaan 1041, 1077 XX Amsterdam, The Netherlands, and our telephone
number at that address is 31-20-676-0304.


Our
corporate web site is www.playlogicgames.com. The information found on our
website is not intended to be part of this annual report and should not be
relied upon by you when making a decision to invest in our common
stock.





General
Overview




Playlogic
is a publisher of interactive entertainment products, such as video game
software and other digital entertainment products. We publish on all 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.


-
3 -


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. Owning our Intellectual Properties increases the
value of our company as our portfolio increases every quarter with new titles
published.




As a
publisher, we are responsible for publishing, sales and marketing of our
products. We sell our products to distributors, who sell to retail. Furthermore,
we sell directly to consumers through online distribution channels, at least two
months after the product was made available at retail or at a time agreed with
our distributors. Moreover, starting in 2008 we will be selling our products
online through our own website in a specifically designed store. Both digital
downloads as well as finished products will be available to consumers on the
Playlogic website.




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
of their games. We evaluate each of these offers based on several factors,
including sales potential, market conditions, technology used, track record and
human resources of the studio, production pipeline and project management
skills.




We select
which games we develop, based on our analysis of consumer trends and behavior
and our experience with similar or competitive products. Full due diligence and
a financial risk analysis / assessment are part of this process. 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
experienced distributors. We
generally aim to release our titles simultaneously across a range of hardware
formats in order to spread development risks and increase total unit sales per
SKU with just a marginal augmentation in development time, resources and
associated costs.




We
believe that greater online functionality and the vast processing capabilities,
as well as the new casual games with simplified controls (i.e. Nintendo Wii,
Nintendo DS, Playstation 3 Sixaxis and Playstation Eye) of the new platforms
will further increase the total world wide installed base, diversifying the
consumer base and help our industry grow. 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.





The games
industry has gone through 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  marginally 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,
both Next Gen titles for the Playstation 3, Xbox 360 and Nintendo Wii as well as
PC games and handheld titles are all part of the line-up for the coming
year.





As
the console transition from ‘past’ to ‘next’ has been in progress over the past
two years Playlogic will focus more of it’s publishing portfolio on console
titles for the current platforms. With the Increased console installed base
Playlogic will shift its focus from publishing PC and console titles to
simultaneous multi platform console releases as  primary and PC
as secondary.







Industry Overview





The
‘next’ generation began in 2004, when Nintendo developed the DS platform as a
successor to the Game Boy Advance, with a touch screen allowing the user to
interact with video game content in a different way. Few observers appreciated
that that the Nintendo DS signaled a change in gameplay that would have a
lasting impact on the industry. Sony followed with the Playstaion Portable (PSP)
in early 2005, with Microsoft launching the Xbox360 later that year. In late
2006 Sony and Nintendo launched the PS3 and Wii, respectively and the next
generation was in full gear. Although the last of these launches completed the
beginning of the next generation cycle, they by no means marked the end of the
current cycle. Both Sony and the software publishers managed software growth in
2006 both by extending the value of the deep catalog of ‘legacy’ software and by
continuing to develop for the Playstation 2.





Since the
introduction of the Playstation 2 in October 2000, the installed base of current
generation hardware (PS2, Gamecube, Xbox) reached over 130 million units in the
US and Europe alone. Total console and handheld software sales have grown from
$6 billion in the US and Europe in 2000 to $12.2 billion 2006, representing a
compound annual growth rate of 11%. It is expected this growth rate will
accelerate to almost 20% over the next three years, even though partially offset
by declining PC sales, unprecedented levels of software sales are
anticipated.


-
4 -


Nintendo
is off to a strong early start with its Wii console. The company has chosen to
forego competition based solely on microprocessor speed and graphics capability,
and instead has chosen to emphasize game play and an innovative control
mechanism.




The
differentiating features of the Xbox360 and the PS3 is the ability to display
game content in high definition (1080p). In contrast to past cycles, it is
believed that that the high definition features of the next generation consoles
will result in slower adoption by the masses, at least until the penetration of
HD monitors accelerates. In prior console cycles, new consoles were compatible
with standard format televisions, so the only hardware required was the console
itself. While the next generation of consoles will operate satisfactorily on
normal 4:3 format televisions, most games for the PS3 and Xbox360 are designed
for  16:9 formats in high definition. It is expected that ultimately
most console purchasers will desire the full benefits of the next generation
experience, and that most consumers will defer buying a PS3 or Xbox360 until
they have purchased an HD monitor. Nintendo is well positioned to exploit the
slower adoption of next generation technology, as its Wii console does not
require an HD monitor. Accordingly, it is expected that overall console adoption
will be slower in the next cycle than in the past, with slower sales of the
PS3 and Xbox360 compared to their predecessors, partially offset by more robust
sales of the Wii compared to the Gamecube(Source: WedBush Morgan Securities:
Industry report May 2007)





Market Trends -
Worldwide




The
Xbox360 and the PS3 are far more similar than their predecessors were and the
economics of game development will serve as a discentive to third party
publishers to offer exclusive content for either console. The similarity between
the two platforms will likely serve to lower the cost of porting from one
platform to another. It is to be expected that virtually all games developed for
one of these platforms will also be ported to the other. The lack of
differentiation between the PS3 and the Xbox 360 allows the Wii to gain a
competitive advantage, due to its different controls and relatively simple
components, publishers are required to develop a special SKU for the Wii,
further differentiating the console. Due to its superior library of first party
titles and low price, Nintendo’s Wii has the greatest share of the hardware
market (46 million units sold as of the end of 2008)..





Although
it is expected that digital content offers the potential for tremendous growth,
it is not expected that there will be a significant earnings contribution from
sales of digital content for a few years. (Source: WedBush Morgan Securities:
Industry report May 2007)





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.





Microsoft’s
Xbox360 has sold more than 28 million units so far. Sony sold almost 20 million
units of its Playstation 3.Nintendo’s next generation console, called ‘Wii’ has
been sold 46 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 98 million units by the end of December 2008, and PSP reached the sales
volume of 44 million units by the end of the same period.


Consumer
Facts





Several
Demographic trends and fundamental market drivers will determine the the size of
the interactive entertainment software market. The most compelling of these include
the widening age demographic of the interactive game consumer, rapid growth of
teen and twenty-something population, Growth of the female gamer market,
penetration of Nintendo Wii among people over 40, and the increasing disposable
incomes of teens and pre-teens. The trends will continue to drive sales
growth in both the hardware and software sectors.





The
primary driver behind the industry’s growth is the dramatic expansion in age
profile of the interactive game consumer.




The first
mass-market generation of interactive consumers (and now the oldest) started
playing video games with the release of the Atari home console during the late
1970s. It is estimated that the age range of consumers in this period was
approximately between 8-20. Since the 1970s succeeding generations of video game
consumers have embraced more advanced systems and complex technology. Some older
consumers drop out of the market each year, replaced by a large number of
children receiving their first DS or Playstation consoles. The mean number of
the original generation of ‘Atari Kids’ is now approaching 40, with an emerging
group of ‘Nintendads’ right behind them and many still play games on PC or home
consoles. The age demographic of 90% of the gamers is believed to be in the
range of 6- 40 years of age, dramatically older than the 1970s
generation.




As the high end of the gamer age
range increases, the number of overall video game consumers continues to
increase . More important, people over 22 typically are employed, and
have a significant amount of disposable income. People in their 20s are also
generally quite self-indulgent, and we believe that they are willing to spend a
large portion of their disposable income on entertainment. As the average age of
video game consumers expands beyond 22, it is expected to see an acceleration in
the spending per user. This
phenomenon differentiates the next generation console cycle from past
cycles.





There
will be a continuing expansion of the age demographic for at least another 20
years, as the oldest gamers stay interested in games well into their 60s and
children continue to embrace games.


-
5 -


Female
Market





The
largest area of future growth is likely to be the female market. Over the next
two years the ‘mass market’ phase of the current console cycle should segue into
the ‘casual’ phase of the next generation cycle. Accordingly, it is expected to
see an overall industry wide trend towards games with non-violent focus. As more
games target mass-market, it is expected that the trend toward more female
gamers to continue. It is estimated that currently only 31% of all primary
gamers in households are female. The Entertainment Software Association (ESA)
estimates that female users (either primary or secondary) make up only 35% of
the console market and 43% of the PC market. An increase of 5% penetration in
these platform compositions by female gamers could translate into as much as $1
billion of incremental annual revenues to the industry each year. (Source:
WedBush Morgan Securities: Industry report May 2007)




Release Overview







(Expected)
      ReleaseGame
                          
                          Studio
                          
                          Platform
                          
                          date
      to retailCompleted
      GamesAlpha
      Black Zero
                          
                          Khaeon
      (NL)
                          
                          PC
                          
                          ReleasedAirborne
      Troops
                          
                          Widescreen
      Games (F)
                          
                          PS2,
      PC
                          
                          ReleasedCyclone
      Circus
                          
                          Playlogic
      Game Factory (NL)
                          
                          PS2
                          
                          ReleasedXyanide
                          
                          Overloaded
      (NL)
                          
                          Mobile
      Phones
                          
                          ReleasedWorld
      Racing 2
                          
                          Synetic
      (G)
                          
                          PS2,
      Xbox, PC
                          
                          ReleasedKnights
      of the Temple 2
                          
                          Cauldron
      (SK)
                          
                          PS2,
      Xbox, PC
                          
                          ReleasedGene
      Troopers
                          
                          Cauldron
      (SK)
                          
                          PS2,
      Xbox, PC
                          
                          ReleasedXyanide
                          
                          Playlogic
      Game Factory (NL)
                          
                          Xbox
                          
                          Released
      (1)Age
      of Pirates: Caribbean Tales
                          
                          Akella
      (Russia)
                          
                          PC
                          
                          Released
      Q3 2006Infernal
                          
                          Metropolis
      (Poland)
                          
                          PC
                          
                          Released
      Q1 2007Ancient
      Wars: Sparta
                          
                          World
      Forge (Russia)
                          
                          PC
                          
                          Released
      Q2 2007Xyanide
      Resurrection
                          
                          Playlogic
      Game Factory (NL)
                          
                          PSP
                          
                          Released
      Q3 2007Evil
      Days Of Luckless John
                          
                          3A
      Entertainment (Great Britain)
                          
                          PC
                          
                          Released
      Q3 2007Xyanide:
      Resurrection
                          
                          Playlogic
      Game Factory (NL)
                          
                          PS2
                          
                          Released
      Q3 2007Obscure
      2
                          
                          Hydravision
      (F)
                          
                          PC
                          
                          Released
      Q3 2007Obscure
      2
                          
                          Hydravision
      (F)
                          
                          PS2
                          
                          Released
      Q3 2007Obscure
      2
                          
                          Hydravision
      (F)
                          
                          Wii
                          
                          Released
      Q1 2008Xyanide:
      Resurrection
                          
                          Playlogic
      Game Factory (NL)
                          
                          PC
                          
                          Released
      Q1 2008Dragon
      Hunters
                          
                          Engine
      software (NL)
                          
                          DS
                          
                          Released
      Q1 2008Aggression
      1914
                          
                          Buka
      (Russia)
                          
                          PC
                          
                          Released
      Q1 2008Dimensity
                          
                          Dagger
      Studio (Bulgaria)
                          
                          PC
                          
                          Released
      Q2 2008Red
      Bull Break Dancing
                          
                          Smack
      Down Productions (F)
                          
                          DS
                          
                          Released
      Q2 2008Simon
      the Sorcerer 4
                          
                          RTL
      /Silverstyle Studio (GER)
                          
                          PC
                          
                          Released
      Q2 2008Worldshift
                          
                          RTL
      Games (Germany)
                          
                          PC
                          
                          Released
      Q2
2008







-
6 -







Stateshift
                
                Engine
      Software (NL)
                
                PC
                
                Released
      Q2 2008Building
      & Co
                
                Electrogames
      (F)
                
                PC
                
                Released
      Q3 2008Under
      developmentVertigo
                
                Icon
      Games Entertainment Ltd (GB)
                
                PC,
      Wii
                
                Q1
      2009Pool
      Hall Pro
                
                Icon
      Games Entertainment Ltd (GB)
                
                PC,  Wii
                
                Q1
      2009Sudoku
      Ball Detective
                
                White
      Bear (NL)
                
                Wii/PC/DS
                
                Q2
      2009Age
      of Pirates 2: City of abandoned ships
                
                Akella
      (Russia)
                
                PC
                
                Q1
      2009Infernal
      returns
                
                Metropolis
      (Poland)
                
                Xbox360
                
                Q2
      2009Obscure
      2
                
                TBA
                
                DS
                
                Q2
      2009Undisclosed
      Title
                
                TBA
                
                DS,
      PC
                
                Q3
      2009Undisclosed
      Title
                
                TBA
                
                Xbox360,
      PC
                
                Q3
      2009TCFU
                
                Engine
      Software (NL)
                
                DS
                
                Q3
      2009TCFU
                
                Revisotronic
                
                PC,
      PS2, Wii,
                
                Q3
      2009Zooloretto
                
                White
      Bear (NL)
                
                PC,
      Wii, DS
                
                Q3
      2009Undisclosed
      Title
                
                TBA
                
                Wii,
      DS
                
                Q3
      2009Fairytale
      Fights
                
                TBA
                
                PS3,
      Xbox360, PC
                
                Q4
      2009Undisclosed
      Title
                
                TBA
                
                PS3,
      Xbox360, PC
                
                Q1
      2010The
      Strategist
                
                Humagade/Canada
                
                DS
                
                Q2
      2010





______________





1       Released
in the US only




·
            working
      title






-
7 -




Material
agreements




We
entered into the following material agreements in the fiscal year ended December
31, 2008:





Sudoku
Ball Detective: On November 24, 2008, we announced the acquisition of Sudoku
Ball TM Detective on Wii, DS and PC to be released in Q2 2009.





Sony
development agreement. On October 27, 2008, we announced that we continued our
collaboration with Sony Computer Entertainment Europe (SCEE). The project will
be developed at Playlogic’s in-house studio Playlogic Gamefactory BV over a
period up to mid 2009. The scope and content of the project will remain
undisclosed until further notice by SCEE Ltd.





Microsoft
Xbox 360 license. On October 15, 2008, we received the worldwide publishers
license on the Xbox 360.





Fairytale
Fights. On August 19, 2008, we announced that our in-house studio Playlogic
Gamefactory B.V. is working on Fairytale Fights. Fairytale Fights is planned for
a Q4 2009 release and will be available on PS3, Xbox360 and PC.





$3.0
million in equity: On June 27, 2008, we successfully closed a $3.0 million in
equity through a private placement. This raise was made with accredited
investors based in the Netherlands.





Building
& Co. On June 24, 2008, we announced the acquisition of the strategic
management sim Building & Co. co-produced by Palludio Games, Elektro Games
and Creative Patterns. The game is planned to be released in Q3
2008.





PlayV Ltd
Joint-Venture. On May 29, 2008, we announced the set up of a joint-venture with
Virgin Play S.A. The joint-venture is called PlayV Ltd and holds office in
Luton, United Kingdom. PlayV Ltd, a sales, marketing and distribution business,
will bring PC, console and handheld products from both parties to the UK market
and also offer flexible pro-active PR, marketing and sales solutions to
additional development and publishing partners looking to penetrate the UK
retail market with their products.





Worldshift.
On April 25, 2008, we announced the acquisition of the real time strategy game
Worldshift for PC from the German publisher Black Inc , a label of RTL Games.
Worldshift will be released in Q2 2008.





$7.0
million equity and loan. On March 20, 2008, we announced the private placement
of $3.0 million in equity and $4.0 million in a long-term loan with accredited
investors in the Netherlands. The loan bears an annual interest of 7% and has a
2.5 year term.





Dragon
Hunters. On March 14, 2008, we announced that Dragon Hunters for Nintendo DS
would be released in April 2008.




Sales
and Distribution




Our sales
expectations for each game are based mostly upon similar or competitive products
and the success that those products have achieved. We also work with our
distributors to generate realistic unit sales figures and revenues based upon
their experience, and after giving presentations to and consulting with the
retail stores in each of our global territories.




Generally,
we aim to release our titles simultaneously across a range of hardware formats,
rather than exclusively for one platform. We believe this allows us to spread
the development risk and increase the sales potential, with only a minimal
increase in development time and resources spent.




We seek
to increase sales and maximize profit potential of all our games by reducing the
wholesale and recommended retail prices of our products at various times during
the life of a product. Price reductions may occur at anytime in a product's life
cycle, but we expect they will typically occur six to nine months after a
product's initial launch. We also employ various other marketing methods
designed to promote consumer awareness and sales, such as attendance at trade
and consumer shows, and we intend to organize in-store promotions, point of
purchase displays and co-operative advertising.




Playlogic
games are distributed worldwide by local distribution partners. Distribution
costs per game are low since Playlogic does not have the costs of a physical
distribution network of its own.





In each
territory Playlogic decides on strategic partners for physical distribution of a
game. This distribution partner must have all necessary listings at local
retail.





Playlogic
delivers finished manufactured products to distribution partners. Delivery of
finished products instead of licensing a game enables Playlogic to a much higher
margin and quality control. In emerging markets Playlogic’s games are
manufactured under licenses held by local distribution partners. In countries in
which we currently do not have a console publishing license, we enter into
co-publishing arrangements with our business partners, who manufacture, finalize
and distribute the finished games to the retail stores.


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8 -


Local
distribution partners of Playlogic sell and deliver the games to retail stores
and take care of reorders. Playlogic’s local distribution partners only get
rights of offline distribution on the manufactured products.





We retain
all rights of further exploitation of a digital entertainment product such as
digital distribution, OEM-/Premium sales, and merchandising.





Worldwide
major games portals and platforms will offer Playlogic’s products for
Games-on-Demand and Purchase-by-Download. To play games on demand end-users pay
for a time limited access to a package of games a monthly subscription, similar
to video rental stores in the past. Playlogic games are offered as well for
purchase by download. The end user has the choice between trying the game for a
limited time (for instance one hour) before buying or direct download. The time
limitation is defined by us for each game individually dependent on the genre.
Hosting and payment fulfillment are completed by external technology
partners.




Playlogic
will pursue a variety of digital distribution strategies for delivering
entertainment products to the end-user, including mobile games, in-flight
entertainment, and set-top boxes.





Furthermore,
in 2009 Playlogic will be selling their products online through our own website
in a specifically designed store. Both digital downloads as well as finished
products will be available to consumers on the Playlogic website.




Competition




Competition
in the entertainment software industry is based on product quality and features,
brand name recognition, access to distribution channels, effectiveness of
marketing and price. We compete for both licenses and game sales with the other
international games publishing houses, including Electronic Arts, Take Two
Interactive, Activision, THQ and Ubisoft. Many of our competitors have greater
financial, technical and personnel resources than we do and are able to carry
larger inventories and make higher offers to licensors and developers for
commercially desirable properties than we can. Further, many of our competitors,
including the ones mentioned above, have the financial resources to withstand
significant price competition and to implement extensive advertising and
marketing campaigns.





Retailers have limited
shelf space and promotional resources, and an increasing number of games titles
compete for adequate levels of shelf space and promotional support: the
competition is intense. We expect competition for retail shelf space to continue
to increase, which may require us to increase marketing expenditures to maintain
our current levels of sales.




Competitors
with more extensive ranges and popular titles may have greater bargaining power
with retailers. Accordingly, we may not be able to achieve the levels of support
or shelf space that such competitors receive. Similarly, as competition for
popular properties increase, our cost of acquiring licenses for such properties
is also likely to increase, possibly resulting in reduced margins. Prolonged
price competition, increased licensing costs or reduced margins would cause our
profits to decrease.




We have
an advantage over our competitors concerning digital distribution; we do not
have our own physical distribution network. Therefore we can easily switch to
digital distribution, whereas our peers need to use its existing physical
distribution network as well. For instance, the agreement we signed in February
2006 with Macrovision illustrates Playlogic’s strategic focus on digital
distribution in the future. We signed the agreement with Macrovision’s Trymedia
Games division for the digital distribution of Playlogic’s entertainment
products. As a leading secure digital distribution services provider and
operator of the world's largest distribution network for downloadable games,
Macrovision will distribute selected Playlogic products on its network. We will
also incorporate the Trymedia technology into our recently re-launched website
www.playlogicgames.com
, offering customers easy and secure access to some of its latest game releases,
as well as the option to try-before-you-buy selected titles.




Intellectual
Property




Like
other entertainment companies, our business is based on the creation,
acquisition, exploitation and protection of intellectual property. Each of our
products embodies a number of separately protected intellectual properties. Our
products are copyrighted as software, our product names are trademarks of ours
and our products may contain voices and likenesses of third parties or the
musical compositions and performances of third parties. Our products may also
contain other content licensed from third parties, such as trademarks, fictional
characters, storylines and software code.




Our
products are susceptible to unauthorized copying. Our primary protection against
unauthorized use, duplication and distribution of our products is copyright and
trademark. We typically own the copyright to the software code as well as the
brand or title name trademark under which our products are
marketed.




Our
business is dependent on licensing and publishing arrangements with third
parties, and if we cannot continue to license popular properties on commercially
reasonable terms, our business could be harmed. Our software may be subject to
legal claims that could be costly and time consuming and cause a material
adverse effect on our business. Acquiring licenses to create games based on
movies could be very expensive. If we spend a significant amount of resources to
acquire such licenses and the resulting games are not successful, our business
may be materially harmed.




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9 -


We own or
have licensed trademarks and copyrights of the following games:




Games
                                    Platform
                                    Area1.
                                    
                                    Alpha
      Black Zero
                                    PC
                                    Worldwide2.
                                    
                                    Airborne
      Troops
                                    PS2
                                    WorldwidePC
                                    Worldwide3.
                                    a.
                                    Xyanide
      Resurection
                                    PSP
                                    Worldwideb.
                                    Xyanide
      Mobile
                                    Mobile
      Phones
                                    Worldwide4.
                                    
                                    Cyclone
      Circus
                                    PS2
                                    Worldwide5.
                                    
                                    World
      Racing 2
                                    PS2
                                    WorldwideXbox
                                    WorldwidePC
                                    Worldwide6.
                                    
                                    Knights
      of the Temple 2
                                    PS2
                                    WorldwideXbox
                                    WorldwidePC
                                    Worldwide7.
                                    
                                    Gene
      Troopers
                                    PS2
                                    WorldwideXbox
                                    WorldwidePC
                                    Worldwide8.
                                    
                                    Age
      of Pirates: Caribbean Tales
                                    PC
                                    Worldwide
      (1)9
                                    
                                    Ancient
      Wars: Sparta
                                    PC
                                    Worldwide
      (2)10.
                                    
                                    Infernal
                                    PC,
      Xbox360
                                    Worldwide
      (3)11.
                                    
                                    Evil
      days of Luckless John
                                    PC
                                    Worldwide12.
                                    
                                    Obscure2
                                    PC,PS2,Wii
                                    Worldwide13.
                                    
                                    Fairytale
      Fights
                                    PS3,
      Xbox360, PC
                                    Worldwide14.
                                    
                                    Age
      of Pirates 2: City of Abandoned Ships
                                    PC
                                    Worldwide15
                                    
                                    Dimensity
                                    PC
                                    Worldwide16.
                                    
                                    Young
      Archeologists
                                    DS
                                    Worldwide17.
                                    
                                    Crazy
      Garage
                                    DS
                                    Worldwide18.
                                    
                                    The
      Strategist
                                    PC,
      Wii, DS
                                    Worldwide


_____________




(1)
Excluding former USSR, Poland, Check, Slovak and South Africa


(2)  
Excluding former USSR


(3)  
Excluding Japan, former USSR







Employees




As of
December 31, 2008, we employed 90 full-time employees and 6 part-time employees.
All of our employees are based in the Netherlands and have executed employment
agreements with us, which are governed by the law of the Netherlands.
Substantially all of the employment contracts are running for an indefinite
period of time. As to the senior executives mentioned under Item 10, the Company
may terminate the employment upon a six-month notice, and a senior executive may
terminate the employment upon a three-month notice. As to 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. We are
obliged to continue to pay base salary and fringe benefits to our employees
during the notice period. We typically pay an annual base salary and allow our
staff certain benefits. Our employees are entitled to 26 vacation days a year.
13 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. With the exception of the disclosures made under Item 10, we did not grant
any bonuses during 2007. Under Dutch law, we are obliged to pay the employees in
the event of illness 100% of 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, we 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 costs associated with employer’s
contribution to the Dutch social security system are per employee in the range
of 15% of annual base pay.






-
10 -


ITEM 1A. RISK FACTORS




An
investment in our common stock involves substantial risks and uncertainties and
our actual results and future trends may differ materially from our past
performance due to a variety of factors, including, without limitation, the risk
factors identified below. The risks and uncertainties described below are
not the only risks and uncertainties we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial also may impair
our business operations. If any of the following risks actually occur, our
business, results of operations and financial condition would suffer. In that
event, the trading price of our common stock could decline, and our shareholders
may lose part or all of their investment in our common stock. The discussion
below and elsewhere in this report also includes forward-looking statements, and
our actual results may differ substantially from those discussed in these
forward-looking statements as a result of the risks discussed
below.




WE
HAVE A LIMITED OPERATING HISTORY, WE HAVE EXPERIENCED LOSSES IN PRIOR YEARS AND
WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY ON A CONSISTENT BASIS.




We
commenced operations in April 2002. Accordingly, we have a limited operating
history and our business strategy may not be successful. Our failure to
implement our business strategy or an unsuccessful business strategy could
materially adversely affect our business, financial condition and
operations.




For the
year 2008 we recorded net revenue of $9.0 million and showed a net loss of $9.5
million. We had a net consolidated profit in 2007of $0.7 million and net
consolidated losses of $12,548,400 in 2006, $9,674,004 in 2005, $20,162,853 in
2004, $7,657,536 in 2003 and $2,199,945 in 2002. The net consolidated
losses of $20,162,853 in 2004 included a one-time expense of $9,824,400 related
to the grant of options to some of our shareholders in 2004.




We may
not be able to be profitable on a consistent basis. The report of Playlogic's
independent auditors on the December 31, 2008 financial statements include an
explanatory paragraph indicating there could be uncertainties about Playlogic's
ability to continue as a going concern.





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.




We expect
that our current cash balance and cash generated from operations will be
sufficient to cover our working capital costs through the second quarter of
2008. We will need to obtain additional financing from third parties. We expect
our capital requirements to increase over the next several years as we continue
to develop new products, 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 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. The
Company is currently in the process of increasing the liquidity of the Company.
If we do not obtain the necessary financing in the future, this could impact our
results.




MANY OF OUR TITLES HAVE SHORT
LIFECYCLES AND MAY FAIL TO GENERATE SIGNIFICANT REVENUES .




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.




A
SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF TITLES.
IF WE FAIL TO DEVELOP NEW, COMMERCIALLY SUCCESSFUL TITLES, OUR BUSINESS MAY BE
HARMED.




For the
year ended December 31, 2008, three titles, Obscure II, Dragon Hunters and Red
Bull BC One accounted for approximately 41% of our revenues. For the year ended
December 31, 2007 three titles, Ancient Wars: Sparta, Infernal and Obscure II
accounted for approximately 60% of our revenues. For the year ended December 31,
2006, two titles, Age of Pirates: Caribbean Tales and World Racing 2, accounted
for approximately 60% of our revenues for the year ended December 31, 2005,
three titles, World Racing 2, Gene Troopers, Knights of the Temple 2 accounted
for approximately 60% of our revenues. For the year ended December 31, 2004, one
title, Alpha Black Zero accounted for 100% of our revenues. We did not have any
revenue in 2003 or 2002. 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.


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11 -







OUR
BUSINESS IS DEPENDENT ON LICENSING AND PUBLISHING ARRANGEMENTS WITH THIRD
PARTIES, AND IF WE CANNOT CONTINUE TO LICENSE POPULAR PROPERTIES ON COMMERCIALLY
REASONABLE TERMS, OUR BUSINESS WILL BE HARMED.




Our
success depends on our ability to identify and exploit new titles on a timely
basis. We have entered into agreements with third parties to acquire the rights
to publish and distribute interactive entertainment software. These agreements
typically require us to make advance payments, pay royalties and satisfy other
conditions. Our advance payments may not be sufficient to permit developers to
develop new software successfully. In addition, software development costs,
promotion and marketing expenses and royalties payable to software developers
have increased significantly in recent years and reduce the potential profits
derived from sales of our software. Future sales of our titles may not be
sufficient to recover advances to software developers and we may not have
adequate financial and other resources to satisfy our contractual commitments.
If we fail to satisfy our obligations under these license agreements, the
agreements may be terminated or modified in ways that may be burdensome to
us. Our profitability depends upon our ability to continue to license
popular properties on commercially feasible terms. Numerous companies compete
intensely for properties and we may not be able to license popular properties on
favorable terms or at all in the future.





ACQUIRING
LICENSES TO CREATE GAMES BASED ON MOVIES MAY BE VERY EXPENSIVE. IF WE SPEND A
SIGNIFICANT AMOUNT OF RESOURCES TO ACQUIRE SUCH LICENSES AND THE RESULTING GAMES
ARE NOT SUCCESSFUL, OUR BUSINESS MAY BE MATERIALLY HARMED.




Many
current video game titles are based on popular motion pictures. Some of these
games have been successful, but many have not. We do not have any such games in
the development stage as of yet.




WE
ARE EXPOSED TO SEASONALITY IN THE PURCHASES OF OUR PRODUCTS AND IF WE FAIL TO
RELEASE PRODUCTS IN TIME DURING PERIODS OF HIGH CONSUMER DEMAND, SUCH AS THE
HOLIDAYS, OUR REVENUES MAY BE NEGATIVELY AFFECTED.




The
interactive entertainment software industry is highly seasonal, with the highest
levels of consumer demand occurring during the year-end holiday buying season.
Additionally, in a platform transition period, sales of game console software
products can be significantly affected by the timeliness of the introduction of
game console platforms by the manufacturers of those platforms, such as Sony,
Microsoft and Nintendo. The timing of hardware platform introduction is also
often tied to holidays and is not within our control. If a hardware platform is
released unexpectedly close to the holidays, this would result in a shortened
holiday buying season and could negatively impact the sales of our products.
Delays in development, licensor approvals or manufacturing can also affect the
timing of the release of our products, causing us to miss key selling periods
such as the year-end holiday buying season.




WE
CONTINUALLY NEED TO DEVELOP NEW INTERACTIVE ENTERTAINMENT SOFTWARE FOR VARIOUS
OPERATING SYSTEMS AND IF DEVELOPERS OF OPERATING SYSTEMS FACE FINANCIAL OR
OPERATIONAL DIFFICULTIES, WE MAY NOT BE ABLE TO RELEASE OUR TITLES AND MAY INCUR
LOSSES.




We depend
on third-party software developers and our internal development studios to
develop new interactive entertainment software within anticipated release
schedules and cost projections. Many of our titles are externally developed. If
developers experience financial difficulties, additional costs or unanticipated
development delays, we will not be able to release titles according to our
schedule and may incur losses.


The
development of new interactive entertainment software is a lengthy, expensive
and uncertain process. Considerable time, effort and resources are required to
complete development of our proposed titles. We have in the past and may in the
future experience delays in introducing new titles. Delays, expenses, technical
problems or difficulties could force the abandonment of or material changes in
the development and commercialization of our proposed titles. In addition, the
costs associated with developing titles for use on new or future platforms may
increase our development expenses.





DEVELOPING
GAMES FOR THE NEXT GENERATION GAME CONSOLES BY SONY, MICROSOFT AND NINTENDO WILL
LIKELY BE MORE EXPENSIVE AND TIME CONSUMING FOR US AND OUR STUDIOS. IF WE ARE
NOT ABLE TO PRODUCE GAMES FOR THESE CONSOLES IN A COST-EFFECTIVE MANNER, OUR
BUSINESS MAY BE SIGNIFICANTLY HARMED.




Each of
Sony, Nintendo and Microsoft are expected to release next generation game
consoles in the next few years. These new consoles will likely be more powerful,
and games for these consoles will have greater graphics and features. With this
increased power and capabilities, there are likely to be increased costs to
develop games and it is likely that each game will need larger development
teams. Budgets for next generation games are likely to be twice those of games
for current consoles and development teams may need to increase three-fold. The
rising costs may make it prohibitively expensive for small game publishers like
us to take the risk of creating new, unproven games. If we cannot create games
for the next generation consoles in a cost effective manner, our business is
likely to be significantly harmed.


-
12 -


WE
DEPEND ON SONY, NINTENDO AND MICROSOFT FOR THE MANUFACTURING OF PRODUCTS THAT WE
DEVELOP FOR THEIR HARDWARE PLATFORMS. ACCORDINGLY, ANY OF THEM COULD CAUSE
UNANTICIPATED DELAYS IN THE RELEASE OF OUR PRODUCTS AS WELL INCREASES TO OUR
DEVELOPMENT, MANUFACTURING, MARKETING OR DISTRIBUTION COSTS, WHICH COULD
MATERIALLY HARM OUR BUSINESS AND FINANCIAL RESULTS.




Generally,
when we develop interactive entertainment software products for hardware
platforms offered by Sony, Nintendo or Microsoft, the products are manufactured
exclusively by that hardware manufacturer or their approved replicator. We pay a
licensing fee to the hardware manufacturer for each copy of a product
manufactured for that manufacturer's game platform.





The
agreements with these manufacturers include certain provisions such as approval
rights over all products and related promotional materials and the ability to
change the fee they charge for the manufacturing of products, that allow them
substantial influence over our costs and the release schedule of our products.
In addition, since each of the manufacturers is also a publisher of games for
its own hardware platforms and manufactures products for all of its other
licensees, a manufacturer may give priority to its own products or those of our
competitors in the event of insufficient manufacturing capacity. Accordingly,
Sony, Nintendo or Microsoft could cause unanticipated delays in the release of
our products as well increase our development, manufacturing, marketing or
distribution costs, which could materially harm our business and financial
results.




WE
PARTLY DEPEND ON INDEPENDENT DEVELOPERS, AND WE MAKE ADVANCE PAYMENTS TO THEM
PRIOR TO THE COMPLETION OF THE PRODUCT. THERE IS NO ASSURANCE THAT WE CAN RECOUP
THESE PAYMENTS IF WE DO NOT ACCEPT THE PRODUCT FROM A THIRD PARTY
DEVELOPER.




We make
advance payments to independent software developers prior to completion of the
games, which are for the development of intellectual property related to our
games. The advance payments become due when the developer meets agreed
milestones.




Upon
termination of the contract for any reason prior to the completion of a game,
the advance payments are repayable by the independent software developers, who
then remain the sole owner of the source material and intellectual property.
These advance payments that are due prior and after completion of the product
are partly capitalized and expensed as cost of goods sold at the higher of the
contractual or effective royalty rate based on net product sales. However, there
is no assurance that the independent developer will return the advance payments
to us, and if they do not, our business may suffer.




WE
MAY FAIL TO ANTICIPATE CHANGING CONSUMER PREFERENCES, AND IF WE DO, OUR RESULTS
OF OPERATIONS MAY BE MATERIALLY HARMED.




Our
business is speculative and is subject to all of the risks generally associated
with the interactive entertainment software industry, which has been cyclical in
nature and has been characterized by periods of significant growth followed by
rapid declines. Our future operating results will depend on numerous factors
beyond our control, including:




·
            the
      popularity, price and timing of new software and hardware platforms being
      released and distributed by us and our competitors;·
            international,
      national and regional economic conditions, particularly economic
      conditions adversely affecting discretionary consumer
      spending;·
            changes
      in consumer demographics;·
            the
      availability of other forms of entertainment; and·
            critical
      reviews and public tastes and preferences, all of which change rapidly and
      cannot be predicted.




In order
to plan for acquisition and promotional activities we must anticipate and
respond to rapid changes in consumer tastes and preferences. A decline in the
popularity of interactive entertainment software or particular platforms could
cause sales of our titles to decline dramatically. The period of time necessary
to develop new game titles, obtain approvals of manufacturers and produce
CD-ROMs or game cartridges is unpredictable. During this period consumer appeal
of a particular title may decrease, causing projected sales to
decline.





RAPIDLY
CHANGING TECHNOLOGY AND PLATFORM SHIFTS COULD HURT OUR OPERATING
RESULTS.




The
interactive software market and the PC and video game industries in general are
associated with rapidly changing technology, which often leads to software and
platform obsolescence and significant price erosion over the life of a product.
The introduction of new platforms and technologies can render existing software
obsolete or unmarketable. We expect that consumer demand of software for
platforms of older generation will decrease as more advanced platforms are
introduced. As a result, our titles developed for such platforms may not
generate sufficient sales to make such titles profitable. Obsolescence of
software or platforms could leave us with increased inventories of unsold titles
and limited amounts of new titles to sell to consumers which would have a
material adverse effect on our operating results.




We have
devoted and will continue to devote significant development and marketing
resources on products designed for new-generation video game systems, such as
Xbox 360 and PlayStation 3. If PlayStation 3 and/or Xbox 360 do not achieve wide
acceptance by consumers or Sony/Microsoft is unable to ship a significant number
of PlayStation 3/Xbox 360 units in an timely fashion, or if our titles fail to
sell through, we will have spent a substantial amount of our resources for this
platform without corresponding revenues, which would have a material adverse
effect on our business, operating results and financial
condition.


-
13 -





We need
to anticipate technological changes and continually adapt our new titles to
emerging platforms to remain competitive in terms of price and performance. Our
success depends upon our ability and the ability of third-party developers to
adapt software to operate on and to be compatible with the products of original
equipment manufacturers and to function on various hardware platforms and
operating systems. If we design titles to operate on new platforms, we may be
required to make substantial development investments well in advance of platform
introductions and we will be subject to the risks that any new platform may not
achieve initial or continued market acceptance.




A number
of software publishers who compete with us have developed or are currently
developing software for use by consumers over the Internet. Future increases in
the availability of such software or technological advances in such software or
the Internet could result in a decline in platform-based software and impact our
sales. Direct sales of software by major manufacturers over the Internet would
adversely affect our distribution business.




IF
OUR PRODUCTS CONTAIN DEFECTS, OUR BUSINESS COULD BE HARMED
SIGNIFICANTLY.




Software
products as complex as the ones we publish may contain undetected errors when
first introduced or when new versions are released. Despite extensive testing
prior to release, we cannot be certain that errors will not be found in new
products or releases after shipment which could result in loss of or delay in
market acceptance. This loss or delay could significantly harm our business and
financial results.




RETURNS
OF OUR TITLES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.




Our
arrangements with retailers for published titles require us to accept returns
for stock balancing, markdowns or defects. We establish a reserve for future
returns of published titles at the time of sales, based primarily on these
return policies and historical return rates and we recognize revenues net of
returns.




Our
distribution arrangements with retailers only give them the right to return
titles to us or to cancel firm orders in case of reorders, although we do accept
returns for stock balancing, markdowns and defects. We sometimes negotiate
accommodations to retailers, including price discounts, credits and returns,
when demand for specific titles falls below expectations.





Our sales
returns and allowances for the year ended December 31, 2008 were $150,000. If
return rates for our published titles significantly exceed our estimates, our
operating results will be materially adversely affected.




OUR
BUSINESS IS COMPETITIVE.




Competition
in our industry is intense and new products are regularly introduced. We compete
for both licenses to properties and the sale of interactive entertainment
software with Sony, Nintendo and Microsoft, each of which is the largest
developer and marketer of software for its platforms. Sony, Microsoft and
Nintendo currently dominate the industry and have the financial resources to
withstand significant price competition and to implement extensive advertising
campaigns, particularly for prime-time television. These companies may also
increase their own software development efforts or focus on developing software
products for third-party platforms.




In
addition, we compete with domestic public and private companies, international
companies, large software companies and media companies. Many of our competitors
have far greater financial, technical, personnel and other resources than we do
and many are able to carry larger inventories, adopt more aggressive pricing
policies and make higher offers to licensors and developers for commercially
desirable properties than we can. Our titles also compete with other forms of
entertainment such as motion pictures, television and audio and DVDs featuring
similar themes, on-line computer programs and forms of entertainment which may
be less expensive or provide other advantages to consumers.




Retailers
typically have limited shelf space and promotional resources and competition is
intense among an increasing number of newly introduced interactive entertainment
software titles for adequate levels of shelf space and promotional support.
Competition for retail shelf space is expected to increase, which may require us
to increase our marketing expenditures just to maintain current levels of sales
of our titles. Competitors with more extensive lines and popular titles
frequently have greater bargaining power with retailers. Accordingly, we may not
be able to achieve the levels of support and shelf space that such competitors
receive. Similarly, as competition for popular properties increases, our cost of
acquiring licenses for such properties is likely to increase, possibly resulting
in reduced margins. Prolonged price competition, increased licensing costs or
reduced operating margins would cause our profits to decrease
significantly.




If our
competitors develop more successful products, or if we do not continue to
develop consistently high-quality products, our revenues will
decline.




Our
products are sold internationally through third-party distribution and licensing
arrangements. Our sales are made primarily on a purchase order basis without
long-term agreements or other forms of commitments. The loss of, or significant
reduction in sales to, any of our principal retail customers or distributors
could significantly harm our business and financial results. We continue to
focus on good investments in games and put focus on cost control throughout the
year.


-
14 -


WE MAY BE BURDENED WITH PAYMENT
DEFAULTS AND UNCOLLECTIBLE ACCOUNTS IF OUR DISTRIBUTORS OR RETAILERS CANNOT
HONOR THEIR CREDIT ARRANGEMENT S WITH US.




Distributors
and retailers in the interactive entertainment software industry have from time
to time experienced significant fluctuations in their businesses and a number of
them have failed. The insolvency or business failure of any significant retailer
or distributor of our products could materially harm our business and financial
results. We typically make sales to most of our retailers and some distributors
on unsecured credit, with terms that vary depending upon the customer's credit
history, solvency, credit limits and sales history, as well as whether we can
obtain sufficient credit insurance. Although, as in the case with most of our
customers, we have insolvency risk insurance to protect us against our
customers' bankruptcy, insolvency or liquidation, this insurance contains a
significant deductible and a co-payment obligation and the policy does not cover
all instances of non-payment. In addition, although we maintain a reserve for
uncollectible receivables, the reserve may not be sufficient in every
circumstance. As a result, a payment default by a significant customer could
significantly harm our business and financial results. We are currently
investigating to insure our debtors in order to limit the risks.





WE
MAY NOT BE ABLE TO MAINTAIN OUR DISTRIBUTION RELATIONSHIPS WITH KEY VENDORS, AND
IF WE DO NOT, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED




We
distribute interactive entertainment software products and provide related
services in the Benelux countries, France, Germany, the United Kingdom, and
other European countries and the United States, for a variety of entertainment
software publishers, many of which are our competitors, and/or hardware
manufacturers. These services are generally performed under limited term
contracts. Although we expect to use reasonable efforts to retain these vendors,
we may not be successful in this regard.




OUR
SOFTWARE MAY BE SUBJECT TO LEGAL CLAIMS WHICH COULD BE COSTLY AND TIME CONSUMING
AND CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.




In prior
years lawsuits were filed against numerous video game companies by the families
of victims who were shot and killed by teenage gunmen in attacks perpetrated at
schools. In these lawsuits plaintiffs alleged that the video game companies
manufactured and/or supplied these teenagers with violent video games, teaching
them how to use a gun and causing them to act out in a violent manner. Both
lawsuits have been dismissed. It is possible, however, that similar, additional
lawsuits may be filed in the future. If such future lawsuits are filed and
ultimately decided against us and our insurance carrier does not cover the
amounts we are liable for, it could have a material adverse effect on our
business and financial results. Payment of significant claims by insurance
carriers may make such insurance coverage materially more expensive or
unavailable in the future, thereby exposing our business to additional
risk.




IN
MANY OF OUR KEY TERRITORIES, OUR BUSINESS, OUR PRODUCTS AND OUR DISTRIBUTION
CHANNELS ARE SUBJECT TO INCREASING REGULATION IN AREAS RELATING TO CONTENT,
CONSUMER PRIVACY AND ONLINE DELIVERY. IF WE DO NOT SUCCESSFULLY COMPLY WITH
THESE REGULATIONS, OUR BUSINESS MAY SUFFER.




Legislation
is continually being introduced that may affect both the content of our products
and their distribution. For example, privacy laws in the United States and
Europe impose various restrictions on our web sites. Those rules vary by
territory although the Internet recognizes no geographical boundaries. Other
countries, such as Germany, have adopted laws regulating content both in
packaged goods and those transmitted over the Internet that are stricter than
current United States laws. In the United States, the federal and several state
governments are considering content restrictions on products such as ours, as
well as restrictions on distribution of such products. Any one or more of these
factors could harm our business by limiting the products we are able to offer to
our customers and by requiring additional differentiation between products for
different territories to address varying regulations. This additional product
differentiation would be costly.




IF
WE DO NOT CONSISTENTLY MEET OUR PRODUCT DEVELOPMENT SCHEDULES, WE WILL
EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS.




Product
development schedules, particularly for new hardware platforms, high-end
multimedia PCs and the Internet, are difficult to predict because they involve
creative processes, use of new development tools for new platforms and the
learning process, research and experimentation associated with development for
new technologies. We have in the past experienced development delays for several
of our products. Failure to meet anticipated production or “go live” schedules
may cause a shortfall in our revenues and profitability and cause our operating
results to be materially different from expectations. Delays that prevent
release of our products during peak selling seasons may reduce lifetime sales of
those products.





OUR
EXPANSION MAY STRAIN OUR OPERATIONS.




We have
expanded through internal growth and acquisitions of titles, which has placed
and may continue to place a significant strain on our management,
administrative, operational, and financial and other resources. We intend to
release a number of titles on current and new platforms. Furthermore, we have
expanded our publishing and distribution operations, increased our advances to
developers and manufacturing expenditures, enlarged our work force and expanded
our presence on international markets. To successfully manage this growth, we
must continue to implement and improve our operating systems as well as hire,
train and manage a substantial and increasing number of management, technical,
marketing, administrative and other personnel. We may be unable to effectively
manage rapidly expanded operations which are geographically
dispersed.


-
15 -


We have
acquired rights to various properties and businesses, and we may pursue
opportunities by making selective acquisitions consistent with our business
strategy. We may be unable to successfully integrate any new personnel, property
or business into our operations. If we are unable to successfully integrate
future personnel, properties or businesses into our operations, we may incur
significant charges.




Our
publishing and distribution activities require significant amounts of capital.
We may seek to obtain additional debt or equity financing to fund the cost of
expansion. The issuance of equity securities would result in dilution to the
interests of our shareholders.




A LIMITED NUMBER OF CUSTOMERS MAY
ACCOUNT FOR A SIGNIFICANT PORTION OF OUR SALES, AND THE LOSS OF OUR RELATIONSHIPS WITH
PRINCIPAL CUSTOMERS OR A DECLINE IN SALES TO PRINCIPAL CUSTOMERS COULD HARM OUR
OPERATING RESULTS.




Sales to
our four largest customers accounted for approximately 63% of our revenues for
the year ended December 31, 2008. Sales to our four largest customers accounted
for approximately 76% of our revenues for the year ended December 31, 2007.
Sales to our four largest customers accounted for approximately 88% of our
revenues for the year ended December 31, 2006. Sales to our three largest
customers accounted for approximately 65% of our revenues for the year ended
December 31, 2005. The loss of our relationships with principal customers or a
decline in sales to principal customers could harm our operating
results.




RATING
SYSTEMS FOR INTERACTIVE ENTERTAINMENT SOFTWARE, POTENTIAL LEGISLATION AND
CONSUMER OPPOSITION COULD INHIBIT SALES OF OUR PRODUCTS.




The home
video game industry requires interactive entertainment software publishers to
provide consumers with information relating to graphic violence or sexually
explicit material contained in software titles. Certain countries have also
established similar rating systems as prerequisites for sales of interactive
entertainment software in such countries. We believe that we comply with such
rating systems and display the ratings received for our titles. Our software
titles generally receive a rating of "G" (all ages), "E10-Plus" (age 10 and
over) or "T" (age 13 and over), although certain of our titles receive a rating
of "M" (age 17 and over), which may limit the potential markets for these
titles.





In the
United States, there have been several legislative proposals that if adopted
would result in the regulation of interactive entertainment software, motion
picture and recording industries, including a proposal to adopt a common rating
system for interactive entertainment software, television and music containing
violence and sexually explicit material and an inquiry by the U.S. Federal Trade
Commission with respect to the marketing of such material to minors. Consumer
advocacy groups have also opposed sales of interactive entertainment software
containing graphic violence and sexually explicit material by pressing for
legislation in these areas and by engaging in public demonstrations and media
campaigns. If any groups were to target our titles, we might be required to
significantly change or discontinue a particular title. In addition, certain
retailers, such as U.S.-based retailers Wal-Mart Stores Inc., Sears Inc.,
including its Kmart and Sears’s division, and Target, a division of Dayton
Hudson Corporation, have declined to sell interactive entertainment software
containing graphic violence or sexually explicit material, which also limits the
potential markets for certain of our games. Such restrictions or impairments may
also occur in other geographic markets and as a result limit the potential for
certain of our games in those markets. Furthermore, because of the content in
some of our titles, religious or other advocacy groups could pressure retailers
not to sell or carry our titles which could impair marketing or sales efforts
with certain retailers and as a consequence limit sales or potential sales for
certain of our games in affected areas.





WE
ARE SUBJECT TO RISKS AND UNCERTAINTIES OF INTERNATIONAL TRADE, AND IF ANY OF
THESE RISKS MATERIALIZE, OUR RESULTS OF OPERATIONS MAY BE HARMED.




Sales in
European markets, primarily Germany, France and the Benelux, have accounted for
an increasing portion of our revenues. In 2008, sales in Europe accounted for
approximately 80% of our revenues and sales in the United States accounted for
the remaining 20% of our revenues. We are subject to risks inherent in
international trade, including:




·
            increased
      credit risks;·
            tariffs
      and duties;·
            fluctuations
      in foreign currency exchange rates;·
            shipping
      delays; and·
            international
      political, regulatory and economic developments, all of which can have a
      significant impact on our operating
results.




WE ARE DEPENDENT UPON OUR KEY
EXECUTIVES AND PERSONNEL, AND IF WE FAIL TO HIRE AND RETAIN NECESSARY PERSONNEL
AS NEEDED, OUR BUSINESS WILL BE SIGNIFICANTLY IMPAIRED .




Our
success is largely dependent on the personal efforts of certain key personnel.
The loss of the services of one or more of these key employees could adversely
affect our business and prospects. Our success is also dependent upon our
ability to hire and retain additional qualified operating, marketing, technical
and financial personnel. Competition for qualified personnel in the computer
software industry is intense, and we may have difficulty hiring or retaining
necessary personnel in the future. If we fail to hire and retain necessary
personnel as needed, our business will be significantly
impaired.


-
16 -


FLUCTUATIONS
IN FOREIGN EXCHANGE RATES AND INTEREST RATES COULD HARM OUR RESULTS OF
OPERATIONS




We are
exposed to currency risks and interest rate risks. We are particularly exposed
to fluctuations in the exchange rate between the U.S. dollar and the Euro, as we
incur manufacturing costs and price our systems predominantly in Euro while a
portion of our revenues and cost of sales is denominated in U.S.
dollars.




In
addition, a substantial portion of our assets, liabilities and operating results
are denominated in Euros, and a minor portion of our assets, liabilities and
operating results are denominated in currencies other than the Euro and the U.S.
dollar. Our consolidated financial statements are expressed in U.S. dollars.
Accordingly, our results of operations are exposed to fluctuations in various
exchange rates.




Furthermore,
a strengthening of the Euro, particularly against the U.S. dollar could lead to
intensified price-based competition in those markets that account for the
majority of our sales, resulting in lower prices and margins and an adverse
impact on our business, financial condition and results of
operations.




THE
MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.




The
market price of the common stock may be highly volatile. Disclosures of our
operating results, announcements of various events by us or our competitors and
the development and marketing of new titles affecting the interactive
entertainment software industry may cause the market price of the common stock
to change significantly over short periods of time.




SOME
OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL SHAREHOLDERS.




As of
December 31, 2008, officers, directors, and shareholders holding more than 5% of
our outstanding shares collectively controlled approximately 56% of our
outstanding common stock. As a result, these shareholders, if they act together,
would be able to exert a significant degree of influence over our management and
affairs and over matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. Accordingly,
this concentration of ownership may harm the market price of our ordinary shares
by delaying or preventing a change in control of us, even if a change is in the
best interests of our other shareholders.




In
addition, the interests of management shareholders and shareholders holding more
than 5% of our outstanding shares may not always coincide with the interests of
our other shareholders, and accordingly, they could cause us to enter into
transactions or agreements that we would not otherwise consider.




THE
COMPANY IS INVOLVED IN A NUMBER OF LEGAL PROCEEDINGS RELATED TO ITS ORDINARY
COURSE OF BUSINESS. THE OUTCOME OF THESE PROCEEDINGS IS UNCERTAIN AND MAY
ADVERSELY AFFECT THE COMPANIES FINANCIAL POSITION.




Although
we believe that we has adequate legal claims or defenses in place and/or
provided adequate accruals for related costs such that the ultimate outcome will
not have a material adverse impact on our future financial position or results
from operation the outcome of these legal proceedings is not sure.





IT
MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OR OUR OFFICERS AND
DIRECTORS.




Service
of process upon our directors and officers, most of whom reside outside the
United States, may be difficult to obtain within the United States. In addition,
because substantially all of our assets and all of our directors and officers
are located outside the United States, any judgment obtained in the United
States against us or any of our directors and officers may not be collectible
within the United States.







THERE IS SUBSTANTIAL DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN. IF THE COMPANY DOES NOT OBTAIN ANY
NECESSARY FINANCING, WE MAY NEED TO CEASE OPERATIONS.




The
Company’s management believes that in order to satisfy its working capital
requirements through the second quarter of 2008, 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 is no
legal obligation for either management or significant shareholders to provide
additional future funding. Consequently, there is substantial doubt about our
ability to continue as a going concern. We have no current plans, proposals,
arrangements or understandings with respect to the sale or issuance of
additional securities prior to the location of a merger or acquisition
candidate. Accordingly, there can be no assurance that sufficient funds will be
available to us to allow us to cover the expenses related to such
activities.


-
17 -


WE
MAY BE SUBJECT TO REGULATORY SCRUTINY AND SUSTAIN A LOSS OF PUBLIC CONFIDENCE IF
WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS RELATING TO OUR INTERNAL
CONTROLS OVER FINANCIAL REPORTING AND/OR IF WE HAVE MATERIAL INTERNAL CONTROL
WEAKNESSES WHICH MAY RESULT IN MATERIAL FINANCIAL REPORTING ERRORS




Section
404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of
our internal controls over financial reporting beginning with our annual report
filed for a fiscal year ending on or after December 15, 2007 and have our
independent registered public accounting firm attest to such evaluation for
fiscal years ending on or after December 15, 2009.  Compliance with
these requirements can be expensive and time-consuming.




While we
believe that we met and will continue to be able to meet the applicable
deadlines, no assurance can be given that we will meet the required deadlines in
future years. If we fail to timely complete this evaluation, or if our auditors
cannot timely attest to our evaluation when we are required to have such
attestation, or if we have material internal control weaknesses which may result
in material financial reporting errors, we may be subject to regulatory scrutiny
and a loss of public confidence in our internal controls.  In
addition, failure to provide the required management report would render our
annual report materially deficient. As a result, we would not be timely or
current in our Exchange Act reporting.  This would result in us not
being eligible to file new Form S-3 or Form S-8 registration statements and the
loss of the availability of Rule 144.  Because the filing of the
annual report constitutes the Section 10(a)(3) update for any effective Forms
S-3 or S-8, we also would be required to suspend any sales under already
effective registration statements.  However, now that have amended our
annual report to provide the required management's report on whether or not
internal control is effective, we would be able file new Forms S-8 and resume
making sales under already effective Forms S-8, and shareholders can avail
themselves of Rule 144 (assuming all other conditions to use of the form or rule
are satisfied).  Although amending the annual report to provide
management's report may result in us becoming current in our Exchange Act
reports, it would remain untimely and we would not be eligible to file new Forms
S-3.







ITEM
1B. UNRESOLVED STAFF COMMENTS





None







ITEM
2. PROPERTY




We do not
own any real estate. Currently, we lease properties in Breda and Amsterdam, The
Netherlands.




Our
offices located at Hambroeklaan 1 in Breda are leased by our subsidiary,
Playlogic Game Factory, from Neglinge BV pursuant to a lease agreement, which
expires on October 1, 2013. Playlogic Game Factory has an option to extend the
lease agreement. If this option is exercised, the lease agreement will expire on
October 1, 2018. The lease property spans 1,600 square meters and may only be
used as office space. At signing of the lease agreement, the lessor committed
itself to invest $440,000 (€300,000) in the lease property which amount shall be
repaid by Playlogic Game Factory B.V. in ten years. Payment is due on a
quarterly basis and amounts to $44,000 (€30,000) per year.





We lease
our offices located at the WTC Amsterdam, Strawinskylaan 1041, 1077 XX
Amsterdam, the Netherlands pursuant to a lease agreement, which expires on July
31, 2013. The lease property spans 870 square meters and may only be used as
office space. Payment is due on a quarterly basis and amounts to $100,000
(€72,000) per quarter.







I TEM 3. LEGAL
PROCEEDINGS




On
November 27, 2007, we have won the legal proceedings in copyrights to the game
Ancient Wars: Sparta. So has decided the District Court of Amsterdam in the case
of Playlogic Entertainment against WorldForge/Visionvale Ltd.  from
Cyprus and Burut Co. from Russia.




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 each time they state the contrary or refrain
from publishing rectifications of former wrong statements.





Furthermore,
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.


-
18 -


ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS




No
matters were submitted to a vote of the holders of our common stock during the
year. During the fiscal year ending December 31, 2008, no other matters
were submitted to a vote of holders of our common stock through the solicitation
of proxies or otherwise.








PART
II




I TEM 5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES




Since
August 2, 2005, our common stock has been quoted on the Over-the-Counter (“OTC”)
Bulletin Board, an electronic stock listing service provided by The NASDAQ Stock
Market, Inc., under the symbol PLGC.OB (our symbol had been DNRE.OB from January
2003 until May 2005, and it was DNRR.OB from May 2005 until August 2,
2005).




As of
December 31, 2008, there were approximately 450 holders of record of our common
stock.




The price
range of our common stock during the past two fiscal years is shown below. High
and low prices given here refer to the high and low bid quoted on the OTC
Bulletin Board. These prices reflect our 1-for-10 reverse stock split effective
April 15, 2005. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual
transactions.




Fiscal
      2007
                        High
                        LowFirst
      Quarter
                        $1.01
                        $0.36Second
      Quarter
                        $1.01
                        $0.45Third
      Quarter
                        $1.01
                        $0.64Fourth
      Quarter
                        $1.10
                        $0.65Fiscal
      2008
                        High
                        LowFirst
      Quarter
                        $1.40
                        $0.71Second
      Quarter
                        $1.49
                        $0.81Third
      Quarter
                        $1.12
                        $0.40Fourth
      Quarter
                        $0.85
                        $0.15




The
source for the high and low closing bids quotations is http://finance.yahoo.com
and does not reflect inter-dealer prices. Such quotations are without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions
and have not been adjusted for stock dividends or splits.




The
Company has never declared or paid dividends on its common stock and anticipates
that for the foreseeable future it will not pay dividends on its common
stock.





Unregistered
Sales of Equity Securities




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.





Common
stock





During
the year ended December 31, 2007, the Company sold 3,182,609 units at $1.15 per
share for proceeds of $3,660,000 pursuant to an exemption from registration
claimed under Rule 4(2) of the Securities Act of 1933, as
amended.  Each unit consisted of two shares of the Company’s par value
common stock and one Common Stock Warrant to purchase the Company’s common stock
at $2.75 per share at any time within the next 5 years. In total 1,591,308
warrants have been issued in relation to this sale. Furthermore, the Company
sold 270,000 shares to an unrelated third party at par value for facilitating
the share issuances.





During
the year ended December 31, 2007, the Company issued 9,147,861 units at $0.80
per share for proceeds of approximately $7,313,000 pursuant to an exemption from
registration claimed under Rule 4(2) of the Securities Act of 1933, as
amended.  In relation to this sale 2,500,000 warrants have been issued
to purchase the Company’s common stock at $1.35 per share at any time within the
next 5 years. Of this subscription, 6,287,273 shares were used to convert
outstanding debt amounting to $5,024,899. The remaining 2,288,471 shares have
been sold for cash which was paid directly by subscriber to
vendors.


-
19 -





During
the year ended December 31, 2007, the Company sold 600,000 shares of its
common stock to an accredited investor based in the Netherlands at $0.90 per
share for a total cash consideration of $538,604 pursuant to an exemption from
registration claimed under Rule 4(2) of the Securities Act of 1933, as
amended.





The above
transactions can be summarized as follows:




Issuance
      price
                            
                            
                            Cash
                            
                            
                            Settlement
      of vendor payables
                            
                            
                            Debt
      conversion
                            
                            
                            Total
                            
                            
                            Units$
                            1.15
                            
                            
                            $
                            2,735,019
                            
                            
                            $
                            635,961
                            
                            
                            $
                            289,020
                            
                            
                            $
                            3,660,000
                            
                            
                            $
                            3,182,609$
                            0.80
                            
                            
                            
                            -
                            
                            
                            
                            2,288,471
                            
                            
                            
                            5,024,899
                            
                            
                            
                            7,313,370
                            
                            
                            
                            9,147,861$
                            0.90
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            538,604
                            
                            
                            
                            538,604
                            
                            
                            
                            600,000$
                            par
                            
                            
                            
                            270
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            270
                            
                            
                            
                            270,000$
                            2,735,289
                            
                            
                            $
                            2,924,432
                            
                            
                            $
                            5,852,523
                            
                            
                            $
                            11,512,244
                            
                            
                            $
                            13,200,470





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 August
28, 2007, the Company granted to Willy J. Simon, the Company’s Chairman and Non
Executive Director, 112,500 options to purchase shares of the Company’s common
stock at an exercise price of $1.35 per share. A total of 112,500 shares of
these options will vest on April 1, 2008. The options will expire after 3
years.




On August
28, 2007, the Company granted to George M. Calhoun, one of the Company’s Non
Executive Directors, 62,500 options to purchase shares of the Company’s common
stock at an exercise price of $1.35 per share. A total of 62,500 shares of these
options will vest on April 1, 2008. The options will expire after 3
years.




On August
28, 2007, the Company granted to Erik L.A. van Emden, one of the Company’s Non
Executive Directors, 62,500 options to purchase shares of the Company’s common
stock at an exercise price of $1.35 per share. A total of 62,500 shares of these
options will vest on April 1, 2008. The options will expire after 3
years.





On August
28, 2007, the Company granted a number of employees and officers a total
of  725,000 options (in accordance with the table below) to purchase
shares of the Company’s common stock at an exercise price of $1.35 per share.
These options will vest for 33,33% on August 28, 2009, and the remaining options
will vest in two equal installments on August 28, 2010 and August 28, 2011. The
options will expire after 4 years.





W.M
      Smit, Chief Executive Officer
                
                
                200,000R.W.
      Smit, Executive Vice President
                
                
                200.000D.
      Morel, Chief Technology Officer
                
                
                100.000P.Y.
      Thiercelin, Director of Sales
                
                
                75.000B.
      Mulderij, Marketing Manager
                
                
                75.000M.
      Janse, Executive Producer
                
                
                25.000O.
      Klooster, Assistant Controller
                
                
                25.000I.
      Frid, Managing Director
                
                
                15.000L.
      Leatomu, PA to the CEO
                
                
                10.000725.000





-
20 -


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





Option
grants




On June
4, 2008, the Company granted to Willy J. Simon, the Company’s Chairman and Non
Executive Director, 80,000 options to purchase shares of the Company’s common
stock at an exercise price of $2.00 per share. The options have a 4 year term
and will vest in accordance with the stock option plan in 3 equal installments,
the first starting one year after the date of granting.




On June
4, 2008, the Company granted to George M. Calhoun, one of the Company’s Non
Executive Directors, 40,000 options to purchase shares of the Company’s common
stock at an exercise price of $2.00 per share. The options have a 4 year term
and will vest in accordance with the stock option plan in 3 equal installments,
the first starting one year after the date of granting.




On June
4, 2008, the Company granted to Erik L.A. van Emden, one of the Company’s Non
Executive Directors, 40,000 options to purchase shares of the Company’s common
stock at an exercise price of $2.00 per share. The options have a 4 year term
and will vest in accordance with the stock option plan in 3 equal installments,
the first starting one year after the date of granting.





On June
4, 2008, the Company granted to Willem M. Smit, one of the Company’s Non
Executive Directors, 40,000 options to purchase shares of the Company’s common
stock at an exercise price of $2.00 per share. The options have a 4 year term
and will vest in accordance with the stock option plan in 3 equal installments,
the first starting one year after the date of granting.





On June
4, 2008, the Company granted a number of employees and officers a total
of  940,000 options (in accordance with the table below) to purchase
shares of the Company’s common stock at an exercise price of $2.00 per share.
These options will vest for 33,33% on June 4, 2009, and the remaining options
will vest in two equal installments on June 4, 2010 and June 4, 2011. The
options will expire after 4 years.





W.M
      Smit, Chief Executive Officer
                    
                    
                    200,000R.W.
      Smit, Executive Vice President
                    
                    
                    400.000D.
      Morel, Chief Technology Officer
                    
                    
                    100,000P.Y.
      Thiercelin, Chief Marketing & Sales Officer
                    
                    
                    100,000Other
      employees
                    
                    
                    140,000940,000





Issuer
Purchase of Equity Securities




None.


-
21 -







ITEM 6.  SELECTED FINANCIAL
DATA  Not
applicable







ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION




Overview




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.





We have
released the following games to date:


Game
                              
                              Studio
                              
                              PlatformCompleted
      GamesAlpha
      Black Zero
                              
                              Khaeon
      (NL)
                              
                              PCAirborne
      Troops
                              
                              Widescreen
      Games (F)
                              
                              PS2,
      PCCyclone
      Circus
                              
                              Playlogic
      Game Factory (NL)
                              
                              PS2Xyanide
                              
                              Overloaded
      (NL)
                              
                              Mobile
      PhonesWorld
      Racing 2
                              
                              Synetic
      (D)
                              
                              PS2,
      Xbox, PCKnights
      of the Temple 2
                              
                              Cauldron
      (SK)
                              
                              PS2,
      Xbox, PCGene
      Troopers
                              
                              Cauldron
      (SK)
                              
                              PS2,
      Xbox, PCXyanide
                              
                              Playlogic
      Game Factory (NL)
                              
                              XboxAge
      of Pirates: Caribbean Tales
                              
                              Akella
      (Russia)
                              
                              PCInfernal
                              
                              Metropolis
      (Poland)
                              
                              PCAncient
      Wars: Sparta
                              
                              Visionvale
      (Cyprus)
                              
                              PCEvil
      days of Luckless John
                              
                              3A
      entertainment (British Virgin Islands)
                              
                              PCXyanide
      Resurrection
                              
                              Playlogic
      Game Factory (NL)
                              
                              PSPObscure
      II
                              
                              Hydravision
      (France)
                              
                              PC,
      PS2, WiiDragon
      Hunters
                              
                              Futurikon
      (France)
                              
                              DSRed
      Bull BC One
                              
                              Smack
      Down Productions (France)
                              
                              DSAggression:
      Europe 1914
                              
                              Buka
      (Cyprus)
                              
                              PCSimon
      the Sorcerer 4
                              
                              RTL
      Media (Germany)
                              
                              PCDimensity
                              
                              Boriana
      (Bulgaria)
                              
                              PCWorldshift
                              
                              RTL
      Media (Germany)
                              
                              PCBuilding
      & Co
                              
                              Elektro
      Games (France)
                              
                              PCStateshift
                              
                              Engine
      Software (NL)
                              
                              PC




-
22 -


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.




Estimates. The preparation of
financial statements in conformity with generally accepted accounting principles
requires us 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 returns, price
concessions and doubtful accounts. Actual amounts could differ significantly
from these estimates.




Results
of Operations




Comparison
of Fiscal 2008 to Fiscal 2007




Revenues . Revenues for
Fiscal 2008 were $9,024,196 as compared to $10,099,746 for Fiscal 2007. This
decrease of  approximately 10% in revenues is primarily the result
of  the fact that the Company had to postpone some of its Q3 and Q4
titles to 2009. Therefore, we have not release new games during the 4th quarter
of 2008, causing the Company to depend on sell through of existing
titles.




Gross Profit . Gross profit
totaled $3,456,091 for Fiscal 2008. For Fiscal 2007, gross profit totaled
$5,039,848. This decrease in gross profitof 31.4% is primarily the
result of the decrease in revenue as well as the fact that the Company hasn’t
released any new titles during the last months of 2008. Due to the amortization
policy, some of the games capitalized on the balance sheet were amortized based
on a straight line basis, resulting in higher cost of sales.Furthermore, the mix in
our product portfolio is different in 2008 compared to 2007. In 2008 we have
released more console titles, which results in overall lower margins.
Manufacturing costs for PC titles are relatively low compared to license fees
and manufacturing costs for consoles.




Research and development
 expenses .
Research and development expenses totaled $460,038 for Fiscal 2008. For Fiscal
2007, research and development expenses totaled $542,215. This represents a
decrease of $82,177 or 15%. This decrease is due to a higher amount of
capitalized personnel expenses in our development studio in Fiscal 2008 for the
game we are developing in-house. Furthermore, the expenses in 2007 contained
R&D expenses for the Sony contract as well as the feasibility of the game we
are developing in-house.




Selling, marketing, general and
administrative expenses .  Selling, marketing, general and
administrative expenses totaled $7,187,881 for the Fiscal 2008. For fiscal 2007,
selling, general and administrative expenses totaled $4,451,357. The increase of
costs is due to the start of the distribution activities in the UK. Furthermore,
we have spent more money on marketing of our products. Also, as a result of the
move of our corporate headquarters in Amsterdam, we have recorded incidental
expenses.




Depreciation . Depreciation
expense totaled $384,960, for Fiscal 2007. For Fiscal 2007, depreciation expense
totaled $297,292. The increase of $87,668 or 29% is caused by additions to the
fixed assets during the year 2008. The Company has moved offices in May 2008 and
had to invest in leasehold improvements as well as furniture.




Asset impairment charges. We
review our Capitalized Software whenever events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. Asset
impairment charges totaled $4,500,000 for fiscal 2008 versus $68,566 in Fiscal
2007. The economic crisis in which the world is since Q3 2008 has impacted our
sales and management believes it is prudent to impair some of its titles that
have been released to market, to ensure the amounts capitalized can be fully
recovered with future sales.




Interest expense . Interest
expense totaled $679,504  for Fiscal 2008. For Fiscal 2007, interest
expense totaled $1,164,250. This represents a decrease of $484,746 and is
primarily the result of the restructuring of our debt position. We have
converted a large part of the 2007 in September 2007 into equity. Furthermore,
due to capital raises in March 2008 and June 2008, we were able to repay
remaining expensive loans.


-
23 -


Net Result . Our net loss for
Fiscal 2008 was $9,478,797 . For Fiscal 2007 we had a net profit that totaled
$743,729. The decrease of the net result is primarily due to lower revenues, a
$4.5 million one time impairment charge , straight line amortization on some of
our games as well as higher operating expenses due to increased number of
employees as well as move of offices.




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 $(371,231) for the Fiscal 2008 and
$(617,751) for Fiscal 2007.




Equity . The total
stockholders’ deficit as of December 31, 2008 amounted to $(2,319,679) s
oppose to a stockholders’equity of $695,753 as of December 31, 2007. The
decrease in equity is mainly caused by the loss for the year amounting to
$9,478,797. The Company has sold $7,500,000 (gross) new equity during
2008.







Liquidity
and Capital Resources




As of
December 31, 2008, our cash balance was $81,978 as compared to $349,464 at
December 31, 2007.




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
December 31, 2008 was $380,993, as compared to $671,148 at
December 31, 2007.





Off
Balance Sheet Arrangements




Except
the operating lease obligations mentioned below 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, and results of operations, liquidity or
capital expenditures.




Contractual
Obligations




We have
the following contractual obligations associated with its lease commitments and
other contractual obligations per December 31, 2008:




Contractual
      Obligations
                          
                          Payments
      Due By Period (in thousands)Total
                          
                          
                          Less
      than 1 Year
                          
                          
                          1-3
      Years
                          
                          
                          3-5
      Years
                          
                          
                          More
      than 5 YearsLong-Term
      Debt Obligations
                          
                          $
                          4,230
                          
                          
                          $
                          2,546
                          
                          
                          $
                          1,592
                          
                          
                          
                          92
                          
                          
                          
                          -Capital
      Lease Obligations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Operating
      lease Obligations (Including Rent)
                          
                          $
                          3,955
                          
                          
                          $
                          934
                          
                          
                          $
                          1,701
                          
                          
                          $
                          1,415
                          
                          
                          
                          -Purchase
      obligations
                          
                          $
                          3,088
                          
                          
                          $
                          3,088
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Other
      contractual obligations
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Total
                          
                          $
                          11,273
                          
                          
                          $
                          6,568
                          
                          
                          $
                          3,293
                          
                          
                          $
                          4,800
                          
                          
                          
                          -





Summary
of Significant Accounting Policies




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.


-
24 -


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 exclusive publishing and distribution rights and require 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.




Prepaid
royalties




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 revenues 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 revenues 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 revenues when collection becomes probable (generally upon
      cash collection).




Product
Revenues




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





New
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.


-
25 -


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.





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.




Related
Party Transactions




See below
Part III.







ITEM
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are
subject to market risks in the ordinary course of our business, primarily risks
associated with interest rate and foreign currency fluctuations.





Current
loans the Company had loans with shareholders at normal interest rates varying
from 7% to 12% depending on the term of the loan. The long term loan bears a 7%
annual interest.





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 year ended December 31,
2008, our foreign currency translation adjustment loss was approximately $3.4
million.


-
26 -


ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The
financial statements and supplementary data appear in a separate section of this
report starting on Page F-1. We provide details of our valuation and qualifying
accounts in "Note 18—Supplementary Financial Information" to the consolidated
financial statements. All schedules have been omitted since the information
required to be submitted has been included on the consolidated financial
statements or notes thereto or has been omitted as not applicable or not
required.







ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None








ITEM 9A. 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 the end of the period covered by this report 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.





Inherent
Limitations Over Internal Controls





Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that:


(i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets;





(ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors;
and





(iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a
material effect on our financial statements.





Management,
including our Chief Executive Officer and Interim Chief Financial Officer, does
not expect that our internal controls will prevent or detect all errors and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected. Also, any evaluation of the effectiveness of controls in future
periods is subject to the risk that those internal controls may become
inadequate because of changes in business conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





Management's
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the criteria set forth in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2008.


This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to the attestation by the company’s
registered public accounting firm pursuant to the temporary rules of the SEC
that permit us to only provide management’s report in this annual
report





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during 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.






ITEM 9B. OTHER INFORMATION




None.


-
27 -







PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT;




Our
directors and executive officers are as follows:





Name
                                  Age
                                  PositionWillem
      M. Smit
                                  62
                                  Director,
      President, and Chief Executive OfficerWilly
      J. Simon
                                  58
                                  Chairman
      of the Board of DirectorsGeorge
      M. Calhoun
                                  56
                                  Member
      of the Board of DirectorsErik
      L.A. van Emden
                                  60
                                  Member
      of the Board of DirectorsRuud
      Spoor
                                  45
                                  Member
      of the Board of DirectorsRogier
      W. Smit
                                  34
                                  Executive
      Vice PresidentWilbert
      Knol
                                  41
                                  Chief
      Financial Officer (ad interim up to March 18, 2009)Marcel
      Noordeloos
                                  40
                                  Chief
      Financial Officer (ad interim as of March 18, 2009)Dominique
      Morel
                                  34
                                  Chief
      Technology OfficerPierre-Yves
      Thiercelin
                                  33
                                  Chief
      Marketing & Sales Officer





Biographical
Information




The
principal occupations and brief summary of the background of each director and
executive officer are as follows:




Willem M. Smit has been the
Chief Executive Officer of Playlogic International since 2001. In July 2005, he
became Chief Executive Officer of the Company. In 1976, he founded Datex
Software B.V., where he grew the company over nine years from 20 to 900
employees. Datex went public in 1985 and it merged with Getronics in 1987. Since
that time, Mr. Smit has been a private investor in various companies. He is the
father of Rogier W. Smit, the Company's Executive Vice President.





Willy J. Simon has been on
Playlogic International N.V.'s Supervisory Board (which is similar to the board
of directors of a US company) since 2003. In July 2005, he became Chairman and
Non Executive Director of the Company. He currently serves as a Non-Executive
Director of Redi & Partners Ltd., a hedge fund of hedge funds. He served
among others as Director of IMC Holding and Chairman of Bank Oyens & van
Eeghen. Moreover he acted as an Advisor to the Board of NIB Capital. From
1997-2001, he was an executive member of the Board of Fortis Bank
NL.





George M. Calhoun became Non
Executive Director of the Company in November 2005. George Calhoun is currently
serving on the faculty of the Howe School of Technology Management at the
Stevens Institute of Technology in Hoboken, New Jersey. He was Chairman and CEO
of Illinois Superconductor Corporation from 1999 until 2002. He has more than 23
years of experience in high-tech wireless systems development, beginning in 1980
as part of the team that organized Inter Digital Communications Corporation,
where he participated in the development of the first commercial application of
digital TDMA radio technology, and introduced the first wireless local loop
system to the North American telecommunications industry. Dr. Calhoun holds a
Ph.D. in Systems Science from the Wharton School at the University of
Pennsylvania, as well as a B.A. from the same university.





Erik L.A. van Emden has been
on Playlogic International N.V.’s Supervisory Board since December 2003. In
July 2005, he became Non Executive Director of the Company. Since 1993 Van Emden
has been an attorney and partner with Bosselaar & Strengers, a law firm
based in Utrecht, the Netherlands, which focuses on large and medium-sized
companies. The firm specializes in practices including employment, liability
& insurance, real estate and corporate. Van Emden specializes in corporate
law and is coordinator of the corporate law practice group. Previously, Van
Emden was Board Member of the Amsterdam Stock Exchange and Member of the
Executive Board of Credit Lyonnais Bank Nederland N.V. He also held positions at
Barclays Bank and Algemene Bank Nederland. In addition, Van Emden currently
serves as a Director of several private Dutch companies.





Ruud Spoorjoined the Board
of Playlogic in July 2008. Mr. Spoor is serving as the fourth non-executive
director on the Board of Playlogic Entertainment, Inc. Since 2007, Mr. Spoor has
been the director of BL Capital B.V., an investment firm located in ‘s
Hertogenbosch, the Netherlands. Prior to BL Capital, Mr. Spoor was Commercial
Director Corporate Clients of ABN-AMRO in the Netherlands. Spoor also currently
serves as a director or as a member of the supervisory board in several Dutch
companies.





Rogier W. Smit co-founded
Playlogic International N.V. and Playlogic Game Factory B.V. in 2001. He has
worked in various management positions at those two companies since then. He has
been Playlogic International N.V.'s Executive Vice President and Chief Operating
Officer since 2002.





Wilbert Knol became the
Company's Chief Financial Officer ad interim on November 1, 2006 following Jan
Willem Kohne’s resignation as CFO per the same date. Mr. Knol has held several
financial and operational positions with among others Hill Rom a division of
Hillebrand Industries Inc. (NYSE) (1999-2005) and Coopers & Lybrand
(1992-1997). Mr. Knol received his RA Degree (the Dutch equivalent of a CPA
Degree) from Amsterdam University the Netherlands in 1999. Mr. Knol was interim
Chief Financial Officer until March 18, 2009.


-
28 -








Marcel Noordeloos became the
Company's Chief Financial Officer ad interim on March 18, 2009 replacing Wilbert
Knol at that date. Mr. Noordeloos has held several financial and operational
positions with among others Nike EMEA Headquarters (2002-2006) and
PricewaterhouseCoopers (1992-2001). Mr. Noordeloos holds an RA Degree (the Dutch
equivalent of a CPA Degree) from the University of Amsterdam, the Netherlands in
1999.




Dominique Morel has joined the Company
as Chief Technology Officer in September 2005. He has a key strategic role in
our business development, evaluation process and current and future line-up.
Before Morel joined the company, he was Project Evaluation & Business
Development Manager of Atari Europe. In this position he signed major deals
(Next-Gen, PC, PS2). He also initiated and established the "Business
Opportunities On-line Database" for Atari worldwide. In this period with Atari
he has acquired an extensive network in the European developer community. Prior
to this, Morel worked as Project Evaluation & Game Play Consulting Manager
for Atari/Infogrames, which involved analyzing and ensuring the Game Play and
Game Design Consulting for over 120 published games. All together Morel worked
with Atari for more than 10 years and has been an important internal consultant
for many production decisions for Atari worldwide.





Pierre-Yves Thiercelin has
joined the Company as International Sales Director in March 2007 and was
promoted to Chief Marketing and Sales Officer on in January 2008. Mr. Thiercelin
has over 9 years experience in international trade working for various video
games companies such as Midway, Novalogic and Ignition and also for non video
games companies such as Samsung.




The
directors named above will serve until the next annual meeting of our
stockholders or until his successor is duly elected and has qualified. Directors
will be elected for one-year terms at the annual stockholders meeting. There is
no arrangement or understanding between any of our directors or officers and any
other person pursuant to which any director or officer was or is to be selected
as a director or officer, and there is no arrangement, plan or understanding as
to whether non-management stockholders will exercise their voting rights to
continue to elect the current directors to our Board of Directors. There are
also no arrangements, agreements or understandings between non-management
stockholders that may directly or indirectly participate in or influence the
management of our affairs.




Indemnification of
Officers and Directors




Our
Certificate of Incorporation provides that we will indemnify any officer or
director, or former officer or director, to the fullest extent permitted by law.
Our bylaws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on behalf of our Company. We will also bear the
expenses of such litigation for any of our directors, officers, employees, or
agents, upon such person's promise to repay us therefore if it is ultimately
determined that any such person shall not have been entitled to
indemnification.





Conflicts of
Interest




Our officers, directors and principal
stockholders may actively negotiate for the purchase of a portion of their
common stock as a condition to, or in connection with, a proposed merger or
acquisition transaction. It is anticipated that a substantial premium may be
paid by the purchaser in conjunction with any sale of shares by our officers,
directors and principal stockholders made as a condition to, or in connection
with, a proposed merger or acquisition transaction. The fact   that a substantial premium may be paid
to members of our management to acquire their shares creates a conflict of
interest for them and may compromise their state law fiduciary duties to our
other stockholders. In making any such sale, members of our management may
consider their own personal pecuniary benefit rather than our best interests and
the best interests of our other stockholders, and the other stockholders are not
expected to be afforded the opportunity to approve or consent to any particular
buy-out transaction involving shares held by members of our management.




Although our management has no current
plans to cause the Company to do so, it is possible that we may enter into an
agreement with an acquisition candidate requiring the sale of all or a portion
of the common stock held by our current stockholders to the acquisition
candidate or principals thereof, or to other individuals or business entities,
or requiring some other form of payment to our current stockholders, or
requiring the future employment of specified officers and payment of salaries to
them. It is more likely than not that any sale of securities by our current
stockholders to an acquisition candidate would be at a price substantially
higher than that originally paid by such stockholders. Any payment to current
stockholders in the context of an acquisition involving our Company would be
determined entirely by the largely unforeseeable terms of a future agreement
with an unidentified business entity.


-
29 -


Involvement
in Certain Legal Proceedings




During
the past five years, no present or former director, executive officer or person
nominated to become a director or an executive officer of our
Company:




1.
            was
      a general partner or executive officer of any business against which any
      bankruptcy petition was filed, either at the time of the bankruptcy or two
      years prior to that time;




2.
            was
      convicted in a criminal proceeding or named subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offenses);




3.
            was
      subject to any order, judgment or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities;
      or




4.
            was
      found by a court of competent jurisdiction (in a civil action), the
      Commission or the Commodity Futures Trading Commission to have violated a
      federal or state securities or commodities law, and the judgment has not
      been reversed, suspended or
vacated.




Beneficial
Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934 and regulations of the SEC there
under require the Company’s executive officers and directors, and persons who
own more than ten percent of a registered class of the Company’s equity
securities, to file reports of initial ownership and changes in ownership with
the SEC. Based solely on its review of copies of such forms received by the
Company, or on written representations from certain reporting persons that no
other reports were required for such persons, the Company believes that during
2008, all of the Section 16(a) filing requirements applicable to its executive
officers, directors and ten percent stockholders were complied with on a timely
basis.





Information
Concerning the Board of Directors and the Audit Committee




During
2008, the Company's Board of Directors had five Directors. During 2008 the Board
met five times on an executive base.





Audit
Committee




The
Company established an Audit Committee on October 31, 2005. Messrs. Calhoun
(Chairman), Van Emden and Simon are the members of the Audit
Committee.




The Audit
Committee assists the Board of Directors in its oversight of the integrity of
the Company's accounting, auditing and reporting practices. The Board of
Directors has determined that Mr. Simon possesses the attributes to be
considered financially sophisticated and has the background to be considered an
"audit committee financial expert" as defined by the rules and regulations of
the SEC. The Audit Committee will meet with the Company's independent
accountants at least annually to review the results of the Company's annual
audit and discuss the financial statements. The Committee will also meet
quarterly with our independent accountants to discuss the results of the
accountants' quarterly reviews as well as quarterly results and quarterly
earnings releases; recommend to the Board that the independent accountants be
retained; and receive and consider the accountants' comments as to internal
controls, adequacy of staff and management performance and procedures in
connection with audit and financial controls.




The Audit
Committee will review all financial reports prior to filing with the SEC. The
specific responsibilities in carrying out the Audit Committee's oversight role
are set forth in the Audit Committee's Charter. All of the members of the Audit
Committee are independent directors as contemplated by Section 10A (m)(3) of the
Securities and Exchange Act, as amended.




During
2008 the Audit Committee met four times.





Compensation Committee





The
Company's Compensation Committee is responsible for establishing and
administering the Company's policies involving the compensation of all of its
executive officers. This committee consists of Messrs. Van Emden (Chairman),
Calhoun and Simon and was formed on December 15, 2005. The Compensation
Committee operates pursuant to a charter approved by the Company's Board of
Directors.





During
2008 one meeting was held by the Compensation Committee.


-
30 -


Nominating and Governance
Committee





The
Company's Nominating and Governance Committee selects nominees for the Board of
Directors. This committee consists of Messrs. Simon (Chairman), Calhoun and Van
Emden and was formed on December 15, 2005. The Nominating and Governance
committee utilizes a variety of methods for identifying and evaluating nominees
for director. Candidates may also come to the attention of the Nominating and
Governance committee through current board members, professional search firms
and other persons. The Nominating and Governance committee operates pursuant to
a charter approved by the Board of Directors.





During
2008 no meetings were held by the Governance Committee





Code
of Business Conduct and Ethics





The
Company's board of directors has adopted in December 2005 a Code of Business
Conduct and Ethics that applies to all of our directors, officers and employees
and an additional Code of Business Ethics that applies to our Chief Executive
Officer and senior financial officers.





The
Company plans to satisfy the disclosure requirement under Item 5.05 of Form 8-K
relating to amendments to or waivers from provisions of these codes by
describing on our Internet website, located at
http://www.playlogicinternational.com, within four business days following the
date of a waiver or a substantive amendment, the nature of the amendment or
waiver, the date of the waiver or amendment, and the name of the person to whom
the waiver was granted.





Information
on the Company’s internet website is not, and shall not be deemed to be, a part
of this 10-K or incorporated into any other filings the Company makes with the
SEC.





Director
Nomination





Criteria for Board
Membership. In selecting candidates for appointment or re-election to the
Board, the Nominating and Governance Committee considers the appropriate balance
of experience, skills and characteristics required of the Board of Directors,
and seeks to insure that at least a majority of the directors are independent
under the rules of the NASDAQ Stock Market, and that members of the Company’s
Audit Committee meet the financial literacy and sophistication requirements
under the rules of the NASDAQ Stock Market and at least one of them qualifies as
an “audit committee financial expert” under the rules of the Securities and
Exchange Commission. Nominees for director are selected on the basis of their
depth and breadth of experience, integrity, ability to make independent
analytical inquiries, understanding of the Company’s business environment, and
willingness to devote adequate time to Board duties.





Stockholder Nominees. The
Nominating Committee will consider written proposals from stockholders for
nominees for director. Any such nominations should be submitted to the
Nominating Committee c/o the Secretary of the Company and should include the
following information: (a) all information relating to such nominee that is
required to be disclosed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (including such person’s written consent to being named in
the Proxy Statement as a nominee and to serving as a director if elected);
(b) the names and addresses of the stockholders making the nomination and
the number of shares of the Company’s common stock which are owned beneficially
and of record by such stockholders; and (c) appropriate biographical
information and a statement as to the qualification of the nominee, and should
be submitted in the time frame described in the Bylaws of the Company and under
the caption, “Stockholder Proposals for the Next Annual Meeting”
below.





Process for Identifying and
Evaluating Nominees. The Nominating Committee believes the Company is
well-served by its current directors. In the ordinary course, absent special
circumstances or a material change in the criteria for Board membership, the
Nominating Committee will renominate incumbent directors who continue to be
qualified for Board service and are willing to continue as directors. If an
incumbent director is not standing for re-election, or if a vacancy on the Board
occurs between annual stockholder meetings, the Nominating Committee will seek
out potential candidates for Board appointment who meet the criteria for
selection as a nominee and have the specific qualities or skills being sought.
Director candidates will be selected based on input from members of the Board,
senior management of the company and, if the nominating committee deems
appropriate, a third-party search firm. The Nominating Committee will evaluate
each candidate's qualifications and check relevant references; in addition, such
candidates will be interviewed by at least one member of the nominating
committee. Candidates meriting serious consideration will meet with all members
of the Board. Based on this input, the Nominating Committee will evaluate which
of the prospective candidates is qualified to serve as a director and whether
the committee should recommend to the Board that this candidate be appointed to
fill a current vacancy on the Board, or presented for the approval of the
stockholders, as appropriate.





The Company has never received a
proposal from a stockholder to nominate a director. Although the Nominating
Committee has not adopted a formal policy with respect to stockholder nominees,
the committee expects that the evaluation process for a stockholder nominee
would be similar to the process outlined above.


-
31 -


ITEM
11. EXECUTIVE COMPENSATION




The
following table sets forth information regarding compensation for the fiscal
years ended December 31, 2006, 2007 and 2008 received by the individual who
served as Playlogic International's Chief Executive Officer during 2008 and
Playlogic International’s other most highly compensated executive officers whose
total annual salary and bonus for fiscal year 2008 exceeded $100,000 (the “Named
Officers”).








Summary
Compensation Table


Long-Term
                              Payouts
                              All
      Other CompensationAnnual
      Compensation
                              Compensation
      AwardsName
      and Principal Position as of December 31, 2008
                              Year
                              Salary
      €/($)
                              Bonus
      ($)
                              Other
      Annual Compensation ($)
                              Restricted
      Stock Awards (2)
                              Securities
      Underlying Options/SARs (#)
                              LTIP
      Payouts ($)Willem
      M. Smit (1)
                                Chief
      Executive Officer
                              2008
                                2007
                                2006
                              €0
                                €0
                                €0
                              
                              --
                              
                              240,000
                                200,000
      (6)
                              --Sloterhof
      Investments N.V. (of which Mr. Willem M. Smit is the beneficial owner)
      Managing Director
                              2008
                                2007
                                2006
                              €0
                                €0
                                €0
                              
                              --
                              
                              
                              --Rogier
      W. Smit
                                Executive
      Vice President
                              2008
                                2007
                                2006
                              €143,000/$210,000
                                €143,000/$196,098
                                €143,000/$188,559
                              
                              --
                              
                              400,000
                                200,000
      (7)
                              --Wilbert
      Knol Chief Financial Officer a.i.
                              2008
                                2007
                                2006
                              €0/$0
                                €105,413/$144,554
                                €99,537/$131,249
                              
                              
                              
                              60,000
      (5)Dominique
      Morel Chief Technology Officer
                              2008
                                2007
                                2006
                              €143,000/$210,000
                                €143,000/$196,098
                                €143,000/$188,559
                              0
                              --
                              
                              100,000
                                100,000 
      (4)
                                100,000
      (4)
                              --
                                --Pierre-Yves
      Thiercelin
                                International
      Sales Director (10)
                              2008
                                2007
                                2006
                              €143,000/$210,000
                                €
      48,500/$66,500
                                -
                                -
                              
                              --
                              
                              100,000
                                75,000
      (8)
                              --


_____________________





(1)
            Willem
      M. Smit, the Company's Chief Executive Officer, will not receive any
      salary until there are positive cash flows from operations. Currently, the
      Company only pays Mr. Smit for his business related expenses, and it
      provides him a company car.





(2)
            Calculated
      by multiplying the amount of restricted stock by the restated value for
      Dutch income tax purposes of the restricted stock grant ($.70 per
      share).





(3)
            In
      connection with Mr. Layer’s employment arrangement, we sold 364,556
      restricted shares to Mr. Layer, our Chief Marketing & Sales Officer at
      an aggregate price of $1. The restricted shares have two years’ lock-up
      period during which Mr. Layer cannot sell the
  shares.





(4)
            We
      granted to Mr. Morel, 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 vested 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





(5)
            We
      granted to Mr. Knol, 60,000 options to purchase shares of our common stock
      at an exercise price of $2.50 per share. A total of 20,000 shares of these
      options will vest on May 4, 2008, and the remaining options will vest in
      two equal installments on May 4, 2009, May 4,
  2010.





-
32 -





(6)
            We
      granted to Mr. W.M. Smit 200,000 options to purchase shares of our common
      stock at an exercise price of $1.30 per share. A total of 66,666 shares of
      these options will vest on August 28, 2009, and the remaining options will
      vest in two equal installments on August 28, 2010 and August 28,
      2011.





(7)
            We
      granted to Mr. R.W. Smit and Mr. D. Morel, 200,000 resp 100,000 options,
      respectively, to purchase shares of our common stock at an exercise price
      of $1.30 per share. A total of 100,000 shares of these options will vest
      on August 28, 2009, and the remaining options will vest in two equal
      installments on August 28, 2010 and August 28,
  2011.




(8)
            We
      granted to Mr. P.Y. Thiercelin, 75,000 options to purchase shares of our
      common stock at an exercise price of $1.30 per share. A total of 25,000
      shares of these options will vest on August 28, 2009, and the remaining
      options will vest in two equal installments on August 28, 2010 and August
      28, 2011. Mr. Thiercelin joined the Company in March 2007 as International
      Sales Director.








STOCK OPTIONS AND STOCK APPRECIATION
RIGHTS





We
established a stock option plan for employees that became effective in August
2007.





The
following table contains information concerning the grant of stock options under
individual employment arrangements with the Executive Officers made during the
fiscal year of 2008.





Name(1)
                  Grant
      and
                    approval date
                  Closing
      Price
                    on Grant date
                  Number
      of
                    Securities
      Underlying
                    Options/SARs granted
                  Percentage
      of Total
                    Options/SARs
      granted to
                    employees in fiscal year
                  Exercise
      or
                    Base Price ($/Sh)
                  Expiration dateWillem
      M. Smit (Chief Executive Officer)
                  June
      4, 2008
                  $1.00
                  240,000
                  21%
                  $2.00
                  June
      4, 2012Rogier
      W. Smit (Executive vice President)
                  June
      4, 2008
                  $1.00
                  400,000
                  35%
                  $2.00
                  June
      4, 2012Dominque
      Morel (CTO)
                  June
      4, 2008
                  $1.00
                  100,000
                  9%
                  $2.00
                  June
      4, 2012W.
      Simon (Chairman of the Board of Directors)
                  June
      4, 2008
                  $1.00
                  80,000
                  7%
                  $2.00
                  June
      4, 2012E.
      van Emden (member of the Board of Directors)
                  June
      4, 2008
                  $1.00
                  40,000
                  3.5%
                  $2.00
                  June
      4, 2012G.
      Calhoun (member of the Board of Directors)
                  June
      4, 2008
                  $1.00
                  40,000
                  3.5%
                  $2.00
                  June
      4, 2012Pierre-Yves
      Thiercelin  (International Sales Director)
                  June
      4, 2008
                  $1.00
                  100,000
                  9%
                  $2.00
                  June
      4, 2012


____________





(1)
      See applicable footnotes to above Summary Compensation
    Table.







Option
Exercises and Holdings




During
the fiscal year ended December 31, 2008, no options were exercised.




Directors’
Compensation





Each
non-employee director is paid an annual cash retainer in the amount of $30,000
($36,000 for the Chairman) for attending the meetings of the Board of Directors
or its committees at which there is a quorum, whether in person or by telephone.
In addition, all directors are eligible for reimbursement of their expenses in
attending meetings of the Board of Directors or its committees. The non-employee
directors have received stock options in 2007 as disclosed in the table above.
The options have a three year term and vest on April 1, 2008. The stock price on
the day of the option grant was $0.75.





Employment
Agreements




Mr.
Rogier W. Smit, Executive Vice President has an employment agreement for an
indefinite period, but can be terminated by the Company upon twelve months
notice or by Mr. Smit upon six months notice. Mr. Smit ́s base salary amounts to
$15,400 (€11,000) per month. In addition to his salary, Mr. Smit is entitled to
a company car. Pursuant to the agreement, Mr. Smit is also subject to
confidentiality, non-competition and invention assignment
requirements.


-
33 -





Mr.
Dominique Morel, Chief Technology Officer, has an employment agreement for an
indefinite period but can be terminated by the Company upon six months notice or
by Mr. Morel upon 3 months notice. Mr. Morel’s base salary will be $15,400
(€11,000) per month. In addition to his salary, Mr. Morel is entitled to a
company car. Pursuant to the agreement, Mr. Morel was granted 100,000 options to
purchase shares of common stock of the Company at an exercise price of $3.50 per
share. 25,000 of these options vested on October 1, 2007, and 25,000 of the
remaining options will vest on October 1, 2008, October 1, 2009 and October 1,
2010. Pursuant to the agreement, Mr. Morel is also subject to confidentiality,
non-competition and invention assignment requirements.




Mr.  Wilbert
Knol, Interim Chief Financial Officer, has an employment agreement is for an
indefinite period but can be terminated by the Company upon two months notice or
by Mr. Knol upon 1 months notice. Mr. Knol ’s base salary as CFO a.i. is $13,700
(€9,336) per month. In addition to his salary, Mr. Knol is entitled to a company
car. Pursuant to the agreement w e granted to Mr. Knol, 60,000 options to
purchase shares of our common stock at an exercise price of $2.50 per share. A
total of 20,000 shares of these options will vest on May 4, 2008, and the
remaining options will vest in two equal installments on May 4, 2009, May 4,
2010. Pursuant to the agreement, Mr. Knol is also subject to confidentiality,
non-competition and invention assignment requirements. The interim contract with
Mr. Knol was not extended as of March 18, 2009.





Mr.  Marcel
Noordeloos, Interim Chief Financial Officer as of March 18, 2009, has an
employment agreement is for an indefinite period but can be terminated by the
Company upon two months notice or by Mr. Noordeloos upon 1 months notice. Mr.
Noordeloos’ base salary as CFO a.i. is $15,400 (€11,000) per month. In addition
to his salary, Mr. Noordeloos is entitled to a company car. Pursuant to the
agreement w e granted to Mr. Noordeloos, 100,000 options to purchase shares of
our common stock at an exercise price of $0.60 per share. A total of 33,333
shares of these options will vest on January 23, 2010, and the remaining options
will vest in two equal installments on January 23, 2011 and January 23, 2012.
Pursuant to the agreement, Mr. Noordeloos is also subject to confidentiality,
non-competition and invention assignment requirements.




Mr.
Pierre-Yves Thiercelin, Chief Marketing and Sales Officer, joined Playlogic in
March 2007 and actively contributes to the further development of the company’s
distribution network. Mr. Thiercelin has over 9 years experience in
international trade working for various video games companies such as Midway,
Novalogic and Ignition and also for non video games companies such as Samsung.
Mr. Thiercelin’s base salary as Chief Marketing and Sales Officer. is $15,400
(€11,000) per month. In addition to his salary, Mr. Noordeloos is entitled to a
company car.




-
34 -


ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The following table sets forth, as of December 31, 2008, information concerning
the ownership of all classes of common stock of the Company of (i) all persons
known to the Company to beneficially own 5% or more of the Company’s common
stock, (ii) each director of the Company, (iii) the Named Executive Officers and
(iv) all directors and executive officers of the Company as a group. Share
ownership includes shares issuable upon exercise of outstanding options that are
exercisable within 60 days of December 31, 2008.




Name
      and Address (1)
                    
                    Number
      of Shares
                      of
      Common Stock
                    
                    
                    Percentage
      of
                      Common
      StockSloterhof
      Investments N.V.
                      Pietermaai
      15
                      Curacao,
      Netherlands Antilles
                    
                    
                    7,303,357
                    
                    
                    
                    15.7
                    %Castilla
      Investments B.V.
                      Concertgebouwplein
      13
                      1071
      LL Amsterdam
                      The
      Netherlands
                    
                    
                    1,777,496
                    
                    
                    
                    3.8
                    %Wind
      Worth Luxembourg Holding S.A.H
                      19
      Rue de l’Industrie
                      8069
      Betrange
                      Luxembourg
                    
                    
                    2,138,874
                    
                    
                    
                    4.6
                    %W.M.
      Smit (2)
                    
                    
                    7,303,357
                    
                    
                    
                    15.7
                    %R.W.
      Smit (3)
                    
                    
                    1,777,496
                    
                    
                    
                    3.8
                    %BL
      Capital BV
                      Zuiderkruis
      1
                      5215
      MV ’s Hertogenbosch
                      The
      Netherlands
                    
                    
                    9,639,541
                    
                    
                    
                    20.7
                    %Opportunity
      Fund Brabant B.V.
                      Vughterweg
      47
                      5211
      CK ‘sHertogenbosch
                      The
      Netherlands
                    
                    
                    7,969,948
                    
                    
                    
                    17.2
                    %E.L.A.
      van Emden
                    
                    
                    0
                    
                    
                    
                    *W.J.
      Simon
                    
                    
                    87,494
                    
                    
                    
                    *G.M.
      Calhoun
                    
                    
                    25,500
                    
                    
                    
                    *All
      directors and executive officers as a group
                    
                    
                    9,193,847
                    
                    
                    
                    19.8
                    %




*Less
than 1%


___________




(1) Unless
otherwise indicated, the address is our address at Strawinskylaan 1041, 1077 XX
Amsterdam, The Netherlands.


(2)
Includes shares held by Sloterhof Investments N.V. a company beneficially owned
by Mr. W.M. Smit.


(3)
Includes shares held by Castilla Investments B.V. a company beneficially owned
by Mr. R.W. Smit.








ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE




Effective
January 1, 2006 the Company entered into a service agreement with Altaville
Investments N.V., a company beneficially owned by its CEO Willem M. Smit. The
Company pays for certain services among others house keeping and cleaning
services provided by Altaville to the Company at an annual aggregate amount of
approximately $66,000 which is paid in 4 quarterly installments.







ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




Audit
Fees.




The
aggregate fees billed by Cordovano & Honeck for professional services
rendered for the review of financial statements included in the Company's Forms
10-QSB for the quarters ended March 31, 2008, June 30, 2008 and September 30,
2008 as included in the Company’s Forms 10-Q as well as for the audit of the
financial statements ended December 31, 2008 as included in the Company’s 10-K
were $115,000




The
aggregate fees billed by DVR Accountants for professional services rendered for
assistance in the review of financial statements included in the Company's Forms
10-Q for the quarter ended March 31, 2008, June 30, 2008 and September 30, 2008
as well as for the audit of the financial statements ended December 31, 2008 as
included in the Company’s 10-K were $44,000.




-
35 -


Audit-Related
Fees.




No fees
were billed for assurance and related services that are reasonably related to
the performance of the audit or review of our financial statements, for the
years ended December 31, 2008.




Tax
Fees.




The
aggregate fees billed for tax compliance, tax advice or tax planning services by
DRV for the fiscal year ended December 31, 2008 were $15,000




All
Other Fees.




There
were no fees billed for products and services, other than the services described
in the paragraphs captions “Audit Fees”, “Audit-Related Fees”, and “Tax Fees”
above for the years ended December 31, 2008.







PART
IV





ITEM 15  EXHIBITS
AND FINANCIAL STATEMENTS
SCHEDULES




(a)
            Documents
      filed as part of Form 10-KSB





1.   Financial
Statements:




The following financial statements of the
Company are submitted in a separate section pursuant to the requirements of Form
10-K, Part I, Item 8 and Part IV, Items 14(a) and 14(d):




Index to Consolidated Financial
Statements


Report
of Independent Registered Public Accounting Firm


Consolidated Balance Sheet


Consolidated Statements of Operations
and Comprehensive Income


Consolidated Statement of Changes in
Shareholders’ Equity (Deficit)


Consolidated Statements of Cash
Flows


Notes to Consolidated Financial
Statements








2.
  Schedules
Supporting Financial Statements:





All
schedules are omitted because they are not required, are inapplicable, or the
information is otherwise shown in the consolidated financial statements or notes
to the consolidated financial statements.





3. Exhibits:




Exhibit
Index





Exhibit
      31.1
              Certification
      of Chief Executive Officer pursuant to Rule
    13a-14(a)/15-14(a)
              Filed
      HerewithExhibit
      31.2
              Certification
      of Chief Financial Officer pursuant to Rule
    13a-14(a)/15-14(a)
              Filed
      HerewithExhibit
      32.1
              Certification
      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
              Filed
      HerewithExhibit
      32.2
              Certification
      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
              Filed
      Herewith




-
36 -







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.Dated: 
      March 31, 2009
              By:
              /s/ Willem
      M. SmitWillem
      M. Smit
                Chief
      Executive Officer








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                              
                              Capacity
      in Which Signed
                              Date/s/Willy
      J.. Simon
                              
                              Chairman
      of the Board
                              March
      31, 2009Willy
      J. Simon/s/
      Willem M. Smit
                              
                              Director
      and Chief Executive Officer
                              March
      31, 2009Willem
      M. Smit/s/
      Marcel W.J. Noordeloos
                              
                              Interim
      Chief Financial Officer
                                (Principal
      Financing and Accounting Officer)
                              March
      31, 2009Marcel
      W.J. Noordeloos/s/
      Erik L.A. van Emden
                              
                              Director
                              March
      31, 2009Erik
      L.A. van Emden/s/
      George M. Calhoun
                              
                              Director
                              March
      31, 2009George
      M. Calhoun/s/
      Ruud Spoor
                              
                              Director
                              March
      31, 2009Ruud
      Spoor










-
37 -





PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES





CONTENTS




PageReports
      of Independent Registered Public Accounting Firms
                F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                F-3Consolidated
      Statements of Operations for the years ended December 31, 2008 and 2007
                F-4Consolidated
      Statement of Changes in Shareholders' Equity for the years ended December
      31, 2008 and 2007
                F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and 2007
                F-6Notes
      to the Consolidated Financial Statements
                F-7









F
- 1












REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors and Shareholders


Playlogic
Entertainment, Inc.





We have
audited the accompanying consolidated balance sheets of Playlogic Entertainment,
Inc. as of December 31, 2008 and 2007, and the related consolidated statements
of operations and comprehensive loss, changes in shareholders equity, and cash
flows for the years ended December 31, 2008 and 2007.   These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Playlogic
Entertainment, Inc. as of December 31, 2008 and 2007, and the consolidated
results of their operations and their cash flows for the years ended December
31, 2008 and 2007 in conformity with accounting principles generally accepted in
the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note A to the
financial statements, the Company has working capital deficit and recurring
negative operating cash flows during the years ended December 31, 2008 and 2007,
which raises substantial doubt about its ability to continue as a going
concern.  Management’s plans regarding those matters also are
described in Note A.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.








/s/
Cordovano and Honeck LLP


Cordovano
and Honeck LLP


Englewood,
Colorado


March 31,
2009








F
- 2








PLAYLOGIC
      ENTERTAINMENT INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSDecember
      31,2008
                                                      
                                                      
                                                      2007ASSETSCurrent
      AssetsCash
      and cash equivalents
                                                      
                                                      $
                                                      81,978
                                                      
                                                      
                                                      $
                                                      349,464ReceivablesTrade,
      net of allowance for doubtful accounts
                                                      
                                                      
                                                      380,993
                                                      
                                                      
                                                      
                                                      671,148Officers
                                                      
                                                      
                                                      109,876
                                                      
                                                      
                                                      
                                                      78,754Value
      Added Taxes from foreign governments
                                                      
                                                      
                                                      71,783
                                                      
                                                      
                                                      
                                                      50,620Current
      portion of software development costs
                                                      
                                                      
                                                      5,179,976
                                                      
                                                      
                                                      
                                                      6,244,843Inventory
      finished product
                                                      
                                                      
                                                      812,020
                                                      
                                                      
                                                      
                                                      -Intellectual
      property licenses
                                                      
                                                      
                                                      1,905,947
                                                      
                                                      
                                                      
                                                      -Prepaid
      expenses and other receivables
                                                      
                                                      
                                                      560,765
                                                      
                                                      
                                                      
                                                      892,855Total
      current assets
                                                      
                                                      
                                                      9,103,338
                                                      
                                                      
                                                      
                                                      8,287,684Property
      and equipment, net of accumulated depreciation
                                                      
                                                      
                                                      1,226,134
                                                      
                                                      
                                                      
                                                      753,768Other
      assetsSoftware
      development costs, net of current portion
                                                      
                                                      
                                                      3,401,058
                                                      
                                                      
                                                      
                                                      1,040,510Restricted
      cash
                                                      
                                                      
                                                      210,000
                                                      
                                                      
                                                      
                                                      -Total
      other assets
                                                      
                                                      
                                                      3,611,058
                                                      
                                                      
                                                      
                                                      1,040,510Total
      Assets
                                                      
                                                      $
                                                      13,940,530
                                                      
                                                      
                                                      $
                                                      10,081,962LIABILITIES AND SHAREHOLDERS'
      DEFICITCurrent
      LiabilitesAccounts
      and notes payableAccounts
      payable
                                                      
                                                      $
                                                      5,453,262
                                                      
                                                      
                                                      $
                                                      4,785,678Note
      payable to bank
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,056,552Note
      payable, other
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      397,845Other
      current liabilitiesCurrent
      maturities of long-term debt
                                                      
                                                      
                                                      3,342,000
                                                      
                                                      
                                                      
                                                      44,205Accrued
      liabilities
                                                      
                                                      
                                                      1,896,466
                                                      
                                                      
                                                      
                                                      2,142,754Deferred
      revenues
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      148,750Indebtedness
      to related party
                                                      
                                                      
                                                      3,794,000
                                                      
                                                      
                                                      
                                                      589,400Total
      current liabilities
                                                      
                                                      
                                                      14,485,728
                                                      
                                                      
                                                      
                                                      9,165,184Non
      Controlling interest in Joint-Venture
                                                      
                                                      
                                                      (371,857
                                                      )
                                                      
                                                      
                                                      -Long-term
      debt, less current maturities
                                                      
                                                      
                                                      2,146,338
                                                      
                                                      
                                                      
                                                      221,025Total
      Liabilities
                                                      
                                                      
                                                      16,260,209
                                                      
                                                      
                                                      
                                                      9,386,209Shareholders'
      EquityPreferred
      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.  46,391,275 and 38,532,580 shares issued and
      outstanding, respectively
                                                      
                                                      
                                                      46,392
                                                      
                                                      
                                                      
                                                      38,533Additional
      paid-in capital
                                                      
                                                      
                                                      61,229,130
                                                      
                                                      
                                                      
                                                      54,081,832Deferred
      Compensation-Employee Stock Options
                                                      
                                                      
                                                      580,572
                                                      
                                                      
                                                      
                                                      374,571Accumulated
      Other Comprehensive Loss
                                                      
                                                      
                                                      (3,955,083
                                                      )
                                                      
                                                      
                                                      (3,057,297
                                                      )Accumulated
      deficit
                                                      
                                                      
                                                      (60,220,690
                                                      )
                                                      
                                                      
                                                      (50,741,886
                                                      )Total
      Shareholders' Equity/(Deficit)
                                                      
                                                      
                                                      (2,319,679
                                                      )
                                                      
                                                      
                                                      695,753Total
      Liabilities and Shareholders' Equity
                                                      
                                                      $
                                                      13,940,530
                                                      
                                                      
                                                      $
                                                      10,081,962





The
accompanying notes are an integral part of these consolidated financial
statements





F
- 3








PLAYLOGIC
      ENTERTAINMENT INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONSYear
      ended December 312008
                                                                        
                                                                        
                                                                        2007Net
      revenuesSales,
      net of returns and allowances
                                                                        
                                                                        $
                                                                        9,024,196
                                                                        
                                                                        
                                                                        $
                                                                        10,099,746Cost
      of salesDirect
      costs and license fees
                                                                        
                                                                        
                                                                        (3,330,955
                                                                        )
                                                                        
                                                                        
                                                                        (2,673,675
                                                                        )Amortisation
      of software development costs
                                                                        
                                                                        
                                                                        (2,237,151
                                                                        )
                                                                        
                                                                        
                                                                        (2,386,223
                                                                        )(5,568,105
                                                                        )
                                                                        
                                                                        
                                                                        (5,059,898
                                                                        )Gross
      profit
                                                                        
                                                                        
                                                                        3,456,091
                                                                        
                                                                        
                                                                        
                                                                        5,039,848Operating
      expensesResearch
      and development
                                                                        
                                                                        
                                                                        460,038
                                                                        
                                                                        
                                                                        
                                                                        542,215Selling
      and marketing
                                                                        
                                                                        
                                                                        871,122
                                                                        
                                                                        
                                                                        
                                                                        1,020,674General
      and administrative
                                                                        
                                                                        
                                                                        6,316,759
                                                                        
                                                                        
                                                                        
                                                                        3,430,683Depreciation
                                                                        
                                                                        
                                                                        384,960
                                                                        
                                                                        
                                                                        
                                                                        297,292Asset
      impairment charges
                                                                        
                                                                        
                                                                        4,500,000
                                                                        
                                                                        
                                                                        
                                                                        68,566Total
      operating expenses
                                                                        
                                                                        
                                                                        12,532,879
                                                                        
                                                                        
                                                                        
                                                                        5,359,430Loss
      from operations
                                                                        
                                                                        
                                                                        (9,076,788
                                                                        )
                                                                        
                                                                        
                                                                        (319,582
                                                                        )Other
      income/(expense)Gain
      on debt restructuring
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        850,411Interest
      expense
                                                                        
                                                                        
                                                                        (679,504
                                                                        )
                                                                        
                                                                        
                                                                        (1,164,250
                                                                        )Realized
      and unrealized exchange profit
                                                                        
                                                                        
                                                                        (412,360
                                                                        )
                                                                        
                                                                        
                                                                        1,377,150Profit/(loss)
      before provision for income taxes
                                                                        
                                                                        
                                                                        (10,168,653
                                                                        )
                                                                        
                                                                        
                                                                        743,729Equity
      in non controlling interest
                                                                        
                                                                        
                                                                        689,856Provision
      for Income Taxes
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Net
      Profit /(loss)
                                                                        
                                                                        
                                                                        (9,478,797
                                                                        )
                                                                        
                                                                        
                                                                        743,729Other
      comprehensive income/(loss)Foreign
      currency adjustment
                                                                        
                                                                        
                                                                        (371,231
                                                                        )
                                                                        
                                                                        
                                                                        (104,667
                                                                        )Comprehensive
      Income/(Loss)
                                                                        
                                                                        $
                                                                        (9,850,028
                                                                        )
                                                                        
                                                                        $
                                                                        639,062Net
      profit per weighted-average share of common stock outstanding, computed on
      Net Profit-
      basic and fully diluted
                                                                        
                                                                        
                                                                        (0.22
                                                                        )
                                                                        
                                                                        
                                                                        0.03Weighted-average
      number of shares of common stock outstanding-
      basic and fully diluted
                                                                        
                                                                        
                                                                        42,758,577
                                                                        
                                                                        
                                                                        
                                                                        29,410,954




The
accompanying notes are an integral part of these consolidated financial
statements





F
- 4





PLAYLOGIC
      ENTERTAINMENT, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYAdditional
                              
                              
                              
                              
                              
                              Accumulated
      Other Comprehensive LossCommon stock
                              
                              
                              Paid-in
                              
                              
                              Deferred
      Compensation
                              
                              
                              AccumulatedShares
                              
                              
                              Par
      Value
                              
                              
                              Capital
                              
                              
                              deficit
                              
                              
                              TotalBalances
      at December 31, 2006
                              
                              
                              25,332,109
                              
                              
                              $
                              25,332
                              
                              
                              $
                              42,596,112
                              
                              
                              $
                              414,040
                              
                              
                              $
                              (2,439,541
                              )
                              
                              $
                              (51,485,615
                              )
                              
                              $
                              (10,889,672
                              )-Common
      stock issued for cash
                              
                              
                              2,648,278
                              
                              
                              
                              2,649
                              
                              
                              
                              2,732,370
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,735,019Issuing
      costs
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (113,052
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (113,052
                              )Common
      stock issued to settle vendor payables
                              
                              
                              3,413,598
                              
                              
                              
                              3,414
                              
                              
                              
                              2,921,018
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,924,432Common
      stock issued in exchange for debt
                              
                              
                              7,138,595
                              
                              
                              
                              7,139
                              
                              
                              
                              5,845,384
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              5,852,523Capital
      contributed to support operations
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              100,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              100,000Stock
      options issued pursuant to Employee Compensation Plan
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (39,469
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (39,469
                              )Change
      in currency translation adjustment
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (617,757
                              )
                              
                              
                              
                              
                              
                              
                              (617,757
                              )Net
      profit for the period
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              743,729
                              
                              
                              
                              743,729Balances
      at December 31, 2007
                              
                              
                              38,532,579
                              
                              
                              
                              38,533
                              
                              
                              
                              54,081,831
                              
                              
                              
                              374,571
                              
                              
                              
                              (3,057,291
                              )
                              
                              
                              (50,741,892
                              )
                              
                              
                              695,753Common
      stock issued for cash
                              
                              
                              7,858,696
                              
                              
                              
                              7,859
                              
                              
                              
                              7,492,141
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              7,500,000Capital
      contributed to support operations
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              100,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              100,000Issuing
      costs
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (963,432
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (963,432
                              )Stock
      options issued pursuant to Employee Compensation Plan
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              206,001
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              206,001Discount
      on debt
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              518,590
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              518,590Change
      in currency translation adjustment
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              (897,792
                              )
                              
                              
                              
                              
                              
                              
                              (897,792
                              )Net
      result for the year
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              (9,478,798
                              )
                              
                              
                              (9,478,798
                              )Balances
      at December 31, 2008
                              
                              $
                              46,391,275
                              
                              
                              $
                              46,392
                              
                              
                              $
                              61,229,130
                              
                              
                              $
                              580,572
                              
                              
                              $
                              (3,955,083
                              )
                              
                              $
                              (60,220,690
                              )
                              
                              $
                              (2,319,679
                              )




The
accompanying notes are an integral part of these consolidated financial
statements





F
- 5









PLAYLOGIC
      ENTERTAINMENT, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSYear
      ended December 31,2008
                                                                                  
                                                                                  
                                                                                  2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Profit / (Loss)
                                                                                  
                                                                                  $
                                                                                  (9,478,797
                                                                                  )
                                                                                  
                                                                                  
                                                                                  743,729Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
                                                                                  
                                                                                  
                                                                                  388,372
                                                                                  
                                                                                  
                                                                                  
                                                                                  287,292Amortization
      of software development
                                                                                  
                                                                                  
                                                                                  2,237,151
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,343,229Impairment
      of software development
                                                                                  
                                                                                  
                                                                                  4,500,000Bad
      debt expense
                                                                                  
                                                                                  
                                                                                  109,004
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Expense
      charges for stock options
                                                                                  
                                                                                  
                                                                                  206,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  (39,469
                                                                                  )Management
      fees contributed as capital
                                                                                  
                                                                                  
                                                                                  100,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  100,000Non-cash
      interest charge on warrants
                                                                                  
                                                                                  
                                                                                  147,000(Increase)/
      Decrease in cash attributable to changes in operating assets and
      liabilitiesCash
      paid for software development
                                                                                  
                                                                                  
                                                                                  (10,158,820
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,981,477
                                                                                  )Restricted
      cash
                                                                                  
                                                                                  
                                                                                  (220,663
                                                                                  )
                                                                                  
                                                                                  
                                                                                  160,105Accounts
      receivable - trade and other
                                                                                  
                                                                                  
                                                                                  (824,400
                                                                                  )
                                                                                  
                                                                                  
                                                                                  154,940Inventory
      finished product
                                                                                  
                                                                                  
                                                                                  (878,317
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Prepaid
      expenses and other
                                                                                  
                                                                                  
                                                                                  (33,237
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (17,345
                                                                                  )Increase
      / (Decrease) inDeferred
      revenues
                                                                                  
                                                                                  
                                                                                  (148,506
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,234,181
                                                                                  )Accounts
      payable - trade
                                                                                  
                                                                                  
                                                                                  1,058,186
                                                                                  
                                                                                  
                                                                                  
                                                                                  (67,904
                                                                                  )Payroll
      taxes payable
                                                                                  
                                                                                  
                                                                                  444,737
                                                                                  
                                                                                  
                                                                                  
                                                                                  (208,661
                                                                                  )Other
      current liabilities
                                                                                  
                                                                                  
                                                                                  (512,745
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (2,714,705
                                                                                  )Net
      cash used in operating activities
                                                                                  
                                                                                  $
                                                                                  (13,065,035
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (3,474,447
                                                                                  )CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      paid to acquire property and equipment
                                                                                  
                                                                                  
                                                                                  (864,078
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (69,180
                                                                                  )Net
      cash used in investing activities
                                                                                  
                                                                                  
                                                                                  (864,078
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (69,180
                                                                                  )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on bank line of credit
                                                                                  
                                                                                  
                                                                                  (1,054,821
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (880,805
                                                                                  )Borrowings
      under short term loans
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,564,353Cash
      repaid on short term notes
                                                                                  
                                                                                  
                                                                                  (397,192
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (967,177
                                                                                  )Principal
      payments on long-term debt
                                                                                  
                                                                                  
                                                                                  (22,066
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (41,138
                                                                                  )Cash
      received from shareholder loans
                                                                                  
                                                                                  
                                                                                  8,986,499Proceeds
      from sales of common stock
                                                                                  
                                                                                  
                                                                                  6,536,568
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,788,939Net
      cash provided by financing activities
                                                                                  
                                                                                  
                                                                                  14,048,988
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,464,172Effect
      of foreign exchange on cash
                                                                                  
                                                                                  
                                                                                  (387,363
                                                                                  )
                                                                                  
                                                                                  
                                                                                  410,486Increase/(Decrease)
      in Cash
                                                                                  
                                                                                  
                                                                                  (267,488
                                                                                  )
                                                                                  
                                                                                  
                                                                                  331,031Cash
      at beginning of period
                                                                                  
                                                                                  
                                                                                  349,465
                                                                                  
                                                                                  
                                                                                  
                                                                                  18,433Cash
      at end of period
                                                                                  
                                                                                  $
                                                                                  81,978
                                                                                  
                                                                                  
                                                                                  $
                                                                                  349,464Supplemental
      disclosures of interest and income taxes paidInterest
      paid during the period
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,331,716Income
      taxes paid (refunded)
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Supplemental
      disclosures of non-cash investing and financing activitiesCommon
      stock issued to repay notes payable
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  5,852,523Cost
      of acquiring capital paid with issuance of common stock
                                                                                  
                                                                                  $
                                                                                  963,432
                                                                                  
                                                                                  
                                                                                  $
                                                                                  113,052Payments
      paid to vendors directly by equity subscribers
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,924,432




The
accompanying notes are an integral part of these consolidated financial
statements





F
- 6





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





NOTE
A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





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 to 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 globally, focusing on the United States, Europe and
Asia.





We have
opened a joint-venture distribution office in the United Kingdom that became
operational during Q4 2008. We have a 60% share in this company that will serve
primarily the UK market through direct retail sales. The Company has invested
Euro 300,000 (or USD 420,000) in setting up this company.  We hold 300
out of 500 shares  of this joint-venture company. The company is named
PlayV Limited.





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





Estimates


The
preparation of consolidated 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 the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
net revenue and expenses during the reporting periods. The most significant
estimates and assumptions relate to the recoverability of software development
costs, licenses and intangibles, and the adequacy of allowances for returns,
price concessions and doubtful accounts. Actual amounts could differ
significantly from these estimates.





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).  Furthermore, we have a 60% share in a joint-venture
founded in the UK that became operational in the fourth quarter of
2008.  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.





Basis of presentation –
Going Concern


The
accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. At December 31, 2008 and 2007, we
had a working capital deficit of approximately $2,320,000 and $877,000,
respectively, resulting from recurring negative operating cash flow which raised
substantial doubts about our ability to continue as a going concern. Our
continued existence as a going concern is dependent upon our ability to generate
sufficient cash flows to support our ongoing operations by meeting our current
obligations as they come due and servicing our long-term debt on a timely
basis.







F
- 7








PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








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.





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.





Currency
translation


The
accompanying consolidated financial statements are reported in U.S.
Dollars.  Accounts of foreign operations are translated into U.S.
dollars using exchange rates at the balance sheet date for assets and
liabilities accounts and average prevailing exchange rates during 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 rateAssets
                            Balance
      sheet date *Liabilities
                            Balance
      sheet date *Equity
                            HistoricalRevenues
                            Annual
      average**Expenses
                            Annual
      average**Gains
                            Annual
      average**Losses
                            Annual
      average**




*$1,4000
and $1.4735 at December 31, 2008 and 2007, respectively





**
Average for the year ended December 31, 2008 was $1.4711


Average
for the year ended December 31, 2007 was $1.3713







F
- 8





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Cash and cash
equivalents


The
Company considers all highly liquid securities with original maturities of three
months or less when acquired to be cash equivalents.  The restricted
cash represents a bank guarantee that we have given in respect to the lease of
the offices in the WTC Amsterdam.





Concentration of Credit
Risk


Financial
instruments which potentially subject us to concentration of credit risk consist
principally of accounts receivable. Our customer base includes distributors and
retailers. We perform ongoing credit evaluations of our customers and maintain
an allowance for potential credit losses. We generally do not require collateral
or other security from our customers. Our four largest customers accounted for
77%, and 76% of consolidated net revenues in each of the two years ended
December 31, 2008, and 2007 respectively. As of December 31, 2008 and 2007, the
four largest customers accounted for 35% and 53%, respectively, of our
consolidated accounts receivable balance. Except for the largest customers noted
above, all receivable balances from the remaining individual customers are less
than 10% of the Company’s consolidated net receivable balance. Management
believes that the receivable balances from these largest customers do not
represent a significant credit risk based on past collection experience. We are
currently investigating to insure our debtors in order to limit credit
risks.





Fair Value of Financial
Instruments


The estimated fair values of financial
instruments have been determined using available market information and
valuation methodologies described below. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein may not be indicative of the amounts
that we could realize in a current market exchange. The use of different market
assumptions or valuation methodologies may have a material effect on the
estimated fair value amounts.




The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value due to their short-term
nature. Short-term investments are carried at fair value with fair values being
estimated based on quoted market prices.




Accounts receivable -
trade


Our
customers are located principally within Europe. We typically make sales on
account, with terms that vary depending upon the customer's credit history,
liquidity, 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 failure of a significant customer could have a material negative
impact on our cash flow.  We consider accounts past due, based on the
terms in the contract. Generally, the payment terms differ per contract
depending on the country in which our customer is located. On average we
consider account more than 45 days old to be past due.





Because
of the credit risk involved, management has provided an allowance for doubtful
accounts receivable, totaling $428,017 and $356,043 at December, 31, 2008 and
2007, respectively, which we believe will eventually become uncollectible. The
main part of this amount has already been expensed in 2006. We recorded expenses
for doubtful debt during the years ended 2008 and 2007 of approximately $88,000
and $-0-, respectively.





Property and
equipment


Property
and equipment is recorded at cost and depreciated on a straight-line basis, over
the estimated useful lives (generally 3 to 10 years) of the respective asset.
Leasehold improvements are depreciated over the lesser of the lease term or
estimated useful life. 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.





Impairment of Long-lived
Assets


The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable.  We assess these assets for impairment based on estimated
undiscounted future cash flows from these assets.  If the carrying
value of the assets exceeds the estimated future undiscounted cash flows, a loss
is recorded for the excess of the asset’s carrying value over the fair
value.  The Company did not recognize any impairment loss for
long-lived assets for the years ended December 31, 2008 and
2007





Software game development
costs


Capitalized
software game development costs include payments made in the form of milestone
payments to independent software developers under development agreements, as
well as direct costs incurred for internally developed titles. We account for
software development costs in accordance with Statement of Financial Accounting
Standard (“SFAS”) No. 86 Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. Initially, we charge
software development costs to research and development expense. We capitalize
software game development costs after the technological feasibility of a title
is established and such costs are determined to be recoverable against future
revenues.  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 net undiscounted future
cash flows and charges to operations any amounts that are deemed
unrecoverable.








F
- 9





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Impairment


For the
years ended December 31, 2008 and 2007, the Company recognized impairment
charges of approximately of $4,500,000 and $69,000, respectively, and
amortization charges of approximately $2,237,000 and $ 2,368,000
respectively.





The
impairment charge recorded in 2008 is due to the worldwide economic crisis as
well as to a change in the market from PC titles to console titles. More and
more consumers are interested in console titles as oppose to PC titles.
Management has assessed all titles in the portfolio, on a title by title basis.
Only titles that have been released to market have been impaired.





Our
agreements with third-party developers generally provide us with exclusive
publishing and distribution rights in exchange for advance payments that are
recouped against royalties due to the developer based on the contractual amounts
of product sales, adjusted for certain costs.





Intellectual property
licenses


Intellectual
property license costs represent license fees paid to intellectual property
rights holders for use of their trademarks, copyrights, software, technology,
music or other intellectual property or proprietary rights in the development of
our products. Depending upon the agreement with the rights holder, we may obtain
the rights to use acquired intellectual property in multiple products over
multiple years, or alternatively, for a single product. Prior to the related
product's release, we expense, as part of "cost of sales—intellectual property
licenses," capitalized intellectual property costs when we believe such amounts
are not recoverable. Capitalized intellectual property costs for those products
that are cancelled or abandoned are charged to product development expense in
the period of cancellation.





Commencing
upon the related product's release, capitalized intellectual property license
costs are amortized to "cost of sales—intellectual property licenses" based on
the ratio of current revenues for the specific product to total projected
revenues for all products in which the licensed property will be utilized. As
intellectual property license contracts may extend for multiple years, the
amortization of capitalized intellectual property license costs relating to such
contracts may extend beyond one year.




Inventory




Inventory
is stated at the lower of average cost or market. We periodically evaluate the
carrying value of our inventory and make adjustments as necessary. Estimated
product returns are included in the inventory balance at their
cost.




Research and development
expenses


Research
and development expenses are charged to operations as incurred and consist of
the direct costs associated with developing software games prior to the
establishment of technological feasibility of a specific game title. Research
and development expenses totaled approximately $460,000 and $542,000 for the
years ended December 31, 2008 and 2007, respectively.





Advertising
expenses


We
expense advertising costs as incurred. Advertising expense for the years ended
December 31, 2008 and 2007 amounted to approximately $736,000, and $988,000,
respectively.





Income
Taxes


We
utilize the asset and liability method of accounting for income taxes. At
December 31, 2008 and 2007, 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 consolidated financial
reporting purposes, primarily accumulated depreciation and amortization and the
anticipated utilization of net operating loss carry forwards to offset current
taxable income.





On
January 1, 2007, we adopted FASB issued FIN 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law. FIN 48 prescribes
a comprehensive model for the financial statement recognition, measurement,
presentation, and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The Company’s policy is to record estimated
interest and penalties related to the underpayment of income taxes as income tax
expense in the Statements of Operations.  The Company had no changes
in the carrying amount value of its tax assets or liabilities for any
unrecognized tax benefits.





Share-Based Payment
Arrangements


The
Company records its share-based compensation in accordance with the provisions
of Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment,” which establishes accounting for equity instruments exchanged for
employee services.  Under the provisions of SFAS No. 123R,
share-based compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an expense over the
employee’s requisite service period (generally the vesting period of the equity
grant). The Company has estimated expected forfeitures, as required by SFAS
No. 123R, and is recognizing compensation expense only for those awards
expected to vest.  The Company also followed the disclosure
requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as
amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and
Disclosure. For the years ended December 31, 2008and 2007, the Company recorded
approximately $206,000 and $72,000 respectively, of stock-based compensation
expense in connection with its adoption of SFAS 123(R). See Note J for a full
discussion of the Company’s stock-based compensation arrangements.





F
- 10





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Earnings (loss) per
share


SFAS
No. 128, Earnings per
Share, requires dual presentation of basic and diluted income per share
for all periods presented. Basic income per share excludes dilution and is
computed by dividing earnings available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that would then
share in the earnings of the Company.




Unexercised
stock options to purchase 3,202.500 and 1,312,500 shares of the Company’s common
stock as of December 31, 2008 and 2007, respectively, were not included in
the computation of diluted earnings per share because the exercise of the stock
options would be anti-dilutive to earnings per share.





Unexercised
warrants to purchase 9,714,864 shares and 6,402,778 shares of our common stock
as of December 31, 2008 and 2007, respectively, were excluded from the
computation of diluted earnings per share because the exercise of warrants would
be anti-dilutive to earnings per share.





Revenue
recognition


We earn
sales revenue from the sale of internally developed interactive software titles
and from the sale of titles developed by and/or licensed from third-party
developers and from contractual development activities.




We
recognize revenue in accordance with 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
..  As such, we recognize revenue when the following conditions are
met:




1.
            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.2.
            Delivery:
      Delivery is considered to occur when the products are shipped and risk of
      loss has been transferred to the customer.3.
            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.4.
            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 the
      credit review shows that customer is able to pay amounts under the
      arrangement as those amounts become due. If we later determine that
      collection is not probable, we recognize revenue when collection becomes
      probable (generally upon cash
collection).





The
Company defers revenues on sales which do not conform to the above listed
criteria until such time that the billed amount is either paid or any attached
right-of-return expires/terminates. Certain of the Company’s software products
provide limited online functionality at no additional cost to the
consumer.  Currently, none of the Company’s products require an
internet connection for use, and online functionality is perceived to be of only
incidental value to the software product itself.  When such
functionality is provided to the consumer, the Company does not provide ongoing
technical support, nor does it provide hosting services.  As the
online functionality features do not meet any of the criteria of EITF 00-21
("Revenue Arrangements with Multiple Deliverables”), the Company does not defer
revenue related to products containing outline features.




Revenue
is recognized after deducting estimated reserves for returns, price concessions
and other allowances. In circumstances when the Company does not have a reliable
basis to estimate returns and price concessions or is unable to determine that
collection of a receivable is probable, it defers the revenue until such time as
it can reliably estimate any related returns and allowances and determine that
collection of the receivable is probable.








F
- 11





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Allowances for Returns,
Price Concessions and Other Allowances


Our
policy is to accept returns and we grant price concessions in connection with
our publishing arrangements. Following reductions in the price of its products,
we grant price concessions which permit customers to take credits for unsold
merchandise against amounts they owe us. Our customers must satisfy certain
conditions to allow them to return products or receive price concessions,
including compliance with applicable payment terms and confirmation of field
inventory levels.  We estimate future product returns and price
concessions related to current period product revenue based upon, among other
factors, historical experience and performance of the titles in similar genres,
historical performance of a hardware platform, customer inventory levels,
analysis of sell-through rates, sales force and retail customer feedback,
industry pricing, market conditions and changes in demand and acceptance of its
products by consumers.  We make significant judgments and estimates in
connection with establishing the allowance for returns and price concessions in
any accounting period. We believe we can make reliable estimates of returns and
price concessions. However, actual results may differ from initial estimates as
a result of changes in circumstances, market conditions and assumptions.
Adjustments to estimates are recorded in the period in which they become
known.





Recently Issued Accounting
Pronouncements


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 beginning
January 1, 2009 will be recorded and disclosed in according with SFAS No.
141R.  We expect SFAS No. 141R to 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, "Non controlling 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 non controlling 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 will
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.




F
- 12





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








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 non forfeitable 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.





In
September 2006, FASB issued Statement No. 157, Fair Value Measurements (SFAS
157), which defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement applies when other accounting pronouncements
require or permit assets and liabilities to be measured at fair value, but does
not expand the use of fair value to new accounting transactions.  SFAS
157 is effective for financial assets and liabilities for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13 , and FASB Staff Position No. 157-2, Effective Date of FASB Statement No.
157 .  Collectively, the Staff Positions defer the effective
date of SFAS 157 to fiscal years beginning after November 15, 2008 for
nonfinancial assets and liabilities, and amend the scope of SFAS
157.  We do not expect the adoption of SFAS 157 to have a material
impact on our financial statements.





Reclassifications


Certain
2007 amounts have been reclassified to conform to the 2008
presentation.







NOTE B - COMPREHENSIVE INCOME
(LOSS)




Components
of comprehensive income (loss) are as follows:




Years
      ended December 31,2008
                              
                              
                              2007Net income
      (loss)
                              
                              $
                              (9,478,797
                              )
                              
                              $
                              743,729Foreign
      currency translation adjustment
                              
                              
                              (371,231
                              )
                              
                              
                              (614,751)Comprehensive income
      (loss)
                              
                              $
                              (9,850,028
                              )
                              
                              $
                              128,978






NOTE C- PROPERTY AND
EQUIPMENT





Property
and equipment consists of the following at December 31, 2008 and
2007:





2008
                  
                  
                  2007Computers
      and office equipment
                  
                  $
                  2,538,087
                  
                  $
                  2,044,528Leasehold
      improvements
                  
                  
                  572,573
                  
                  
                  395,269Software
                  
                  
                  532,667
                  
                  
                  405,7213,643,327
                  
                  
                  2,845,518Less
      accumulated depreciation
                  
                  
                  (2,417,193)
                  
                  
                  (2,091,750)Net
      property and equipment
                  
                  $
                  1,226,134
                  
                  $
                  753,768








F
- 13





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Depreciation
expense for the years ended December 31, 2008, and 2007, was $388,372, and
$287,292, respectively.







NOTE
D - SOFTWARE DEVELOPMENT COSTS




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




December
      31,2008
                                                
                                                
                                                2007Beginning
      balance
                                                
                                                $
                                                7,285,353
                                                
                                                
                                                $
                                                4,463,430Additions
                                                
                                                
                                                8,032,832
                                                
                                                
                                                
                                                4,593,03615,318,185
                                                
                                                
                                                
                                                9,056,466Less:  Amortization
                                                
                                                
                                                (2,237,151
                                                )
                                                
                                                
                                                2,386,223Less:  Write
      down
                                                
                                                
                                                (4,500,000
                                                )
                                                
                                                
                                                68,566Less:  Foreign
      exchange
                                                
                                                
                                                0
                                                
                                                
                                                
                                                (683,676
                                                )(6,737,151
                                                )
                                                
                                                
                                                (1,771,113
                                                )Total
      software development costs
                                                
                                                $
                                                8,581,034
                                                
                                                
                                                $
                                                7,285,353Less:
      current portion
                                                
                                                
                                                (5,179,976
                                                )
                                                
                                                
                                                (6,244,843
                                                )Non-current
      portion
                                                
                                                $
                                                3,401,058
                                                
                                                
                                                $
                                                1,040,510




The
amount of software development costs resulting from advance payments and
guarantees to third-party developers were $4,906,000 and $6,407,000,
respectively, at December 31, 2008 and 2007. In addition, software development
costs totaling $8,717,000 and $1,795,870 at December 31, 2008 and 2007,
respectively, were related to titles that have not been released. The
non-current portion of the capitalized software development costs is expected to
be amortized in 2010.







NOTE
E - INVENTORY





As of
December 31, 2008 and 2007, inventory consisted of:




Years
      ended December 31,2008
                          
                          
                          2007Finished
      Product Playlogic titles
                          
                          $
                          153,868
                          
                          
                          $
                          0Finished
      Product Third party titles
                          
                          
                          658,152
                          
                          
                          
                          0$
                          812,020
                          
                          
                          $
                          0


Finished
product Playlogic titles are valued at cost of manufacturing. Finished product
third parties titles are valued at the price paid to this third
party.  Overall, due to estimated lower market value an amount of USD
898,000 has been written off and charged to expenses during the year. The
inventory is held at PlayV Ltd, United Kingdom, a 60% owned subsidiary of the
Company. The amount has been included in the G&A expenses.








NOTE
F - RELATED PARTY TRANSACTIONS





Common
stock





On
September 24, 2008, the Company sold 2,250,000 shares of its common stock to an
entity controlled by a member of our board of directors 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.








F
- 14





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








On June
2008, the Company sold 2,608,696 shares of its common stock to an entity
controlled by a member of our board of directors 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 entity
controlled by a member of our board of directors 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.





Loans from
shareholders


On
December 11, 2008, the Company entered into a bridge loan agreement with two
principal shareholders based in the Netherlands, pursuant to which the Company
borrowed a principal amount of € 1,200,000 (or $1,680,000). The loans bear
interest at a rate of 10% per annum. Interest will be paid on a monthly basis,
the principle amounts will be repaid on May 1, 1, 2009. The lenders have the
right to convert the principle amount into equity at a price of $0.50 per
share.  No beneficial conversion feature was recognized since the fair
value of the common stock was less than the conversion price at the commitment
date.





On
November 7, 2008, the Company entered into a bridge loan agreement with two
principal shareholders based in the Netherlands, pursuant to which the Company
borrowed a principal amount of € 800,000 (or $1,120,000). The loans bear
interest at a rate of 8% per annum. Interest will be paid on a monthly basis,
the principle amounts will be repaid on April 1, 2009.  Concurrent
with these loan agreements of November 7, 2008, the Company issued to these
shareholders warrants to purchase 400,000 shares of the Company’s common stock
at an exercise price of $0.50 per share. The warrants may be exercised starting
November 7, 2008 and expire on November 7, 2011.





In
accordance with APB 14, we allocated the debt proceeds between the debt and
detachable stock purchase warrants based on relative fair values.  We
have recognized a discount on the debt amounting to $28,590 which will be
amortized over the term of the loan.  During the year ended December
31, 2008, $9,530 was amortized as interest expense in the accompanying
consolidated financial statements.





The fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:





Risk-free
      interest rate
                        2%Dividend
      yield
                        0%Volatility
      factor
                        43.8%Weighted-average
      expected life
                        3
      years








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 $980,000).  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 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.





In
accordance with APB 14, we allocated the debt proceeds between the debt and
detachable stock purchase warrants based on relative fair values.  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 year ended
December 31, 2008, $147,000 was amortized as interest expense in the
accompanying consolidated financial statements.








F
- 15





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








The fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:





Risk-free
      interest rate
                  4.5%Dividend
      yield
                  0%Volatility
      factor
                  45.8%Weighted-average
      expected life
                  5
      years





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 were
$71,000 and $49,000 outstanding receivables due to our officer as of December
31, 2008 and 2007, respectively.  The Company will offset these
receivables against future costs (such as travel) paid by the
officers.







NOTE
G — ACCRUED LIABILITIES




Accrued
liabilities can be specified as follows:





December
      31,2008
                          
                          
                          2007Payroll
      Taxes payable (a)
                          
                          $
                          710,198
                          
                          
                          $
                          1,326,649Interest
      payable
                          
                          
                          -
                          
                          
                          
                          104,686Royalties
      payable
                          
                          
                          329,000
                          
                          
                          
                          200,391Wages,
      salaries and related personnel costs
                          
                          
                          257,454
                          
                          
                          
                          218,060Board
      remuneration to be paid
                          
                          
                          140,000
                          
                          
                          
                          134,089Credit
      notes to be issued
                          
                          
                          70,000
                          
                          
                          
                          0Other
      accrued expenses
                          
                          
                          389,814
                          
                          
                          
                          158,879$
                          1,896,466
                          
                          
                          $
                          2,142,754




(a)  
Payroll taxes payable have been partly offset against VAT refund claimed, in
accordance with Dutch law.








NOTE
H - LONG-TERM DEBT





Long term
debt includes a debt obligation on a license agreement that the Company will pay
over a 2.5 year period. We have calculated the present value of this obligation
and have recorded this amount as a payable. We have classified the amounts that
have to be paid within a 1 year under current liabilities. We have calculated
the present value of the obligation using an interest percentage of 8% per year
..





Long-term
debt consists of the following note payable:





December
      31,2008
                      
                      
                      2007Long
      term loan with shareholders (See Note F)
                      
                      $
                      4,000,000
                      
                      
                      $
                      -Discount
      on loan term debt relating to warrants (See Note F)
                      
                      
                      (362,060
                      )
                      
                      
                      -Debt
      obligation on license agreement, net of discount of
    $147,049
                      
                      
                      1,619,938
                      
                      
                      
                      -Note
      payable to landlord for leasehold improvements, payable in quarterly
      installments of approximately $11,050,  matures in 2013,
      unsecured
                      
                      
                      231,000
                      
                      
                      
                      265,230Less:
      current maturities
                      
                      
                      (3,342,000
                      )
                      
                      
                      (44,205
                      )$
                      2,146,338
                      
                      
                      $
                      221,025








F
- 16








PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Future
maturities of long-term debt are as follows:




Year endingDecember 31,2009
                      
                      $
                      3,342,0002010
                      
                      
                      2,342,0002011
                      
                      
                      208,4472012
                      
                      
                      42,0002013
                      
                      
                      42,000Thereafter
                      
                      
                      0








NOTE
I - INCOME TAXES





The
components of income tax (benefit) expense for each of the years ended December
31, 2008 and 2007, respectively, are as follows:








Year
      EndedDecember
      31,2008
                    
                    
                    2007Domestic:
                    
                    $
                    
                    
                    
                    $Current
                    
                    
                    0
                    
                    
                    
                    0Deferred
                    
                    
                    0
                    
                    
                    
                    0Foreign:Current
                    
                    
                    0
                    
                    
                    
                    0Deferred
                    
                    
                    0
                    
                    
                    
                    0State:Current
                    
                    
                    0
                    
                    
                    
                    0Deferred
                    
                    
                    0
                    
                    
                    
                    0$
                    0
                    
                    
                    $
                    0





As of
December 31, 2008, the Company has a net operating loss carry forward of
approximately $700,000 to offset future United States taxable income and
approximately $48,000,000 to offset future Netherlands taxable income. Subject
to current United States regulations, the approximate $500,000 carry forward
will begin to expire in 2020. The amount and availability of the net operating
loss carry forwards 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 carry forwards.





As of
December 31, 2007, the Company has a net operating loss carry forward of
approximately $500,000 to offset future United States taxable income and
approximately $40,000,000 to offset future Netherlands taxable income. Subject
to current United States regulations, the approximate $500,000 carry forward
will begin to expire in 2020. The amount and availability of the net operating
loss carry forwards 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 carry forwards.





The
Company's income tax expense (benefit) for the years ended December 31, 2008 and
2007, respectively, differed from the statutory rate of 26% as noted
below:





F
- 17





PLAYLOGIC ENTERTAINMENT, INC. AND
SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS











Year
      ended December 31,2008
              
              
              2007Statutory
      rate applied to result before income taxes
              
              $
              (8,918,992)
              
              
              $
              746,729Increase
      (decrease) in income taxes resulting from:Foreign
      income taxes
              
              
              8,612,992
              
              
              
              (707,260
              )State
      income taxes
              
              
              -
              
              
              
              -Deferred
      income taxes
              
              
              -
              
              
              
              -Non-deductible
      items:
              
              
              100,000Stock
      option expenses
              
              
              206,000
              
              
              
              (39,469
              )Other,
      including reserve for deferred tax assetand
      effect of graduated tax brackets
              
              
              -
              
              
              
              154,771Total
      income tax expense (benefit)
              
              $
              -
              
              
              $
              -







NOTE
J - SHAREHOLDER’S EQUITY





Preferred
stock


As of
December 31, 2008, the Company has 20,000,000 shares of par value $0.001
preferred stock authorized but unissued. The rights, preferences, and
restrictions of the preferred stock may be designated by the Board of Directors
without further action by our shareholders.





Common
stock


During
the year ended December 31, 2008 the Company sold a total of 7,858,696 shares as
disclosed under Note F related party transactions. A total of 1,800,000 warrants
were sold in combination with these share subscriptions.





During
the year ended December 31, 2007, the Company sold 3,182,609 units at $1.15 per
share for proceeds of $3,660,000 pursuant to an exemption from registration
claimed under Rule 4(2) of the Securities Act of 1933, as
amended.  Each unit consisted of two shares of the Company’s par value
common stock and one Common Stock Warrant to purchase the Company’s common stock
at $2.75 per share at any time within the next 5 years. In total 1,591,308
warrants have been issued in relation to this sale. Furthermore, the Company
sold 270,000 shares to an unrelated third party at par value for facilitating
the share issuances.





During
the year ended December 31, 2007, the Company issued 9,147,861 units at $0.80
per share for proceeds of approximately $7,313,000 pursuant to an exemption from
registration claimed under Rule 4(2) of the Securities Act of 1933, as
amended.  In relation to this sale 2,500,000 warrants have been issued
to purchase the Company’s common stock at $1.35 per share at any time within the
next 5 years. Of this subscription, 6,287,273 shares were used to convert
outstanding debt amounting to $5,024,899. The remaining 2,288,471 shares have
been sold for cash which was paid directly by subscriber to
vendors.





During
the year ended December 31, 2007, the Company sold 600,000 shares of its
common stock to an accredited investor based in the Netherlands at $0.90 per
share for a total cash consideration of $538,604 pursuant to an exemption from
registration claimed under Rule 4(2) of the Securities Act of 1933, as
amended.





The above
transactions can be summarized as follows:




Issuance
      price
                                              
                                              
                                              Cash
                                              
                                              
                                              Settlement
      of vendor payables
                                              
                                              
                                              Debt
      conversion
                                              
                                              
                                              Total
                                              
                                              
                                              Units$
                                              1.15
                                              
                                              
                                              $
                                              2,735,019
                                              
                                              
                                              $
                                              635,961
                                              
                                              
                                              $
                                              289,020
                                              
                                              
                                              $
                                              3,660,000
                                              
                                              
                                              $
                                              3,182,609$
                                              0.80
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,288,471
                                              
                                              
                                              
                                              5,024,899
                                              
                                              
                                              
                                              7,313,370
                                              
                                              
                                              
                                              9,147,861$
                                              0.90
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              538,604
                                              
                                              
                                              
                                              538,604
                                              
                                              
                                              
                                              600,000$
                                              par
                                              
                                              
                                              
                                              270
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              270
                                              
                                              
                                              
                                              270,000$
                                              2,735,289
                                              
                                              
                                              $
                                              2,924,432
                                              
                                              
                                              $
                                              5,852,523
                                              
                                              
                                              $
                                              11,512,244
                                              
                                              
                                              $
                                              13,200,470











F
- 18





PLAYLOGIC ENTERTAINMENT, INC. AND
SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Stock options





The Board
of Directors of the Company approved an Employee Stock Option Plan on August 28,
2007.  The plan allows the Company to grant to employees a maximum of
3% of the issued common stock per year and is intended to attract and retain
talented or key employees.





On August
28, 2007, we granted to Willy J. Simon, the Company’s Chairman and Non Executive
Director, 112,500 options to purchase shares of the Company’s common stock at an
exercise price of $1.35 per share. A total of 112,500 shares of these options
will vest on April 1, 2008. The options will expire after 3 years.





On August
28, 2007, we granted to George M. Calhoun, one of the Company’s Non Executive
Directors, 62,500 options to purchase shares of the Company’s common stock at an
exercise price of $1.35 per share. A total of 62,500 shares of these options
will vest on April 1, 2008. The options will expire after 3 years.





On August
28, 2007, we granted to Erik L.A. van Emden, one of the Company’s Non Executive
Directors, 62,500 options to purchase shares of the Company’s common stock at an
exercise price of $1.35 per share. A total of 62,500 shares of these options
will vest on April 1, 2008. The options will expire after 3 years.





On August
28, 2007, we granted to certain employees and officers a total of 725,000
options (in accordance with the table below) to purchase shares of the Company’s
common stock at an exercise price of $1.35 per share. These options vest ratably
over three years and will expire in 4 years.





On  June
4, 2008, we granted to Willy J. Simon, the Company’s Chairman and Non Executive
Director,  80,000 options to purchase shares of the Company’s common
stock at an exercise price of $2.00per share. A total of 26,667 shares of these
options will vest on June 4, 2010. The options will expire after 4
years.




On  June
4, 2008, we granted to George M. Calhoun, one of the Company’s Non Executive
Directors, 40,000 options to purchase shares of the Company’s common stock at an
exercise price of $2.00 per share. A total of 13,333 shares of these options
will vest on June 4, 2010. The options will expire after 4
years.




On June
4, 2008, we granted to Erik L.A. van Emden, one of the Company’s Non Executive
Directors, 40,000 options to purchase shares of the Company’s common stock at an
exercise price of $2.00 per share. A total of 40,000 shares of these options
will vest on June 4, 2010. The options will expire after 4 years.




On June
4, 2008, we granted to certain employees and officers a total of 940,000 options
(in accordance with the table below) to purchase shares of the Company’s common
stock at an exercise price of $2.00 per share. These options vest ratably over
three years and will expire in 4 years.





Optionee
                      
                      Number
      of options granted on
                        June
      4, 2008
                      
                      Number
      of options granted on
                        August
      23, 2007W.M.
      Smit, Chief Executive Officer
                      
                      
                      200,000
                      
                      200,000R.W.
      Smit, Executive Vice President
                      
                      
                      400,000
                      
                      200,000D.
      Morel, Chief Technology Officer
                      
                      
                      100,000
                      
                      100,000P.Y.
      Thiercelin, Director of Sales
                      
                      
                      100,000
                      
                      75,000B.
      Mulderij, Marketing Manager
                      
                      
                      25,000
                      
                      75,000M.
      Janse, Executive Producer
                      
                      
                      20,000
                      
                      25,000O.
      Klooster, Assistant Controller
                      
                      
                      25,000
                      
                      25,000C.
      Neessen, Producer
                      
                      
                      15,000
                      
                      -H.Minh
      Luu, Product Support Manager
                      
                      
                      15,000
                      
                      -J.
      America, Producer
                      
                      
                      15,000
                      
                      -P.
      Torkan, Associate Producer
                      
                      
                      10,000
                      
                      -I.
      Frid, Managing Director
                      
                      
                      10,000
                      
                      15,000L.
      Leatomu, PA to the CEO
                      
                      
                      5,000
                      
                      10,000940,000
                      
                      725,000








F
- 19





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








The fair
value of options granted during 2008 and 2007 were 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:





2008
              
              2007Risk-free
      interest rate
              4.5%
              
              4.4%Dividend
      yield
              0%
              
              0%Volatility
      factor
              38.56%
              
              51.35%Weighted-average
      expected life
              4
      Years
              
              4
      Years







A summary
of our stock options for the two years ended December 31, 2008 and 2007 is as
follows:




Number
      of shares
                      
                      
                      Weighted-average
      exercise price
                      
                      
                      Weighted-average
      remaining contractual term (months)
                      
                      
                      Aggregate
      intrinsic valueOutstanding
      at December 31, 2006 (none exercisable)
                      
                      
                      350,000
                      
                      
                      $
                      3.07
                      
                      
                      
                      32
                      
                      
                      $
                      493,060Granted
                      
                      
                      962,500
                      
                      
                      
                      1.30
                      
                      
                      
                      29
                      
                      
                      
                      182,471Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfieted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Expired
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at December 31, 2007
                      
                      
                      1,312,500
                      
                      
                      $
                      1.77
                      
                      
                      
                      30
                      
                      
                      
                      675,531Granted
                      
                      
                      1,140,000
                      
                      
                      
                      2.00
                      
                      
                      
                      42
                      
                      
                      
                      151,506Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfieted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Expired
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at December 31, 2008
                      
                      
                      2,452,500
                      
                      
                      $
                      1.87
                      
                      
                      
                      35
                      
                      
                      $
                      827,037Exercisable
      at December 31, 2008
                      
                      
                      377,500
                      
                      
                      
                      1.79
                      
                      
                      
                      30
                      
                      
                      
                      264,890Vested
      at December  31, 2008
                      
                      
                      377,500
                      
                      
                      
                      1.79
                      
                      
                      
                      30
                      
                      
                      
                      264,890




Options
outstanding that are expected to vest are net of estimated future
forfeitures.  No options have been exercised during the year ended
December 31, 2008.  Total compensation cost recognized under
share-based payment arrangements during the years ended December 31, 2008 and
2007 were $208,000 and $(39,000), respectively.








Total
compensation cost not yet recognized as of December 31, 2008 and 2007is presented
in the table below:


December
      31,
                          
                          
                          Weighted
      –Average2008
                          
                          
                          2007
                          
                          
                          Remaining
      Vesting Period (Years)Stock
      option awards to employees
                          
                          $
                          100,724
                          
                          
                          $
                          285,729
                          
                          
                          
                          34Stock
      option awards to non-employees
                          
                          
                          17,171
                          
                          
                          
                          43,587
                          
                          
                          
                          32.3Total
      compensation costs
                          
                          $
                          117,895
                          
                          
                          $
                          302,316
                          
                          
                          
                          33.7
 F
- 20


PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Total
compensation cost not yet recognized as of December 31, 2008 and 2007 are
related to non-vested awards. The actual compensation cost recognized might
differ due to forfeitures or cancellations.Vesting period for restricted stock
awards is based on performance criteria so may differ from this
estimate.








Stock
Warrants





A summary
of the status of the Company’s outstanding common stock warrants as of December
31, 2008 and 2007:




Number of
                                                                Warrants
                                                              
                                                              Weighted
                                                                Average
                                                                Exercise Price
                                                              
                                                              Remaining
                                                                Contractual
                                                                Term
                                                              
                                                              Aggregate
                                                                Intrinsic
                                                                ValueOutstanding
      at December 31, 2006
                                                              
                                                              
                                                              1,878,136
                                                              
                                                              $
                                                              3.89
                                                              
                                                              
                                                              30.7
                                                              
                                                              $
                                                              7,306Granted
                                                              
                                                              
                                                              4,150,728
                                                              
                                                              
                                                              1.73
                                                              
                                                              
                                                              40.0
                                                              
                                                              
                                                              8,389Exercised
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —Forfeited
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —Expired
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —Outstanding
      at December 31, 2007
                                                              
                                                              
                                                              6,028,864
                                                              
                                                              
                                                              2.60
                                                              
                                                              
                                                              36.2
                                                              
                                                              
                                                              15,695Granted
                                                              
                                                              
                                                              3,486,000
                                                              
                                                              
                                                              1.49
                                                              
                                                              
                                                              36.0
                                                              
                                                              
                                                              5,193Exercised
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —Forfeited
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —Expired
                                                              
                                                              
                                                              (717,631)
                                                              
                                                              
                                                              5.00
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              3,588Outstanding
      and Exercisable at December 31, 2008
                                                              
                                                              
                                                              8,797,233
                                                              
                                                              $
                                                              1.97
                                                              
                                                              
                                                              31.4
                                                              
                                                              $
                                                              17,300











NOTE
K - COMMITMENTS AND CONTINGENCIES





Litigation




On
November 27, 2007, the District Court of Amsterdam ruled in favor of 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 $428,825 (€ 291,500) for the offices and
$30,300 (€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
$155,000 in rent expense from this lease agreement during the year
2008.







F
- 21





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








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 expired on February 28, 2007. 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 $425,000
(€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 $425,000 (€300,000) per year, payable in quarterly
installments.





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





December
      31,2009
                            
                            $
                            399,0002010
                            
                            
                            355,0002011
                            
                            
                            355,0002012
                            
                            
                            355,0002013
                            
                            
                            355,000Thereafter
                            
                            
                            355,000Total
                            
                            $
                            2,174,000




Transportation
leases





The
Company leases 10 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 $ 15,000.





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




December
      31,2008
                    
                    $
                    79,5002009
                    
                    
                    37,4002010
      and thereafter
                    
                    
                    -Total
                    
                    
                    116,900





Software development
contracts





The
Company has entered into seven (7) 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 $3.2 million through completion.






NOTE
L - 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:





F
- 22





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS











For
      the year ended December 31,2008
                                      
                                      2007Europe and United KingdomCustomer
      A *
                                      
                                      3,475,120
                                      38.5%
                                      
                                      2,320,721
                                      23.0%Customer
      B
                                      
                                      645,357
                                      7.2%
                                      
                                      1,473,039
                                      14.6%Customer
      C
                                      
                                      1,118,214
                                      12.4%
                                      
                                      512,799
                                      5.1%Customer
      D
                                      
                                      0
                                      0.0%
                                      
                                      3,348,524
                                      33.2%Customer
      E
                                      
                                      364,006
                                      4.0%
                                      
                                      0
                                      0.0%Customer
      F
                                      
                                      374,578
                                      4.2%
                                      
                                      0
                                      0.0%Others
                                      
                                      2,330,525
                                      25.8%
                                      
                                      2,208,296
                                      21.9%8,307,800
                                      92.1%
                                      
                                      9,863,379
                                      97.7%AsiaOthers
                                      
                                      31,605
                                      0.4%
                                      
                                      73,603
                                      0.7%31,605
                                      0.4%
                                      
                                      73,603
                                      0.7%United States & CanadaCustomer
      E
                                      
                                      684,791
                                      7.6%
                                      
                                      162,764
                                      1.6%others
                                      
                                      0
                                      0.0%
                                      
                                      0
                                      0.0%684,791
                                      7.6%
                                      
                                      162,764
                                      1.6%Total
                                      
                                      9,024,196
                                      100.0%
                                      
                                      10,099,746
                                      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 M – OTHER
INCOME & EXPENSES





Debt
restructuring





No gains
were recorded from debt restructuring during 2008.





During
the year ended December 31, 2007, the Company has negotiated a discount
amounting to $100,000 with vendor A resulting in the obligation to pay an amount
of $100,000 as a premium to the next capital raise. The realized gain following
the agreed discount has been included in gain on debt restructuring.
Furthermore, the Company has negotiated a discount amounting to $80,000 with
vendor B resulting in the obligation to pay an amount of $110,000 as a premium
to the next capital raise. The realized gain following the agreed discount has
been included in gain on debt restructuring. With the same vendor (B) the
Company agreed on a settlement of $197,000 based on agreed
payments.  The Company estimates the chance of a future successful
capital raise to be probable.





During
the year 2007, the Company negotiated discounts resulting in the following
gains, as presented under gains on debt restructuring totaling $850,411 over 4
different vendors.  The total gains from settlements are summarized as
follows:





Vendor
                          
                          Gain
      recognized in 2007Vendor
      A
                          
                          $
                          100,000Vendor
      B
                          
                          
                          285,000Vendor
      C
                          
                          
                          115,000Vendor
      D
                          
                          
                          350,411$
                          850,411








F
- 23





PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS








Loan
penalty expense


During
the year ended December 31, 2007, one of the Company’s loan providers, who
imposed a penalty for being in default of repayment of a loan, amounting to
$1,242,000 (€ 1,000,000) has waived that penalty. As a result we have reversed
that transaction and we have recorded this reversal as a gain, amounting to
$1,377,000 (€ 1,000,000).






NOTE
N – SUBSEQUENT EVENTS





On
January 23, 2009, the Company entered into a bridge loan agreement with two
principal shareholders based in the Netherlands, pursuant to which the Company
borrowed a principal amount of € 1,500,000 (or $2,100,000). The loans bear
interest at a rate of 10% per annum. Interest will be paid on a monthly basis,
the principle amounts will be repaid on December 31, 2009.  Concurrent
with these loan agreements of January 23, 2009, the Company issued to these
shareholders warrants to purchase 1,500,000 shares of the Company’s common stock
at an exercise price of $0.50 per share. The warrants may be exercised cashless
starting January 23, 2009 and expire on January 23, 2013.






F - 24