UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

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

FOR THE FISCAL YEAR ENDED: December 31, 2006

|_| 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. Employer
Incorporation or Organization)	Identification No.)

Concertgebouwplein 13, 1071 LL Amsterdam, The Netherlands	1071 LL
(Address of Principal Executive Offices)	(Zip Code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ]

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [ ] Yes       [X] No

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X|

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ]

The Issuer's revenues for its most recent fiscal year were $5,042,517

As of April 13, 2007, 25,766,893 shares of the Issuer's $0.001 par value common stock were outstanding and the aggregate market value of the shares held by non-affiliates was approximately $16,748,480 based upon a closing bid price on April 13, 2007 of $0.65 per share of common stock on the Over-The-Counter Bulletin Board.

As of April 16, 2007 the registrant has shares of common stock outstanding. As of April 16 2006, no shares of preferred stock were outstanding.

PLAYLOGIC ENTERTAINMENT ANNUAL REPORT ON FORM 10-KSB

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS

PART I		Page
Item 1.	Business	2
Item 1A.	Risk Factors	10
Item 2.	Property	21
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Small Business Issuer Purchases of Equity Securities	23
Item 6.	Management’s Discussion and Analysis	27
Item 7.	Financial Statements	34
Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	34
Item 8A.	Controls and Procedures	35
Item 8B.	Other Information	36
PART III
Item 9.	Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act	37
Item 10.	Executive Compensation	42
Item 11.	Security Ownership of Certain Beneficial Owners and  Management and Related Shareholder Matters	46
Item 12.	Certain Relationships and Related Transactions	47
Item 13.	Exhibits and Financial Statement Schedules	47
Item 14.	Principal Accounting Fees and Services	48

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.

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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 Concertgebouwplein 13, 1071 LL 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 web site 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 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, 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.

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 (primarily based on past performance by the studio or developer), technology used, track record and human resources of the studio, game play, graphics and sounds.

We select which games we develop, based on our analysis of consumer trends and behavior and our experience with similar or competitive products. Once we select a game to develop, we then assign a development studio, based upon its qualifications, previous experience and prior performance. Once developed, we distribute our games 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 and increase with a minimum augmentation in development time and resources.

We believe that greater online functionality and the expanded artificial intelligence capabilities of the new platforms will improve game play 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.

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Industry Overview

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

Worldwide, the video game market is projected to increase from $26.2 billion in 2004 to $46.5 billion in 2010, growing at an 11.4 percent compound annual rate. Asia Pacific, currently the largest market at $9.6 billion in 2004, is projected to maintain its dominance, growing at a 12.3 percent compound annual rate through 2010 to reach $17.4 billion. The United States has the second largest market and is expected to grow from $8.4 billion in 2005 to $13.0 billion in 2010, an 8.9 percent compounded annual according to Company Annual Reports of Crandell & Sidak

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

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

Market Trends - Worldwide

In the U.S. wireless games will experience the fastest rate of growth, increasing from $646 million in 2005 to $2.3 billion in 2010, a 28.6 percent compound annual increase. In EMEA the online game market will be driven by increased penetration of the broadband subscriber market as well as by the new consoles, which will emphasize online play. In the Asia Pacific region online games became the second-largest category in 2005, passing the PC game total, and will increase by 23.0 percent compounded annually, reaching $4.4 billion in 2010 as compared with $1.6 billion in 2005.As a result of lack of competition from the newer online and wireless technologies, PC games are relatively more important in Latin America and are not exhibiting the declines evident elsewhere in the world. Canada has one of the highest broadband penetration rates in the world, spurring growth in the online game segment, according to the 2006 report commissioned by the Entertainment Software Association exam

Console Installed Base

Since the introduction of PlayStation 2 in 2000, the console has sold over 100 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 10 million units so far. Sony sold almost 3 million units of its Playstation 3.Nintendo’s next generation console, called ‘Wii’ has been sold more than 6 million units so far. Wed bush Morgan Securities expects next generation hardware shipments through the end of 2007 will reach 46 million units in the U.S. and Europe. 

Nintendo Dual Screens (‘Nintendo DS’) and PlayStation Portable (‘PSP’) were both successfully introduced to the market. The sales volume of the Nintendo DS reached 13 million units by January 1, 2006, and PSP reached the sales volume of 10 million units by the end of October 2005.

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PC Games

Playlogic will continue its focus on PC games because in comparison to next generation consoles, PC games are less expensive to develop and address a much wider target audience. Furthermore Playlogic will focus on handheld games, because of the large big installed base, Nintendo especially of the DS. Playlogic will continuedevelopment of PlayStation2 titles, because of their large installed base of over 100 million units.

Consumer Facts

Thirty percent of most frequent game players are under eighteen years old while twenty-six percent of most frequent game players are between 18 and 35 years old. Forty-four percent of most frequent game players are over 35 years old. Forty percent of most frequent console game players are under eighteen years old while thirty-five percent of most frequent game players are between 18 and 35 years old. Twenty-five percent of most frequent console game players are over 35 years old. Thirty-eight percent of game players are women. Women age 18 or older represent a significantly greater portion of the game-playing population (30%) than boys age 17 or younger (23%).The average adult woman plays games 7.4 hours per week.  The average adult man plays 7.6 hours per week. Though males spend more time playing than do females, the gender/time gap has narrowed significantly.  Whereas in 2003, males spent an average of 18 more minutes a day playing games than did their female counterparts, in 2004 they spent only six minutes more each day doing so.  Females spend an average of two hours more per week playing games now than they did a year ago. Forty-four percent of most frequent game players say they play games online, up from 31% in 2002.

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

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Release Overview

			Expected release
Game	Studio	Platform	date to retail
Completed Games
Alpha Black Zero	Khaeon (NL)	PC	Released
Airborne Troops	Widescreen Games (F)	PS2, PC	Released
Cyclone Circus	Playlogic Game Factory (NL)	PS2	Released
Xyanide	Overloaded (NL)	Mobile Phones	Released
World Racing 2	Synetic (G)	PS2, Xbox, PC	Released
Knights of the Temple 2	Cauldron (SK)	PS2, Xbox, PC	Released 1
Gene Troopers	Cauldron (SK)	PS2, Xbox, PC	Released 1
Xyanide	Playlogic Game Factory (NL)	Xbox	Released
Age of Pirates: Caribbean Tales	Akella (Russia)	PC	Released
Infernal	Metropolis (Poland)	PC	Released2
Under Development
Ancient Wars: Sparta	World Forge (Russia)	PC	Q2 2007
Xyanide Resurrection	Playlogic Game Factory (NL)	PSP	Q2 2007
Evil Days Of Luckless John	3A Entertainment (Great Britain)	PC	Q2 2007
Xyanide Resurrection	Playlogic Game Factory (NL)	PS2	Q3 2007
Obscure 2	Hydravision (F)	PC	Q3 2007
Obscure 2	Hydravision (F)	PS2	Q3 2007
Obscure 2	Hydravision (F)	Wii	Q3 2007
Officers	GFI (Russia)	PC	Q3 2007
Age of Pirates:CT the Sequel	Akella (Russia)		Q3 2007
Age of Pirates: Captain Blood*	Akella (Russia)	PC	Q4 2007
Age of Pirates: Captain Blood*	Akella (Russia)	Xbox360	Q4 2007
Aggression 1914	Buka (Russia)	PC	Q4 2007
Manhunter*	L’Art/PLGF	PC	Q4 2007
Collapse	Buka (Russia)	PC	Q1 2008
Red Bull Break dancing	TBC	TBC	TBC
Infernal 2	Metropolis (Poland)	TBC	TBC
Infernal	Metropolis (Poland)	Wii	TBC

_______________

1Released in Europe only.

2Final decision on Next Generation options to be made.

*working title

Currently Playlogic is mainly focusing on PC titles. Some major publishers have posted higher losses than the previous year recently. These losses are primarily caused by their high investments in games for the next generation consoles. Playlogic has intentionally focused on publishing PC titles during the transition period, since the installed base of the Xbox 360 is too low for Playlogic to make sufficient return on investments. Playlogic intends to start publishing for the next generation consoles in the second half of 2007.

Material agreements

We entered into the following material agreements in the fiscal year ended December 31, 2006:

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Macrovision agreement. On February 21 2006, we signed an 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. Playlogic will also incorporate the Trymedia technology into their 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. The agreement illustrates Playlogic’s strategically focus on digital distribution in the future.

Sony agreement. On March 1, 2006, our subsidiary Playlogic Game Factory B.V. signed a first-party software development agreement with Sony Computer Entertainment Europe Limited. We develop dedicated software for Sony Computer Entertainment Europe Limited. One of our two in-house teams is fully dedicated to the project.

Red Bull agreement. On March 28, 2006, we signed a worldwide licensing agreement with leading soft drink company Red Bull for the publishing and production of a break dance video game. The game is based on the “Red Bull BC One Event”. The title will be produced for various platforms and will be released in 2007. The game is based on the increasing worldwide popularity of break dancing and will give a realistic representation of dance moves and actions.

Age of Pirates agreement . On July 7, 2006 we signed a worldwide licensing and distribution agreement with Atari to distribute our game Age of Pirates: Caribbean Tales throughout Europe, the US and Asia. This game has been released in Europe in September 2006 and in North America.

PSP license On October 11, 2006 Sony Computer Entertainment Europe, based in London, licensed us as official PSP® publisher.

Sony agreement On October 25, 2006 we signed an extension on our cooperation agreement dated March 1, 2006 with Sony Computer Entertainment Europe Limited (SCEE).

Eidos agreement. On December 4, 2006 we signed an agreement with Eidos Interactive Plc. for Eidos to worldwide distribute our PC titles “ Infernal” and Ancient Wars: Sparta” in the first quarter and second quarter of 2007..

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.

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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.

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 fulfilment 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.

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 licences 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.

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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 will 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 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.

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

		Games	Platform	Area
1.		Alpha Black Zero	PC	Worldwide
2.		Airborne Troops	PS2	Worldwide
			PC	Worldwide
3.	a.	Xyanide Resurection	PSP	Worldwide
	b.	Xyanide Mobile	Mobile Phones	Worldwide
4.		Cyclone Circus	PS2	Worldwide
5.		World Racing 2	PS2	Worldwide
			Xbox	Worldwide
			PC	Worldwide
6.		Knights of the Temple 2	PS2	Worldwide
			Xbox	Worldwide
			PC	Worldwide
7.		Gene Troopers	PS2	Worldwide
			Xbox	Worldwide
			PC	Worldwide
8.		Age of Pirates: Caribbean Tales	PC	Worldwide (1)
9		Ancient Wars: Sparta	PC	Worldwide (2)
10.		Age of Pirates Captain Blood	PC	Worldwide (3)
11.		Infernal	PC	Worldwide (4)
12.		Evil days of Luckless John	PC	Worldwide
13.		Obscure2	PC,PS2,Wii	Worldwide

_____________

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

(2)Excluding former USSR

(3) Excluding former USSR, Poland, Czech, Slovak and South Africa

(4)Excluding Japan, former USSR

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Employees

As of December 31, 2006, we employed 63 full-time employees and 2 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. 23 of our employees are entitled to a company car. Two of our senior non-Dutch executives are entitled to receive allowances for housing, and home leave travel cost. With the exception of the disclosures made under Item 10, we did not grant any bonuses during 2005. 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.

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 SIGNIFICANT 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.

We had net consolidated losses of $.13, 456,418 .in 2006, $8,567,942 in 2005, $22,095,677 in 2004, $7,657,536 in 2003 and $2,199,945 in 2002. The net consolidated losses of $22,095,677 in 2004 included a one-time expense of $9,824,400 related to the grant of options to some of our shareholders in 2004.

Although we expect to be profitable in the future, we may never achieve profitability. If we do achieve profitability, we may not be able to maintain profitability on a consistent basis. The report of Playlogic's independent auditors on Playlogic International's December 31, 2006 financial statements included an explanatory paragraph indicating there is substantial doubt at year end 2006 about Playlogic's ability to continue as a going concern.

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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 first quarter of 2007. 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. If we do not obtain the necessary financing in the future, we may need to cease operations.

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, 2006, two titles, Age of Pirates Caribbean Tales and World Racing 2accounted 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.

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.

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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.

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TRANSITIONS IN CONSOLE PLATFORMS HAVE A MATERIAL IMPACT ON THE MARKET FOR INTERACTIVE ENTERTAINMENT SOFTWARE AND DELAYS IN THE LAUNCH, SHORTAGES, TECHNICAL PROBLEMS OR LACK OF CONSUMER ACCEPTANCE OF THESE PLATFORMS AND NEXT GENERATION PLATFORMS COULD ADVERSELY AFFECT OUR SALES OF PRODUCTS FOR THESE PLATFORMS.

When new console platforms are announced or introduced into the market, consumers typically reduce their purchases of game console entertainment software products for current console platforms in anticipation of new platforms becoming available. During these periods, sales of our game console entertainment software products can be expected to slow down or even decline until new platforms have been introduced and have achieved wide consumer acceptance. Each of the three current principal hardware producers launched a new platform in recent years. Sony made the first shipments of its PlayStation2 console system in North America and Europe in the fourth quarter of calendar year 2000. Microsoft made the first shipments of its Xbox console system in North America in November 2001 and in Europe and Japan in the first quarter of calendar 2002. Nintendo made the first shipments of its GameCube console system in North America in November 2001 and in Europe in May 2002. Additionally, in June 2001, Nintendo launched its Game Boy Advance hand-held device. Most recently, in late 2004 Sony introduced its hand-held gaming device, PlayStation Portable and Nintendo introduced its Nintendo Dual Screen. The next hardware transition cycle commenced in late 2005 and will continue in 2006. Microsoft introduced its Xbox 360 in November 2005. Sony’s PlayStation 3 has been introduced during the second half of 2006 and Nintendo’s Wii was introduced in November 2006. Delays in the launch, shortages, technical problems or lack of consumer acceptance of these platforms and next generation platforms could adversely affect our sales of products for these platforms. 

DEVELOPING GAMES FOR THE NEXT GENERATION GAME CONSOLES BY SONY, MICROSOFT AND NINTENDO (WHICH ARE EXPECTED TO BE RELEASED IN THE NEXT FEW YEARS) 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.

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.

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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.

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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.

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.

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Our sales returns and allowances for the year ended December 31, 2006 were $0. If return rates for our published titles significantly exceed our estimates, our operating results will be materially adversely affected.

OUR BUSINESS IS HIGHLY COMPETITIVE AND INCREASINGLY “HIT” DRIVEN. IF WE DO NOT CONTINUE TO DELIVER “HIT” PRODUCTS, OUR SUCCESS WILL BE LIMITED.

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 MAY BE BURDENED WITH PAYMENT DEFAULTS AND UNCOLLECTIBLE ACCOUNTS IF OUR DISTRIBUTORS OR RETAILERS CANNOT HONOR THEIR CREDIT ARRANGEMENTS 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.

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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. The cancellation or non-renewal of one or more of these contracts could significantly harm our business and financial results.

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.

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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.

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 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. Sales to our three largest customers accounted for approximately 95% of our revenues for the year ended December 31, 2004. The loss of our relationships with principal customers or a decline in sales to principal customers could harm our operating results. Atari accounted for 32% or more of the Company’s sales revenues.

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.

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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 2005, sales in Europe accounted for approximately 79% 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.

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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.

We are also exposed to fluctuations in interest rates. As of December 31, 2006 we had a net bank overdraft. An increase of the short-term interest rates could increase the interest expense on our bank overdraft and adversely affecting our financial results.

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, 2006, officers, directors, and shareholders holding more than 5% of our outstanding shares collectively controlled approximately 38% 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 ADVERSILY 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.

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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 2007, 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.

ITEM 2. PROPERTY

We do not own any real property. 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 $409,350 (€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 $40,935 (€30,000) per year.

Our offices located at Hoge Mosten 16-24 in Breda are leased by Playlogic Game Factory from Kantoren Fonds Nederland B.V. pursuant to a lease agreement which expired on February 28, 2007. The lease property spans 451 square meters and may only be used as office space. Rent is due on an annual basis and amounts to $123,593 (€90,584) per year. The lease agreement has been rescinded by a court decision as of February 15, 2006. We have recognized an obligation for payments in the amount of $245,592 (€180,000) due on February 28, 2007.

We lease our offices located at Concertgebouwplein 13 in Amsterdam from Mr. Prof. Dr. D. Valerio pursuant to a lease agreement, which expires on March 31, 2012. The lease property spans 260 square meters and may only be used as office space. Payment is due on a quarterly basis and amounts to $81,363 (€59,628.52) per year.

On June 1, 2005, we entered into a lease for new offices at Amstelveenseweg 639-710 in Amstelveen. The move of our offices to this location has been delayed following late commissioning of entrance and elevators. We will start using this office now as from June 2007

The leased premises have 1,500 square meters. The lease amounts to $272.90 (€200) per square meter for rent and $34 (€25) per square meter for service costs. Payment starts December 2006 for 750 square meters, and by January 1, 2007, we will start paying for the remaining 750 square meters. Payment of the service costs for the 750 square meter segment is due immediately upon the start date of the lease agreement (June 1, 2005). Payment is due on a quarterly basis and amounts per January 1, 2007 to $460,514 (€337,497) per year.

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ITEM 3. LEGAL PROCEEDINGS

On December 15, 2005, Playlogic International N.V. (plaintiff) filed a motion to institute proceedings against Digital Concepts DC Studios Inc., of Montreal (“DC Studios”) (defendant) and South Peak Interactive LLC, of North Carolina (“South Peak”) (defendant) with the Superior Court of the Province of Quebec District of Montreal Canada. Playlogic claims damages in the amount of Canadian $9,262,640 (or approximately $ 8.2 million using September 30, 2006 exchange rates) in view of the alleged unlawful termination by DC Studios of a Letter of Intent under which DC Studios granted the Company exclusive worldwide publishing rights of State of Emergency 2, a title that was released in the first half of 2006. The Company sued South Peak in these proceedings as the second defendant because South Peak, in alleged violation of a clear letter of demand issued by the plaintiff to the defendants, has entered into a publishing agreement with DC Studios with respect to the State of Emergency 2. The Company reached a settlement out of court in August 2006. Under this settlement the Company agreed to withdraw its action in Court while defendants renounced to claim against the Company taxable costs related to the proceedings and all parties to this settlement agreement mutually gave each other a complete full and final release and forever mutually discharged each other.

On March 30, 2007, Fortis Vastgoed B.V. (plaintiff) filed a motion to institute accelerated proceedings against Playlogic International N.V.(defendant)  with the Court of Amsterdam (Kantongerecht) the Netherlands. Fortis claims evacuation of the offices at Amstelveenseweg 639-710 in Amstelveen with immediate effect and damages in the amount of € 142,249 plus € 91,626 for each quarter following April 1, 2007 till the end of the lease term expiring on May 31, 2011 in case Fortis is unable to agree on a lease for the offices with a third party (or approximately $ 187,569 using December 31, 2006 exchange rates) in view of the alleged unlawful non performance by Playlogic under the lease agreement dated June 1, 2005.

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

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

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

On June 27, 2006 we had our annual general shareholder meeting for the election of directors for a term expiring on the date of the annual meeting of the Company in 2007. Each of the four director nominees recommended by the Board was reelected by the shareholders present at the meeting, as follows:

Nominee	Number of Votes For	Number of Votes Withheld
Willem M. Smit	14,203,622	1,000
Willy Simon	14,203,622	1,000
George Calhoun	14,203,622	1,000
Erik van Emden	14,203,622	1,000

No other matter was submitted to a vote of the holders of our common stock during this meeting. During the second half of the fiscal year ending December 31, 2006, no other matters were submitted to a vote of holders of our common stock through the solicitation of proxies or otherwise.

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PART II

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

Since January 7, 2003, 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, 2006, there were approximately 370 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 2005	High	Low
First Quarter	$3.10	$1.40
Second Quarter	$4.00	$2.80
Third Quarter	$7.24	$4.30
Fourth Quarter	$5.40	$4.60
Fiscal 2006	High	Low
First Quarter	$5.05	$5.05
Second Quarter	$2.75	$2.50
Third Quarter	$2.20	$2.00
Fourth Quarter	$0,65	$0.65

The source for the high and low closing bids quotations is www.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.

In December 2005, we submitted a listing application for the quotation of our shares of common stock on the NASDAQ Capital Market. During the fourth quarter of 2005 we have taken steps necessary to meet NASDAQ listing requirements, including forming an audit committee and compensation committee and appointing additional independent directors to the Board of Directors (see Item 4). We received NASDAQ’s initial comment letter on January 24, 2006. Following a further review by NASDAQ we have decided to withdraw our listing application for the time being. There is no assurance that we will re file our application and there isno assurance that our securities will be listed on the NASDAQ stock market. On January 17, 2007 we announced that we are currently reviewing a potential listing at the London Stock Exchange (AIM).

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.

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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

On January 31, 2006, the Company exchanged 38,586 shares of its common stock to an accredited investor based in the Netherlands for the repayment of a loan payable in the amount of approximately $ 96,000, or approximately $2.50 per share. The exchange was made pursuant to the terms of a Subscription Agreement, dated as of January 31, 2006, which agreement contained confidentiality and non-disclosure agreements and covenants. Furthermore, on February 12, 2006, the Company sold 72,462 shares of its common stock to this

investor at $2.50 per share for a total cash consideration of $181,155. These sales were made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the January 31, 2006 debt conversion, the Company issued warrants convertible into 19,299 shares of the Company’s common stock at a price of $5.00 per share. The warrants, fair valued at $0.305 each, may be exercised starting February 1, 2007 and expire on January 31, 2009. Concurrent with the February 12, 2006 stock sale, the Company issued warrants to purchase 36,243 shares of the Company’s common stock at an exercise price of $5 per share. These warrants may be exercised starting February 1, 2007 and expire on January 31, 2009.

On January 31, 2006, the Company sold 184,178 shares of its common stock to an accredited investor based in the Netherlands at $2.50 per share for a total cash consideration of $460,445. The sale was made pursuant to the terms of a Subscription Agreement, dated as of January 31, 2006. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the January 31, 2006 stock sale, the Company issued warrants to purchase 92,089 shares of the Company’s common stock at an exercise price of $5.00 per share. The warrants may be exercised starting on February 1, 2007 and expire on January 31, 2009.

On March 17, 2006, the Company sold 53,300 shares of its common stock to an accredited investor based in the Netherlands at $3.75 per share for a total cash consideration of $200,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of March 28, 2006, This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the first March 17, 2006 stock sales the Company issued warrants to purchase 25,000 shares of the Company’s common stock at a price of $5.00 per share. These warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

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On March 17, 2006, the Company sold 30,000 shares of its common stock to a second accredited investor based in the Netherlands at $4.00 per share for total cash consideration of approximately $120,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of March 28, 2006, This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the second March 17, 2006 stock sales the Company issued warrants to purchase 15,000 shares of common stock at an exercise price of $5.00 per share. These warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

On March 17, 2006, the Company sold 30,000 shares of its common stock to a third accredited investor based in the Netherlands at $4.00 per share for total cash consideration of approximately $120,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of March 28, 2006, This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale. Concurrent with the third March 17, 2006 stock sales, the Company issued to warrants to purchase 15,000 shares of common stock at an exercise price of $5.00 per share. These warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

On June 1, 2006, the Company sold 128,000 of its common stock to an accredited investor based in the Netherlands at $3.00 per share for total cash consideration of approximately $384,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of June 1, 2006. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to

Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the June 1, 2006 stock sales, the Company issued warrants to purchase 128,000 shares of common stock at an exercise price of $5.00 per share. The warrants may be exercised starting on June 2, 2007 and expire on June 1, 2009. The weighted average exercise price of all issued and outstanding warrants at September 30, 2006 is approximately $5.00.

On December 31, 2006, the Company sold 627,016 of its common stock to an accredited investor based in the Netherlands at $1.15 per share for total cash consideration of approximately $721,069. The sale was made pursuant to the terms of a Subscription Agreement, dated as of December 31, 2006. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the December 31, 2006 stock sales, the Company issued warrants to purchase 313,508 shares of common stock at an exercise price of $2.75 per share. The warrants may be exercised starting on January 1, 2008 and expire on December 31, 2011.

On December 31, 2006, the Company sold 114,660 of its common stock to an accredited investor based in the Netherlands at $1.15 per share for total cash consideration of approximately $131,860. The sale was made pursuant to the terms of a Subscription Agreement, dated as of December 31, 2006. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to

Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

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Concurrent with the December 31, 2006 stock sales, the Company issued warrants to purchase 57,331 shares of common stock at an exercise price of $2.75 per share. The warrants may be exercised starting on January 1, 2008 and expire on December 31, 2011.

Option grants

On June 27, 2006 the Company granted to Willy J. Simon, the Company’s Chairman and Non Executive Director, 56,250 options to purchase shares of the Company’s common stock at an exercise price of $2.90 per share. A total of 18,750 shares of these options will vest on June 27, 2008, and the remaining options will vest in two equal installments on June 27, 2009, June 27, 2010.

On June 27, 2006 the Company granted to George M. Calhoun, one of the Company’s Non Executive Directors, 46,875 options to purchase shares of the Company’s common stock at an exercise price of $2.90 per share. A total of 15,625 shares of these options will vest on June 27, 2008, and the remaining options will vest in two equal installments on June 27, 2009, June 27, 2010.

On June 27, 2006 the Company granted to Erik L.A. van Emden, one of the Company’s Non Executive Directors, 46,875 options to purchase shares of the Company’s common stock at an exercise price of $2.90 per share. A total of 15,625 shares of these options will vest on June 27, 2008, and the remaining options will vest in two equal installments on June 27, 2009, June 27, 2010.

Pursuant to an amendment of the employment agreement with our Chief Financial Officer ad interim dated November 1, 2006 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 and May 4, 2010.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth, as of December 31, 2006, information with respect to the Company’s equity compensation.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)	Weighted-average exercise price of outstanding options, warrants, and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)
Equity compensation plans approved by security holders	--	--	--
Equity compensation plans not approved by security holders	600,000	$ 2.75	--
Total	600 ,000

Issuer Purchase of Equity Securities

None.

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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 

Overview

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 91% of our common stock. Playlogic International has become our wholly-owned subsidiary and represents all of our commercial operations.

On August 2, 2005, Donar Enterprises 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. When we refer to "Playlogic Entertainment" in this document, we are also referring to our company when it was known as Donar Enterprises, Inc.

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, 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.

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

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

We select which games we develop, based on our analysis of consumer trends and behavior and our experience with similar or competitive products. Once we select a game to develop, we then assign a development studio, based upon its qualifications, previous experience and prior performance. Once developed, we distribute our games 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 with a minimum increase in development time and resources.

We believe that greater online functionality and the expanded artificial intelligence capabilities of the new platforms will improve game play 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.

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We have released 10 games to date:

			Expected release
Game	Studio	Platform	date to retail
Completed Games
Alpha Black Zero	Khaeon (NL)	PC	Released
Airborne Troops	Widescreen Games (F)	PS2, PC	Released
Cyclone Circus	Playlogic Game Factory (NL)	PS2	Released
Xyanide	Overloaded (NL)	Mobile Phones	Released
World Racing 2	Synetic (D)	PS2, Xbox, PC	Released
Knights of the Temple 2	Cauldron (SK)	PS2, Xbox, PC	Released
Gene Troopers	Cauldron (SK)	PS2, Xbox, PC	Released
Xyanide	Playlogic Game Factory (NL)	Xbox	Released
Age of Pirates: Caribbean Tales	Akella (Russia)	PC	Released
Infernal	Metropolis (Poland)	PC	Released

We entered into the following material agreements in the fiscal year ended December 31, 2006:

Macrovision agreement. On February 21 2006, we signed an 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. Playlogic will also incorporate the Trymedia technology into their 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. The agreement illustrates Playlogic’s strategically focus on digital distribution in the future.

Sony agreement. On March 1, 2006, our subsidiary Playlogic Game Factory B.V. signed a first-party software development agreement with Sony Computer Entertainment Europe Limited. We develop dedicated software for Sony Computer Entertainment Europe Limited. One of our two in-house teams is fully dedicated to the project.

Red Bull agreement. On March 28, 2006, we signed a worldwide licensing agreement with leading soft drink company Red Bull for the publishing and production of a break dance video game. The game is based on the “Red Bull BC One Event”. The title will be produced for various platforms and will be released in 2007. The game is based on the increasing worldwide popularity of break dancing and will give a realistic representation of dance moves and actions.

Age of Pirates agreement . On July 7, 2006 we signed a worldwide licensing and distribution agreement with Atari to distribute our game Age of Pirates: Caribbean Tales throughout Europe, the US and Asia. This game has been released in Europe in September 2006 and in North America.

PSP license On October 11, 2006 Sony Computer Entertainment Europe, based in London, licensed us as official PSP® publisher.

Sony agreement On October 25, 2006 we signed an extension on our cooperation agreement dated March 1, 2006 with Sony Computer Entertainment Europe Limited (SCEE).

Eidos agreement. On December 4, 2006 we signed an agreement with Eidos Interactive Plc. for Eidos to worldwide distribute our PC titles “Infernal” and Ancient Wars: Sparta” in the first quarter and second quarter of 2007.

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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 2006 to Fiscal 2005

Revenues. Revenues for Fiscal 2006 were $5,042,517 as compared to $1,824,199 for Fiscal 2005. This increase in revenues is primarily the result of increased sales volumes following the release of “Age of Pirates - Caribbean Tales”, the release of 3 new titles in the US and 3^rd party development activities. During 2006. $3,654,358 (72%) of the revenues ($1,437,347 or 79% for 2005) was generated by the sales in Europe and $1,333,522 (26%) was generated by the sales in the U.S ($372,871 or 20% for 2005). These revenues were primarily derived from our game distributors and our 3^rd party development contract with SONY.

Gross Profit. Gross profit totaled $1,205,437 for Fiscal 2006. For Fiscal 2005, gross profit totaled $741,893. This increase in gross profit is primarily the result of an increase in net sales.

Reorganization expenses. Reorganization expenses totaled $0 for Fiscal 2006 compared to $899,697 for Fiscal 2005. These expenses related to the June 2005 share exchange transaction.

Selling, marketing, general and administrative expenses. Selling, marketing, general and administrative expenses totaled $7,223,641 for the Fiscal 2006. For fiscal 2005, selling, general and administrative expenses totaled $7,287,391.

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Expense related to intrinsic value of issued stock options. Expense related to the fair value of issued stock options totaled $345,052 for Fiscal 2006 and has following FAS 123R been included G&A expenses as a compensation expense. This relates to the cost of options granted to personnel. For Fiscal 2005 expense related to intrinsic value of issued stock options totaled $70,773. The increase is due to a higher number of employees with stock options. Furthermore, in 2006 the non executive members of the Board of Directors received stock options.

Research and developmentexpenses. Research and development expenses totaled $2,135,832 for Fiscal 2006. For Fiscal 2005, research and development expenses totaled $1,581,987. This represents an increase of $553,845, or 35%. This increase is due to a lower amount of capitalized personnel expenses in our development studio in Fiscal 2006 following the 3^rd Party development agreement with SONY.  Furthermore,asset impairment charges amounting to $837,714 for fiscal 2005 were included in Research and Development.

Depreciation. Depreciation expense totaled $315,175 for Fiscal 2006. For Fiscal 2005, depreciation expense totaled $280,480. The decrease of $34,695 or 12% is caused by some additions in fixed assets.

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 $ 1,907,117 for fiscal 2006 versus $837,714 in Fiscal 2005. The Fiscal 2006 amount primarily reflects our decisions to terminate the development of two games following our assessment of changes in marketability of these games.  As mentioned above the asset impairment charges amounting to $837,714 for fiscal 2005 were included in Research and Development.

Interest expense. Interest expense totaled $917,973 for Fiscal 2006. For Fiscal 2005, interest expense totaled $ 288,165. This represents an increase of $629,808 and is primarily the result of an increase of our short term debts. Furthermore, an interest penalty expense for late repayment of an outstanding loan amounting to $1,254,100 has been recognized.

Net loss. Our net loss was $12,548,400 for Fiscal 2006. For Fiscal 2005 the net loss totaled $9,674,004. The increase of the net loss is primarily due to higher research and development expenses, impairments charges on capitalized games and a higher amount of interest expenses including penalty expense.

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 $(908,018) for the Fiscal 2006 and $1,106,062 for Fiscal 2005.

Equity. The total stockholders’ deficit as of December 31, 2006 was $(11,021,531).

Liquidity and Capital Resources

As of December 31, 2006, our cash balance was $18,433, as compared to $139,760 at December 31, 2005.

In order to cover our working capital requirements through the second quarter of 2007, we will need to obtain additional financing. The Company is currently in negotiation with several parties in this respect. The Company is presently in contact with private investors. The company anticipates closing during the second quarter a private placement composed of both the issuance of new shares and debt instruments in the maximum total amount of 10 million USD. If the Company does not obtain any necessary financing in the future, it may need to cease operations.

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

Our net accounts receivable, after providing an allowance for doubtful accounts, at December 31, 2006 was $749,578, as compared to $645,884 at December 31, 2005. The increase is due to increased sales of our games, especially during the third quarter of 2006 when the Company realized sales of the game Age of Pirates: Caribbean Tales.

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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, 2006:

Contractual Obligations	Payments Due By Period (in thousands)
	Total	Less than 1 Year	1-3 Years	3-5 Years	More than 5 Years
Long-Term Debt Obligations	$277	$40	$79	$79	$79
Capital Lease Obligations	-	-	-	-	-
Operating lease Obligations (Including Rent)	$8.874	$948	$2.669	$2,414	$2,843
Purchase obligations	$1.857	$1.857	-	-	-
Other contractual obligations	-	-	-	-	-
Total	$11,008	$2.845	$2,748	$2,493	$2,922

Note

On June 1, 2005, we entered into a lease for new offices at Amstelveenseweg 639-710 in Amstelveen. The move of our offices to this location has been delayed following late commissioning of entrance and elevators. We will start using this office now as from June 2007.  The leased premises have 1,500 square meters. The rent is $272.90 (€200) per square meter and the service fee is $34 (€25) per square meter. Payments have become due per 1 December 2006 for 750 square meters and by January 1 2007 we will start paying for the remaining 750 square meters. Payment of the service fee for each 750 square meter segment is due immediately upon the start of the lease term on June 1, 2005.

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.

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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.

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New Accounting Pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin, or SAB, No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006. The Company is currently in the process of evaluating the impact of SAB No. 108 on our financial position and results of operations.

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently in the process of evaluating the impact of SFAS No. 157 on our financial position and results of operations.

In July 2006, the 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. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently in the process of evaluating the impact of FIN 48 on our financial position and results of operations.

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

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment”, which addresses the accounting for employee stock options. SFAS 123(R) revises the disclosure provisions of SFAS 123 and supersedes APB 25. SFAS 123(R) requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in financial statements based on the estimated fair value of the awards. In March 2005, the Securities & Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107, “Share-Based Payment”, which summarizes the views of the SEC staff regarding the interaction between SFAS123(R) and certain SEC rules and regulations, and is intended to assist in the initial implementation. SFAS(R) is effective for all companies that file as small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company is currently evaluating the provisions of SFAS 123(R) and its effect on its financial statements. The Company does not expect the adoption of this statement to have a material impact on its financial statements.

In December 2004, the FASB issued SFAS 153. “Exchanges of Non monetary Assets, an amendment of APB 29, Accounting for Non monetary Transactions”. This statement’s amendments are based on the principle that exchanges of non monetary assets should be measured based on the fair value of the assets exchanged. Further, SFAS 153 eliminates the narrow exception for non monetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of non monetary 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.

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

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

Related Party Transactions

See below Part III.

ITEM 7. FINANCIAL STATEMENTS

The required financial statements begin on Page F-1 of this document.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On August 18, 2006, the Board of Directors elected to replace S. W. Hatfield, CPA (SWHCPA) as the Company's Registered Independent Certified Public Accounting Firm.

Concurrent with the above action, the Company's Board of Directors appointed Rosthein Kass $ Company, P.C. as the Company’s Registered Independent Certified Public Accounting Firm.

The Report of Registered Independent Certified Public Accounting Firm issued by SWHCPA on May 1, 2006 for the year ended December 31, 2005 did not contain an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles, except for a going concern opinion expressing substantial doubt about the ability of the Company to continue as a going concern. Subsequent to the issuance of this report SWHCPA withdrew the report on November 16, 2006 following management determining that the Company’s accounting for certain expenses incurred during the second and third quarter of 2005 had not been properly reflected in accordance with U.S. generally accepted accounting principles. Certain operating expenses and transaction costs associated with the company’s Share Exchange Agreement entered into in June 2005, which were initially paid by the Company and reimbursed by certain shareholders, were omitted from the Company’s consolidated statement of operations for the year ended December 31, 2005. Accordingly, these matters created a situation requiring the restatement of the company’s financial statements as of and for the year ended December 31, 2005. The results of these findings resulted in an additional charge of approximately $1,706,688 being charged to operations. The Report of Registered Independent Certified Public Accounting Firm reissued by SWHCPA on December 11, 2006 including the restated financial statements for the year ended December 31, 2005 did not contain an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles, except for the restatement mentioned and a going concern opinion expressing substantial doubt about the ability of the Company to continue as a going concern.

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During the Company's then most recent fiscal year (ended December 31, 2005 and from January 1, 2006 to August 18, 2006, the date of the Company’s Form 8-K filing relating to certain events, including the change in the Company’s certifying accountants, there were no disagreements with SWHCPA on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure, except that SWHCPA's opinion expressed substantial doubt with respect to the Company's ability to continue as a going concern for both fiscal years. Further, there were no reportable events, as described in Item 304(a)(1)(iv)(B) of Regulation S-B, during the Company's most recent fiscal year (ended December 31, 2005) and from January 1, 2006 to August 18, 2006 the date of the Company’s Form 8-K filing relating to certain events, including the change in the Company’s certifying accountants.

SWHCPA furnished a letter addressed to the SEC stating that it agreed with the above statements. A copy of such letter, dated August 18, 2006, was attached as an Exhibit to the Company’s Form 8-K filed on August 18, 2006.

During the two most recent fiscal years and to August 18, 2006, the Company had not consulted with Rosthein Kass $ Company, P.C. regarding (i) either the application of accounting principles to a specified transaction (completed or proposed) or the type of audit opinion that might be rendered on the Company’s financial statements, or (ii) any matter that was the subject of a disagreement and required to be reported under Item 304(a)(1)(iv) of Regulation S-B and the related instructions thereto.

Subsequent thereto, Rosthein Kass $ Company, P.C. declined their August 18, 2006 appointment as the Company's Registered Independent Certified Public Accounting Firm on January 10, 2007 prior to their performance of any audit but after performing their review procedures for the Company on the quarter ending September 31, 2006 financial statements.

From August 16, 2006 to the date of this report, there were no disagreements with Rothstein Kass on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. In connection with its review of the Company’s unaudited financial statements for the quarterly period ended September 30, 2006, Rothstein Kass advised the management and the board of directors of the Company that the Company had material weaknesses in its internal control, which was disclosed by the Company in its quarterly report on Form 10-QSB for the same period, as amended, restated and filed on December 21, 2006 after which the Company is in full compliance with its reporting and filing duties; there were otherwise no reportable events, as described in Item 304(a)(1)(iv)(B) of Regulation S-B.

The Company then undertook the process of seeking a new Registered Independent Certified Public Accounting Firm.

On April 2, 2007, the Company’s Board of Directors authorized the appointment of Cordovano and Honeck, CPA’s of Englewood Colorado as the Company's new independent auditors for periods subsequent to the September 30, 2006. The Company, its Board of Directors and/or management, did not consult with Cordovano and Honeck at any time prior to the April 2, 2007 appointment, regarding the Company's two most recent fiscal years ended December 31, 2006 and 2005, the subsequent interim period through the April 2, 2007 filing of the Form 8-K announcing this appointment event, and any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-B.

ITEM 8A. DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Such controls and procedures, by their nature, can provide only reasonable assurance regarding management's control objectives.

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As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. It should be noted that the design of any system of control is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out the evaluation.

While we believe that our existing disclosure controls and procedures have been effective to accomplish their objectives, we intend to continue to examine, refine and formulize our disclosure controls and procedures and to monitor ongoing developments in this area.

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

ITEM 8B. OTHER INFORMATION

None.

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PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Our directors and executive officers are as follows:

Name	Age	Position
Willem M. Smit	60	Director, President, and Chief Executive Officer
Willy J. Simon	56	Chairman of the Board of Directors
George M. Calhoun	54	Director
Erik L.A. van Emden	58	Director
Rogier W. Smit	32	Executive Vice President
Jan Willem Kohne	35	Chief Financial Officer till November 1, 2006
Wilbert Knol	39	Chief Financial Officer ad interim as of November 1, 2006
Stefan Layer	36	Chief Marketing & Sales Officer
Dominique Morel	33	Chief Technology 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.

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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.

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.

Stefan Layer has been Chief Marketing & Sales Officer / VP of Playlogic International N.V. since April 2005 and of the Company since July 2005. From 1999 until joining us, Mr. Layer was the Vice President Licensing Europe for Atari Deutschland GmbH where he was responsible for the expansion to new markets, the European licensing business and the acquisition of IP rights. Mr. Layer defined the European licensing strategy of Atari Europe for digital distribution, OEM and premium sales and managed the expansion to Eastern Europe.

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.

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.

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.

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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 factthat 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.

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 2006, 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.

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Information Concerning the Board of Directors and the Audit Committee

During 2006, the Company's Board of Directors had four Directors. During 2006 the Board met twelve times on an executive base. The Board acted by unanimous written consent on nine occasions.

Audit Committee

The Company established an Audit Committee on October 31, 2005. Messrs. Calhoun (Chair), 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 2006 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 (Chair), 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 2006 no meetings were held by the Compensation Committee

Nominating and Governance Committee

The Company's Nominating and Governance Committee selects nominees for the Board of Directors. This committee consists of Messrs. Simon (Chair), 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 2006 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.

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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-KSB 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.

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ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth information regarding compensation for the fiscal years ended December 31, 2004, 2005 and 2006 received by the individual who served as Playlogic International's Chief Executive Officer during 2006 and Playlogic International’s other most highly compensated executive officers whose total annual salary and bonus for fiscal year 2006 exceeded $100,000 (the “Named Officers”).

Summary Compensation Table

					Long-Term		Payouts	All Other Compensation
	Annual Compensation				Compensation Awards
Name and Principal Position as of December 31, 2005	Year	Salary €/($)	Bonus ($)	Other Annual Compensation ($)	Restricted Stock Awards (3)	Securities Underlying Options/SARs (#)	LTIP Payouts ($)
Willem M. Smit (1) Chief Executive Officer	2006 2005 2004	€0 €0 €0		--			--
Sloterhof Investments N.V. (of which Mr. Willem M. Smit is the beneficial owner) Managing Director	2006 2005 2004	€0 €0 €100,000/$135,458		--			--
Rogier W. Smit Executive Vice President	2006 2005 2004	€143,000/$188,559 €143,000/$195,109 €100,000/$147,096		--			--
Jan Willem Kohne Chief Financial Officer (2)	2006 2005 2004	€131,083/$172,846 €143,000/$195,109 €0 €0	48,480	--	0 (4)	0(7)	-- --
Wilbert Knol Chief Financial Officer a.i.(2)	2006 2005 2004	€99537/$131,249 €7,716/$10,174 €0				60,000(10)
Stefan Layer Chief Marketing & Sales Officer / VP (2)	2006 2005 2004	€143,000/$188,559 €143,000/$195,109 €0	67,200 67,200	--	$245,000 (5)		--
Maarten Minderhoud General Counsel (2)	2006 2005 2004	€143,000/$188,559 €143,000/$195,109 €0	0	--	$21,000 (6)	40,000(8)	-- --
Dominique Morel Chief Technology Officer (2)	2006 2005 2004	€143,000/$188,559 €143,000/$195,109 €0	0	--		100,000 (9)	-- --

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_____________________

(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) Mr. Kohne, Knol, Layer, Minderhoud and Morel joined the Company in 2005. Mr Kohne left the Company on December 1, 2006

(3) 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).

(4) In connection with Mr. Kohne’s employment arrangement with the Company, we sold 90,000 restricted shares to Mr. Kohne at an aggregate price of $1. The restricted shares have two years’ lock-up period during which Mr. Kohne cannot sell the shares. The shares were sold back by Kohne to the Company at an aggregate price of $ 1 upon the termination of Mr. Kohne’s employment with the Company effective December 1, 2006.

(5) 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.

(6) In connection with Mr. Minderhoud’s employment arrangement with the Company we sold 30,000 restricted shares to Mr. Minderhoud at an aggregate price of $1. The restricted shares have a two-year lock up period during which Mr. Minderhoud can not sell the shares.

(7) We granted to Mr. Kohne, 250,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 62,500 shares of these options will vest on October 1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010. These options were cancelled on December 1, 2006 upon termination of the employment of Mr. Kohne per the same date.

(8) We granted to Mr. Minderhoud, 40,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 10,000 shares of these options will vest on October1, 2007, and the remaining options will vest in three equal installments on September 1, 2008, September 1, 2009 and September 1, 2010.

(9) 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 will vest on October1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010

(10) 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.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

We do not have a stock option plan or stock appreciation rights plan. We intend to implement a stock option plan, which will require the prior approval of at least a majority of our shareholders.

The following table contains information concerning the grant of stock options under individual employment arrangements with the Names Executive Officers made during the fiscal year of 2006.

- 43 -

NAME	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 (2)	Exercise or Base Price ($/Sh)	Expiration date
Wilbert Knol (1)	November 1, 2006	$2.00	60,000	100%	$2.50                                                          November 1, 2011

____________

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

(2) The Company has not granted any stock appreciation rights in the fiscal year ended December 31, 2006.

Option Exercises and Holdings

During the fiscal year ended December 31, 2006, 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. Further, each non-employee director is granted per year of service options to purchase share of the Company’s common stock with a cash equivalent equal to the annual cash retainer. Stock options are granted and valued at 33% of the prevailing stock price. The prevailing stock price is the closing price of the stock on the business day prior to the date of grant (being the day of the annual meeting). Such options vest upon a waiting period of two years following the date of grant in three equal installments over three years and have a term of four years.

Employment Agreements

In July 2005, Playlogic International amended an existing employment agreement (effective February 1, 2002) with Rogier Smit, Executive Vice President. The agreement is 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 starting salary was $9,427 (€7,500) per month. On July 1, 2005, his base salary increased to $15,009 (€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.

In January 2005, Playlogic International entered into an employment agreement with Stefan Layer, Chief Marketing & Sales Officer, effective as of April 1, 2005. Pursuant to the terms of the agreement, Mr. Layer is responsible for marketing, sales and licensing. The agreement is for an indefinite period, but can be terminated by the Company upon six months notice or by Mr. Layer upon three months notice. Mr. Layer's starting salary is $15,009 (€11,000) per month. In addition to his salary, Mr. Layer is entitled to an annual bonus equal to 1% of our net profit of the net consolidated year figures after taxes and a company car. Under this agreement, Mr. Layer received 500,000 ordinary shares of Playlogic International at a nominal value of $0.068 (€0.05) per share which were exchanged for 364,556 shares of the Company's common stock. Such shares are subject to a two-year lock up period. After the lock up period Mr. Layer will be permitted to sell up to 50% of his shares each year. If Mr. Layer terminates the agreement or is dismissed, the shares he still owns must be sold back to the Company at nominal value. Pursuant to the agreement, Mr. Layer is also subject to confidentiality, non-competition and invention assignment requirements.

- 44 -

In August 2005, Playlogic International entered an employment contract with Maarten Minderhoud as General Counsel effective as of September 1, 2005. The agreement is for an indefinite period but can be terminated by the Company upon six months notice or by Mr. Minderhoud upon 3 months notice. Mr. Minderhoud’s starting salary will be $15,055 (€11,034) per month. . In addition to his salary, Mr. Morel is entitled to a company car. On September 1, 2005, pursuant to the agreement, Mr. Minderhoud received 30,000 shares of the Company's common stock at par value of $0.001. Such shares will be subject to a two-year lock up period. After the lock up period Mr. Minderhoud will be permitted to sell up to 50% of his shares each year. Pursuant to the agreement, Mr. Minderhoud was granted 40,000 options to purchase shares of common stock of the Company at an exercise price of $3.50 per share. 10,000 of these options vest on September1, 2007, and 10,000 of the remaining options will vest on September1, 2008, September1, 2009 and September 1, 2010. Pursuant to the agreement, Mr. Minderhoud is also subject to confidentiality, non-competition and invention assignment requirements.

In August 2005, Playlogic International entered an employment contract with Dominique Morel as Chief Technology Officer effective as of September 14, 2005. The agreement is 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 starting salary will be $15,008.50 (€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 vest 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.

In November 2006, Playlogic International amended the existing employment agreement of Wilbert Knol

(Corporate controller as of December 1, 2005) as Chief Financial Officer ad interim effective as of November 1, 2006. The 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 starting salary as CFO a.i. will be $12,310.45 (€9,336) per month. In addition to his salary, Mr. Knol is entitled to a company car. Pursuant to the agreement 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. Pursuant to the agreement, Mr. Morel is also subject to confidentiality, non-competition and invention assignment requirements.

Mr. Kohne was a party to an employment agreement with the Company dated October 1, 2005. The agreement has been terminated effective December 1, 2006 without any further obligation for the Company. Options granted pursuant to the employment agreement were cancelled effective December 1, 2006. 90,000 Shares of common stock awarded upon signing of the employment agreement were sold back by Mr. Kohne to the Company at an aggregate price of $ 1.

- 45 -

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of December 31, 2006, 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, 2006.

Name and Address (1)	Number of Shares of Common Stock	Percentage of Common Stock
Sloterhof Investments N.V. Kaya Richard J. Beaujon Z/N Curacao, Netherlands Antilles	7,303,357	30.36%
Castilla Investments B.V. Concertgebouwplein 13 1071 LL Amsterdam The Netherlands	1,777,496	7.39%
Wind Worth Luxembourg Holding S.A.H 19 Rue de l’Industrie 8069 Betrange Luxembourg	2,138,874	8.89%
Sophia International Holding S.A.H. 3 Rue de Bains Luxembourg L-2016 Luxembourg	1,611,500	6.70%
Willem Smit (2)	7,303,357	30.36%
Rogier Smit (3)	1,777,496	7.39%
Stefan Layer	364,556	1.52%
Erik L.A. van Emden	0	*
Willy J. Simon	87,494	*
George M. Calhoun	200	*
All directors and executive officers as a group	9,533,103	38%

*Less than 1%

___________

(1) Unless otherwise indicated, the address is our address at Concertgebouwplein 13, 1071 LL Amsterdam, and The Netherlands.

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

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

- 46 -

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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 $ 49,843 which is paid in twelve monthly installments.

ITEM 13. 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-KSB, 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 Herewith
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15-14(a)	Filed Herewith
Exhibit 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 Herewith
Exhibit 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

- 47 -

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees.

The aggregate fees billed by SWHCPA for professional services rendered for the review of financial statements included in the Company's Forms 10-QSB for the quarters ended March 31, 2006 and June 30, 2006 and the restated financial statements 2005 and 2006 included in the Company’s Forms 10-QSB and 10-KSB were $31,125.

The aggregate fees billed by Rosthein Kass $ Company, P.C. for professional services rendered for the review of financial statements included in the Company's Forms 10-QSB for the quarter ended September 30, 2006 were $10,000.

The aggregate fees billed by Cordovano & Honeck, LLP and DRV Accountants for professional services rendered for the audit of the financial statements included in the Company's Forms 10-KSB for the year ended December 30, 2006 were $112,500.

The aggregate fees billed by BDO CampsObers for professional services rendered for (i) the review of financial statements included in the Company’s Forms 10-QSB for the quarters ended, June 30, 2005 and September 30, 2005, (ii) the audit of the Company’s financial statements for the fiscal year ended December 31, 2005 and (iii) audit-related services were $455,075.

The aggregate fees billed by SWHCPA for professional services rendered for the review of financial statements included in the Company’s Forms 10-QSB for the quarters ended June 30, 2005 and September 30, 2005 and the audit of the Company’s financial statements for the fiscal year ended December 31, 2005 were $27,400.

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, 2006.

Tax Fees.

The aggregate fees billed for tax compliance, tax advice or tax planning services by SWHCPA for the fiscal year ended December 31, 2006 were $300. The aggregate fees for such services by SWHCPA for the fiscal year ended December 31, 2005 were $263.

The aggregate fees billed for tax compliance, tax advice or tax planning services by DRV for the fiscal year ended December 31, 2006 were $6,250. The aggregate fees for such services by BDO CampsObers were $9,811 for the fiscal year ended December 31, 2005.

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, 2006.

- 48 -

An aggregate amount of 1,625 was billed by SWHCPA 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, 2005 and 2004.

No other fees were billed by BDO CampsObers 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, 2005 and 2004.

- 49 -

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: April 17, 2007	By:	/s/ Willem M. Smit
		Willem 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 Willy J. Simon	Chairman of the Board	April 17, 2007
/s/ Willem M. Smit Willem M. Smit	Director and Chief Executive Officer	April 17, 2007
/s/ Wilbert Knol Wilbert Knol	Chief Financial Officer (Principal Financing and Accounting Officer)	April 17, 2007
/s/ Erik L.A. van Emden Erik L.A. van Emden	Director	April 17, 2007
/s/ George M. Calhoun George M. Calhoun	Director	April 17, 2007

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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONTENTS

	Page
Reports of Independent Registered Public Accounting Firms	F-1
Consolidated Financial Statements
Consolidated Balance Sheet
as of December 31, 2006	F-3
Consolidated Statements of Operations and Comprehensive Loss
for the year ended December 31, 2006 and 2005	F-4
Consolidated Statement of Changes in Shareholders' Deficit
for the year ended December 31, 2006 and 2005	F-5
Consolidated Statements of Cash Flows
for the year ended December 31, 2006 and 2005	F-6
Notes to the Consolidated Financial Statements	F-7

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Playlogic Entertainment, Inc.

We have audited the accompanying consolidated balance sheet of Playlogic Entertainment, Inc. as of December 31, 2006, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ deficit, and cash flows for the year ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards of the Public Companies Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Playlogic Entertainment, Inc. as of December 31, 2006, and the consolidated results of their operations and their cash flows for the year ended December 31, 2006 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 C to the financial statements, the Company has not fully realized the potential of it’s business plan and, accordingly, has experienced limited revenues related to the sale of videogames. Additionally, the Company continues to experience net operating losses and is reliant upon outside sources of working capital to meet current obligations. The Company’s existence is dependent upon the successful introduction of videogame products into the marketplace and the ability to raise working capital from outside sources. These circumstances create substantial doubt about the Company's ability to continue as a going concern and Management's plans in regard to these matters are also described in Note C. The financial statements do not contain any adjustments that might result from the outcome of these uncertainties.

/s/ Cordovano and Honeck LLP

Cordovano and Honeck LLP

Englewood, Colorado

April 17, 2007

F-1

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Playlogic Entertainment, Inc.

(formerly Donar Enterprises, Inc.)

We have audited the accompanying restated consolidated balance sheet of Playlogic Entertainment, Inc. (formerly Donar Enterprises, Inc.) (a Delaware corporation) and Subsidiaries (Netherlands corporations) as of December 31, 2005 (not separately included herein) and the related restated statements of operations and comprehensive loss, changes in stockholders' equity (deficit) and cash flows for the year ended December 31, 2005, respectively. These restated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these restated financial statements based on our audit.

The consolidated statement of operations and comprehensive loss and consolidated statement of cash flows of the Company’s subsidiaries, Playlogic International, N. V. and it’s wholly-owned subsidiary, Playlogic Game Factory, B. V., as of and for the year ended December 31, 2004 were audited by other auditors whose report was dated May 24, 2005 and included a paragraph expressing substantial doubt about Playlogic International, N. V.s ability to continue as a going concern.

We conducted our audit 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 restated 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 financial reporting. Our audits included consideration of internal control over 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 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 restated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the restated financial position of Playlogic Entertainment, Inc. as of December 31, 2005 and the results of its restated operations and cash flows for the year ended December 31, 2005, 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 C to the financial statements, the Company has not fully realized the potential of it’s business plan and, accordingly, has experienced limited revenues related to the sale of videogames. Additionally, the Company continues to experience net operating losses and is reliant upon outside sources of working capital to meet current obligations. The Company’s existence is dependent upon the successful introduction of videogame products into the marketplace and the ability to raise working capital from outside sources. These circumstances create substantial doubt about the Company's ability to continue as a going concern and Management's plans in regard to these matters are also described in Note C. The financial statements do not contain any adjustments that might result from the outcome of these uncertainties.

We initially issued a Report of Independent Certified Public Accountants (Report) on the above listed financial statements on May 1, 2006. Subsequent to the date of that Report, Management determined that the Company’s accounting for the reimbursement of certain expenses incurred during the second and third quarter of 2005 had not been properly reflected in accordance with U.S. generally accepted accounting principles. Certain operating expenses and transaction costs associated with the Company’s Share Exchange Agreement entered into in June 2005, which were initially paid by the Company and reimbursed by certain shareholders, were omitted from the Company’s consolidated statements of operations for the year ended December 31, 2005. Accordingly, these matters created a situation requiring the restatement of the Company’s financial statements as of and for the year ended December 31, 2005. The results of these findings resulted in an additional charge of approximately $1,706,688 being charged to operations.

We formally withdrew our Report of Registered Independent Certified Public Accounting Firm dated May 1, 2006 on November 16, 2006 and no reliance should be placed on that opinion.

/s/ S. W. Hatfield, CPA

S. W. HATFIELD, CPA

Dallas, Texas

December 11, 2006

F-2

PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2006

ASSETS
Current Assets
Cash	$	18,433
Receivables
Trade accounts, net of allowance for doubtful accounts		749,579
Value Added Taxes from foreign governments		557,089
Software development costs		3,115,659
Prepaid expenses and other		247,371
Total current assets		4,688,131
Property and Equipment - at cost
Computers and office equipment		1,813,213
Leasehold improvements		322,440
Software		344,211
		2,479,864
Less accumulated depreciation		(1,595,401	)
Net property and equipment		884,463
Other assets
Software development costs, net of current portion		1,347,771
Restricted cash		153,953
Total other assets		1,501,724
Total Assets	$	7,074,318
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilites
Bank credit facility	$	1,792,429
Short-term debt		395,580
Derivative liability		8,087
Current maturities of long-term debt		39,558
Accounts payable - trade		4,347,885
Other accrued liabilities		6,241,500
Deferred revenues		1,319,853
Loan from shareholders		3,581,747
Total current liabilities		17,726,639
Long-term debt, less current maturities		237,350
Total Liabilities		17,963,989
Committments and contingencies		-
Shareholders' Deficit
Preferred stock - $0.001 par value. 20,000,000 shares authorized. None issued and outstanding		-
Common stock - $0.001 par value.100,000,000 shares authorized. 25,332,109 shares issued and outstanding		25,332
Additional paid-in capital		42,596,112
Deferred Compensation-Employee Stock Options		414,040
Accumulated deficit		(51,485,615	)
Accumulated Other Comprehensive Loss		(2,439,540	)
		(10,889,671	)
Stock subscriptions receivable		-
Total shareholders' deficit		(10,889,671	)
Total Liabilities and Shareholders' Deficit	$	7,074,318

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

F-3

PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	For the year ended December 31,
	2006			2005 (restated)
Revenues
Net revenues	$	5,042,516		$	1,824,199
Cost of sales
Direct costs of production		(3,837,079	)		(1,082,306	)
Gross profit		1,205,437			741,893
Operating expenses
Reorganization expenses		-			899,697
Research and development		2,135,832			1,581,987
Selling and marketing		1,343,722			778,273
General and administrative		5,879,920			6,509,118
Depreciation		315,174			280,480
Asset impairment charges		1,907,117			-
Total operating expenses		11,581,765			10,049,641
Loss from operations		(10,376,328	)		(9,307,748	)
Other income/(expense)
Interest expense		(917,972	)		(288,165	)
Loan penalty expense		(1,254,100	)		-
Income/(Loss) before provision for income taxes		(12,548,400	)		(9,595,913	)
Provision for Income Taxes		-			(78,091	)
Net loss		(12,548,400	)		(9,674,004	)
Other comprehensive income/(loss)
Foreign currency adjustment		(908,017	)		1,106,062
Comprehensive Loss	$	(13,456,417	)	$	(8,567,942	)
Net loss per share of common stock
- basic and fully diluted		(0.51	)		(0.42	)
Weighted-average number of shares of common stock outstanding
- basic and fully diluted		24,482,474			22,865,402

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

F-4

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

					Additional					Stock						Accumulated Other
	Common stock				Paid-in			Deferred		Subscription			Accumulated			Comprehensive
	Shares		Par Value		Capital			Compensation		Receivable			deficit			Loss			Total
Balances at December 31, 2004 as restated	22,765,894	$	22,766	$	32,855,370		$	-	$	-		$	(29,263,210	)	$	(2,637,585	)	$	977,341
-
Common stock issued pursuant to private placements for:					-														-
Cash	936,132		936		3,767,256			-		(1,229,344	)		-			-			2,538,848
Conversion of debt	255,181		255		918,397			-		-			-			-			918,652
Aggregate equalization charge for sale at less than "fair value"	-		-		983,150			-		-			-			-			983,150
Common stock issued pursuant to employee compensation plan:	100,000		100		59,900			-		-			-			-			60,000
Equalization charge for sale at less than "fair value"	-		-		90,000			-		-			-			-			90,000
Less: cost of raising capital	-		-		(3,500	)		-		-			-			-			(3,500	)
Capital contributed to support operations	-		-		1,292,462			-		-			-			-			1,292,462
Change in currency translation difference	-		-		-			-		-			-			1,106,062			1,106,062
Net loss for the year	-		-		-			-		-			(9,674,005	)		-			(9,674,005	)
Balances at December 31, 2005 as restated	24,057,207		24,057		39,963,035			-		(1,229,344	)		(38,937,215	)		(1,531,523	)		(1,710,990	)
Common stock issued for cash	647,887		648		1,706,474			-		(190,560	)		-			-			1,516,562
Offering costs					(17,599	)													(17,599	)
Loan conversions into shares	627,015		627		720,442			-		-			-			-			721,069
Common stock warrants	-		-		-			-		-			-			-			-
Collections on stock subscriptions receivable	-		-		-			-		1,419,904			-			-			1,419,904
Capital contributed to support operations	-		-		100,000			-		-			-			-			100,000
Change in currency translation adjustment	-		-		-			-		-			-			(908,017	)		(908,017	)
Stock options issued pursuant to Employee Compensation Plan	-		-		-			414,040		-			-			-			414,040
Non cash interest charge	-		-		123,760			-		-			-			-			123,760
Net loss for the period	-		-		-			-		-			(12,548,400	)		-			(12,548,400	)
Balances at December 31, 2006	25,332,109	$	25,332	$	42,596,112		$	414,040	$	-		$	(51,485,615	)	$	(2,439,540	)	$	(10,889,670	)

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

F-5

PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Year Ended December 31,
	2006			2005 (restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(12,548,402	)	$	(9,674,004	)
Adjustments to reconcile net loss to net cash used in operating activities
Currency translation difference		-			1,106,062
Depreciation of fixed assets		315,174			280,480
Amortization of capitalized software		835,461			-
Asset impairment charge		1,907,117			-
Bad debt expense		280,834			276,070
Expense charges for stock options		414,040			70,773
Expenses paid for by affiliated entity		-			1,162,938
Expense related to common stock issuances at less than "fair value"		-			1,073,150
Non-cash interest charge related to fair value of warrants issued in conjunction with debt		123,760			-
Warrant derivatives		8,800			-
Management fees contributed as capital		100,000			-
(Increase)/ Decrease in cash attributable to changes in operating assets and liabilities
Restricted cash		(146,420	)		-
Accounts receivable - trade and other		(308,987	)		(1,686,201	)
Prepaid expenses and other		(993,488	)		(654,396	)
Increase / (Decrease) in
Deferred revenues		1,244,976			9,729
Accounts payable - trade		1,828,600			(618,035	)
Payroll taxes payable		1,874,025			2,164,522
Other current liabilities		380,592			43,842
Net cash used in operating activities		(4,683,918	)		(6,445,070	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for software development		(3,695,342	)		(1,931,021	)
Cash advanced for prepaid royalties to affiliated entities		-			(406,985	)
Cash paid to acquire property and equipment		(361,571	)		(308,687	)
Net cash used in investing activities		(4,056,913	)		(2,646,693	)
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts on bank credit facility		81,547			598,035
Receipts/(payments) on short term notes		376,230			(807,011	)
Receipts on software financing notes payable		1,748,945			-
Principal payments on long-term debt		(37,623	)		(43,824	)
Cash advanced by affiliated entities		525,582			-
Cash advanced / (repaid) to shareholder		3,335,347			(6,842,586	)
Proceeds from sales of common stock		1,688,248			3,446,728
Collections on stock subscriptions receivable		1,229,343			-
Proceeds from sales of pre-merger subsidiary common stock		-			12,731,932
Cash contributed by shareholder to support operations		-			145,341
Cash paid to acquire capital		-			(19,318	)
Net cash provided by financing activities		8,947,618			9,209,297
Effect of foreign exchange on cash		(328,114	)		-
Decrease in Cash		(121,327	)		117,534
Cash at beginning of year		139,760			22,226
Cash at end of period	$	18,433		$	139,760
Supplemental disclosures of interest and income taxes paid
Interest paid during the year	$	75,408		$	288,164
Income taxes paid (refunded)		-			-
Supplemental disclosures of non-cash investing and financing activities
Common stock issued to repay notes payable	$	721,069		$	918,652
Offering costs paid with issuance of common stock	$	13,200		$	-

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

December 31, 2006 and 2005

NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS

The Company was incorporated on May 25, 2001 in the State of Delaware.

On June 30, 2005, pursuant to a Securities and Exchange Agreement (Exchange Agreement) by and among PEI, a “shell company” at the time, and Playlogic International N.V. (Playlogic N.V.), a corporation formed under the laws of The Netherlands in April 2002, and the shareholders of Playlogic N.V., the Playlogic N.V. shareholders exchanged 100.0% of the issued and outstanding ordinary shares and preferred shares of Playlogic N.V. for an aggregate 21,836,930 shares of PEI’s common stock. As a result of the Exchange Agreement, Playlogic N.V. became PEI’s wholly-owned subsidiary. Playlogic N.V. Shareholders control approximately 91.0% of the outstanding common stock of PEI, post-transaction.

The Company develops and publishes interactive software games designed for video game consoles, handheld platforms and personal computers.

NOTE B - PREPARATION OF FINANCIAL STATEMENTS

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the 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.

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

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

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

F-7

Restatements

During the course of preparing the unaudited financial statements for the three months ended September 30, 2006, Management of the Company determined that the Company’s accounting for the reimbursement of certain expenses incurred during the second and third quarter of 2005 had not been properly reflected in accordance with U.S. generally accepted accounting principles. Certain operating expenses and transaction costs associated with the Company’s Share Exchange Agreement entered into in June 2005, which were initially paid by the Company and reimbursed by certain shareholders, were not included in the Company’s consolidated statements of operations for each of the six and three months ended June 30, 2005, the nine and three months ended September 30, 2005 and the year ended December 31, 2005. The corrections to this situation resulted in the recognition of expenses in connection with the Share Exchange Agreement as well as either the recognition of additional contributed capital and/or a reduction in amounts due from shareholder(s) for unrelated advances made prior to the aforementioned Share Exchange Agreement

The impact on the consolidated balance sheet for the year ended December 31, 2005, is as follows:

	Year ended December 31, 2005			Restatement			Year ended December 31, 2005 Restated
Current liabilities
Due to shareholders	$	163,091		$	591,450		$	754,541
Total current liabilities	$	7,699,076		$	591,450		$	8,290,526
Total liabilities	$	7,947,485		$	591,450		$	8,538,935
Stockholders' deficit
Additional paid-in capital	$	37,549,545		$	1,147,120		$	38,696,665
Currency translation adjustments	$	(1,499,641	)	$	(31,882	)	$	(1,531,523	)
Accumulated deficit	$	(37,230,526	)	$	(1,706,688	)	$	(38,937,214	)
Total Stockholders' deficit	$	109,804		$	(591,450	)	$	(481,646	)

The restated numbers have been included in the consolidated statement of operations.

These restatements to the Company’s financial statements were, in part, caused by a material weakness in the Company’s internal control over financial reporting due to the limitations in the capacity of the Company’s accounting resources to appropriately identify and react in a timely manner to non-routine, complex and related party transactions and communicate said occurrences to it’s independent auditors, as well as the adequate understanding of the disclosure requirements relating to these types of transactions. In order to remediate this material weaknesses, Management of the Company has designed and implemented improvements to it’s internal controls over financial reporting and to better define the most appropriate protocols to enhance the preparation, review, presentation and disclosures of the Company’s financial statements.

NOTE C - GOING CONCERN UNCERTAINTY

The Company is a global publisher of interactive software games designed for personal computers, and video game consoles and handheld platforms manufactured by Sony, Microsoft and Nintendo. Its principal sources of revenue are derived from publishing and distribution operations. Publishing revenues are derived from the sale of internally developed software titles or software titles developed by third parties. Operating margins in its publishing business are dependent upon its ability to continually release new, commercially successful products. Operating margins for titles based on licensed properties are affected by the Company's costs to acquire licenses. The Company pursues a

growth strategy by capitalizing on the widespread market acceptance of video game consoles, as well as the growing popularity of innovative action games that appeal to mature audiences.

F-8

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. At December 31, 2006, the Company had an accumulated deficit of approximately $51.5 million, a shareholders’ deficit of approximately $10.9 million and a working capital deficit of approximately $16.2 million. During the year ended December 31, 2006, the Company incurred a net loss of $12.5 million and negative operating cash flows of approximately $4.7 million. These circumstances raise uncertainties about the Company’s ability to continue as a going concern.

While the Company has contracts in place with several third-party developers and is developing titles through its Playlogic Game Factory B.V. subsidiary, and anticipates successful debuts of such titles; the market for interactive entertainment software is characterized by short product lifecycles and frequent introduction of new products. Many software titles do not achieve sustained market acceptance or do not generate a sufficient level of sales to offset the costs associated with product development. A significant percentage of the sales of new titles generally occur within the first three 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 funding is received during the next twelve months, the Company will be forced to rely on 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.

NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.Currency translation

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

F-9

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:

December 31, 2006: $ 1.31860

For revenues, expenses, gains and losses during a respective reporting period, a 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:

December 31, 2006	$	1.25410
December 31, 2005:	$	1.24658

2.Cash and cash equivalents

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

3.Accounts receivable - trade

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

Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. The allowance for doubtful accounts as of December,31 2006 is $318,615.

4.Property and equipment

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

F-10

5.Software development costs

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 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 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. For the years ended December 31, 2006 and 2005, the Company recognized impairment charges of approximately $1,907,000 and $837,000, respectively.   For the year ended December 31, 2005 the impairment charges were included in Research and Development expenses.

For the years ended December 31, 2006 and 2005, the Company recognized amortization charges of approximately $835,000 and $ 184,000 respectively.

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.

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

6.Organization and reorganization costs

The Company has adopted the provisions of AICPA Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” whereby all organizational and reorganizational costs incurred with either the initial formation and capitalization of the Company or the reorganization of the Company pursuant to the June 2005 Share Exchange Agreement were charged to operations as incurred.

7.Research and development expenses

Research and development expenses include the direct costs related to software and game development which are incurred prior to the establishment of technological feasibility of a specific game title or product. These costs are charged to operations as incurred. The total Research and Development expense recorded for the years ended December 31, 2006 and 2005 amount to $2,135,832 and $1,582,073 respectively.

F-11

9.Advertising expenses

The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2006, and 2005 amounted to approximately $683,000, and $591,000, respectively.

10.Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. At December 31, 2006, 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 Payments

Effective January 1, 2006, the Company adopted SFAS 123(R), “Share-Based Payment”, which revised Statement of Financial Accounting Standards No. 123. SFAS 123(R) requires all share-based payment transactions with employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period based on their relative fair values. Prior to the adoption of SFAS 123(R), stock-based compensation expense related to employee stock options was not recognized in the statement of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Prior to November 1, 2005, the Company had adopted the disclosure-only provisions under SFAS 123.

The Company elected to use the Modified Prospective Application (“MPA”) method for implementing SFAS 123(R). Under the MPA method, prior periods are not restated and new awards are valued and accounted for prospectively upon adoption. Outstanding prior stock option awards that are non-vested as of December 31, 2005 are recognized as compensation expense in the statement of operations over the remaining requisite service period. For the year ended December 31, 2006, the Company recorded approximately $345,052 of incremental stock-based compensation expense in connection with its adoption of SFAS 123(R). See Note O for a full discussion of the Company’s stock-based compensation arrangements.

12.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 then shared in the earnings of the Company.

Unexercised stock options to purchase 350,000 and 390,000 shares of the Company’s common stock as of December 31, 2006 and 2005, 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 1,097,962 shares of the Company’s common stock as of December 31, 2006, were not included in the computation of diluted earnings per share because the exercise of the warrants would be anti-dilutive to earnings per share. The 900,000 warrants issued in connection with a loan as per note L are excluded from the computation as they are used as collateral for the loan. As of December 31, 2005 there were 570,000 warrants to purchase shares of the Company’s common stock outstanding.

F-12

13.Revenue recognition

The Company earns its 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. The Company also earns revenue from 3^rd Party development activities.

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

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

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

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

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

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

Some 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 offered to the consumer, the Company does not provide ongoing technical support for gameplay. Accordingly, the Company considers such features to be an insignificant deliverable and does not defer revenue related to products containing online 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.

Allowances for Returns, Price Concessions and Other Allowances

The Company accepts returns and grants price concessions in connection with its publishing arrangements. Following reductions in the price of its products, the Company grants price concessions which permit customers to take credits for unsold merchandise against amounts they owe the Company. The Company’s 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.

The Company’s distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, the Company sometimes accepts returns from its distribution customers for stock balancing and makes accommodations to customers, which include credits and returns, when demand for specific titles falls below expectations.

F-13

The Company makes estimates of 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.

Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price concessions in any accounting period. The Company believes it 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.

14. Foreign Currency Translation

The functional currency for the Company’s foreign operations is primarily the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in income in the period in which they occur, except on inter-company balances considered to be long term. Transaction gains and losses on inter-company balances considered to be long term are recorded in other comprehensive income.

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

15.New accounting pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin, or SAB, No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006. The Company is currently in the process of evaluating the impact of SAB No. 108 on our financial position and results of operations.

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently in the process of evaluating the impact of SFAS No. 157 on our financial position and results of operations.

In July 2006, the 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

F-14

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. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently in the process of evaluating the impact of FIN 48 on our financial position and results of operations.

16.  Reclassifications

Certain 2005 amounts have been reclassified to conform to the 2006 presentation

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

NOTE F - CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, restricted cash and accounts receivable. Cash and restricted cash are deposited with high quality financial institutions. Accounts receivable are derived from revenue earned primarily from game distributors in Europe and the U.S.

The Company maintains cash balances at several major financial institutions. While the Company attempts to limit credit exposure with any single institution, balances often exceed insurable amounts.

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

If the financial condition and operations of the Company’s customers deteriorate, the Company’s risk of collection could increase substantially. A majority of the Company’s trade receivables are derived from sales to major distributors.

F-15

The Company’s four largest customers accounted for 88%, and 64% of net revenue in each of the two years ended December 31, 2006, and 2005, respectively. As of December 31, 2006, the four largest customers accounted for 58% of gross accounts receivable, respectively. Except for the largest customers noted above, all receivable balances from the remaining individual customers are less than 10% of the Company’s 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.

NOTE G - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2006:

	Carrying value			Estimated Life
Computers and office equipment	$	1,813,213			3-5 years
Leasehold improvements		322,440			Initial lease term
Software		344,211			3-5 years
		2,479,864
Less accumulated depreciation		(1,595,401	)
Net property and equipment		884,463

Depreciation expense for the years ended December 31, 2006, and 2005, was $315,175, and $280,480, respectively.

NOTE H - SOFTWARE DEVELOPMENT COSTS

The following table provides the details of software development costs for the year ended December 31, 2006:

Beginning balance	$	3,601,041
Additions	3,169,886
Amortization	(835,461)
Write down	(1,907,117)
Foreign exchange	435,081
Ending balance	4,463,430
Less: current portion	3.115,659
Non-current portion	$	1,347,771

The amount of software development costs resulting from advance payments and guarantees to third-party developers was $3,466,638 at December 31, 2006. In addition, software development costs at December 31, 2006 included an amounts of $2,659,470, related to titles that have not been released yet.

The non-current portion of the capitalized software development costs is expected to be amortized in 2008.

F-16

NOTE I - LONG-TERM DEBT

Long-term debt consists of the following at December 31, 2006:

Note payable to a landlord for leasehold improvements uncollateralized.
Payable in quarterly installments of approximately
$9,750. Final maturity in 2013.	$	276,908
Less current maturities		(39,558	)
Current portion	$	237,350

Future maturities of long-term debt are as follows:

Year ending
December 31	Amount
2007	39,558
2008	39,558
2009	39,558
2010	39,558
2011	39,558
2012-2015	79,118
	$	276,908

NOTE J — BANK CREDIT FACILITY AND SHORT-TERM DEBT

Bank Credit Facility

On March 10, 2006, the Company entered into a credit facility with ABN-AMRO Bank N.V. in the amount of €1,250,000, or approximately $1.6 million. This credit facility bears interest at 7.0% and was due on October 15, 2006. As the credit facility is in default, the Company is no longer able to draw on this facility and has negotiated extension of the repayment terms. The outstanding amount is required to be repaid in four installments. The last installment is due on July 5, 2007. Under the terms of this credit facility, the Company entered into a negative pledge arrangement on the Intellectual Property owned by the Company. Additionally, the Company’s CEO Mr. Willem M. Smit has issued a personal guarantee to ABN AMRO Bank N.V. for this credit facility.

Short-term debt

On May 3, 2006, the Company entered into a loan agreement with a lender based in The Netherlands, pursuant to which the Company borrowed the principal amount of €300,000, or approximately $396,000. This loan bears compound interest at a rate of 60% per annum, and repayment of principal and interest was due on August 4, 2006, which due date was extended for an indefinite period of time under the same terms and conditions.

F-17

NOTE K — OTHER ACCRUED LIABILITIES

As of December 31, 2006, other accrued liabilities can be specified as follows:

Payroll taxes payable	$	2,948,993
Loan penalty expense		1,318,600
Accrued interest		302,696
Royalties to be paid		549,078
Deferred Rent		458,572
Accrued wages and related personnel costs		311,523
Accrued expenses		229,436
Accrued board remuneration		122,602
	$	6,241,500

NOTE L - LOAN FROM SHAREHOLDERS

On May 24, 2006, the Company entered into a loan agreement with a lender based in the Netherlands, pursuant to which the Company borrowed the principal amount of €100,000, or approximately $132,000. This loan bears compound interest at a rate of 60% per annum, and repayment of principal and interest was due on August 24, 2006. Under this loan agreement, the Company pledged as a collateral any income generated by the Company publishing agreement with XIM Inc. On August 7, 2006, the Company extended the maturity date of this loan for an indefinite period of time under the same terms and conditions.

Since June 30, 2006, a lender based in Andorra has advanced loans to the Company in an aggregate principal amount of €40,000, or approximately $52,000. These loans bear interest at a rate of 4.0% per annum, and the repayment of the principal and interest was due in August 2006. The Company extended the maturity date of this loan until January 1, 2007 under the same terms and conditions.

Concurrent with the extension of this loan under an agreement dated September 1, 2006, the Company issued to this lender, warrants convertible into 40,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The warrants, fair valued at $0.88, may be exercised starting on September 1, 2007 and expire on September 1, 2009. A non cash interest charge of $35,000 was recorded in the consolidated financial statements in relation to the value of the warrants.

Loans from a lender based in The Netherlands

The Company entered into four loan agreements with a lender based in the Netherlands, and its director. On June 17, 2006 the company entered into a first agreement (the “First Loan”) pursuant to which the Company borrowed a principal amount of €600,000, or approximately $791,000 from this lender. The First Loan bears compound interest at a rate of 20% per annum, payable at maturity. The repayment of the principal and interest was due on August 17, 2006.

Concurrent with entering into the loan agreement on June 17, 2006, the Company issued to this lender warrants convertible into 100,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The warrants, fair valued at $0.88, may be exercised starting on November 1, 2006 and expire on October 31, 2009. A non cash interest charge of $88,000 was recorded in the consolidated financial statements in relation to the value of the warrants.

F-18

On August 16, 2006 the Company entered into a second loan agreement (the “Second Loan”), pursuant to which the Company extended the maturity date of the First Loan to November 1, 2006, and also borrowed an additional principal amount of €1,000,000, or approximately $1,318,000. The second loan bears compound interest at a rate of 20% per annum, payable at maturity. The repayment of the principal and interest was due on October 31, 2006. As a condition to the Second Loan, the Company pledged all the Company’s intellectual property rights (second after the ABN-AMRO credit facility) as security and collaterized its accounts receivables to the lender. The Company had the option to extend the maturity date of the First and Second Loan to December 1, 2006, provided that the Company shall pay a total amount of principal and interest of €1,600,000, or approximately $2.1 million on the extended maturity date plus an amount of €1,600,000, or approximately $2.1 million as premium. In addition, the Company has the option to further extend the maturity date of the First and Second Loan beyond December 1, 2006, as discussed below.

Concurrent with entering into the second loan agreement the Company issued to this lender warrants convertible into 400,000 shares of the Company’s common stock at an exercise price of $2.50 per share. The warrants, fair valued at $0.017 may be exercised starting on November 1, 2006 and expire on October 31, 2009. A liability and debt discount of $6,800 has been recorded associated with these warrants as these warrants were issued as collateral until October 31, 2006. In accordance with the Second loan, the warrants would be returned to the Company for consideration of €500,000 or approximately $660,000 if received by October 31, 2006.

On September 5, 2006 the Company entered into a third loan agreement (the “Third Loan”), pursuant to which the Company borrowed a principal amount of €500,000, or approximately $660,000. The Third Loan bears compound interest at a rate of 20% per annum, payable at maturity. The repayment of the principal and interest was due on October 31, 2006. The Company has the option to extend the maturity date of the Third Loan to December 1, 2006, provided that the Company shall pay a total amount of principal and interest of €1,000,000, or approximately $1,318,000 on the extended maturity date. In addition, the Company has the option to further extend the maturity date of the First, Second and Third Loan beyond December 1, 2006, as discussed below.

Concurrent with entering into the Second and Third loan agreement the Company issued to this lender warrants convertible into 500,000 shares of the Company’s common stock at an exercise price of $3.50 per share. The warrants, fair valued at $0.004 per warrant, may be exercised starting on November 1, 2006 and expire on October 31, 2009. A liability and debt discount of $2,000 has been recorded associated with these warrants as these warrants were issued as collateral until October 31, 2006. In accordance with the Second loan, the warrants would be returned to the Company for consideration of €500,000 or approximately $660,000 if received by October 31, 2006.

On September 29, 2006 the Company borrowed an additional principal amount of €500,000, or approximately $660,000 (the “Fourth Loan”) from the lender who provided the First, Second and Third Loan. The Fourth Loan bears a compound interest at a rate of 20% per annum, payable at maturity. The repayment of the principal and interest was due on October 31, 2006. The Company has the option to extend the maturity date of the Fourth Loan to December 1, 2006, provided that the Company shall pay a total amount of principal and interest of €1,000,000, or approximately $1,318,000 on the extended maturity date. In addition, the Company has the option to further extend the maturity date of the First, Second, Third and Fourth Loan beyond December 1, 2006, provided that the Company pays a premium of €60,000, or approximately $79,000 per month.

The Company entered into a fixing agreement effective as of December 31, 2006. Repayment of the principal amount of these loans has been extended until May 15, 2007. Furthermore, it has been agreed that all other rights on cost, penalties of which ever kind for non- or late payment are waived, with the exception of the penalty of €1 million or $1.3 million. This penalty and the interest due has been recorded under the accrued interest expenses, which are classified under the ‘other accrued liabilities’.

F-19

Loans from shareholder at December 31, 2006 are comprised of the following:

Loan with a lender based in Andorra	52,744
Loans with a lender based in the Netherlands	3,428,360
Other receivables from shareholders	(23,131)
Less: unamortized debt discount	(8,087)
Loans from shareholder, less unamortized debt discount	$	3,449,886

NOTE M - INCOME TAXES

The components of income tax (benefit) expense for each of the years ended December 31, 2006 and 2005, respectively, are as follows:

	Year-ended		Year-ended
	December 31,		December 31,
	2006		2005 (restated)
Domestic:
Current	$	0	$	0
Deferred		0		0
		0		0
Foreign:
Current		0		78,901
Deferred		0		0
		0		78,901
State:
Current		0		0
Deferred		0		0
		0		0
Total	$	0	$	78,901

As of December 31, 2006, the Company has a net operating loss carry forward of approximately $500,000 to offset future for United States taxable income and approximately $37,000,000 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.

F-20

The Company's income tax expense (benefit) for the years ended December 31, 2006 and 2005, respectively, differed from the statutory rate of 29% as noted below:

	Year-ended		Year-ended
	December 31,		December 31,
	2006		2005 (restated)
Statutory rate applied to loss before income taxes	(12,548,400)		(3,289,200)
Increase (decrease) in
income taxes resulting from:
Foreign income taxes	11,979,589		2,771,700
State income taxes	-		-
Deferred income taxes	-		-
Non-deductible items:
Imputed expense related to common stock
issued at less than “fair value”	414,040		364,900
Other, including reserve for deferred tax asset
and effect of graduated tax brackets	154,772		152,600
Total income tax expense (benefit)	$	-	$	-

Temporary differences, consisting primarily of the timing of the utilization of net operating loss carry forwards, give rise to deferred tax assets as of December 31, 2006.

Net operating loss carry forwards	12,548,000
Less valuation allowance	(12,548,000	)
Net Deferred Tax Asset	-

 

NOTE N — LONG-TERM DEBT

Long-term debt consists of a note payable to a landlord for leasehold improvements, payable in quarterly installments of approximately $9,750 through 2013. This note does not bear interest. As of December 31, 2006, this can be specified as follows:

Note payable	$	276,908
Less current maturities		39,558
Long term debt, less current maturities	$	237,350

NOTE O - SHAREHOLDER’S EQUITY TRANSACTIONS

Preferred stock

As of December 31, 2006, 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.

F-21

Common stock

On January 31, 2006, the Company exchanged 38,586 shares of its common stock to an accredited investor based in the Netherlands for the repayment of a loan payable in the amount of approximately $ 96,000, or approximately $2.50 per share. The exchange was made pursuant to the terms of a Subscription Agreement, dated as of January 31, 2006, which agreement contained confidentiality and non-disclosure agreements and covenants. Furthermore, on February 12, 2006, the Company sold 72,462 shares of its common stock to this investor at $2.50 per share for a total cash consideration of $181,155. These sales were made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the January 31, 2006 debt conversion, the Company issued warrants convertible into 19,299 shares of the Company’s common stock at a price of $5.00 per share. The warrants, fair valued at $0.305 each, may be exercised starting February 1, 2007 and expire on January 31, 2009. Concurrent with the February 12, 2006 stock sale, the Company issued warrants to purchase 36,243 shares of the Company’s common stock at an exercise price of $5 per share. These warrants may be exercised starting February 1, 2007 and expire on January 31, 2009.

On January 31, 2006, the Company sold 184,178 shares of its common stock to an accredited investor based in the Netherlands at $2.50 per share for a total cash consideration of $460,445. The sale was made pursuant to the terms of a Subscription Agreement, dated as of January 31, 2006. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the January 31, 2006 stock sale, the Company issued warrants to purchase 92,089 shares of the Company’s common stock at an exercise price of $5.00 per share. The warrants may be exercised starting on February 1, 2007 and expire on January 31, 2009.

F-22

On March 17, 2006, the Company sold 53,300 shares of its common stock to an accredited investor based in The Netherlands at $3.75 per share for a total cash consideration of $200,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of March 28, 2006, This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the first March 17, 2006 stock sales the Company issued warrants to purchase 25,000 shares of the Company’s common stock at a price of $5.00 per share. These warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

On March 17, 2006, the Company sold 30,000 shares of its common stock to a second accredited investor based in the Netherlands at $4.00 per share for total cash consideration of approximately $120,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of March 28, 2006, This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the second March 17, 2006 stock sales the Company issued warrants to purchase 15,000 shares of common stock at an exercise price of $5.00 per share. These warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

On March 17, 2006, the Company sold 30,000 shares of its common stock to a third accredited investor based in the Netherlands at $4.00 per share for total cash consideration of approximately $120,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of March 28, 2006, This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are

“restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.Concurrent with the third March 17, 2006 stock sales, the Company issued to warrants to purchase 15,000 shares of common stock at an exercise price of $5.00 per share. These warrants may be exercised starting on March 1, 2007 and expire on February 28, 2009.

On June 1, 2006, the Company sold 128,000 of its common stock to an accredited investor based in the Netherlands at $3.00 per share for total cash consideration of approximately $384,000. The sale was made pursuant to the terms of a Subscription Agreement, dated as of June 1, 2006. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the June 1, 2006 stock sales, the Company issued warrants to purchase 128,000 shares of common stock at an exercise price of $5.00 per share. The warrants may be exercised starting on June 2, 2007 and expire on June 1, 2009.

On December 31, 2006, the Company exchanged 627,016 shares of its common stock to an accredited investor based in Spain for the repayment of a loan payable in the amount of approximately $ 721,000, or approximately $1.15 per share. The exchange was made pursuant to the terms of a Subscription Agreement, dated as of December 31, 2006, which agreement contained confidentiality and non-disclosure agreements and covenants.

Concurrent with the December 31, 2006 loan conversion, the Company issued warrants to purchase 313,508 shares of common stock at an exercise price of $2.75 per share. The warrants may be exercised starting on January 1, 2008 and expire on January 1, 2011.

On December 31, 2006, the Company sold 114,661 of its common stock to an accredited investor based in the Netherlands at $1.15 per share for total cash consideration of approximately $131,860. The sale was made pursuant to the terms of a Subscription Agreement, dated as of December 31, 2006. This sale was made without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The shares are “restricted securities” in that the sense that they are marked with a legend with reference to Rule 144. The Company did not utilize an underwriter for this offering of its securities and no sales commissions were paid to any third party in connection with this sale.

Concurrent with the December 31, 2006 stock sales, the Company issued warrants to purchase 57,331 shares of common stock at an exercise price of $2.75 per share. The warrants may be exercised starting on January 1, 2008 and expire on January 1, 2010.

Option grants

On June 27, 2006 the Company granted to Willy J. Simon, the Company’s Chairman and Non Executive Director, 56,250 options to purchase shares of the Company’s common stock at an exercise price of $2.90 per share. A total of 18,750 shares of these options will vest on June 27, 2008, and the remaining options will vest in two equal installments on June 27, 2009, June 27, 2010.

On June 27, 2006 the Company granted to George M. Calhoun, one of the Company’s Non Executive Directors, 46,875 options to purchase shares of the Company’s common stock at an exercise price of $2.90 per share. A total of 15,625 shares of these options will vest on June 27, 2008, and the remaining options will vest in two equal installments on June 27, 2009, June 27, 2010.

F-23

On June 27, 2006 the Company granted to Erik L.A. van Emden, one of the Company’s Non Executive Directors, 46,875 options to purchase shares of the Company’s common stock at an exercise price of $2.90 per share. A total of 15,625 shares of these options will vest on June 27, 2008, and the remaining options will vest in two equal installments on June 27, 2009, June 27, 2010.

On November 1, 2006, pursuant to the appointment as Interim Chief Financial Officer, the Company granted Wilbert Knol 60,000 options to purchase shares of the Company’s 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 and May 4, 2010.

We granted to Mr. Kohne, 250,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 62,500 shares of these options will vest on October 1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010. These options were cancelled on December 1, 2006 upon termination of the employment of Mr. Kohne per the same date.

A summary of our stock options for the two years ended December 31, 2006 is as follows:

			Number of options
Options outstanding at January 1, 2005			-
Issued	390,000
Exercised	-
Expired/Terminated	-
Options outstanding at December 31, 2005
Options outstanding at January 1, 2006				390,000
Issued	210,000
Exercised	-
Expired/Terminated	(250,000	)
Options outstanding at December 31, 2006				(40,000	)
				350,000

The weighted average exercise price of all issued and outstanding options at December 31, 2006 is approximately $3.07.

Restricted stock awards are expensed on a straight-line basis over the vesting period, which typically ranges from two to five years. As of December 31, 2006, the total future unrecognized compensation cost, net of estimated forfeitures, related to outstanding unvested restricted stock is approximately $317,000 and will be recognized as compensation expense on a straight-line basis over the remaining vesting period, which is through fiscal year ended December 31, 2010. The Company recognized $414,000 of stock-based compensation related to its restricted stock awards for the year ended December 31, 2006.

The following table summarizes the activity in non-vested restricted stock under the Company’s stock-based compensation plans:

				Weighted average
	Number of options			shares grant price
Non-vested restricted stock at December 31, 2005		390,000			3.50
Granted		210,000			2.79
Vested		-			-
Forfeited		(250,000	)		3.50
Non-vested restricted stock at December 31, 2006		350,000			3.07

F-24

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based payment” (SFAS No. 123R”), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions, as the Company formerly did, using the intrinsic value method as prescribed by Accounting Principles Board (“APB”), Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally requires that such transactions be accounted for using a fair-value-based method and recognized as an expense in the Company’s Consolidated Statements of Operations.

The implementation of SFAS No. 123R has the following effect on the statement of operations for the three months and year ended December 31, 2006:

	Year Ended December 31, 2006
Net loss before stock option expense	$	(11,477,419	)
Less stock option expense		345,052
Net loss as reported	$	(11,822,471	)

The following table illustrates the effect on the net loss and loss per share as if the Company had applied the fair value recognition provisions of FAS No. 123R for the three months and year ended December 31, 2006.

	Year Ended December 31, 2005 (restated)
Net loss applicable to common shareholders, as reported	$	(9,674,005	)
Deduct: total stock-based compensation expense under fair
value method for awards, net of related tax effect		(2,315	)
Net loss applicable to common shareholders, pro forma	$	(9,676,320	)
Loss per share:
Basic and diluted loss, as reported	$	(0.42	)
Basic and diluted loss, pro forma	$	(0.42	)

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.

F-25

The following table summarizes the assumptions and variables used by the Company to compute the weighted average fair value of stock option grants:

	December 31, 2006			December 31, 2005
Risk-free interest rate		5.0	%		4.5	%
Expected stock price volatility		12.2	%		61.2	%
Expected term until exercise (years)		4			4
Dividends		none			none

NOTE P — OTHER RELATED PARTY TRANSACTIONS

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 is imputed as the value of his services and recorded as additional contributed capital to the Company.

Furthermore Mr. Willem M. Smit has a current account with the Company. As of December 31, 2006 the balance of this account amounts to approximately $23,000 (payable to the Company) which is included in the Loans from shareholders. This amount been reduced significantly and will be further reduced to zero during 2007.

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 house keeping and cleaning services provided by Altaville to the Company an annual aggregate amount of $ 49,843 which is paid in twelve monthly installments. No amounts have been recorded during the year ended Decmeber 31, 2005.

NOTE Q - COMMITMENTS AND CONTINGENCIES

Litigation

On December 15, 2005, Playlogic International N.V. (plaintiff) filed a motion to institute proceedings against Digital Concepts DC Studios Inc., of Montreal (“DC Studios”) (defendant) and South Peak Interactive LLC, of North Carolina (“South Peak”) (defendant) with the Superior Court of the Province of Quebec District of Montreal Canada. Playlogic claims damages in the amount of Canadian $9,262,640 (or approximately $ 8.2 million using September 30, 2006 exchange rates) in view of the alleged unlawful termination by DC Studios of a Letter of Intent under which DC Studios granted the Company exclusive worldwide publishing rights of State of Emergency 2, a title that was released in the first half of 2006. The Company sued South Peak in these proceedings as the second defendant because South Peak, in alleged violation of a clear letter of demand issued by the plaintiff to the defendants, has entered into a publishing agreement with DC Studios with respect to the State of Emergency 2. The Company reached a settlement out of court in August 2006. Under this settlement the Company agreed to withdraw its action in Court while defendants renounced to claim against the Company taxable costs related to the proceedings and all parties to this settlement agreement mutually gave each other a complete full and final release and forever mutually discharged each other.

On March 30, 2007, Fortis Vastgoed B.V. (plaintiff) filed a motion to institute accelerated proceedings against Playlogic International N.V.(defendant)  with the Court of Amsterdam (Kantongerecht) the Netherlands. Fortis claims evacuation of the offices at Amstelveenseweg 639-710 in Amstelveen with immediate effect and damages in the amount of € 142,249 plus € 91,626 for each quarter following April 1, 2007 till the end of the lease term expiring on May 31, 2011 in case Fortis is unable to agree on a lease for the offices with a third party (or approximately $ 187,569 using December 31, 2006 exchange rates) in view of the alleged unlawful non performance by Playlogic under the lease agreement dated June 1, 2005.

F-26

Moreover 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.

Office leases

The Company leases it’s executive offices located at Concertgebouwplein 13 in Amsterdam from Mr. Prof. Dr. D. Valerio. This lease agreement expired on March 31, 2007. This lease agreement contained an extension option, which has extended the expiration date to March 31, 2012. The lease requires annual payments of approximately$81,000 (€59,000) per year, to be paid in quarterly installments.

Our subsidiary, Playlogic Game Factory, B. V., previously operated in leased offices, located at Hoge Mosten 16-24 in Breda, from Kantoren Fonds Nederland B.V. pursuant to a lease agreement which expired on February 28, 2007. The lease requires annual payments of approximately $85,000 (€62,500) per year. Due to space limitations, Playlogic Game Factory, B. V. has abandoned this property and is no longer using this location, by an official notice to the landlord. The landlord has granted the Company permission to sublease this property; however, to date, the Company has not found an interested party to date. The Company has accrued the total obligation due to the landlord under the original terms of the lease as of the abandonment date.

Our subsidiary, Playlogic Game Factory, B. V., leases offices located at Hambroeklaan 1 in Breda from Neglinge BV pursuant to a lease agreement which expires on October 1, 2013. This lease agreement contains an extension option, which if exercised, will extend the expiration date to October 1, 2018. At the execution of this lease agreement, the landlord committed itself to invest approximately $409,000 (€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$41,000 (€30,000) per year, payable in quarterly installments.

On June 1, 2005, the Company entered into a new lease agreement for new corporate offices at Amstelveenseweg 639-710 in Amstelveen. The move of our offices to this location has been delayed following late commissioning of entrance and elevators. We will start using this office now as from June 2007.

The lease requires annual payments of approximately$273 (€200.00) per square meter for rent and $34.00 (€25.00) per square meter for service costs. Payment started December 1, 2006 for approximately ½ of the leased premises (approximately 750 square meters) and in June 2007, payment will start on the second ½ of the leased premises (approximately 750 square meters). Payment of the service costs for each of the 750 square meter segments began at the execution of the lease agreement. The lease expires in June 2011.

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

Year ending
December 31		Amount
	2007	$	801,850
	2008		788,107
	2009		788,107
	2010		788,107
	2011-2015		2,175,337
	Totals	$	5,341,508

F-27

Transportation leases

The Company leases 23 automobiles for certain officers and employees pursuant to the terms of their individual employment agreements under operating lease agreements. These agreements are for terms of 3 to 4 years and begin to expire in 2007. The leases require monthly aggregate payments of approximately $24,760.

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

Year ending
December 31,		Amount
	2007	$	146,563
	2008		94,025
	2009		50,042
	2010		-
	2011-2015		-
	Totals	$	290,630

Employment agreements

In July 2005, Playlogic International amended an existing employment agreement (effective February 1, 2002) with Rogier Smit, Executive Vice President. The agreement is 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 starting salary was $9,427 (€7,500) per month. On July 1, 2005, his base salary increased to $15,009 (€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.

In January 2005, Playlogic International entered into an employment agreement with Stefan Layer, Chief Marketing & Sales Officer, effective as of April 1, 2005. Pursuant to the terms of the agreement, Mr. Layer is responsible for marketing, sales and licensing. The agreement is for an indefinite period, but can be terminated by the Company upon six months notice or by Mr. Layer upon three months notice. Mr. Layer's starting salary is $15,009 (€11,000) per month. In addition to his salary, Mr. Layer is entitled to an annual bonus equal to 1% of our net profit of the net consolidated year figures after taxes and a company car. Under this agreement, Mr. Layer received 500,000 ordinary shares of Playlogic International at a nominal value of $0.068 (€0.05) per share which were exchanged for 364,556 shares of the Company's common stock. Such shares are subject to a two-year lock up period. After the lock up period Mr. Layer will be permitted to sell up to 50% of his shares each year. If Mr. Layer terminates the agreement or is dismissed, the shares he still owns must be sold back to the Company at nominal value. Pursuant to the agreement, Mr. Layer is also subject to confidentiality, non-competition and invention assignment requirements.

In August 2005, Playlogic International entered an employment contract with Maarten Minderhoud as General Counsel effective as of September 1, 2005. The agreement is for an indefinite period but can be terminated by the Company upon six months notice or by Mr. Minderhoud upon 3 months notice. Mr. Minderhoud’s starting salary will be $15,055 (€11,034) per month. . In addition to his salary, Mr. Morel is entitled to a company car. On September 1, 2005, pursuant to the agreement, Mr. Minderhoud received 30,000 shares of the Company's common stock at par value of $0.001. Such shares will be subject to a two-year lock up period. After the lock up period Mr. Minderhoud will be permitted to sell up to 50% of his shares each year. Pursuant to the agreement, Mr. Minderhoud was granted 40,000 options to purchase shares of common stock of the Company at an exercise price of $3.50 per share. 10,000 of these options vest on September1, 2007, and 10,000 of the remaining options will vest on September1, 2008, September1, 2009 and September 1, 2010. Pursuant to the agreement, Mr. Minderhoud is also subject to confidentiality, non-competition and invention assignment requirements.

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In August 2005, Playlogic International entered an employment contract with Dominique Morel as Chief Technology Officer effective as of September 14, 2005. The agreement is 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 starting salary will be $15,008.50 (€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 vest 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.

In November 2006, Playlogic International amended the existing employment agreement of Wilbert Knol (Corporate controller as of December 1, 2005) as Chief Financial Officer ad interim effective as of November 1, 2006. The 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 starting salary as CFO a.i. will be $12,310.45 (€9,336) per month. In addition to his salary, Mr. Knol is entitled to a company car. Pursuant to the agreement 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. Pursuant to the agreement, Mr. Morel is also subject to confidentiality, non-competition and invention assignment requirements.

Mr. Kohne was a party to an employment agreement with the Company dated October 1, 2005. The agreement has been terminated effective December 1, 2006 without any further obligation for the Company. Options granted pursuant to the employment agreement were cancelled effective December 1, 2006. 90,000 Shares of common stock awarded upon signing of the employment agreement were sold back by Mr Kohne to the Company at an aggregate price of $ 1.

Software development contracts

The Company has entered into six (6) separate software development contracts with unrelated entities. These contracts require periodic payments of agreed-upon amounts upon the achievement of certain developmental milestones, as defined in each individual contract. All of these contracts have completion deadlines of less than one (1) year from the contract execution and will require an aggregate funding liability of approximately $2.6 million through completion.

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NOTE R - SEGMENT INFORMATION AND REVENUE CONCENTRATIONS

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

	Year ending				Year ending
	December 31, 2006				December 31, 2005
Europe and United Kingdom
Customer A		1,872,371	37	%		558,181	31	%
Customer B		1,238,058	25	%		262,529	14	%
Customer C		167,235	3	%		0	0	%
Others		376,694	7	%		616,636	34	%
		3,654,358	72	%		1,437,346	79	%
Middle East/Africa
Others		54,637	1	%		13,982	1	%
		54,637	1	%		13,982	1	%
Asia
Others		0	0	%		0	0	%
		0	0	%		0	0	%
United States & Canada
Customer D		905,075	18	%		353,817	19	%
Customer E		417,933	9	%		0	0	%
others		10,514	0	%		19,054	1	%
		1,333,522	27	%		372,871	20	%
South America
Others		0	0	%		0	0	%
		0	0	%		0	0	%
Total revenue as reported		5,042,517	100	%		1,824,199	100	%

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