<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB/A
                                 Amendment No. 2

(Mark One)

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED September 30, 2004

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

       For the transition period from ________________ to _______________

                                     0-29873
                            (Commission file number)

                                   UWINK, INC.
        (Exact name of small business issuer as specified in its charter)

                    UTAH                                 87-0412110
        (State or other jurisdiction                    (IRS Employer
      of incorporation or organization)              Identification No.)

                  16106 Hart Street, Van Nuys, California 91406
                    (Address of principal executive offices)

                                 (818) 909 6030
                           (Issuer's telephone number)

                                       N/A
             (Former name, former address and former fiscal year, if
                           changed since last report)

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 [ ]

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

The number of shares of common stock outstanding as of November 27, 2006 was
24,984,179.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

<PAGE>


                                   UWINK, INC.
                                      INDEX

                                                                            Page
                                                                          Number
                                                                          ------

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheet as of September 30, 2004 (unaudited)     1

         Consolidated Statements of Operations for the three and nine
         months ended September 30, 2004 and 2003 (unaudited)                2

         Consolidated Statements of Cash Flows for the nine months ended
         September 30, 2004 and 2003 (unaudited)                             3

         Notes to Consolidated Financial Statements (unaudited)              4

Item 2.  Management's Discussion and Analysis or Plan of Operations         26

Item 3.  Controls and Procedures                                            33

PART II. OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds        34

Item 6.  Exhibits and Reports on Form 8-K                                   35

SIGNATURES                                                                  35


<PAGE>

EXPLANATORY NOTE


uWink, Inc. (referred to in this discussion as "we", "us" or "our") is filing
this amendment number 2 to its Quarterly Report on Form 10-QSB for the period
ended September 30, 2004 (the "Original Report") in order to clarify certain
information provided in amendment number 1 to the Original Report filed on July
20, 2006. It has come to our attention that the statement "The independent
accountants have not reviewed the unaudited consolidated financial statements
for the three and nine months ended September 30, 2003" included in the
financial statements presented in the amended September 30, 2004 Form 10-QSB is
misleading in that it could be construed to mean that no independent accountants
had reviewed our unaudited consolidated financial statements for the three and
nine months ended September 30, 2003, presented in this report.

On July 27, 2005, our board of directors approved the dismissal of Stonefield
Josephson, Inc. as our independent public accountants and the appointment of
Kabani & Company, Inc. as their replacement. The statement in our amended
September 30, 2004 Form 10-QSB that the September 30, 2003 financial statements
were not reviewed by the independent accountants refers to the fact that our new
auditors, Kabani & Company, did not review the 2003 quarterly financial
statements. The 2003 quarterly financial statements presented in the September
30, 2004 amended Form 10-QSB were reviewed by our prior auditors, Stonefield
Josephson. We believe that the September 30, 2003 unaudited quarterly financials
statements presented in this report, as amended, are in compliance with Item
310(b) of Regulation S-B because they were reviewed by Stonefield Josephson. As
such, we are amending this report solely for the purpose of removing the
statement that "The independent accountants have not reviewed the unaudited
consolidated financial statements for the three and nine months ended September
30, 2003."

We filed amendment number 1 to this report on July 20, 2006 for the purpose of
correcting certain errors in the financial statements.

The Quarterly Report on Form 10-QSB/A for the three and nine months ended
September 30, 2004 filed in July 20, 2006 amended and restated the financial
statements and related financial information for all periods presented herein.
The determination to restate the financial statements was made as a result of
management's identification of certain errors in the financial statements
included in the Original Report. Further information on the restatement can be
found in Note 2 to the Unaudited Consolidated Financial Statements.

The disclosures in this Form 10-QSB/A continue to speak as of the date of the
Original Report, and do not reflect events occurring after the filing of the
Original Report. Accordingly, this Form 10-QSB/A should be read in conjunction
with our other filings made with the Securities and Exchange Commission
subsequent to the filing of the Original Report, including any amendments to
those filings. The filing of this Form 10-QSB/A shall not be deemed an admission
that the Original Report when made included any untrue statement of a material
fact or omitted to state a material fact necessary to make a statement not
misleading.


<PAGE>


PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

<TABLE>
<S>     <C>

                           UWINK, INC. AND SUBSIDIARY
                           Consolidated Balance Sheet
                                   (Unaudited)

                                                                               SEPTEMBER
                                                                                30, 2004
                                                                               (RESTATED)
                                                                              ------------
                                     ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                                $      2,165
     Account receivable, net of allowance for doubtful accounts of $95,782         371,453
     Inventory, net of obsolescence reserve of $370,400                            476,355
     Deposits - inventory                                                          260,600
     Prepaid expenses and other current assets                                      89,200
                                                                              ------------
  TOTAL CURRENT ASSETS                                                           1,199,773
                                                                              ------------

PROPERTY AND EQUIPMENT, net of accumulated
      depreciation of $375,076                                                     176,359
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of
     accumulated amortization of $803,469                                          217,572
                                                                              ------------
                                                                              $  1,593,703
                                                                              ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                                         $    732,777
     Accrued expenses                                                              135,954
     Accrued payroll and related benefits                                           27,625
     Due to related parties                                                         84,280
     Convertible note payable                                                      150,000
                                                                              ------------
  TOTAL CURRENT LIABILITIES                                                      1,130,636
                                                                              ------------


STOCKHOLDERS' EQUITY
     Common stock, $0.001 par value; 50,000,000 shares
        authorized; 10,520,805 shares issued and outstanding                        10,520
     Additional paid-in capital                                                 20,652,491
     Accumulated deficit                                                       (20,580,679)
     Shares to be issued                                                           182,722
     Warrants to be Issued                                                         198,013
                                                                              ------------
  TOTAL STOCKHOLDERS' EQUITY                                                       463,067
                                                                              ------------
                                                                              $  1,593,703
                                                                              ============


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

                                       1

<PAGE>

                                     UWINK, INC. AND SUBSIDIARY
                                Consolidated Statements of Operations
                                             (Unaudited)

                                                      THREE MONTH PERIODS ENDED       NINE MONTH PERIODS ENDED
                                                             SEPTEMBER 30                   SEPTEMBER 30
                                                        2004            2003            2004            2003
                                                     (RESTATED)                      (RESTATED)
                                                     -----------     -----------     -----------     -----------

NET SALES                                            $   474,929     $  (192,077)    $ 1,103,997     $    41,671

COST OF SALES                                             58,371          11,851         832,280           5,681

                                                     -----------     -----------     -----------     -----------
GROSS PROFIT (LOSS)                                      416,559        (203,928)        271,716          35,990
                                                     -----------     -----------     -----------     -----------

OPERATING EXPENSES
     Selling, general and administrative expenses      1,316,141         246,180       3,788,091         455,783
     Research and development                             29,391          35,985         291,389         115,120
                                                     -----------     -----------     -----------     -----------
       TOTAL OPERATING EXPENSES                        1,345,532         282,165       4,079,480         570,902
                                                     -----------     -----------     -----------     -----------

       LOSS FROM OPERATIONS                             (928,974)       (486,093)     (3,807,764)       (534,912)

OTHER INCOME/ (EXPENSE)
     Other income                                              3          44,337             478          48,433
     Debt discount expense                                    --         (47,742)       (169,798)        (47,742)
     Nominal stock option expense                        (47,493)             --        (144,159)             --
     Gain on settlement of debt                           34,939          48,396         336,779          48,396
     Interest expense                                     (7,247)        (91,507)        (24,152)        (93,964)
                                                     -----------     -----------     -----------     -----------
       TOTAL OTHER EXPENSE                               (19,798)        (46,516)           (852)        (44,877)
                                                     -----------     -----------     -----------     -----------

LOSS BEFORE PROVISION FOR INCOME TAXES                  (948,771)       (532,608)     (3,808,616)       (579,789)

PROVISION FOR INCOME TAXES                                    --              --              --              --
                                                     -----------     -----------     -----------     -----------

NET LOSS                                             $  (948,771)    $  (532,608)    $(3,808,616)    $  (579,789)
                                                     ===========     ===========     ===========     ===========

NET LOSS PER COMMON SHARE - BASIC & DILUTED          $     (0.10)    $     (0.18)    $     (0.42)    $     (0.20)
                                                     ===========     ===========     ===========     ===========

WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING - BASIC                               9,790,309       2,929,823       9,032,615       2,929,823
                                                     ===========     ===========     ===========     ===========

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




                                                  2

<PAGE>


                                UWINK, INC. AND SUBSIDIARY
                           Consolidated Statements of Cash Flows
                                        (Unaudited)

                                                                          NINE MONTH PERIODS ENDED
                                                                               SEPTEMBER 30
                                                                           2004            2003
                                                                        (RESTATED)
                                                                        -----------     -----------

CASH FLOW FROM OPERATING ACTIVITIES:
   Net loss                                                             $(3,808,616)    $  (579,789)
   Adjustment to reconcile net loss to net cash
     used in operating activities:
       Amortization of debt discount on convertible note payable            169,798              --
       Amortization of options issued below market price                    144,159              --
       Depreciation and amortization expense                                115,863          67,500
       Bad debt allowance                                                    95,782              --
       Gain on Settlement of Debt                                          (336,779)             --
       Issuance of warrants for services                                    474,215              --
       Issuance of common stock for payroll                                 108,710              --
       Issuance of common stock for services                                466,270              --
       Issuance of common stock on conversion of prepaid license fee        125,000              --
       Inventory Obsolesence Reserve                                        319,149              --
   Changes in operating assets and liabilities:
     Accounts receivable                                                   (335,179)         14,441
     Inventory                                                             (616,369)          1,976
     Deposits - inventory                                                  (260,600)             --
     Prepaid expenses and other current assets                              (74,976)         35,291
     Accounts payable                                                       272,749        (169,631)
     Accrued expenses                                                        67,339        (244,658)
     Accrued payroll and related benefits                                  (225,063)       (137,876)
     Advances from Customers                                               (159,722)        163,889
                                                                        -----------     -----------
Net cash used in operating activities                                    (3,458,268)       (848,858)
                                                                        -----------     -----------

CASH FLOW FROM INVESTING ACTIVITIES:
   Payment for property and equipment                                       (88,256)       (107,278)
   Payment for capitalized product development costs                       (240,429)         26,979
                                                                        -----------     -----------
Net cash used in investing activities                                      (328,685)        (80,299)
                                                                        -----------     -----------

CASH FLOW FROM FINANCING ACTIVITIES:
   Proceeds (repayments) from issuance of debt                                   --        (352,256)
   Proceeds (repayments) from advances from related parties                  26,868          (5,000)
   Proceeds from issuance of common stock                                 2,988,722       1,307,298
   (Payment) of offering costs                                             (382,642)             --
                                                                        -----------     -----------
Net cash provided by financing activities                                 2,632,948         950,042
                                                                        -----------     -----------

NET INCREASE/ (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                                      (1,154,005)         20,884

CASH AND CASH EQUIVALENTS, Beginning of period                            1,156,170           6,683
                                                                        -----------     -----------

CASH AND CASH EQUIVALENTS, End of period                                $     2,165     $    27,567
                                                                        ===========     ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   Interest paid                                                        $    24,152     $        --
                                                                        ===========     ===========
   Income taxes paid                                                    $       800     $        --
                                                                        ===========     ===========

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES

   Conversion of debt into shares of common stock                       $   237,133     $
                                                                        ===========     ===========


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



                                        3
</TABLE>
<PAGE>

NOTE 1 - BASIS OF PRESENTATION AND GOING CONCERN

The unaudited consolidated financial statements have been prepared by uWink,
Inc. (the "Company"), pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended December 31,
2003 included in the Company's Annual Report on Form 10-KSB. The results of the
nine months ended September 30, 2004 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2004.

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company has
incurred a net loss of $3,808,616 for the nine months ended September 30, 2004,
and as of September 30, 2004, the Company had an accumulated deficit of
$20,580,679. These conditions raise substantial doubt as to the Company's
ability to continue as a going concern. These unaudited consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. These unaudited consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts, or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.

The Company will need additional working capital to fund its expanding
operations over the next 12 months. The Company believes that it will need at
least an additional $2.5 million of working capital to fund inventory and
accounts receivable resulting from the projected demand for its Snap! and Bear
Shop products, as well as further development of those products, and, if
necessary, to finance future losses from operations. The Company plans to obtain
the additional working capital through the private placement sale of its equity
securities. As of the date of this report, there are no commitments for the sale
of the Company's securities nor can there be any assurance that such funds will
be available on commercially reasonable terms, if at all. Should the Company be
unable to raise additional funds, its ability to finance its continued growth
will be materially adversely affected.


                                       4

<PAGE>

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
uWink, Inc. and its subsidiary, uWink California, Inc. The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. All
inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Fair Value of Financial Instruments

Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value. For certain of
the Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and unearned revenue,
the carrying amounts approximate fair value due to their short maturities. The
amounts shown for convertible debentures and notes payable also approximate fair
value because current interest rates and terms offered to the Company for
similar debt are substantially the same.

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits,
certificates of deposit and all highly liquid debt instruments with original
maturities of three months or less.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit risk include accounts receivable. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses, as required.

Research and Development

Research and development costs are charged to expense as incurred until
technological feasibility has been established. These costs consist primarily of
salaries and direct payroll related costs.


                                       5

<PAGE>

Software Development Costs

Software development costs related to computer games and network and terminal
operating systems developed by the Company are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of software development costs begins upon the establishment of
technological feasibility and is discontinued when the product is available for
sale. When the software is a component part of a product, capitalization begins
when the product reaches technological feasibility. The establishment of
technological feasibility and the ongoing assessment for recoverability of
capitalized software development costs require considerable judgment by
management with respect to the completion of all planning, designing, coding and
testing activities necessary to establish that the product can be produced to
meet its design specifications and certain external factors including, but not
limited to, anticipated future gross revenues, estimated economic life, and
changes in software and hardware technologies. Capitalized software development
costs are comprised primarily of salaries and direct payroll related costs and
the purchase of existing software to be used in the Company's products.

Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products (not to exceed three years). Management periodically
compares estimated net realizable value by product with the amount of software
development costs capitalized for that product to ensure the amount capitalized
is not in excess of the amount to be recovered through revenues. Any such excess
of capitalized software development costs to expected net realizable value is
expensed at that time.

Amortization of capitalized software development costs was $29,224 for the three
months ended and $69,634 for the nine months ended September 30, 2004.

Revenue Recognition

The Company recognizes revenue related to software licenses in compliance with
the American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 97-2, "Software Revenue Recognition." Revenue is recognized when
the Company delivers its touch screen pay-for-play game terminals to its
customer and the Company believes that persuasive evidence of an arrangement
exits and the fees are fixed or determinable. Included with the purchase of the
touch screen terminals are licenses to use the games loaded on the terminals.
The Company delivers the requested terminals for a fixed price either under
agreements with customers or pursuant to purchase orders received from
customers.

The Company does not have any contractual obligations to provide post sale
support of its products. The Company does provide such support on a case by case
basis and the costs of providing such support are expensed as incurred.

Impairment of Long-Lived Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.


                                       6

<PAGE>

30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal.

Advances from Customers

The Company records advances from customers as a liability and recognizes these
amounts as revenue over the period of the related agreement. The Company had no
advances from customers at September 30, 2004.

Returns

The Company does not offer customers a contractual right to return products sold
by the Company. The Company does accept product returns from time to time on a
case by case basis.

Advertising and Marketing Costs

The Company expenses costs of advertising and marketing as incurred.

Income Taxes

The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.

Stock Options

The Company has adopted only the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." It applies Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its Stock Option Plan. It recognizes an expense in accordance
with APB No. 25 when the exercise price is less than the fair market value at
the date of grant of the stock. When the exercise price is the same as the fair
market value at the date of grant of the stock the Company does not recognize
compensation expense for its Stock Option Plan other than for restricted stock
and options issued to outside third parties. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date for
awards under the Stock Option Plan consistent with the methodology prescribed by
SFAS No. 123, the Company's net loss and loss per share would be increased to
the pro forma amounts indicated below for the nine months ended September 30,
2004 and 2003:


                                       7



<PAGE>

                                                        2004            2003
                                                     ------------   ------------
         Net loss
           As reported                               $(3,808,616)  $   (579,789)
           Compensation recognized under APB 25          144,159         48,333
           Compensation recognized under SFAS 123       (343,977)       (85,487)

                                                     ------------   ------------
                      Pro forma                      $(4,008,434)  $   (616,943)

                                                     ============   ============

         Basic and diluted loss per common share
           As reported                               $     (0.42) $     (0.20)
           Pro forma                                 $     (0.44) $     (0.21)


This option valuation model requires input of highly subjective assumptions.
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 model does not necessarily provide a reliable single
measure of fair value of its employee stock options.

For purposes of computing the pro forma disclosures required by SFAS No. 123,
the fair value for options granted in prior periods was estimated at the date of
grant in 2002 using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 3.0%; dividend yield of
0%; volatility factor of the expected market price of the Company's common stock
of 40%; and a weighted average expected life of the option of 10 years. There
were no options granted in 2003 or in the first six months of 2004.

On July 15, 2004, we granted a total of 663,500 10-year options to employees at
a strike price of $2.40 per share and 150,000 10-year options to another
employee at a strike price of $2.64. For purposes of computing the pro forma
disclosures required by SFAS No. 123, the fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate of 5.25%;
dividend yield of 0%; volatility factor of the expected market price of the
Company's common stock of 84%; and a weighted average expected life of the
option of 10 years.

The Company assumed the uWink.com, Inc. 2000 Employee Stock Option Plan pursuant
to its acquisition of uWink California. The 2000 Plan provides for the issuance
of up to 681,218 (after giving effect to a 3.15611 reverse stock split in
connection with the acquisition of uWink California) incentive and non-qualified
stock options to employees, officers, directors and consultants of the Company.
Options granted under the 2000 Plan vest as determined by the Board of
Directors, provided that any unexercised options will automatically terminate on
the tenth anniversary of the date of grant.

On February 24, 2004, the Company's Board of Directors approved the uWink, Inc.
2004 Stock Incentive Plan (the "2004 Plan"). The 2004 Plan provides for the
issuance of up to 1,200,000 incentive stock options, non-qualified stock
options, restricted stock awards and performance stock awards to employees,
officers, directors, and consultants of the Company. Awards granted under the
2004 Plan vest as determined by the Board of Directors, provided that no option
or restricted stock award granted under the 2004 Plan may be exercisable prior
to six months from its date of grant and no option granted under the 2004 Plan
may be exercisable after 10 years from its date of grant.


                                       8



<PAGE>

The following table summarizes the options outstanding as of September 30, 2004.

                                                                    Weighted
                                                   Stock             Average
                                                  Option             Exercise
                                                   Plans              Price
                                                ----------         ------------
Balance December 31, 2003                         613,413             $  0.96
Granted                                           813,500                2.44
Exercised                                           --                   --
Canceled                                           41,348             $  1.60
Balance September 30, 2004                      1,385,565             $  1.81
Exercisable September 30, 2004                    470,965             $  1.25

The weighted average remaining contractual life of options outstanding issued
under the plans is 8.9 years at September 30, 2004. The exercise prices for the
options outstanding under the plans at September 30, 2004 ranged from $0.32 to
$6.31.

NOTE 2 - RESTATEMENT

On March 7, 2006, the Company's Chief Executive Officer
concluded that its previously issued financial statements for the fiscal year
ended December 31, 2004 and the first three quarters of 2004 and 2005 should not
be relied upon because of errors in those financial statements. As discussed
below, the Company has restated its fiscal year 2004 financial statements and
filed the restated fiscal year 2004 financial statements in the Form 10-KSB for
the 2005 fiscal year filed on April 17, 2006. In addition, these errors require
the Company to restate its financial statements for the first three quarters of
2004 and 2005.

Subsequent to the issuance of the Company's financial
statements as of and for the year ended December 31, 2004, as reported in the
Company's Form 10-KSB filed on March 31, 2005, the Company engaged in a
comprehensive re-audit of its financial condition and results of operations as
of and for the year ending December 31, 2004.

Pursuant to this re-audit, the Company discovered a number of errors in its 2004
financial statements, as originally filed. As a result, the Company restated its
2004 financial statements and presented the restated 2004 financial statements
in the Form 10-KSB for the 2005 fiscal year filed by the Company on April 17,
2006.

The material errors discovered by the Company during the re-audit of its 2004
financial statements are set forth below.


                                       9



<PAGE>

In respect of its revenue for the fiscal year ended December 31, 2004, the
Company determined that $200,200 was incorrectly recorded as revenue. This
$200,200 related to the potential licensing of Bear Shop technology to
Bell-Fruit Games of the United Kingdom. The revenue was booked prematurely prior
to the entry into definitive documentation relating to the transaction. The
transaction was subsequently finalized in early 2005 as a licensing transaction
with a $24,980 advance against royalty payments based on future sales. The
$24,980 payment received in 2005 was booked as an advance from customers on the
December 31, 2005 balance sheet. In addition, the Company, in consultation with
its external auditors, determined that, given the software problems associated
with the original Microsoft Windows version of the Bear Shop machines sold in
2004, a $150,000 provision for sales returns should have been recorded at
December 31, 2004. The Company also discovered that $62,249 of Snap! and Bear
Shop machines shipped to distributors on consignment was incorrectly recorded as
revenue and should have been recorded as consignment inventory. The Company also
determined to reduce revenue by an additional $10,114 to properly record
customer credits in 2004 rather than 2005. As a result, the Company restated its
2004 financial statements to reverse the amounts incorrectly booked as revenue
and to record the provision for sales returns. The effect of this restatement is
to reduce revenue by $422,563 and cost of goods sold by $44,845 (including
approximately $6,000 of vendor credits recorded in 2004 rather than 2005); and
to increase inventory by $39,223. These adjustments, combined with a reduction
in the bad debt reserve of $44,848 resulting from the lower, restated level of
accounts receivable, also resulted in a reduction in accounts receivable of
$377,741.

The Company also determined that the market price used to value shares of its
common stock issued for certain services in 2004 was incorrect and that, as a
result, the expense relating to such services was undervalued by $90,000. In
addition, the Company, in consultation with its external auditors, determined
that 150,000 warrants to purchase common stock issued to a public relations firm
in 2004 were issued for services rather than in connection with a financing and
that, as a result, financial consulting expense of $474,216 based on the Black
Scholes value of those warrants should be recorded. In addition, the Company
determined that the calculation of 2004 nominal stock option expense was
incorrect and, in consultation with its external auditors, determined that
nominal stock option expense was more properly classified as an administrative
expense under selling, general and administrative expenses rather than other
expense. As a result, the Company restated its 2004 financial statements to
record the additional expense and to restate and reclassify nominal stock option
expense as selling, general and administrative expenses. The effect of this
restatement, together with certain additional adjustments to selling, general
and administrative expenses and other income (expense), is to increase selling,
general and administrative expenses by $805,030 and increase other income
(expense) by $186,406.

Furthermore, the Company determined that there was insufficient documentation to
support recording a gain on the settlement of debt in respect of certain of its
accounts payable in 2004. As a result, the Company determined to restate gain on
settlement of debt income for 2004. The effect of this restatement is to reduce
gain on settlement of debt income by $38,961.


                                       10



<PAGE>

The Company also determined that the beneficial conversion feature on $225,003
of convertible notes issued in November and December 2004 was overstated by
$182,144 as a result of an incorrect conversion price being used in the
beneficial conversion feature calculation and that a $50,000 convertible note
issued to a director of the Company was a related party transaction and,
therefore, should be reclassified from convertible notes to due to related
parties. As a result, the Company determined to restate convertibles notes and
due to related parties on the balance sheet as of December 31, 2004 and to
restate debt discount amortization expense for 2004. The effect of this
restatement is to increase convertible notes by $119,348; increase due to
related parties by $50,000; and reduce debt discount expense by $12,797.

The $90,000 increase in the value of common stock issued for services, the
recording of $474,216 in expense relating to warrants issued for services, the
restatement of nominal stock option expense ($44,599 effect on additional paid
in capital) and the $182,144 correction of the beneficial conversion feature on
$225,003 of convertible notes, each described above, resulted in an increase in
the additional paid in capital account of $426,691 (taking into account $21 of
additional adjustments). In addition, the Company determined that common stock
certificates relating to $176,808 of equity capital previously received were
still to be issued as of December 31, 2004 and, as a result, the Company
reclassified $176,808 of additional paid in capital to the shares to be issued
account in the stockholder's deficit section of the balance sheet at December
31, 2004 (shares to be issued amounted to $176,930 on the restated balance
sheet, taking into account an additional reclassification of $120 from the
common stock account). The foregoing adjustments resulted in a restatement of
additional paid in capital to the effect of increasing additional paid in
capital by an aggregate of $249,883.

The Company also determined that the weighted average common shares outstanding
calculation for 2004 was incorrect. As a result, the Company restated the
weighted average common shares outstanding for 2004. The effect of this
restatement is to reduce the weighted average common shares outstanding for 2004
by 1,662,706.

Finally, the Company, in consultation with its external auditors, determined
that the cash invested in a deposit relating to the Company's pursuit of the
assets of Sega Gameworks out of bankruptcy was more properly classified as an
investing activity rather than an operating activity. As a result, the Company
determined to reclassify the cash effect of Deposits - Sega Gameworks to cash
flow from investing activities from cash flow from operating activities. As a
result, cash flow from operating activities was increased by $615,000 and cash
flow from investing activities was reduced by $615,000 on the restated 2004
statement of cash flows.

The following presents the effect on the Company's previously issued financial
statements for the year ended December 31, 2004. THE TABLES SET FORTH BELOW ONLY
PRESENT THOSE ACCOUNTS THAT WERE AFFECTED BY THE RESTATEMENT. FOR A FULL
COMPARISON OF THE 2004 FINANCIAL STATEMENTS AS ORIGINALLY FILED AND AS RESTATED,
PLEASE REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE 2005 FISCAL
YEAR FILED ON APRIL 17, 2006.

                                       11



<PAGE>

<TABLE>
<S>   <C>

Balance sheet at December 31, 2004:


                                                                             PREVIOUSLY          INCREASE
                                                                              REPORTED           (DECREASE)          RESTATED

     Cash and cash equivalents                                              $     58,307              (965)           57,342
     Account receivable,
     net of allowance for doubtful accounts of $140,630 and $95,782              659,751          (377,741)          282,010
     Inventory, net of obsolescence reserve of $370,400 and $370,400             480,447            39,223           519,670
     Prepaid expenses and other current assets                                    72,890           (22,500)           50,391

TOTAL CURRENT ASSETS                                                           2,239,588          (361,982)        1,877,606
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
     DEPRECIATION OF $400,478 AND $400,478, RESPECTIVELY                         151,450              (494)          150,956
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET OF
     ACCUMULATED AMORTIZATION OF $830,617 AND $826,370, RESPECTIVELY             225,289           (24,092)          201,197

TOTAL ASSETS                                                                $  2,616,327          (386,568)        2,229,759

CURRENT LIABILITIES
     Accounts payable                                                       $    821,996             2,621           824,617
     Accrued expenses                                                            128,477             7,130           135,608
     Due to related parties                                                      417,139            50,000           467,139
     Convertible note payable, net of discounts of $206,253 and $36,905          168,750           119,348           288,098

TOTAL CURRENT LIABILITIES                                                      2,331,781           179,102         2,510,882

STOCKHOLDERS' DEFICIT
     Common stock                                                                 10,736              (120)           10,616
     Additional paid-in capital                                               20,814,442           249,883        21,064,324
     Accumulated deficit                                                     (20,540,633)         (992,360)      (21,532,993)
     Shares to be Issued                                                              --           176,930           176,930

TOTAL STOCKHOLDERS' DEFICIT                                                      284,545          (565,668)         (281,123)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                 $  2,616,327          (386,568)        2,229,759


                                                              12



<PAGE>

Statement of operations for the year ended December 31, 2004:


                                                                         PREVIOUSLY           INCREASE
                                                                          REPORTED            (DECREASE)           RESTATED

NET SALES                                                             $  1,819,978             (422,563)           1,397,415
COST OF SALES                                                            1,179,576              (44,845)           1,134,731
GROSS PROFIT                                                               640,402             (377,718)             262,684
OPERATING EXPENSES
      Selling, general and administrative expenses                       4,027,205              805,030            4,832,235
      Research and development                                             355,315               (3,984)             351,332
TOTAL OPERATING EXPENSES                                                 4,382,520              801,047            5,183,567
LOSS FROM OPERATIONS                                                    (3,742,118)          (1,178,766)          (4,920,883)
OTHER INCOME (EXPENSE)
      Debt discount expense                                               (157,469)              12,797             (144,672)
      Nominal Stock Option Expense                                        (221,236)             221,236                   --
      Gain on settlement of debt                                           397,256              (38,961)             358,295
      Interest expense                                                     (65,226)              (8,666)             (73,892)
TOTAL OTHER INCOME (EXPENSE)                                               (24,082)             186,406              162,324
LOSS BEFORE PROVISION FOR INCOME TAXES                                  (3,766,200)            (992,399)          (4,758,599)
NET LOSS                                                              $ (3,769,322)            (992,360)          (4,761,682)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED                         $      (0.35)               (0.17)               (0.52)

WEIGHTED AVERAGE COMMON SHARES
      OUTSTANDING - BASIC                                               10,737,051           (1,662,706)           9,074,345


                                                            13





<PAGE>

Statement of cash flows for the year ended December 31, 2004:


                                                                                    PREVIOUSLY        INCREASE
                                                                                     REPORTED         (DECREASE)       RESTATED

CASH FLOW FROM OPERATING ACTIVITIES:
    Net loss                                                                       $(3,769,322)        (992,360)     $(4,761,682)
    Adjustment to reconcile net loss to net cash used in operating activities:
        Amortization of debt discount on convertible note payable                      157,469           10,389          167,858
        Amortization of options issued below market price                              129,066           44,599          173,665
        Depreciation and amortization expense                                          168,414           (4,247)         164,167
        Bad debt allowance                                                             140,630          (44,848)          95,782
        Issuance of warrants for services                                                   --          474,216          474,216
        Issuance of common stock for payroll and exercise of options                        --          144,975          144,975
        Issuance of common stock for services                                          456,963           56,150          513,113
        Inventory obsolescence reserve                                                 319,149            1,250          320,400
    Changes in operating assets and liabilities:
      Accounts receivable net of provision for sales returns of $150,000
         as restated                                                                  (668,961)         423,326         (245,635)
      Inventory                                                                       (301,311)        (359,623)        (660,934)
      Deposits-Sega Gameworks                                                         (615,000)         615,000               --
      Deposits                                                                         (23,403)          22,500             (903)
      Prepaid expenses and other current assets                                        (27,270)            (686)         (27,956)
      Accounts payable                                                                 147,726          (95,476)          52,250
      Accrued expenses                                                                 (61,673)         128,666           66,993
      Advances from Customers                                                          (59,722)         125,000           65,278

Net cash used in operating activities                                               (4,512,706)         548,832       (3,963,874)

CASH FLOW FROM INVESTING ACTIVITIES:
    Payment for property and equipment                                                 (88,750)             494          (88,256)
    Payment for capitalized product development costs                                 (275,294)          28,339         (246,955)
    Deposits - Sega Gameworks                                                               --         (615,000)        (615,000)

Net cash used in investing activities                                                 (364,044)        (586,167)        (950,211)

CASH FLOW FROM FINANCING ACTIVITIES:
    Proceeds from debt, net of conversion into common stock                          1,069,574         (279,574)         790,000
    Proceeds from advances from related parties                                        132,000          277,727          409,727
    Proceeds from issuance of common stock                                           2,977,672           20,498        2,998,170
    Payment of offering costs                                                         (400,360)          17,718         (382,642)

Net cash provided by financing activities                                            3,778,886           36,369        3,815,255

NET DECREASE IN CASH AND CASH EQUIVALENT                                            (1,097,863)            (967)      (1,098,830)

CASH AND CASH EQUIVALENTS, END OF PERIOD                                           $    58,307             (965)     $    57,342

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES

    Issuance of common stock for services                                          $   481,963           31,150      $   513,113


</TABLE>

                                       14


<PAGE>

The net effect of the restatement is an increase of $1,178,766 in loss from
continuing operations, and an increase of $992,360 in net loss for the fiscal
year ended December 31, 2004. As a result, basic and diluted loss per share from
continuing operations increased by $0.19 per share, and basic and diluted net
loss per share increased by $0.17 per share for the fiscal year ended December
31, 2004.

As a result of the above adjustments to the 2004 financial statements, the
Company has restated the affected balances for the quarter ended September 30,
2004. The following presents the effect on the Company's previously issued
financial statements for the quarter ended September 30, 2004. THE TABLES SET
FORTH BELOW ONLY PRESENT THOSE ACCOUNTS THAT WERE AFFECTED BY THE RESTATEMENT.
The restated financial statements also include certain reclassifications made
purely for presentation purposes.

<TABLE>
<S> <C>
Balance Sheet at September 30, 2004:

                                                                 Previously        Increase
                                                                  Reported        (Decrease)      Restated

CURRENT ASSETS
       Cash and cash equivalents                                     2,910            (745)          2,165
       Account receivable, net of allowance for doubtful
             accounts of $0 and $95,782, respectively              720,261        (348,808)        371,453
       Inventory, net of obsolescence reserve of $99,745
             and $370,400, respectively                            724,077        (247,722)        476,355
       Deposits - inventory                                             --         260,600         260,600
       Prepaid expenses and other current assets                   357,600        (268,400)         89,200
TOTAL CURRENT ASSETS                                             1,804,848        (605,075)      1,199,773
PROPERTY AND EQUIPMENT, net of accumulated
        depreciation of $396,322 and $375,076, respectively        155,607          20,752         176,359
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of
       accumulated amortization of $780,612
       and $803,469, respectively                                  268,768         (51,196)        217,572
TOTAL ASSETS                                                     2,229,223        (635,520)      1,593,703
CURRENT LIABILITIES
       Accounts payable                                            727,138           5,639         732,777
       Accrued expenses                                            167,532         (31,578)        135,954
       Accrued payroll and related benefits                             --          27,625          27,625
TOTAL CURRENT LIABILITIES                                        1,128,950           1,686       1,130,636
TOTAL LIABILITIES                                                1,128,950           1,686       1,130,636
STOCKHOLDERS' DEFICIT
       Common stock, $0.001 par value; 50,000,000 shares
             authorized; 10,628,594 and 10,520,805 shares
             issued and outstanding, respectively                   10,628            (108)         10,520
       Additional paid-in capital                               20,428,778         223,713      20,652,491
       Accumulated deficit                                     (19,339,133)     (1,241,546)    (20,580,679)
       Shares to be issued                                              --         182,722         182,722
       Warrants to be issued                                            --         198,013         198,013
TOTAL STOCKHOLDERS' DEFICIT                                      1,100,273        (637,206)        463,067
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                      2,229,223        (635,520)      1,593,703


                                       15



<PAGE>

Statement of Operations for nine months ended September 30, 2004:

                                                                 Previously        Increase
                                                                  Reported        (Decrease)      Restated

NET SALES                                                        1,364,672        (260,675)      1,103,997
COST OF SALES                                                      841,049          (8,769)        832,280
GROSS PROFIT (LOSS)                                                523,623        (251,907)        271,716
OPERATING EXPENSES
       Selling, general and administrative expenses              2,979,550         808,541       3,788,091
       Research and development                                    293,412          (2,023)        291,389
TOTAL OPERATING EXPENSES                                         3,272,962         806,518       4,079,480
LOSS FROM OPERATIONS                                            (2,749,339)     (1,058,425)     (3,807,764)
OTHER INCOME (EXPENSE)
       Debt discount expense                                      (138,719)        (31,079)       (169,798)
       Nominal stock option expense                                     --        (144,159)       (144,159)
       Gain on settlement of debt                                  375,739         (38,960)        336,779
       Interest expense                                            (55,231)         31,079         (24,152)
TOTAL OTHER INCOME (EXPENSE)                                       182,267        (183,119)           (852)
LOSS BEFORE PROVISION FOR INCOME TAXES                          (2,567,072)     (1,241,544)     (3,808,616)
NET LOSS                                                        (2,567,072)     (1,241,544)     (3,808,616)
NET LOSS PER COMMON SHARE - BASIC & DILUTED                          (0.27)          (0.15)          (0.42)
WEIGHTED AVERAGE COMMON SHARES
       OUTSTANDING - BASIC                                       9,596,042        (563,427)      9,032,615


                                       16




<PAGE>

Statement of cash flows for nine months ended September 30, 2004:

                                                                 Previously        Increase
                                                                  Reported        (Decrease)      Restated

CASH FLOW FROM OPERATING ACTIVITIES:
       Net loss                                                 (2,567,072)     (1,241,544)     (3,808,616)
       Adjustment to reconcile net loss to net cash
             Provided by (used in) operating activities:
                  Amortization of debt discount on
                    convertible note payable                       138,719          31,079         169,798
                  Amortization of options issued
                    below market price                             161,466         (17,307)        144,159
                  Depreciation and amortization expense            114,252           1,611         115,863
                  Bad debt allowance                                    --          95,782          95,782
                  Gain on Settlement of Debt                            --        (336,779)       (336,779)
                  Issuance of warrants for services                     --         474,215         474,215
                  Issuance of common stock for payroll                  --         108,710         108,710
                  Issuance of common stock for services            379,245          87,025         466,270
                  Issuance of common stock on
                    conversion of prepaid license fee                   --         125,000         125,000
                  Inventory Obsolesence Reserve                         --         319,149         319,149
       Changes in operating assets and liabilities:
             Accounts receivable                                  (588,104)        252,925        (335,179)
             Inventory                                            (544,942)        (71,427)       (616,369)
             Deposits - inventory                                       --        (260,600)       (260,600)
             Deposits                                             (272,803)        272,803              --
             Prepaid expenses and other current assets             (43,317)        (31,659)        (74,976)
             Accounts payable                                       51,083         221,666         272,749
             Accrued expenses                                      (62,471)        129,810          67,339
             Accrued payroll and related benefits                 (212,002)        (13,061)       (225,063)
             Advances from Customers                               (34,722)       (125,000)       (159,722)
Net cash used in operating activities                           (3,480,668)         22,400      (3,458,268)
CASH FLOW FROM INVESTING ACTIVITIES:
       Payment for property and equipment                          (88,750)            494         (88,256)
       Payment for capitalized product development costs          (268,768)         28,339        (240,429)
Net cash used in investing activities                             (357,517)         28,832        (328,685)
CASH FLOW FROM FINANCING ACTIVITIES:
       Proceeds from issuance of common stock                    3,033,838         (45,116)      2,988,722
       (Payment) of offering costs                                (375,780)         (6,862)       (382,642)
Net cash provided by financing activities                        2,684,926         (51,978)      2,632,948
NET DECREASE IN CASH AND
       CASH EQUIVALENTS                                         (1,153,260)           (745)     (1,154,005)
CASH AND CASH EQUIVALENTS, End of period                             2,910            (745)          2,165
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       Interest paid                                                55,766         (31,614)         24,152
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
       Issuance of common stock for accrued salaries               133,793         (25,083)        108,710
       Issuance of common stock for services                       245,542         220,728         466,270


</TABLE>


NOTE 3 - LOSS PER SHARE

The Company reports loss per share in accordance with SFAS No. 128, "Earnings
per Share." Basic loss per share is computed by dividing loss available to
common shareholders by the weighted average number of common shares available.
Diluted loss per share is computed similar to basic loss per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. The following potential
common shares have been excluded from the computation of diluted net loss per
share for the nine months ended September 30, 2004 and 2003 because the effect
would have been anti-dilutive:


                                       17





<PAGE>
<TABLE>
                                                                           2004           2003
                                                                        ----------     ----------
<S>                                                                      <C>            <C>
              Shares to be issued upon conversion
                of preferred stock                                            --        1,610,018
              Shares to be issued upon conversion
                of convertible notes                                       94,937         517,515
              Stock options issued to employees                            67,647        566,521
              Stock options issued to consultants and others                  --           46,892
              Warrants issued to consultants and finders                  313,271         137,036
              Warrants issued for financing                               687,074         504,653
                                                                        ----------     ----------
                                                                         1,162,929      3,382,635
                                                                        ==========     ==========

</TABLE>


NOTE 4 - ACCOUNTS RECEIVABLE

Accounts Receivable at September 30, 2004 were marked down to net realizable
value, as reflected by an increase in the allowance for doubtful accounts of
$95,782.

Accounts Receivable at September 30, 2004                            $ 467,235
Less:  allowance for doubtful accounts                                 (95,782)
                                                                     ----------
                                                                     $ 371,453
                                                                     ==========
NOTE 5 - INVENTORY

Inventory has been reviewed for obsolescence and stated at lower of cost or
market as of September 30, 2004, determined on a first in first out basis.
Inventory at September 30, 2004 was marked down to its net realizable value, as
reflected by an increase in the obsolescence reserve of $270,400.

Inventory at September 30, 2004                                      $ 846,755
Less: obsolescence reserve                                            (370,400)
                                                                     ----------
                                                                     $ 476,355
                                                                     ==========


NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2004, consists of the following:

                  Computer equipment and related software            $  246,984
                  Office furniture and equipment                         17,926
                  Leasehold improvements                                 84,849
                  Machinery and equipment                               201,676
                                                                      ---------
                                                                        551,435
                  Less accumulated depreciation and amortization       (375,076)
                                                                      ---------
                                                                      $ 176,359
                                                                      =========


                                       18




<PAGE>
<TABLE>
<S> <C>

NOTE 7 - CONCENTRATION OF CASH

The Company considers all liquid investments with an original maturity of three
months or less to be cash equivalents. As of September 30, 2004, the Company had
no cash and cash equivalent balances in financial institutions, which were in
excess of federally insured amounts.

NOTE 8 - DUE TO RELATED PARTIES

Due to related parties consists of amounts advanced to the Company by certain
related parties, specifically its employees and their family members and
directors of the Company.

Due to related parties outstanding at September 30, 2004 consisted of the
following:

Loan payable to the Company's Vice President of Marketing issued on various
dates in 2001-2004, 12% interest
secured by inventory and receivables of the Company, due upon demand.                    $ 50,780

Loan payable to the wife of the President and CEO issued September 14,
2004, 8% interest
unsecured, due upon demand.                                                                31,000

Loan payable to the Company's Vice President of Operations issued September 14,
2004, 8% interest
unsecured, due upon demand.                                                                 2,500

                                                                                         ---------

Total                                                                                    $  84,280
                                                                                         =========


During the three months ended September 30, 2004, we repaid $6,632 of the loan
payable to the Company's Vice President of Marketing. We accrued interest of
$5,316 and repaid interest of $395 on amounts due to related parties during the
nine month period ended September 30, 2004.


                                       19




<PAGE>

NOTE 9 - CONVERTIBLE NOTES PAYABLE

Convertible notes payable outstanding at September 30, 2004 consisted of the
following:

On March 12, 2002, the Company entered into a $150,000 convertible note with Mr.
Scottie Pippen. The note bears interest at 10%, was due on September 9, 2002 and
is convertible into common stock at $1.58 per share. The Company made repeated
attempts to contact Mr. Pippen's representatives to come to a resolution
regarding the disposition of the note. As a result of a lack of communication
from Mr. Pippen's representatives, the note was not converted into common stock
until May 24, 2005. On May 24, 2005, we issued 121,986 shares of common stock
upon conversion of the principal amount of this note plus $42,500 in accrued
interest.

Principal Amount                                                                         $150,000
                                                                                         ========
</TABLE>


NOTE 10 - EQUITY

Preferred Stock of uWink

The Company has authorized 5,000,000 shares of Preferred Stock. The Board of
Directors is authorized to establish, from the authorized shares of Preferred
Stock, one or more classes or series of shares, to designate each such class and
series, and to fix the rights and preferences of each such class and series.
Without limiting the authority of the Board of Directors granted hereby, each
such class or series of Preferred Stock shall have such voting powers (full or
limited or no voting powers), such preferences and relative, participating,
optional or other special rights, and such qualifications, limitations or
restrictions as shall be stated and expressed in the resolution or resolutions
providing for the issue of such class or series of Preferred Stock as may be
adopted from time to time by the Board of Directors prior to the issuance of any
shares thereof. Fully-paid stock of the Company shall not be liable to any
further call or assessment.


                                       20




<PAGE>

Common Stock

During the nine months ended September 30, 2004, the Company:

         o        sold 719,521 shares of common stock for cash in private
                  placement offerings for gross proceeds of $1,439,050. The
                  Company paid $190,866, issued 43,850 shares of the Company's
                  common stock and issued 245,000 warrants to purchase the
                  Company's common stock at an exercise price of $2.00 per share
                  valued at $443,039 in payment to Falcon Capital, an Amsterdam
                  based securities firm, for services related to the sales of
                  the Company's securities. The warrants are immediately
                  exercisable and are exercisable for 5 years. The fair value of
                  the warrants was calculated using the Black Scholes option
                  pricing model using the following assumptions: risk free rate
                  of return of 4%, volatility of 84%; expected life of 5 years
                  and dividend yield of 0%. The fair value of the warrants and
                  the placement agent's commission and expenses were accounted
                  for as cost of raising equity with a corresponding amount
                  debited to additional paid-in capital;

         o        sold 890,992 shares of common stock for gross proceeds of
                  $1,559,124. Each investor also received a warrant to purchase
                  one share of our common stock at an exercise price of $3.50
                  per share for every share of stock purchased in the offering.
                  The warrants are immediately exercisable, and will remain
                  exercisable for five years. Falcon Capital acted as a
                  placement agent for this offering and received a commission of
                  $191,777 for services related to the sales of the Company's
                  securities. In addition, the Company issued 85,000 warrants to
                  purchase one share of our common stock to Falcon Capital at an
                  exercise price of $1.75 per share valued at $198,013 as
                  compensation for arranging this transaction. These warrants
                  were issued on October 1, 2004 and are reflected as warrants
                  to be issued on the September 30, 2004 balance sheet. The
                  warrants are immediately exercisable and are exercisable for 5
                  years. The fair value of the warrants was calculated using the
                  Black Scholes option pricing model using the following
                  assumptions: risk free rate of return of 5%, volatility of
                  84%; expected life of 5 years and dividend yield of 0%. The
                  fair value of the warrants and the placement agent's
                  commission and expenses were accounted for as cost of raising
                  equity with a corresponding amount debited to additional
                  paid-in capital;

         o        issued 48,584 shares of common stock in exchange for the
                  settlement of accrued payroll of $108,710;

         o        issued 30,000 shares of common stock to CCRI, Inc. in exchange
                  for investor relation services valued at $150,000, based on
                  the stock price on the date of the agreement;

         o        issued 5,000 shares of common stock to Jaffoni & Collins for
                  public relations services valued at $10,000, based on the
                  stock price on the date of the agreement;

         o        issued 323,288 shares valued at $254,760 to Scientific Games
                  Corporation in connection with the conversion by Scientific
                  Games of a $125,000 convertible note and a $125,000 prepaid
                  licensing fee and the exercise by Scientific Games of warrants
                  to purchase 158,422 shares of common stock at $0.03 per share.
                  317,299 of these shares were reflected as shares to be issued
                  on the balance sheet at June 30, 2004;

         o        issued 50,000 shares of its common stock to New Capital
                  Advisors for financial consulting services rendered on behalf
                  of the Company valued at $125,000, based on the stock price on
                  the date of the agreement;

         o        issued 10,000 shares of common stock to Mr. Gary Ramirez in
                  exchange for the services of an employee valued at $25,000,
                  based on the stock price on the date of the agreement; and

         o        issued 10,000 shares of common stock to Mr. Nimish Patel in
                  exchange for serving on our Board of Directors valued at
                  $25,000, based on the stock price on the date of the
                  agreement.


                                       21



<PAGE>

Shares to be Issued

At September 30, 2004, shares to be issued consisted of:

         o        21,039 shares valued at $21 still to be issued to original
                  uWink-DE (now uWink California) shareholders in connection
                  with the acquisition of uWink-DE (now uWink California).

         o        28,685 shares valued at $51,451 to be issued in connection
                  with the Company's capital raising transactions. These shares
                  remained unissued at September 30, 2004 for ministerial
                  reasons.

         o        75,000 shares valued at $131,250 to be issued to Falcon
                  Capital for investor relations services. These shares remained
                  unissued at September 30, 2004 for ministerial reasons.

Stock Warrants

The Company has issued warrants to consultants and finders for services rendered
and to investors in connection with raising capital.

The following table summarizes the warrants outstanding as of September 30,
2004.

                                                                  Weighted-
                                                                   Average
                                                                   Exercise
                                                     Warrants       Price
                                                    ---------      -------
Balance, December 31, 2003                           785,160       $3.46
Granted                                              474,211       $3.25
Exercised                                            158,422       $0.03
Cancelled                                            100,601       $6.50
Balance September 30, 2004                         1,000,348       $3.60
Exercisable September 30, 2004                     1,000,348       $3.60


During the nine months ended September 30, 2004:

o        We issued 150,000 immediately exercisable 5-year warrants to CCRI, Inc.
         at exercise prices ranging from $5-$9 for financial consulting
         services rendered. The Company recognized expense equal to the fair
         value of the warrants of $474,216. The fair value of the warrants was
         calculated using the Black Scholes option pricing model using the
         following assumptions: risk free rate of return of 4%, volatility of
         84%; expected life of 5 years and dividend yield of 0%.

o        We issued 245,000 warrants to purchase the Company's common stock at an
         exercise price of $2.00 per share valued at $443,039 to Falcon Capital
         in payment for services related to the sales of the Company's
         securities. The warrants are immediately exercisable and are
         exercisable for 5 years. The fair value of the warrants was calculated
         using the Black Scholes option pricing model using the following
         assumptions: risk free rate of return of 4%, volatility of 84%;
         expected life of 5 years and dividend yield of 0%. The fair value of
         the warrants was accounted for as cost of raising equity with a
         corresponding amount debited to additional paid-in capital.


                                       22



<PAGE>

o        We issued 79,211 warrants to purchase the Company's common stock at an
         exercise price of $0.03 to Scientific Games in connection with the
         conversion by Scientific Games of a $125,000 prepaid licensing fee into
         common stock. The Company recognized expense of $125,000 in connection
         with the issuance of the 79,211 warrants to Scientific Games.
         Scientific Games exercised these warrants on May 19, 2004. The shares
         relating to these warrants were issued on August 11, 2004 and were
         reflected as shares to be issued on the balance sheet at June 30, 2004.

Subsequent warrant issuances and warrants to be issued:

o        On September 29, 2004, we completed the sale of 890,992 shares of
         common stock for gross proceeds of $1,559,124. Each investor also
         received a warrant to purchase one share of our common stock at an
         exercise price of $3.50 per share for every share of stock purchased in
         the offering. The warrants were issued on October 1, 2004, are
         immediately exercisable, and will remain exercisable for five years. In
         addition, the Company issued 85,000 warrants to purchase one share of
         our common stock to Falcon Capital at an exercise price of $1.75 per
         share valued at $198,013 as compensation for arranging this
         transaction. These warrants were issued on October 1, 2004 and are
         reflected as warrants to be issued on the September 30, 2004 balance
         sheet. The warrants are immediately exercisable and are exercisable for
         5 years. The fair value of the warrants was calculated using the Black
         Scholes option pricing model using the following assumptions: risk free
         rate of return of 5%, volatility of 84%; expected life of 5 years and
         dividend yield of 0%. The fair value of the warrants was accounted for
         as a cost of raising equity with a corresponding amount debited to
         additional paid-in capital.

NOTE 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104 supersedes
SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary
purpose is to rescind accounting guidance contained in SAB 101 related to
multiple element revenue arrangements, superseded as a result of the issuance of
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.

In March 2004, the Financial Accounting Standards Board (FASB) approved the
consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004, while the disclosure requirements for certain investments are
effective for annual periods ending after December 15, 2003, and for other
investments such disclosure requirements are effective for annual periods ending
after June 15, 2004. The Company has evaluated the impact of the adoption of
EITF 03-1 and does not believe the impact will be significant to the Company's
overall results of operations or financial position.


                                       23



<PAGE>

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.

In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006.

In March 2006, FASB issued SFAS 156 "Accounting for Servicing of Financial
Assets" this Statement amends FASB Statement No. 140, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement:

    1.   Requires an entity to recognize a servicing asset or servicing
         liability each time it undertakes an obligation to service a financial
         asset by entering into a servicing contract.

    2.   Requires all separately recognized servicing assets and servicing
         liabilities to be initially measured at fair value, if practicable.

    3.   Permits an entity to choose "Amortization method" or "Fair value
         measurement method" for each class of separately recognized servicing
         assets and servicing liabilities.

    4.   At its initial adoption, permits a one-time reclassification of
         available-for-sale securities to trading securities by entities with
         recognized servicing rights, without calling into question the
         treatment of other available-for-sale securities under Statement 115,
         provided that the available-for-sale securities are identified in some
         manner as offsetting the entity's exposure to changes in fair value of
         servicing assets or servicing liabilities that a servicer elects to
         subsequently measure at fair value.

    5.   Requires separate presentation of servicing assets and servicing
         liabilities subsequently measured at fair value in the statement of
         financial position and additional disclosures for all separately
         recognized servicing assets and servicing liabilities.

This Statement is effective as of the beginning of the Company's first fiscal
year that begins after September 15, 2006. Management believes that this
statement will not have a significant impact on the financial statements.

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material effect on its consolidated financial position or results of operations.


                                       24



<PAGE>

The Company believes that the adoption of these standards will have no material
impact on its financial statements.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Other Litigation

In the ordinary course of business, the Company is generally subject to claims,
complaints, and legal actions. As of September 30, 2004, management believes
that the Company is not a party to any action which would have a material impact
on its financial condition, operations, or cash flows.

Leases

Our executive offices are located at 5443 Beethoven Street, Los Angeles,
California 90066 and consist of 10,000 square feet of office space. We lease
this space pursuant to a lease expiring on January 1, 2005 at the rate of
$10,000 per month.

NOTE 13 - SUBSEQUENT EVENTS

The following sets forth the significant capital raising transactions and equity
issuances engaged in by the Company following September 30, 2004.

On October 1, 2004, the Company issued 75,000 shares of common stock valued at
$131,250 to Falcon Capital for investor relations services provided to the
Company. These shares are reflected as shares to be issued on the balance sheet
at September 30, 2004.

On October 1, 2004, the Company issued 890,988 immediately exercisable, 5-year
warrants to purchase one share of its common stock at an exercise price of $3.50
per share to investors in its private placement offering conducted from May to
September 2004.

On October 1, 2004, the Company issued 85,000 warrants to purchase one share of
its common stock to Falcon Capital at an exercise price of $1.75 per share
valued at $198,013 as compensation for arranging a private placement offering
conducted from May to September 2004. The warrants are immediately exercisable
and are exercisable for 5 years. These warrants are reflected as warrants to be
issued on the September 30, 2004 balance sheet. The fair value of the warrants
was calculated using the Black Scholes option pricing model using the following
assumptions: risk free rate of return of 5%, volatility of 84%; expected life of
5 years and dividend yield of 0%. The fair value of the warrants and the
placement agent's commission and expenses were accounted for as cost of raising
equity with a corresponding amount debited to additional paid-in capital.

On January 1, 2005, the Company issued 50,000 shares of common stock to Mr. Paul
Abramowitz in exchange for financial consulting services valued at $127,500,
based on the stock price on the date of the agreement.

On February 22, 2005, the Company issued 175,000 shares of common stock to Tom
Hemingway in exchange for business advisory services valued at $194,444, based
on the stock price on the date of the agreement.


                                       25



<PAGE>

On March 8, 2005, the Company issued 400,000 shares of common stock to Redwood
Consultants, Inc. in exchange for investor relations services valued at
$444,000, based on the stock price on the date of the agreement.

On March 14, 2005, the Company sold 100,000 shares of common stock for cash to
an investor in a private placement offering for gross proceeds of $75,000.

On May 15, 2005, the Company sold 533,458 shares of common stock for cash to 6
investors for $293,402. In addition, we issued these investors warrants to
purchase 533,458 shares of our common stock at $1.50 per share. These warrants
are immediately exercisable and expire on May 15, 2010.

On May 25, 2005, the Company issued 121,986 shares of common stock to Mr.
Scottie Pippen upon conversion of $150,000 in principal and $42,500 in accrued
interest outstanding on a convertible note issued in 2002.

On January 10, 2006, the Company issued 500,012 shares of common stock valued at
$150,003 to 4 investors on conversion of $125,003 principal amount of
convertible notes plus $25,000 of accrued interest.

On March 3, 2006, the Company sold 5,000,000 shares of common stock to 22
investors for gross proceeds of $1,500,000. The investors in the transaction
also received immediately exercisable, three-year warrants to purchase an
aggregate of 2,500,000 shares of common stock priced at $0.345 per share.
Merriman Curhan Ford & Co. acted as sole placement agent for this transaction.
We paid to Merriman Curhan Ford & Co, as placement agent, a commission of
$75,000 (equal to 5% of the aggregate offering price) plus $5,000 in expenses.
Merriman also received an additional 450,000 immediately exercisable, three-year
warrants to purchase common stock at $0.345 per share as part of this fee
arrangement. The fair value of the warrants was calculated using the Black
Scholes option pricing model using the following assumptions: risk free rate of
return of 7.5%, volatility of 109%, expected life of 3 years and dividend yield
of 0%. The fair value of the warrants and the placement agent's commission and
expenses were accounted for as cost of raising equity with a corresponding
amount debited to additional paid-in capital.

On March 31, 2006, the Company issued 115,000 shares of common stock, valued at
$65,550 based on the closing price of the common stock on the date of the
agreement, to Ms. Alissa Bushnell, daughter of our CEO Nolan Bushnell, in
payment for public relations services provided to the Company during 2005.

On March 31, 2006, the Company issued 50,000 shares of common stock valued at
$21,000, based on the closing price of the common stock on the date of the
agreement, to the holder of a $120,000 convertible note in consideration for the
holder extending the maturity date of the note from November 2005 to March 2006.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

GENERAL

The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related footnotes for the year ended
December 31, 2003 included in our Annual Report on Form 10-KSB. The discussion
of results, causes and trends should not be construed to imply any conclusion
that such results or trends will necessarily continue in the future.


                                       26



<PAGE>

OVERVIEW

uWink, Inc. ("uWink", "we", "us", or the "Company") is a digital entertainment
company, based in Los Angeles, California, that designs and develops interactive
entertainment software and platforms for restaurants, bars, and mobile devices.

We design, develop and market entertainment and gaming software. Much of our
software is bundled on our proprietary credit card- and cash-operated game
terminals and amusement vending machines. We derive revenue from the sale of our
game terminals, amusement vending machines and prizes that the machines
dispense. We generate recurring revenue from ongoing software upgrades,
tournament network services and reorders of vending machine products. We realize
additional revenue from the licensing of our software to lottery, gaming and
electronics manufacturers. We sell our products in the United States and some
international markets with the majority of our sales being generated in Asia.
Our core product line includes: Snap, a network-capable countertop game terminal
offering 60 proprietary short-form video games; and Bear Shop, a vending machine
utilizing interactive and entertaining software to dispense customized plush
teddy bear toys and accessories. We anticipate the use of the Bear Shop vending
technology will be utilized for the sale of a range of other
products. We believe that we have an experienced product development team with
diverse skills, allowing us to develop new software programs on a common
platform as well as perform the majority of our physical prototyping in-house.

Our primary customers are established domestic and international distributors of
coin-operated amusement products. Sales to distributors accounted for more than
95% of our sales for the nine months ended September 30, 2004. We also sell to
the owners and operators of establishments who place our products into their own
businesses. Our end users are individuals who play games and make impulse
purchases of novelty items in public amusement places.

We were incorporated under the laws of the State of Utah on October 14, 1982.
Prior to the reverse acquisition described below, our corporate name was
Prologue. We had not generated significant revenue and were considered a
development stage company as defined in Statement of Financial Accounting
Standards No. 7. Pursuant to a Securities Purchase Agreement and Plan of
Reorganization dated November 21, 2003 among Prologue, uWink, California Inc., a
Delaware corporation ("uWink California") and its stockholders, Prologue has
acquired 99.5% of the issued and outstanding shares of uWink California's
capital stock. We expect to acquire the remaining uWink California shares
outstanding in subsequent closings. Prologue issued one (1) share of its common
stock for every 3.15611 shares of uWink California capital stock. Since the
stockholders of uWink California acquired approximately 84% of the issued and
outstanding shares of Prologue and the uWink California management team and
board of directors became the management team and board of directors of
Prologue, according to FASB Statement No. 141 - "Business Combinations," this
acquisition has been treated as a recapitalization for accounting purposes, in a
manner similar to reverse acquisition accounting. In accounting for this
transaction:

         o        uWink California is deemed to be the purchaser and surviving
                  company for accounting purposes. Accordingly, its net assets
                  are included in the balance sheet at their historical book
                  values and the results of operations of uWink California have
                  been presented for the comparative prior period;

         o        Control of the net assets and business of Prologue was
                  acquired effective December 4, 2003. This transaction has been
                  accounted for as a purchase of the assets and liabilities of
                  Prologue by uWink California. The historical cost of the net
                  liabilities assumed was $750.


                                       27



<PAGE>

As a result of the transaction described above we changed our name from Prologue
to uWink, Inc.

BASIS OF PRESENTATION

The accompanying consolidated financial statements, included elsewhere in this
Quarterly Report on Form 10-QSB, have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation as a going concern. We have incurred a net loss of
$3,808,616 for the nine months ended September 30 2004, and as of September 30,
2004, we had an accumulated deficit of $20,580,679. These conditions raise
substantial doubt as to our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.

RESULTS OF OPERATIONS

Nine months Ended September 30, 2004 Compared With Nine months Ended September
30, 2003.

Net sales for the nine months ended September 30, 2004 increased by $1,062,325
(2,549%) from $41,671 for the nine months ended September 30, 2003 to $1,103,997
for the nine months ended September 30, 2004. For the nine months ended
September 30, 2003 the Company's operations were very limited. For this period,
there were approximately 5 employees and less than $30,737 in revenue generated
by product sales. Upon completion of the reverse merger previously discussed and
the related sale of the Company's equity securities, the Company was effectively
recapitalized and restarted. In January 2004, we commenced sales of the Snap!
unit and sold $315,000 of this product in the first 60 days after the product
launch. Based on the initial response from the marketplace, we suspended sales
to reconfigure the product. We reintroduced the Snap! product into the
marketplace in June 2004 and recorded $200,000 in orders for the month then
ended. For nine months ended September 30, 2004, we generated more than $750,000
in revenue from the sale of 375 Snap! units. As of September 30, 2004, the
Company has an order backlog for 305 Snap! units with a value of $620,000. In
July 2004, we introduced the Bear Shop, a vending machine that allows purchasers
to design their own "toy bear" characters with unique colors, clothing, and
accessories. For the nine months ended September 30, 2004, we sold approximately
$340,000 in Bear Shop units and related plush reorders. As of September 30,
2004, the Company has an order backlog for 265 Bear Shop units
with a value of $1,600,000. Licensing revenue for the first 9 months of 2004
amounted to $34,722 or approximately 3% of total revenue.

Cost of sales for the nine months ended September 30, 2004 increased by $826,599
(14,550%) from $5,681 for the nine months ended September 30, 2003 to $832,280
for the nine months ended September 30, 2004. Cost of sales activity during 2003
reflected the very low level of product sales for that period. In 2004,
approximately $275,000 of the increase in cost of sales is attributable to the
cost associated with the seeding of the marketplace by issuing Snap! and Bear
Shop units for evaluation by distributors with the anticipation of the eventual
conversion into sales. Additionally, $358,000 of the increase was attributable
to the increase in sales of the Snap! product. As hardware products with
embedded software, Snap! and Bear Shop are constructed with a variety of
hardware components, each of which incurs a cost on a per-unit basis. As a
result, as we increase the number of units sold, we correspondingly increase our
cost of sales.

Our gross profit percentage was 86.3% for the nine months ended September 30,
2003 compared to 24.6% for the nine months ended September 30, 2004. As hardware
products with embedded software, the cost of sales associated with sales of
SNAP! and Bear Shop generated in 2004 are significantly higher than the sale
of software alone, which was the primary source of sales for the nine months
ended September 30, 2003.


                                       28



<PAGE>

Selling, general and administrative expenses for the nine months ended September
30, 2004 increased by $3,332,308 (731%) from $455,783 for the nine months ended
September 30, 2003 to $3,788,091 for the nine months ended September 30, 2004.
Approximately $1,275,000 of the increase is attributable to the cost associated
with the hiring of additional personnel; $250,000 of the increase is
attributable to marketing, advertising and trade show expenses; and $1,200,000
of the increase is attributable to audit, legal, and consulting expenses, and
other expenses resulting from public reporting requirements. We anticipate that
as sales increase we will continue to hire additional personnel in sales,
marketing and engineering to support the organization.

Research and development expense for the nine months ended September 30, 2004
increased by $176,269 (153%) from $115,120 for the nine months ended September
30, 2003 to $291,389 for the nine months ended September 30, 2004. The increase
in the nine months ended September 30, 2004 was principally due to the ongoing
development efforts on the Bear Shop product and continued enhancement of the
Snap! product.

Gain on the settlement of debt for the nine months ended September 30, 2004
increased by $288,382 (595%) from $48,396 for the nine months ended September
30, 2003 to $336,779 for the nine months ended September 30, 2004. During this
period, we were able to settle certain trade payables for amounts less than
originally invoiced relating to over-billed amounts or amounts billed in error.
In particular, we settled a trade payable to MCI Worldcom at a gain of $127,023
relating to inflated network usage invoices. We also settled a legal bill from
outside counsel at a gain of $15,649. We also recorded a $137,500 gain on the
settlement of a $137,500 payable to DeAmertek Corporation upon receiving written
acknowledgment from DeAmertek that the Company had no obligation to DeAmertek
and recorded a $34,395 gain on the settlement of a trade payable to our former
auditors Stonefield Josephson relating to accounting services.

Amortization of debt discounts for the nine months ended September 30, 2004
increased by $122,056 (255%) from $47,742 for the nine months ended September
30,
2003 to $169,798 for the nine months ended September 30, 2004. In the second
quarter of 2003, we issued a convertible note payable in the amount of $125,000
that included detachable warrants to purchase shares of our common stock and
also a conversion feature. On May 19, 2004, the holder of the note elected to
convert this promissory note into common stock and also to convert a $125,000
prepaid license fee into common stock and warrants, as described below. Due to
these conversions, we recorded $138,719 in beneficial conversion feature
discount expense in addition to the $31,079 of debt discount amortization
recorded for the first three months of 2004.

Interest expense for the nine months ended September 30, 2004 decreased by
$69,812 (74%) from $93,964 for the nine months ended September 30, 2003 to
$24,152 for the nine months ended September 30, 2004. The decrease in interest
expense reflects the conversion of debt into common stock during 2004.

As a result, net loss for the nine months ended September 30, 2004 increased by
$3,228,826 (556%) from a net loss of $579,789 for the nine months ended
September 30, 2003 to a net loss of $3,808,616 for the nine months ended
September 30, 2004.

LIQUIDITY AND CASH RESOURCES

As of September 30, 2004, our cash position was $2,165 and we had working
capital of $69,137. Working capital represents our current assets minus our
current liabilities and is related to our ability to pay short term debt as it
becomes due.


                                       29



<PAGE>

During the first three quarters of 2004 we sold 1,610,513 shares of common stock
for cash in private placement offerings for gross proceeds of $2,988,722. We
have used the net proceeds (after commissions and professional fees) of the
offerings to complete the development of our products, restructure and improve
our balance sheet, pay off certain accounts payable and accrued liabilities,
purchase game terminal inventory and for working capital.

Our debt outstanding at September 30, 2004 consists of the following:

A $50,780 loan payable to the Company's Vice President of Marketing issued on
various dates in 2001-2004. The loan bears interest at 12%, is secured by
inventory and receivables of the Company, and is due upon demand.

A $31,000 loan payable to the wife of the President and CEO issued September 14,
2004. The loan bears interest at 8% and is due upon demand.

A $2,500 loan payable to the Company's Vice President of Operations issued
September 14, 2004. The loan bears interest at 8% and is due upon demand.

A $150,000 convertible note. We entered into this note on March 12, 2002 with
Mr. Scottie Pippen. The note bears interest at 10%, was due on September 9, 2002
and is convertible into common stock at $1.58 per share. The Company made
repeated attempts to contact Mr. Pippen's representatives to come to a
resolution regarding the disposition of the note. As a result of a lack of
communication from Mr. Pippen's representatives, the note was not converted into
common stock until May 24, 2005. On May 24, 2005, we issued 121,986 shares of
common stock upon conversion of the principal amount of this note plus $42,500
in accrued interest.

On May 19, 2004, we converted a $125,000 convertible note due to Scientific
Games into 79,211 shares of common stock. These shares were reflected as shares
to be issued on the June 30, 2004 balance sheet and were issued on August 11,
2004. We also subsequently issued an additional 5,988 shares to Scientific Games
relating to $10,479 of accrued interest on this note. In addition, on May 19,
2004, Scientific Games exercised warrants to purchase 79,211 share of common
stock at $0.03 per share. The shares relating to these warrants were issued on
August 11, 2004 and were reflected as shares to be issued on the balance sheet
at June 30, 2004.

On May 14, 2003, Scientific Games made a $125,000 advance against future
licensing fees to the Company. The advance was recorded as advances from
customers. On May 19, 2004, Scientific Games converted the prepaid license fee
into a convertible promissory note in the amount of $125,000. This note is
convertible at the option of the holder into the Company's common stock at $1.58
per share and, upon conversion, the holder was due to receive 79,211 warrants to
purchase common stock at $0.03 per share. Scientific Games immediately converted
this note into 79,211 shares of common stock. The Company recognized expense of
$125,000 for the three month period ended June 30, 2004 in connection with the
issuance of the warrants due to Scientific Games upon conversion of this note.
Scientific Games also exercised these warrants on May 19, 2004. The shares of
common stock issuable upon conversion of the note and the exercise of the
warrants were issued on August 11, 2004 and were reflected as shares to be
issued on the June 30, 2004 balance sheet.

We will need additional working capital to fund our expanding operations over
the next 12 months. We believe that we will need at least an additional $2.5
million of working capital to fund inventory and accounts receivable resulting
from the projected demand for our Snap! and Bear Shop products and, if
necessary, to finance future losses from operations. We expect to use
approximately $1.7 million of the additional $2.5 million of working capital to
finance the production of our Bear Shop and Snap! units. We intend to use the
remaining net proceeds to finance research and development activities, sales and
marketing activities, general and administrative matters and on capital
expenditures. We have not yet allocated specific amounts for these purposes. We
plan to obtain the additional working capital through the private placement sale
of our equity securities. As of the date of this report, there are no
commitments for the sale of the Company's securities nor there be any assurance
that such funds will be available on commercially reasonable terms. Should we be
unable to raise the required additional funds, our ability to finance our
continued growth will be materially adversely affected.

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<PAGE>

CASH POSITION AND USES OF CASH

Our cash and cash equivalents position as of September 30, 2004 was $2,165.

During the nine months ended September 30, 2004, we used $3,458,268 in cash in
our operating activities, as compared to using $848,858 for the nine months
ended September 30, 2003. The change in the use of cash from our operating
activities is primarily due to a $3,228,827 increase in our net loss for the
first nine months of 2004 as compared to the first nine months of 2003, plus an
increased cash investment in inventory, inventory deposits and accounts
receivable of an aggregate of $1,228,565 in the first nine months of 2004 as
compared to the first nine months of 2003, partially offset by the use of common
stock and warrants to pay for $1,049,195 of services in 2004 and a $754,377
increase in cash generated from accrued expenses and accounts payable in the
first nine months of 2004 as compared to the first nine months of 2003.

During the nine months ended September 30, 2004, we used $328,685 in cash in
investing activities, as compared to $80,299 for the nine months ended September
30, 2003. The increase is principally the result of payment for capitalized
product development costs and new computer equipment purchases to both replace
aging equipment and to support the increase in the Company's headcount. The
Company will continue to make capital purchases to support its ongoing
operations.

During the nine months ended September 30, 2004, our financing activities
provided cash in the amount of $2,632,948 as compared to providing $950,042 for
the nine
months ended September 30, 2003. During the first three quarters of 2004, we
completed private placements of equity securities for gross proceeds of
$2,988,722 ($2,606,080 net of offering costs). During the nine months ended
September 30, 2003, we received gross proceeds of $1,307,298 from the private
sales of our equity securities; made net repayment of $5,000 of related party
debt; and repaid $352,256 of debt.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

ESTIMATES - Our discussion and analysis of our consolidated financial condition
and results of operations are based upon our consolidated financials statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to allowance for doubtful
accounts, inventory reserves, impairment of long-lived assets and intangibles,
and value of our stock and options/warrants issued for services. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.

Software Development Costs

Software development costs related to computer games and network and terminal
operating systems developed by the Company are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of software development costs begins upon the establishment of
technological feasibility and is discontinued when the product is available for
sale. When the software is a component part of a product, capitalization begins
when the product reaches technological feasibility. The establishment of

                                       31



<PAGE>


technological feasibility and the ongoing assessment for recoverability of
capitalized software development costs require considerable judgment by
management with respect to the completion of all planning, designing, coding and
testing activities necessary to establish that the product can be produced to
meet its design specifications and certain external factors including, but not
limited to, anticipated future gross revenues, estimated economic life, and
changes in software and hardware technologies. Capitalized software development
costs are comprised primarily of salaries and direct payroll related costs and
the purchase of existing software to be used in the Company's products.

Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products (not to exceed three years). Management periodically
compares estimated net realizable value by product with the amount of software
development costs capitalized for that product to ensure the amount capitalized
is not in excess of the amount to be recovered through revenues. Any such excess
of capitalized software development costs to expected net realizable value is
expensed at that time.

Revenue Recognition

The Company recognizes revenue related to software licenses in compliance with
the American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 97-2, "Software Revenue Recognition." Revenue is recognized when
the Company delivers its touch screen pay-for-play game terminals to its
customer and the Company believes that persuasive evidence of an arrangement
exits and the fees are fixed or determinable. Included with the purchase of the
touch screen terminals are licenses to use the games loaded on the terminals.
The Company delivers the requested terminals for a fixed price either under
agreements with customers or pursuant to purchase orders received from
customers.

The Company does not have any contractual obligations to provide post sale
support of its products. The Company does provide such support on a case by case
basis and the costs of providing such support are expensed as incurred.

FORWARD-LOOKING STATEMENTS

In this report we make a number of statements, referred to as "FORWARD-LOOKING
STATEMENTS", which are intended to convey our expectations or predictions
regarding the occurrence of possible future events or the existence of trends
and factors that may impact our future plans and operating results. These
forward-looking statements are derived, in part, from various assumptions and
analyses we have made in the context of our current business plan and
information currently available to us and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe to be appropriate in the
circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:


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<PAGE>

         o        whether or not markets for our products and services develop
                  and, if they do develop, the pace at which they develop;

         o        our ability to attract the qualified personnel to implement
                  our growth strategies;

         o        the accuracy of our estimates and projections;

         o        our ability to fund our short-term and long-term financing
                  needs;

         o        changes in our business plan and corporate strategies; and

         o        other risks and uncertainties discussed in greater detail
                  under "Risk Factors" in our Annual Report on Form 10-KSB for
                  the year ended December 31, 2003.

Each forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this report as well as other pubic reports filed with
the United States Securities and Exchange Commission (the "SEC"). You should not
place undue reliance on any forward-looking statement as a prediction of actual
results or developments. We are not obligated to update or revise any
forward-looking statement contained in this report to reflect new events or
circumstances unless and to the extent required by applicable law.


ITEM 3.    CONTROLS AND PROCEDURES

Under the supervision and with the participation of its senior management,
including the Chief Executive Officer, the Company conducted an evaluation of
the effectiveness of the design and operation of its disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
as of the end of the period covered by this report (the "Evaluation Date").
Based on this evaluation, the Company's CEO concluded as of the Evaluation Date
that certain of the Company's disclosure controls and procedures were not
effective, as evidenced by the following failures:

Failure to timely file the financial statements and proforma financial
information in connection with our acquisition of our wholly owned subsidiary
uWink California. This filing was due on February 19, 2004 and was not made
until May 18, 2004.

As set forth in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2005 and our Current Report on Form 8-K/A filed on May 30, 2006,
during a re-audit of our 2004 financial results we discovered a number of
accounting errors that required the restatement of our financial statements for
the fiscal year ended December 31, 2004.

Changes in Internal Control Over Financial Reporting

The Company intends to address the ineffective controls and procedures, and to
take appropriate action to correct the deficiencies identified. The Board of
Directors is performing oversight of the implementation of enhancements and
improvements to its internal controls.

Limitations on Controls

Management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent or detect all error and
fraud. Any control system, no matter how well designed and operated, is based
upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls
can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected.


                                       33



<PAGE>

PART II.   OTHER INFORMATION


ITEM 2.  CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
         SECURITIES

During the three months ended September 30, 2004, we sold or issued unregistered
shares of our securities in the following transactions:

From July 6, 2004 to September 29, 2004, we completed the sale of 709,057 shares
of common stock for gross proceeds of $1,240,849 to 32 individual investors.
Each investor also received a warrant to purchase one share of our common stock
at an exercise price of $3.50 per share for every share of stock purchased in
the offering. The warrants are immediately exercisable, and will remain
exercisable for five years. Falcon Capital acted as a placement agent for this
offering and received a commission of $74,187 for services related to the sales
of the Company's securities. In addition, the Company issued 85,000 warrants to
purchase one share of our common stock to Falcon Capital at an exercise price of
$1.75 per share valued at $198,013 as compensation for arranging this
transaction. These warrants were issued on October 1, 2004 and are reflected as
warrants to be issued on the September 30, 2004 balance sheet. The warrants are
immediately exercisable and are exercisable for 5 years. The fair value of the
warrants was calculated using the Black Scholes option pricing model using the
following assumptions: risk free rate of return of 5%, volatility of 84%;
expected life of 5 years and dividend yield of 0%. The fair value of the
warrants and the placement agent's commission and expenses were accounted for as
cost of raising equity with a corresponding amount debited to additional paid-in
capital. The offer and sale of the common stock and warrants to the investors
was exempt from the registration requirements of the Securities Act insofar as
these issuances were made only to persons who are not "U.S. Persons" as defined
in Regulation S and were not sold in the United States. The issuance to Falcon
Capital was made pursuant to the exemption from registration provided by Section
4(2) of the Securities Act.

On July 1, 2004, we issued 10,000 shares of common stock to Mr. Nimish Patel in
exchange for serving on our Board of Directors valued at $25,000. This issuance
was made pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act.

On July 19, 2004, we issued 10,000 shares of common stock to Mr. Gary Ramirez in
exchange for the services of an employee valued at $25,000. This issuance was
made pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act.

On July 19, 2004, we issued 50,000 shares of its common stock valued at $125,000
to New Capital Advisors for financial consulting services rendered on behalf of
the Company. This issuance was made pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act.

On August 11, 2004, we issued 323,288 shares valued at $254,760 to Scientific
Games Corporation in connection with the conversion by Scientific Games on May
19, 2004 of a $125,000 convertible note and a $125,000 prepaid licensing fee and
the exercise by Scientific Games on May 19, 2004 of warrants to purchase 158,650
shares of common stock at $0.03 per share. 317,299 of these shares were
reflected as shares to be issued on the balance sheet at June 30, 2004. These
issuances were made only to "accredited investors" pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D.


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<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

       REGULATION
       S-B NUMBER                   EXHIBIT

         31.1     Rule 13a-14(a) Certification of Chief Executive Officer*

         31.2     Rule 13a-14(a) Certification of Chief Financial Officer*

         32.1     Certification of Chief Executive Officer and Chief Financial
                  Officer pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

         32.2     Certification of Chief Financial Officer and Chief Accounting
                  Officer pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
*Filed herewith


(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter for which this report is
filed.



                                   SIGNATURES

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

                                                  UWINK, INC.


November 29, 2006                                  By:  /s/ NOLAN K. BUSHNELL
                                                       ------------------------
                                                       Nolan K. Bushnell
                                                       Chief Executive Officer


                                                   By: /s/ PETER F. WILKNISS
                                                       ------------------------
                                                       Peter F. Wilkniss
                                                       Chief Financial Officer
                                                       Chief Accounting Officer