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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the period ended: June 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-49649
 PLAYLOGIC ENTERTAINMENT, INC.
  Delaware
    
    23-3083371(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Concertgebouwplein 13, 1071 LL Amsterdam, The Netherlands
    
    1071 LL(Address of principal executive offices)
    
    (Zip Code)
 31-20-676-0304  (Issuers telephone number)
 þ o
 o þ
  Class
    
    Outstanding at June 30, 2006Common Stock, par value $.001 per share
    
    24,593,733 shares
 o þ




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PLAYLOGIC ENTERTAINMENT, INC.
 FORM 10-QSB
 CONTENTS
 Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    1Item 2. Managements Discussion and Analysis
    
    20Item 3. Controls and Procedures
    
    28PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    28Item 3. Defaults Upon Senior Securities
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    29Item 5. Other Information
    
    29Item 6. Exhibits
    
    30Signatures
    
    31Exhibit Index
    
    31CertificationsEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 PLAYLOGIC
ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
  (Unaudited)
 June 30
    
    
    June 302006
    
    
    2005ASSETSCurrent AssetsCash on hand and in bank
    
    $
    151,593
    
    
    $
    144,031Accounts receivableTrade, net of allowance for doubtful accounts of approximately $22,499 and $-0-, respectively
    
    
    2,681,281
    
    
    
    703,430Loans to affiliated companies
    
    
    
    
    
    
    491,115Value Added Taxes from foreign governments
    
    
    286,040
    
    
    
    301,740Prepaid expenses and other
    
    
    787,079
    
    
    
    784,499Total current assets
    
    
    3,905,993
    
    
    
    2,424,815Property and Equipment  at costComputers and office equipment
    
    
    1,575,793
    
    
    
    1,352,125Leasehold improvements
    
    
    310,874
    
    
    
    184,096Software
    
    
    306,147
    
    
    
    42,8142,192,813
    
    
    
    1,579,035Less accumulated depreciation
    
    
    (1,378,365
    )
    
    
    (1,075,371
    )Net property and equipment
    
    
    814,448
    
    
    
    503,666Other assetsCapitalized software development costs
    
    
    4,797,825
    
    
    
    1,838,512Other assets
    
    
    
    
    
    
    Loan to stockholder
    
    
    
    
    
    
    694,419Deferred tax asset
    
    
    
    
    
    
    584,837Total other assets
    
    
    4,797,825
    
    
    
    3,117,768Total Assets
    
    $
    9,518,266
    
    
    $
    6,046,249
 - Continued -
 
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PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30
    
    
    June 302006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent
LiabilitiesBank overdraft
    
    $
    1,629,568
    
    
    $
    393,896Short-term loans from third parties
    
    
    1,296,726
    
    
    
    187,023Software financing loans payable
    
    
    
    
    
    
    241,320Current maturities of long-term debt
    
    
    38,139
    
    
    
    Accounts payable  trade
    
    
    2,989,468
    
    
    
    2,450,847Payroll taxes payable
    
    
    2,180,219
    
    
    
    745,263Other accrued liabilitiesAccrued wages and related personnel costs
    
    
    276,544
    
    
    
    415,339Other
    
    
    1,970,267
    
    
    
    85,250Deferred revenues
    
    
    1,502,626
    
    
    
    Loan from stockholders
    
    
    50,852
    
    
    
    Total Current Liabilities
    
    
    11,934,409
    
    
    
    4,518,938Long-Term LiabilitiesLong-term debt, net of current maturities
    
    
    247,904
    
    
    
    271,485Total Liabilities
    
    
    12,182,312
    
    
    
    4,790,423Commitments and contingenciesStockholders DeficitPreferred stock  $0.001 par value
20,000,000 shares authorized
None issued and outstandingCommon stock  $0.001 par value
100,000,000 shares authorized
24,593,733 and 23,063,994 shares
issued and outstanding, respectively
    
    
    24,594
    
    
    
    23,064Deferred Compensation-Employee Stock Options
    
    
    197,411
    
    
    
    Common stock warrants
    
    
    1,890,268
    
    
    
    Additional paid-in capital
    
    
    38,600,034
    
    
    
    33,808,178Currency translation adjustments
    
    
    (1,960,638
    )
    
    
    (1,707,896
    )Accumulated deficit
    
    
    (41,195,811
    )
    
    
    (30,867,521
    )(2,444,142
    )
    
    
    1,255,826Stock subscriptions receivable
    
    
    (219,904
    )
    
    
    Total Stockholders Equity
    
    
    (2,664,046
    )
    
    
    1,255,826Total Liabilities and Shareholders Equity
    
    $
    9,518,266
    
    
    $
    6,046,249
 
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PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (Unaudited)
 Six months
    
    
    Six months
    
    
    Three months
    
    
    Three monthsended
    
    
    ended
    
    
    ended
    
    
    endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesGame software
    
    $
    3,132,671
    
    
    $
    736,559
    
    
    $
    413,061
    
    
    $
    204,421Cost of salesDirect costs of production
    
    
    (1,927,913
    )
    
    
    (139,769
    )
    
    
    (166,288
    )
    
    
    (16,692
    )Gross Profit
    
    
    1,204,758
    
    
    
    596,790
    
    
    
    246,773
    
    
    
    187,729Operating expensesResearch and development
    
    
    1,625,110
    
    
    
    485,937
    
    
    
    1,281,418
    
    
    
    123,668Selling and marketing
    
    
    738,002
    
    
    
    500,585
    
    
    
    648,333
    
    
    
    494,665General and administrative
    
    
    2,791,646
    
    
    
    1,300,367
    
    
    
    1,189,625
    
    
    
    649,388Depreciation
    
    
    154,364
    
    
    
    204,968
    
    
    
    75,866
    
    
    
    100,901Compensation expense related
to common stock issuances at
less than fair value
    
    
    
    
    
    
    90,000
    
    
    
    
    
    
    
    90,000Total operating expenses
    
    
    5,309,122
    
    
    
    2,581,857
    
    
    
    3,195,242
    
    
    
    1,458,623Loss from Operations
    
    
    (4,104,364
    )
    
    
    (1,985,067
    )
    
    
    (2,948,469
    )
    
    
    (1,270,894
    )Other Income/(Expense)Interest expense
    
    
    (172,087
    )
    
    
    (197,775
    )
    
    
    (95,260
    )
    
    
    (94,445
    )Realized and Unrealized
Exchange gains/(losses)
    
    
    311,166
    
    
    
    
    
    
    
    275,949
    
    
    
    Income/(Loss) before provision
for income taxes
    
    
    (3,965,285
    )
    
    
    (2,182,842
    )
    
    
    (2,767,780
    )
    
    
    (1,365,339
    )Provision for Income Taxes
    
    
    
    
    
    
    623,404
    
    
    
    
    
    
    
    365,890Net loss
    
    
    (3,965,285
    )
    
    
    (1,559,438
    )
    
    
    (2,767,780
    )
    
    
    (999,448
    )Other comprehensive income/(loss)Foreign currency adjustment
    
    
    (461,003
    )
    
    
    929,689
    
    
    
    (352,382
    )
    
    
    335,755Comprehensive Income/(Loss)
    
    $
    (4,426,288
    )
    
    $
    (629,749
    )
    
    $
    (3,121,162
    )
    
    $
    (663,693
    )Net loss per weighted-average
share of common stock
outstanding, computed on Net
Loss - basic and fully diluted
    
    
    (0.16
    )
    
    
    (0.07
    )
    
    
    (0.11
    )
    
    
    (0.04
    )Weighted-average number of
shares of common stock
outstanding - basic and fully diluted
    
    
    24,391,068
    
    
    
    22,821,155
    
    
    
    24,507,931
    
    
    
    22,840,205
 
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2006
    
    
    2005Cash Flows from Operating ActivitiesNet loss
    
    $
    (3,965,285
    )
    
    $
    (1,604,311
    )Adjustments to reconcile net income to net cash provided
provided by operating activitiesCurrency translation adjustment
    
    
    (460,997
    )
    
    
    929,689(Un)realized (gains)/ losses on currency exchange
    
    
    (311,166
    )Depreciation
    
    
    154,364
    
    
    
    204,968Bad debt expense
    
    
    66,821
    
    
    
    Expense charges for stock options
    
    
    134,106
    
    
    
    Expense related to common stock issuances at less than fair value
    
    
    
    
    
    
    90,000Deferred income taxes
    
    
    
    
    
    
    (623,404
    )Management fees contributed as capital
    
    
    50,000(Increase) Decrease inAccounts receivable  trade and other
    
    
    (2,102,218
    )
    
    
    (703,430
    )Prepaid expenses and other
    
    
    517,994
    
    
    
    (813,421
    )Increase (Decrease) inDeferred revenues
    
    
    1,492,897
    
    
    
    Accounts payable  trade
    
    
    419,910
    
    
    
    (736,746
    )Payroll taxes payable
    
    
    (123,125
    )
    
    
    606,441Other current liabilities
    
    
    1,357,407
    
    
    
    (542,383
    )Net cash used in operating activities
    
    
    (2,769,292
    )
    
    
    (3,192,597
    )Cash Flows from Investing ActivitiesCash paid for software development
    
    
    (1,692,407
    )
    
    
    (664,115
    )Cash advanced for prepaid royalties to affiliated entities
    
    
    
    
    
    
    (402,357
    )Cash paid to acquire property and equipment
    
    
    (208,854
    )
    
    
    (4,110
    )Net cash used in investing activities
    
    
    (1,901,261
    )
    
    
    (1,070,582
    )Cash Flows from Financing ActivitiesIncrease (Decrease) in cash overdraft
    
    
    98,516
    
    
    
    (539,121
    )Net activity on short term notes to third parties
    
    
    1,296,726
    
    
    
    (25,995
    )Net activity on software financing notes payable
    
    
    
    
    
    
    (352,673
    )Principal payments on long-term debt
    
    
    2,147
    
    
    
    (56,235
    )Cash advanced by affiliated entities
    
    
    495,743Cash advanced or repaid to shareholder  net
    
    
    (112,239
    )
    
    
    (8,291,545
    )Proceeds from sales of common stock
    
    
    1,892,053
    
    
    
    Collections on stock subscriptions receivable
    
    
    1,009,440
    
    
    
    Proceeds from sales of pre-merger subsidiary common stock
    
    
    
    
    
    
    13,650,553Net cash provided by financing activities
    
    
    4,682,386
    
    
    
    4,384,984Increase (Decrease) in Cash and Cash Equivalents
    
    
    11,833
    
    
    
    121,805Cash and cash equivalents at beginning of period
    
    
    139,760
    
    
    
    22,226Cash and cash equivalents at end of period
    
    $
    151,593
    
    
    $
    144,031Supplemental Disclosures of Interest and Income Taxes PaidInterest paid during the period
    
    $
    172,087
    
    
    $
    197,775Income taxes paid (refunded)
    
    $
    
    
    
    $
    Supplemental Disclosures of Non-Cash Investing and Financing ActivitiesCommon stock issued to repay notes payable
    
    $
    918,652
    
    
    $
    Cost of acquiring capital paid with issuance of common stock
    
    $
    13,200
    
    
    $
    
 
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  ORGANIZATION AND DESCRIPTION OF BUSINESS
        NOTE B  PREPARATION OF FINANCIAL STATEMENTS
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NOTE C  GOING CONCERN UNCERTAINTY
     
      NOTE D  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 1.
    
    Currency translationThe Company incurs expenses in both US Dollar and Euro transaction accounts. The Euro is the
functional currency of the Companys operating subsidiaries domiciled in The Netherlands. All
transactions reflected in the accompanying financial statements have been converted into US
Dollar equivalents.For balance sheet purposes, at the end of any accounting cycle, the exchange rate at the balance
sheet is used for all assets and liabilities. The utilized conversion rates are:
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June 30, 2006
    
    $
    1.27130December 31, 2005:
    
    $
    1.18290June 30, 2005
    
    $
    1.20660December 31, 2004:
    
    $
    1.36550
 1.
    
    Currency translation  continuedFor revenues, expenses, gains and losses during a respective reporting period, an weighted
average exchange rate for the respective reporting period is used to translate those elements.
The Companys management considers the Euro to be a stable currency. Accordingly, the Company
calculates the weighted average exchange rate using the first day of the period being converted,
the 15th of each respective month and the last day of each respective month in the reporting
period. The exchange rates used for all revenues, expenses, gains and losses during the
year-to-date periods ended, as noted, are:
 June 30, 2006
    
    $
    1.22889December 31, 2005:
    
    $
    1.24658June 30, 2005
    
    $
    1.28617December 31, 2004:
    
    $
    1.24514
 2.
    
    Cash and cash equivalentsThe Company considers all cash on hand and in banks, certificates of deposit and other
highly-liquid investments with maturities of three months or less, when purchased, to be cash and
cash equivalents.Cash overdrafts may occur from time-to-time depending upon managements cash management policies.
 3.
    
    Accounts receivable  tradeThe Companys current customers are located principally within Europe; however, the Company
anticipates having customers throughout the world in future periods. The Company typically makes
sales to distributors on unsecured credit, with terms that vary depending upon the customers
credit history, solvency, credit limits and sales history. From time to time, distributors and
retailers in the interactive entertainment software industry have experienced significant
fluctuations in their business operations and a number of them have failed. The insolvency or
business failure of any significant Company customer could have a material negative impact on the
Companys business and financial results.Because of the credit risk involved, management has provided an allowance for doubtful accounts
which reflects its opinion of amounts which will eventually become uncollectible.In the event of complete non-performance, the maximum exposure to the Company is the recorded
amount of trade accounts receivable shown on the balance sheet at the date of non-performance.
 4.
    
    Property and equipmentProperty and equipment is recorded at cost and is depreciated on a straight-line basis, over the
estimated useful lives (generally 3 to 10 years) of the respective asset. Major additions and
betterments are capitalized and depreciated over the estimated useful lives of the related
assets. Maintenance, repairs, and minor improvements are charged to expense as incurred.5.
    
    Software development costs
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Capitalized software 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 products. The Company accounts for software development costs
in accordance with Statement of Financial Accounting Standards No. 86  Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Software development
costs are capitalized once technological feasibility of a product is established and such costs
are determined to be recoverable against future revenues. The Company also capitalizes internal
software development costs and other content costs subsequent to establishing technological
feasibility of a title. Amortization of such costs as a component of cost of sales is recorded
on a title-by-title basis based on the greater of the proportion of current year sales to the
total of current and estimated future sales for the title or the straight-line method over the
remaining estimated useful life of the title. At each balance sheet date, the company evaluates
the recoverability of capitalized software costs based on undiscounted future cash flows and
charges to operations any amounts that are deemed unrecoverable.The Companys agreements with third-party developers generally provide it with exclusive
publishing and distribution rights and require it to make advance payments that are recouped
against royalties due to the developer based on the contractual amounts of product sales,
adjusted for certain costs.6.
    
    Prepaid royaltiesThe Company capitalizes external software development costs (prepaid royalties) and other content
costs subsequent to establishing technological feasibility of a title. Advance payments are
amortized as royalties in cost of sales on a title-by-title basis based on the greater of the
proportion of current year sales to the total of current and estimated future sales for that
title or the contractual royalty rate based on actual net product sales as defined in the
respective agreements. At each balance sheet date, the company evaluates the recoverability of
advanced development payments and unrecognized minimum commitments not yet paid to determine the
amounts unlikely to be realized through product sales. Advance payments are charged to cost of
sales in the amount that management determines is unrecoverable in the period in which such
determination is made or if management determines that it will cancel a development project.7.
    
    Organization and reorganization costsThe Company has adopted the provisions of AICPA Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities whereby all organizational and initial costs incurred with the
incorporation and initial capitalization of the Company were charged to operations as incurred.8.
    
    Research and development expensesResearch and development expenses include the direct costs related to software and game
development which are incurred prior to the establishment of technological feasibility of a
specific game title or product. These costs are charged to operations as incurred.9.
    
    Advertising expensesThe Company does not utilize direct solicitation advertising. All other advertising and marketing
expenses are charged to operations as incurred.10.
    
    Income TaxesThe Company utilizes the asset and liability method of accounting for income taxes. At June 30,
2006 and 2005, the deferred tax asset and deferred tax liability accounts, as recorded when
material, are entirely the result of temporary differences. Temporary differences generally
represent differences in the recognition of assets and liabilities for tax and financial
reporting purposes, primarily accumulated depreciation and amortization and the anticipated
utilization of net operating loss carry forwards to offset current taxable income.11.
    
    Share-Based PaymentsThe Company utilizes the fair-value method of accounting for the payment for goods and/or
services with the issuance of equity shares in lieu of cash.12.
    
    Earnings (loss) per shareBasic earnings (loss) per share is computed by dividing the net income (loss) available to common
shareholders by the weighted-average number of common shares outstanding during the respective
period presented in our accompanying financial statements.Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share
except that the denominator is increased to include the number of common stock equivalents
(primarily outstanding options and warrants).Common stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at either the beginning
of the respective period presented or the date of issuance, whichever is later, and only if the
common stock equivalents are considered dilutive based upon the Companys net income (loss)
position at the calculation date.As of June 30, 2006 and 2005, the Companys outstanding stock options and warrants are
considered anti-dilutive due to the Companys net operating loss position.
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13.
    
    Revenue recognitionThe Company evaluates the recognition of revenue based on the criteria set forth in SOP 97-2,
Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions and U. S. Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, as revised by SAB 104, Revenue Recognition. The Company evaluates revenue
recognition using the following basic criteria:
      14.
    
    New accounting pronouncementsIn November 2004, the Financial Accounting Standards Board (the FASB) issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. SFAS
No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The initial application of SFAS No. 151 is not expected to have a significant impact on the
Companys financial position or results of operations.In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123R (revised 2004), Share-Based Payment which revised
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
This statement supersedes Opinion No. 25, Accounting for Stock Issued to Employees. The
revised statement addresses the accounting for share-based payment transactions with employees
and other third parties, eliminates the ability to account for share-based compensation
transactions using APB 25 and requires that the compensation costs relating to such transactions
be recognized in the statement of operations. The revised statement has been implemented by the
Company effective January 1, 2006.Effective January 1, 2006, the Company adopted FAS No. 123R utilizing the modified prospective
method. FAS No. 123R requires the recognition of stock-based compensation expense in the
financial statements. Under the modified prospective method, the provisions of FAS No. 123R apply
to all awards granted or modified after the date of adoption. In addition, the unrecognized
expense of awards not yet vested at the date of adoption, determined under the original
provisions of FAS 123, Accounting for Stock Based Compensation, shall be recognized in net
earnings in the periods after the date of adoption. Stock based compensation consists primarily
of stock options. Stock options are granted to employees at exercise prices equal to the fair
market value of the Companys stock at the dates of grant. Stock options generally vest over four
years. Compensation expense for stock options is recognized over the period for each separately
vesting portion of the stock option award.The fair value for options issued prior to January 1, 2006 was estimated at the date of grant
using a Black Scholes option-pricing model.In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB
29, Accounting for Nonmonetary Transactions. This statements amendments are based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged. Further, SFAS 153 eliminates the narrow exception for nonmonetary exchanges of
similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. Provisions of this statement are effective for
fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this
statement to have a material impact on its financial statements.In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations"(FIN 47), which is an interpretation of SFAS 143, Accounting for Asset
Retirement Obligations. FIN 47 clarifies terminology within SFAS 143 and requires an entry to
recognize a liability for the fair value of a conditional asset retirement obligation when
incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is effective for
fiscal years ending after December 15, 2005. The Company does not expect the adoption of this
statement to have a material impact on its financial statements.In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which
will require entities that voluntarily make a change in accounting principle to apply that change
retroactively to prior periods financial statements unless this would be impracticable. SFAS No.
154 supersedes Accounting Principles Board Opinion No. 20, Accounting Changes (APB No. 20),
which previously required that most voluntary changes in accounting principle be recognized by
including in the current periods net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between retrospective application
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of an accounting principle and the restatement of financial statements to reflect the
correction of an error. Another significant change in practice under SFAS No. 154 will be that if
an entity changes its method of depreciation, amortization, or depletion for long-lived,
non-financial assets, the change must be accounted for as a change in accounting principle. SFAS
No. 154 applies to accounting changes and error corrections that are made in fiscal years
beginning after December 15, 2005. The provisions of SFAS No. 154 are not expected to affect the
Companys consolidated financial statements.
 NOTE E  FAIR VALUE OF FINANCIAL INSTRUMENTS
    NOTE F  CONCENTRATIONS OF CREDIT RISK
   NOTE G  PROPERTY AND EQUIPMENT
  June 30,
    
    
    June 30,2006
    
    
    2005
    
    Estimated LifeComputers and office equipment
    
    $
    1,575,793
    
    
    $
    1,352,125
    
    
    3-5 yearsLeasehold improvements
    
    
    310,874
    
    
    
    184,096
    
    
    initial lease termSoftware
    
    
    306,147
    
    
    
    42,814
    
    
    3-5 years2,192,813
    
    
    
    1,579,035Less accumulated depreciation
    
    
    (1,378,365
    )
    
    
    (1,075,371
    )Net property and equipment
    
    $
    814,448
    
    
    $
    503,666
 NOTE H  AMOUNTS DUE FROM RELATED PARTIES
  NOTE I  LONG-TERM DEBT
  June 30,
    
    
    June 30,2006
    
    
    2005Note payable to a landlord for
leasehold improvements. Payable in
quarterly installments of approximately
$8,871. Final maturity in 2013.
    
    $
    286,043
    
    
    $
    271,845Less current maturities
    
    
    (38,139
    )
    
    
    Current portion
    
    $
    247,904
    
    
    $
    271,845
 10




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##### Table of Contents



Year endingDecember 31,
    
    Amount2006
    
    $
    17,7432007
    
    
    35,4872008
    
    
    35,4872009
    
    
    35,4872010
    
    
    35,4872011-2015
    
    
    106,481Totals
    
    $
    266,152
 NOTE J  CURRENT LIABILITIES
 
 
 NOTE K  LOANS FROM STOCKHOLDERS
  
  st
 NOTE L  INCOME TAXES
  Six months Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2006
    
    
    2005Domestic:Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Foreign:Current
    
    
    
    
    
    
    Deferred
    
    
    
    
    
    
    593,934State:Current
    
    
    
    
    
    
    Deferred
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
 11




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##### Table of Contents



Six months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2006
    
    
    2005Statutory rate applied to loss before income taxes
    
    $
    (1,340,493
    )
    
    $
    (316,060
    )Increase (decrease) in income taxes resulting from:Foreign income taxes
    
    
    1,320,693
    
    
    
    316,060State income taxes
    
    
    
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    (584,837
    )Other, including reserve for deferred tax asset and effect of graduated tax brackets
    
    
    19,800
    
    
    
    Total income tax expense (benefit)
    
    $
    
    
    
    
    (584,837
    )
  June 30,2006Net operating loss carry forwards
    
    $
    9,983,000Less valuation allowance
    
    $
    9,983,000Net Deferred Tax Asset
    
    $
    
 NOTE M  COMMON STOCK TRANSACTIONS
      12




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13




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NOTE N  STOCK WARRANTS
        WeightedAverageNumber of
    
    ExerciseShares
    
    PriceBalance at December 31, 2004
    
    
    100,000
    
    
    $
    0.60Issued
    
    
    570,000
    
    
    $
    5.00Exercised
    
    
    (100,000
    )
    
    $
    0.60Balance at December 31, 2005
    
    
    570,000
    
    
    $
    5.00Issued
    
    
    430,631
    
    
    $
    5.00Expired
    
    
    Exercised
    
    
    Balance at June 30, 2006
    
    
    1,000,631
    
    
    $
    5.00
 14




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##### Table of Contents



NOTE O  STOCK OPTIONS
        Weightedaverageprice pershareOptions outstanding at January 1, 2004
    
    
    
    
    
    
    Issued
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired/Terminated
    
    
    
    
    
    
    Options outstanding at December 31, 2004
    
    
    
    
    
    
    Issued
    
    
    390,000
    
    
    $
    3.50Exercised
    
    
    
    
    
    
    Expired/Terminated
    
    
    
    
    
    
    Options outstanding at December 31, 2005
    
    
    390,000Issued
    
    
    150,000
    
    
    $
    2.90Exercised
    
    
    
    
    
    
    Expired/Terminated
    
    
    
    
    
    
    Options outstanding at June 30, 2006
    
    
    540,000
 15




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##### Table of Contents



Six MonthsEnded(in thousands, except per share amounts)
    
    June 30, 2006Net loss before stock option expense
    
    $
    (3,831,285
    )Less stock option expense
    
    
    (134,000
    )Net loss as reported
    
    $
    (3,965,285
    )
   June 30, 2006
    
    June 30, 2005Risk free annual interest rate
    
    
    4.50
    %
    
    n/aExpected volatility
    
    
    61
    %
    
    n/aExpected life
    
    3 years
    
    
    n/aAssumed dividends
    
    None
    
    
    n/a
   16




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NOTE P  COMMITMENTS AND CONTINGENCIES
 Security agreement
  Transactions with related parties
  Office leases
 
 
  
   1 2 1 2
  Year endingDecember 31,
    
    Amount2006
    
    $
    314,0812007
    
    
    727,2162008
    
    
    697,2202009
    
    
    697,2202010
    
    
    697,2202011-2015
    
    
    1,593,828Totals
    
    $
    4,726,784
 17




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##### Table of Contents



Transportation leases
   Year endingDecember 31,
    
    Amount2006
    
    $
    111,9292007
    
    
    141,3062008
    
    
    90,6522009
    
    
    48,247Totals
    
    $
    392,134
 Employment agreements
   
   
 
  
 18




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
 Software development contracts
  Litigation
      19




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Item 2. Managements Discussion and Analysis
 Forward-Looking Statements
   Our Business
        20




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Release Schedule
 Expected ReleaseGame
    
    Studio
    
    Platform
    
    DateCompleted 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 (D)
    
    PS2, Xbox, PC
    
    ReleasedKnights of the Temple 2
    
    Cauldron (SK)
    
    PS2, Xbox, PC
    
    ReleasedGene Troopers
    
    Cauldron (SK)
    
    PS2, Xbox, PC
    
    ReleasedUnder DevelopmentXyanide
    
    Playlogic Game Factory (NL)
    
    Xbox
    
    Q3 2006Age of Pirates: Caribbean Tales
    
    Akella (Russia)
    
    PC
    
    Q3 2006Ancient Wars: Sparta
    
    World Forge (Russia)
    
    PC
    
    Q4 2006Infernal
    
    Metropolis
    
    PC
    
    Q4 2006Age of Pirates: Captain Blood
    
    Akella
    
    PC
    
    Q1 2007Xyanide Resurrection
    
    Playlogic Game Factory (NL)
    
    PSP
    
    Q4/Q1 2007P.R.I.S.M.  Threat Level: Red
    
    Rebellion (UK)
    
    PC
    
    To be announcedInfernal
    
    Metropolis
    
    Next Gen
    
    Q3/Q4 2007Age of Pirates: Captain Blood
    
    Akella
    
    Next Gen
    
    To be announcedRed Bull Break Dance Game
    
    JGI Games
    
    Various
    
    Q3 2007Voodoo Nights
    
    Mindware
    
    PC & Next Gen
    
    Q3/4 2007(i)
 
 (i)
    
    Final decision on Next Gen options to be made.     21




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Managements Overview of Historical and Prospective Business Trends
 Increased Console Installed Base.
  Software Prices.
 Increasing Cost of Titles.
 Uncertainties and Other Factors that May Affect our Future Results and Financial
Condition
     22




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##### Table of Contents



Critical Accounting Policies
 General
  Estimates
  Accounts
  Software Development Costs
    23




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##### Table of Contents



Revenue
  
    
    Evidence of an arrangement: We recognize revenue when we have evidence of an agreement
with the customer reflecting the terms and conditions to deliver products.
    
    Delivery: Delivery is considered to occur when the products are shipped and risk of loss
has been transferred to the customer.
    
    Fixed or determinable fee: If a portion of the arrangement fee is not fixed or
determinable, we recognize that amount as revenue when the amount becomes fixed or
determinable.
    
    Collection is deemed probable: At the time of the transaction, we conduct a credit
review of each customer involved in a significant transaction to determine the
creditworthiness of the customer.
    
    Collection is deemed probable if we expect the customer to be able to pay amounts under
the arrangement as those amounts become due. If we determine that collection is not
probable, we recognize revenue when collection becomes probable (generally upon cash
collection).
 Product Revenue
  New Accounting
   24




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Results of Operations
 Three and Six Ended June 30, 2006 Compared to Three and Six Months Ended June 30, 2005.
  25




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26




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Liquidity and Capital Resources
 June 30,
      Off Balance Sheet Arrangements
  27




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Item 3. Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
    
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Shares
 NAME
    
    SHARES
    
    DATEMatrans Holding B.V.
    
    128,000
    
    June 1, 2006
  28




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##### Table of Contents



Options and Warrants
 Options
  Warrants
  NAME
    
    WARRANTS
    
    DATEMatrans Holding B.V.
    
    128,000
    
    June 1, 2006Built to Build Vastgoed B.V.
    
    100,000
    
    June 17, 2006
   Issuer Purchase of Equity Securities
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission Matters to a Vote of Security Holders.
  Nominee
    
    Number of Votes For
    
    Number of Votes WithheldWillem M. Smit
    

    14,203,622
    
    
    1,000Willy Simon
    
    14,203,622
    
    
    1,000George Calhoun
    
    14,203,622
    
    
    1,000Erik van Emden
    
    14,203,622
    
    
    1,000
  
 Item 5. Other Information.
  29




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
 
 
 Item 6. Exhibits.
  30




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SIGNATURES
  Playlogic Entertainment, Inc.(Registrant)Date: August 14, 2006
    
    By:
    
    /s/ Willem M. Smit

Willem M. SmitChief Executive Officer
 PLAYLOGIC ENTERTAINMENT, INC.
 
 EXHIBIT INDEX
 Exhibit Number
    
    Description31.1
    
    Certifications of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certifications of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certifications of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 31