<PAGE>

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

                                  FORM 10-QSB/A
                                 Amendment No. 1
(Mark One)

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

                FOR THE QUARTERLY PERIOD ENDED June 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 [ ]

The number of shares of common stock outstanding as of July 10, 2006 was
18,608,086.

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 June 30, 2004 (unaudited)         3

           Consolidated Statements of Operations for the three
           and six months ended June 30, 2004 and 2003 (unaudited)            4

           Consolidated Statements of Cash Flows for the six months
           ended June 30, 2004 and 2003 (unaudited)                           5

           Notes to Consolidated Financial Statements (unaudited)             6

Item 2.    Management's Discussion and Analysis or Plan of Operations        31

Item 3.    Controls and Procedures                                           38

PART II.   OTHER INFORMATION

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds       39

Item 6.    Exhibits and Reports on Form 8-K                                  40

SIGNATURES                                                                   41


                                        1

<PAGE>

EXPLANATORY NOTE

uWink, Inc. (referred to in this discussion as "we", "us" or "our") is amending
its Quarterly Report on Form 10-QSB for the period ended June 30, 2004 (the
"Original Report") for the purpose of correcting certain errors in the financial
statements.

This Quarterly Report on Form 10-QSB/A for the three and six months ended June
30, 2004 amends and restates 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.


                                       2

<PAGE>

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

<TABLE>
<S>     <C>
                               UWINK, INC. AND SUBSIDIARY
                               CONSOLIDATED BALANCE SHEET
                                      (UNAUDITED)


                                                                             June 30,
                                                                               2004
                                                                          -------------
                                                                            (Restated)

                                ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                            $     208,419
     Account receivable, net of allowance for doubtful accounts of $0           220,453
     Inventory, net of obsolescence reserve of $100,000                         448,089
     Deposits - inventory                                                       237,400
     Prepaid expenses and other current assets                                   68,673
                                                                          -------------
      TOTAL CURRENT ASSETS                                                    1,183,035
                                                                          -------------

PROPERTY AND EQUIPMENT, net of accumulated
      depreciation of $357,638                                                  182,727
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of
     accumulated amortization of $774,244                                         6,517
                                                                          -------------
                                                                          $   1,372,279
                                                                          =============


                 LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                                     $     750,501
     Accrued expenses                                                           330,992
     Accrued payroll and related benefits                                        56,424
     Due to related parties                                                      57,412
     Convertible note payable                                                   150,000
                                                                          -------------
      TOTAL CURRENT LIABILITIES                                               1,345,329

STOCKHOLDERS' EQUITY
     Common stock, $0.001 par value; 50,000,000 shares
       authorized; 9,479,387 shares issued and outstanding                        9,478
     Additional paid-in capital                                              19,363,987
     Accumulated deficit                                                    (19,616,899)
     Shares to be issued                                                        270,384
                                                                          -------------
      TOTAL STOCKHOLDERS' EQUITY                                                 26,950
                                                                          -------------
                                                                          $   1,372,279
                                                                          =============


                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                           3

<PAGE>

                                               UWINK, INC. AND SUBSIDIARY
                                         CONSOLIDATED STATEMENTS OF OPERATIONS
                                                      (UNAUDITED)


                                                          THREE MONTH PERIODS ENDED          SIX MONTH PERIODS ENDED
                                                                   JUNE 30,                          JUNE 30,
                                                            2004             2003             2004              2003
                                                         -----------      -----------      -----------      -----------
                                                          (RESTATED)                        (RESTATED)

NET SALES                                                $   294,176      $   164,912      $   629,067      $   233,549

COST OF SALES                                                550,152           (9,892)         773,910           (6,170)
                                                         -----------      -----------      -----------      -----------
      GROSS PROFIT/(LOSS)                                   (255,976)         174,804         (144,842)         239,719
                                                         -----------      -----------      -----------      -----------

OPERATING EXPENSES
     Selling, general and administrative expenses          1,776,665           97,442        2,553,607          219,485
     Research and development                                128,894           45,402          261,998           69,053
                                                         -----------      -----------      -----------      -----------
      TOTAL OPERATING EXPENSES                             1,905,559          142,844        2,815,605          288,538
                                                         -----------      -----------      -----------      -----------

INCOME/(LOSS) FROM OPERATIONS                             (2,161,536)          31,960       (2,960,448)         (48,819)
                                                         -----------      -----------      -----------      -----------

OTHER INCOME (EXPENSE)
     Other income                                                346             (250)             475              286
     Debt discount expense                                  (138,719)              --         (169,798)              --
     Gain on settlement of debt                              159,167               --          301,840            4,059
     Interest expense                                         (8,452)            (203)         (16,905)          (2,707)
                                                         -----------      -----------      -----------      -----------
      TOTAL OTHER INCOME (EXPENSE)                            12,341             (453)         115,612            1,638
                                                         -----------      -----------      -----------      -----------

INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAXES           (2,149,195)          31,507       (2,844,836)         (47,181)

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

NET INCOME/(LOSS)                                        $(2,149,195)     $    31,507      $(2,844,836)     $   (47,181)
                                                         ===========      ===========      ===========      ===========


NET INCOME/(LOSS) PER COMMON SHARE - BASIC & DILUTED     $     (0.23)     $      0.01      $     (0.32)     $     (0.02)
                                                         ===========      ===========      ===========      ===========

WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING - BASIC                                   9,263,443        2,929,823        8,787,516        2,929,823
                                                         ===========      ===========      ===========      ===========


                                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                                      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

* The independent accountants have not reviewed the unaudited consolidated
  financial statements for the three and six months ended June 30, 2003.

                                                           4

<PAGE>

                                      UWINK, INC. AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (UNAUDITED)


                                                                            SIX MONTH PERIODS ENDED
                                                                                   JUNE 30,
                                                                             2004             2003
                                                                         -----------      -----------
                                                                          (RESTATED)

CASH FLOW FROM OPERATING ACTIVITIES:
   Net loss                                                              $(2,844,836)     $   (47,181)
   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                      96,666               --
       Depreciation and amortization expense                                  69,201               --
       Gain on settlement of debt                                           (301,840)              --
       Issuance of warrants for services                                     474,215               --
       Issuance of common stock for payroll                                  108,710               --
       Issuance of common stock for services                                 160,000               --
       Issuance of common stock on conversion of prepaid license fee         125,000               --
       Inventory obsolescence reserve                                         50,000               --
   Changes in operating assets and liabilities:
     Accounts receivable                                                     (88,296)          21,779
     Inventory                                                              (318,953)           1,868
     Deposits - inventory                                                   (237,400)              --
     Prepaid expenses and other current assets                               (33,761)         (71,435)
     Accounts payable                                                        348,146         (160,583)
     Accrued expenses                                                        262,377             (606)
     Accrued payroll and related benefits                                   (196,264)        (286,007)
     Advances from Customers                                                (159,722)              --
                                                                         -----------      -----------
Net cash used in operating activities                                     (2,316,958)        (542,165)
                                                                         -----------      -----------

CASH FLOW FROM INVESTING ACTIVITIES:
   Payment for property and equipment                                        (77,186)            (986)

CASH FLOW FROM FINANCING ACTIVITIES:
   Debt Repayment                                                                 --         (380,000)
   Proceeds (repayments) from advances from related parties                       --          125,000
   Proceeds from issuance of common stock                                  1,747,961          820,000
   Payment of offering costs                                                (301,568)              --
                                                                         -----------      -----------
Net cash provided by financing activities                                  1,446,393          565,000
                                                                         -----------      -----------

NET DECREASE IN CASH AND
   CASH EQUIVALENTS                                                         (947,751)          21,849

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

CASH AND CASH EQUIVALENTS, End of period                                 $   208,419      $    28,531
                                                                         ===========      ===========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   Interest paid                                                         $    16,905      $     2,457
                                                                         ===========      ===========
   Income taxes paid                                                     $       800      $        --
                                                                         ===========      ===========

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES

   Conversion of debt into shares of common stock                        $   125,000
                                                                         ===========      ===========


                         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                              UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

* The independent accountants have not reviewed the unaudited consolidated
  financial statements for the three and six months ended June 30, 2003.

                                                  5
</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
six months ended June 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 $2,844,836 for the six months ended June 30, 2004, and as
of June 30, 2004, the Company had an accumulated deficit of $19,616,899. 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 million of working capital to fund inventory and accounts
receivable for, and further development of, its Snap! and Boxter Bear Shop (Bear
Shop) products and, if necessary, to finance future losses from operations as it
endeavors to build revenue and reach a profitable level of operations. We have
not yet allocated specific amounts for these purposes. The Company plans to
obtain the additional working capital through the private placement sale of its
equity securities. However, as of the date of this report, there are no
commitments for the sale of its 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 the required funds, its ability to finance its
continued growth will be materially adversely affected.


                                        6

<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.


                                       7

<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 $22,605 for the three
months ended June 30, 2004 and $40,410 for the six months ended June 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.


                                       8

<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. As of June 30,
2004, there were no advances from customers.

On May 19, 2004, the Company converted a $125,000 prepaid license fee into a
convertible promissory note in the amount of $125,000. The 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. The holder immediately converted this note into
79,211 share of common stock. These shares were issued on August 11, 2004 and
are recorded as shares to be issued on the balance sheet at June 30, 2004.
Accordingly, we reduced the advances from customers balance at June 30, 2004 by
$125,000.

In addition, pursuant to the terms of the related licensing agreement, we
recorded $30,556 of licensing revenue for the three months ended June 30, 2004
and reduced the advances from customers balance at June 30, 2004 by $30,556.

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.


                                       9

<PAGE>

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 six months ended June 30, 2004 and
2003:

                                                        2004            2003
                                                     ------------   ------------
         Net loss
           As reported                               $(2,844,836)    $  (47,181)
           Compensation recognized under APB 25           96,666         48,333
           Compensation recognized under SFAS 123       (227,037)       (85,487)

                                                     ------------   ------------
                      Pro forma                      $(2,975,207)   $   (84,335)

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

         Basic and diluted loss per common share
           As reported                               $     (0.32)   $     (0.02)
           Pro forma                                 $     (0.34)   $     (0.10)


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 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 3.5%; dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of 223%; 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.

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.


                                       10

<PAGE>

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.

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

                                                                     Weighted
                                                   Stock             Average
                                                  Option             Exercise
                                                   Plans              Price
                                                ----------          ----------
Balance December 31, 2003                         613,413             $  0.96
Granted                                                --                  --
Exercised                                              --                  --
Canceled                                            4,752             $  3.16
Balance June 30, 2004                             608,661             $  0.95
Exercisable June 30, 2004                         395,818             $  1.19


The weighted average remaining contractual life of options outstanding issued
under the plans is 7.86 years at June 30, 2004. The exercise prices for the
options outstanding under the plans at June 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.


                                       11

<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.


                                       12

<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.


                                       13

<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
                                                                            =================================================


                                                             14

<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


                                                   15

<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>

                                                                16

<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 June 30, 2004.
The following presents the effect on the Company's previously issued financial
statements for the quarter ended June 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 June 30, 2004:

                                                                                       PREVIOUSLY         INCREASE
                                                                                        REPORTED         (DECREASE)       RESTATED
                                                                                      ----------------------------------------------

CURRENT ASSETS
            Cash and cash equivalents                                                 $   209,060             (641)         208,419
            Account receivable, net of allowance for doubtful accounts of $0              224,246           (3,793)         220,453
            Inventory, net of obsolescence reserve of $100,000                            441,299            6,790          448,089
            Deposits - inventory                                                               --          237,400          237,400
            Prepaid expenses and other current assets                                     291,073         (222,400)          68,673
                                                                                      ----------------------------------------------
TOTAL CURRENT ASSETS                                                                    1,165,678           17,357        1,183,035
PROPERTY AND EQUIPMENT, net of accumulated
   depreciation of $374,497 and $357,638, respectively                                    165,868           16,859          182,727
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of
   accumulated amortization of $769,443 and $774,244, respectively                         11,167           (4,650)           6,517
                                                                                      ----------------------------------------------
TOTAL ASSETS                                                                          $ 1,342,713           29,566        1,372,279
                                                                                      ==============================================

CURRENT LIABILITIES
            Accounts payable                                                          $   701,913           48,588          750,501
            Accrued expenses                                                              331,428             (436)         330,992
            Accrued payroll and related benefits                                           96,140          (39,716)          56,424
                                                                                      ----------------------------------------------
TOTAL CURRENT LIABILITIES                                                               1,336,893            8,436        1,345,329
                                                                                      ----------------------------------------------
TOTAL LIABILITIES                                                                       1,336,893            8,436        1,345,329

STOCKHOLDERS' DEFICIT
            Common stock, $0.001 par value; 50,000,000 shares authorized;
               9,784,826 and 9,479,387 shares issued and outstanding, respectively          9,785             (307)           9,478
            Additional paid-in capital                                                 19,069,077          294,910       19,363,987
            Accumulated deficit                                                       (19,073,042)        (543,857)     (19,616,899)
            Shares to be issued                                                                --          270,384          270,384
                                                                                      ----------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT                                                                 5,820           21,130           26,950
                                                                                      ----------------------------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                           $ 1,342,713           29,566        1,372,279
                                                                                      ==============================================


                                                                 17

<PAGE>

Statement of Operations for six months ended June 30, 2004:

                                                                                       PREVIOUSLY         INCREASE
                                                                                        REPORTED         (DECREASE)       RESTATED
                                                                                      ----------------------------------------------

NET SALES                                                                             $   625,238            3,829          629,067
COST OF SALES                                                                             770,590            3,320          773,910
                                                                                      ----------------------------------------------
GROSS PROFIT (LOSS)                                                                      (145,352)             510         (144,842)
                                                                                      ----------------------------------------------
OPERATING EXPENSES
            Selling, general and administrative expenses                                1,994,271          559,336        2,553,607
            Research and development                                                      316,831          (54,833)         261,998
                                                                                      ----------------------------------------------
TOTAL OPERATING EXPENSES                                                                2,311,102          504,503        2,815,605
                                                                                      ----------------------------------------------
INCOME/(LOSS) FROM OPERATIONS                                                          (2,456,454)        (503,994)      (2,960,448)
                                                                                      ----------------------------------------------
OTHER INCOME (EXPENSE)
            Debt discount expense                                                        (138,719)         (31,079)        (169,798)
            Gain on settlement of debt                                                    340,951          (39,111)         301,840
            Interest expense                                                              (47,984)          31,079          (16,905)
                                                                                      ----------------------------------------------
TOTAL OTHER INCOME (EXPENSE)                                                              154,723          (39,111)         115,612
                                                                                      ----------------------------------------------
INCOME/ (LOSS) BEFORE PROVISION FOR INCOME TAXES                                       (2,301,731)        (543,105)      (2,844,836)
NET INCOME/(LOSS)                                                                     $(2,301,731)        (543,105)      (2,844,836)
NET LOSS PER COMMON SHARE - BASIC & DILUTED                                           $     (0.25)           (0.07)           (0.32)
                                                                                      ==============================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC                                      9,258,429         (470,913)       8,787,516


                                                                 18

<PAGE>

Statement of Cashflows for six months ended June 30, 2004:

                                                                                       PREVIOUSLY         INCREASE
                                                                                        REPORTED         (DECREASE)       RESTATED
                                                                                      ----------------------------------------------

CASH FLOW FROM OPERATING ACTIVITIES:
            Net loss                                                                  $(2,301,731)        (543,105)      (2,844,836)
            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
                  Depreciation and amortization expense                                    81,261          (12,060)          69,201
                  Gain on settlement of debt                                                   --         (301,840)        (301,840)
                  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                                        --          160,000          160,000
                  Issuance of common stock on conversion of prepaid license fee                --          125,000          125,000
                  Inventory obsolescence reserve                                               --           50,000           50,000
            Changes in operating assets and liabilities:
                  Accounts receivable                                                     (92,089)           3,793          (88,296)
                  Inventory                                                              (262,163)         (56,790)        (318,953)
                  Deposits - inventory                                                         --         (237,400)        (237,400)
                  Deposits                                                               (218,400)         218,400               --
                  Prepaid expenses and other current assets                               (31,193)          (2,568)         (33,761)
                  Accounts payable                                                         94,894          253,252          348,146
                  Accrued expenses                                                         68,865          193,512          262,377
                  Accrued payroll and related benefits                                    156,548         (352,812)        (196,264)
                  Advances from Customers                                                 (34,722)        (125,000)        (159,722)
                                                                                      ----------------------------------------------
Net cash used in operating activities                                                  (2,303,345)         (13,613)      (2,316,958)
                                                                                      ----------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
            Proceeds from issuance of common stock                                      1,734,989           12,972        1,747,961
                                                                                      ----------------------------------------------
Net cash provided by financing activities                                               1,433,421           12,972        1,446,393
                                                                                      ----------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                                (947,110)            (641)        (947,751)

CASH AND CASH EQUIVALENTS, End of period                                                  209,060             (641)         208,419
                                                                                      ==============================================
</TABLE>

                                                                 19

<PAGE>

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 six months ended June 30, 2004 and 2003 because the effect would
have been anti-dilutive:

<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                           149,235         566,521
              Stock options issued to consultants and others                   --          46,892
              Warrants issued to consultants and finders                  319,070         137,036
              Warrants issued for financing                               703,458         504,653
                                                                        ----------     ----------
                                                                         1,266,700      3,382,635
                                                                        ==========     ==========
</TABLE>


NOTE 4 - ACCOUNTS RECEIVABLE

Accounts Receivable at June 30, 2004                                 $ 220,453
Less:  allowance for doubtful accounts                                      (0)
                                                                     ----------
                                                                     $ 220,453
                                                                     ==========
NOTE 5 - INVENTORY

Inventory has been reviewed for obsolescence and stated at lower of cost or
market as of June 30, 2004, determined on a first in first out basis. Inventory
at June 30, 2004 was marked down to its net realizable value, as reflected by an
increase in the obsolescence reserve of $50,000.


Inventory at June 30, 2004:

Raw Materials                                                         $ 276,887
Work in process                                                          26,217
Finished Good                                                           244,985
Less: obsolescence reserve                                             (100,000)
                                                                      ---------
                                                                      $ 448,089
                                                                      =========


                                       20

<PAGE>

NOTE 6 - PROPERTY AND EQUIPMENT

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

                  Computer equipment and related software            $ 237,564
                  Office furniture and equipment                        17,926
                  Leasehold improvements                                84,849
                  Machinery and equipment                              200,026
                                                                     ---------
                                                                       540,365
                  Less accumulated depreciation and amortization      (357,638)
                                                                     ---------
                                                                     $ 182,727
                                                                     =========


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 June 30, 2004, the Company had cash
and cash equivalent balances totaling $106,056 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 June 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.                57,412
                                                                          ======


We accrued interest of $3,594 on amounts due to related parties during the six
month period ended June 30, 2004.


                                       21

<PAGE>

NOTE 9 - CONVERTIBLE NOTES PAYABLE

Convertible notes payable outstanding at June 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
                                                                        ========


On May 14, 2003, the Company entered into a convertible promissory note in the
amount of $125,000 with Scientific Games. The note bears interest at 8% per
annum and is due on May 14, 2004. The note can be converted, at the option of
the holder, to shares of the Company's common stock at $1.58 per share, the
market value of the Company's common stock on the date of issuance. In addition
to the convertible note payable, the lender was issued 79,211 warrants to
purchase shares of the Company's common stock for $0.03 per share. This note was
converted into 79,211 shares of common stock on May 19, 2004. These shares were
issued on August 11, 2004 and are reflected as shares to be issued on the
balance sheet at June 30, 2004.

The remaining unamortized discount related to this note was expensed at that
time, resulting in amortization expense of $13,719 for the three month period
ended June 30, 2004. We also subsequently issued an additional 5,988 shares to
Scientific Games relating to $10,479 of accrued interest on this note.

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 the balance sheet. 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. These shares were issued on August 11, 2004 and are reflected as shares
to be issued on the balance sheet at June 30, 2004. The Company recognized
expense of $125,000 for the three month period ended June 30, 2004 in connection
with the issuance of the 79,211 warrants due to Scientific Games upon conversion
of this note.


                                       22

<PAGE>

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.

Common Stock

During the six-month period ended June 30, 2004, the Company:

o        sold 896,044 shares of common stock for cash in private placement
         offerings for gross proceeds of $1,747,961. The Company paid $301,568,
         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. The shares and warrants issued
         to Falcon Capital were reflected as shares to be issued and warrants to
         be issued, respectively, on the March 31, 2004 balance sheet;

o        issued 48,584 shares of common stock in exchange for the cancellation
         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; and

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.


                                       23

<PAGE>

Shares to be Issued

At June 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        42,920 shares valued at $15,603 to be issued in connection with the
         Company's capital raising transactions. These shares remained unissued
         at June 30, 2004 for ministerial reasons.

o        317,299 shares valued at $254,760 to be issued 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. These shares remained unissued at
         June 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 June 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                                             78,421       $6.31
Balance June 30, 2004                              1,022,528       $3.68
Exercisable June 30, 2004                          1,022,528       $3.68


During the three months ended June 30, 2004:

o        We issued 150,000 immediately exercisable 5-year warrants to CCRI, Inc.
         at exercise prices ranging between $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%.


                                       24

<PAGE>

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. These
         warrants were reflected as warrants to be issued on the March 31, 2004
         balance sheet.

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 for the three
         month period ended June 30, 2004 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 are reflected as shares to be issued on
         the balance sheet at June 30, 2004.


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.


                                       25

<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.


                                       26

<PAGE>

    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.

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 June 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.


                                       27

<PAGE>

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 June 30, 2004.

From July 6, 2004 to September 29, 2004, the Company 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. 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.

In July 2004, the Company authorized the issuance of 813,500 options to purchase
shares of its common stock to certain employees under the terms of the Company's
2004 Stock Incentive Plan.

On July 19, 2004, the Company issued 50,000 shares of its common stock valued at
$125,000, based on the stock price on the date of the agreement, to New Capital
Advisors for financial consulting services rendered on behalf of the Company.

On August 11, 2004, the Company 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.

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.


                                       28

<PAGE>

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. 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.

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.


                                       29

<PAGE>

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.


                                       30

<PAGE>

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.

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 software for touch screen video game
terminals, amusement vending machines, and lottery and gaming kiosks. For our
video game terminals and amusement vending machines, we develop the software and
hardware prototypes internally, and we rely on contract manufacturers overseas
to build the units delivered to our customers. We derive our revenue from the
sale of our game terminals, licensing fees on software sales, and a variety of
network services.

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 revenues and were considered a
development stage company as defined in Statement of Financial Accounting
Standards No. 7. We were seeking business opportunities or potential business
acquisitions. 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 98.8% 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:


                                       31

<PAGE>

      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; and

      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.

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
$2,844,836 for the six months ended June 30 2004, and as of June 30, 2004, we
had an accumulated deficit of $19,616,899. 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

Six Months Ended June 30, 2004 Compared With Six Months Ended June 30, 2003.

Net sales for the six months ended June 30, 2004 increased by $395,518 (169%)
from $223,549 for the six months ended June 30, 2003 to $629,067 for the six
months ended June 30, 2004. We derive our revenue from the sale of our game
terminals, amusement vending machines, licensing fees and network services.
During the six months ended June 30, 2003, we were principally engaged in the
process of securing new funding for the ongoing development of the Company's
products. During the first 6 months of 2003, the Company sold approximately 12
Eyecon units and had approximately 5 employees working without cash
compensation. The Company had very limited working capital during the first 6
months of 2003 and therefore did not have the funds to hire or pay employees.
Revenue recognized in 2003 was mainly attributable to the licensing of game
technology. In January 2004, we commenced sales of the Snap! unit and sold
$315,000 of this product. Based on the initial response from the marketplace, we
suspended sales to reconfigure the product. We reintroduced Snap! into the
marketplace in June 2004 and recorded $200,000 in orders for the month then
ended. Additionally, in June 2004, we completed the test marketing of the Bear
Shop unit and launched it for sale nationally at the end of the month. Licensing
revenue for the first 6 months of 2004 amounted to $34,722 or approximately 6%
of total revenue.


                                       32

<PAGE>

Cost of sales for the six months ended June 30, 2004 increased by $780,079
(12,643%) from $(6,170) for the six months ended June 30, 2003 to $773,910 for
the six months ended June 30, 2004. Cost of sales activity during 2003 resulted
in a negative based on credits received for the return of materials purchased
previously. 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.

Selling, general and administrative expenses for the six months ended June 30,
2004 increased by $2,334,122 (1063%) from $219,485 for the six months ended June
30, 2003 to $2,553,607 for the six months ended June 30, 2004. As stated above,
during the six months ended June 30, 2003, there were limited operations as we
were principally engaged in the process of securing new funding for the ongoing
development of the Company's products. During the six months ended June 30,
2004, approximately $1,000,000 of the increase is attributable to the cost
associated with the hiring of approximately 36 additional personnel; $250,000 of
the increase is attributable to marketing, advertising and trade show expenses;
and approximately $1,000,000 of the increase is attributable to audit, legal,
and financial consulting expenses and additional 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 six months ended June 30, 2004
increased by $192,945 (279%) from $69,053 for the six months ended June 30, 2003
to $261,998 for the six months ended June 30, 2004. As stated above, during the
six months ended June 30, 2003, the Company had approximately 5 employees
working without cash compensation. The Company had very limited working capital
during the first 6 months of 2003 and therefore did not have the funds to hire
or pay employees. During this time, we were principally engaged in the process
of securing new funding for the ongoing development of the Company's products.
The increase was due to the development of both new hardware and software
products. A substantial portion of this expense was associated with the
development of our Bear Shop prototype, which we began showcasing and test
marketing in various Southern California locations during the first quarter of
2004.

Gain on the settlement of debt for the six months ended June 30, 2004 increased
by $297,780 (7,336%) from $4,059 for the six months ended June 30, 2003 to
$301,840 for the six months ended June 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.


                                       33

<PAGE>

Amortization of debt discounts for the six months ended June 30, 2004 increased
by $169,798 (100%) from $0 for the six months ended June 30, 2003 to $169,798
for the six months ended June 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 six months ended June 30, 2004 increased by $14,197
(524%) from $2,707 for the six months ended June 30, 2003 to $16,905 for the six
months ended June 30, 2004.

As a result, net loss for the six months ended June 30, 2004 increased by
$2,797,654 (5,929%) from a net loss of $47,181 for the six months ended June 30,
2003 to a net loss of $2,844,836 for the six months ended June 30, 2004.

LIQUIDITY AND CASH RESOURCES

As of June 30, 2004, our cash position was $208,419 and we had negative working
capital of $162,294. 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.

During the first and second quarters of 2004 we sold 896,044 shares of common
stock for cash in private placement offerings for gross proceeds of $1,747,961.
We have used the net proceeds (after commissions and professional fees) of the
offering 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. Subsequent to the six
months ended June 30, 2004, our liquidity and cash resources improved through
the sales of 471,032 shares of our common stock for gross proceeds of $824,307.

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

A $57,412 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 $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.


                                       34

<PAGE>

On May 19, 2004, we converted a $125,000 convertible note due to Scientific
Games into 79,211 shares of common stock. These shares are reflected in 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 are 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 are 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 million of working capital to fund inventory and accounts
receivable for, and further development of, our Snap! and Boxter Bear Shop (Bear
Shop) products and, if necessary, to finance future losses from operations as we
endeavor to build revenue and reach a profitable level of operations. 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. However, as of the date of this report, there are no commitments for
the sale of our securities nor can there be any assurance that such funds will
be available on commercially reasonable terms, if at all. Should we be unable to
raise the required funds, our ability to finance our continued growth will be
materially adversely affected.

CASH POSITION AND USES OF CASH

Our cash and cash equivalents position as of June 30, 2004 was $208,419.

During the six months ended June 30, 2004, we used $2,316,958 in cash in our
operating activities, as compared to using $542,165 for the six months ended
June 30, 2003. The change in the use of cash from our operating activities is
primarily due to a $2,797,655 increase in our net loss for the first six months
of 2004 as compared to the first six months of 2003, plus an increased cash
investment in both inventory and accounts receivable of an aggregate of $430,896
in the first six months of 2004 as compared to the first six months of 2003,
partially offset by a $771,712 increase in cash generated from accounts payable
and accrued expenses in the first six months of 2004 as compared to the first
six months of 2003 and the use of common stock and warrants to pay for $742,925
of services during the first 6 months of 2004.


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<PAGE>

During the six months ended June 30, 2004, we used $77,186 in cash in investing
activities, as compared to $986 for the six months ended June 30, 2003. The
increase is the result of 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 six months ended June 30, 2004, our financing activities provided
cash in the amount of $1,446,393 as compared to $565,000 for the six months
ended June 30, 2003. During the first two quarters of 2004 we completed private
placements of equity securities for gross proceeds of $1,747,961 ($1,446,393 net
of offering costs). During the six months ended June 30, 2003 we received gross
proceeds of $820,000 from the private sales of our equity securities; issued a
$125,000 convertible note; and repaid $380,000 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
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.


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<PAGE>

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
exists 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:

         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;


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<PAGE>

         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.


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<PAGE>

PART II.   OTHER INFORMATION


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

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

On April 1, 2004, 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%. The issuances were made pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act.

On April 19, 2004, 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 for services related to the sale 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. These warrants were
reflected as warrants to be issued on the March 31, 2004 balance sheet. This
issuance was made pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act.

On May 19, 2004, 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 prepaid licensing fee into 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 79,211 warrants due to Scientific
Games. Scientific Games exercised these warrants on May 19, 2004. The shares
relating to the exercise of these warrants were issued on August 11, 2004 and
are reflected as shares to be issued on the June 30, 2004 balance sheet. 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.

Beginning on May 11, 2004 and ending on June 28, 2004, we sold 176,519 shares of
common stock for gross proceeds of $308,907 to 16 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 common stock purchased in the
offering. The warrants are immediately exercisable, and will remain exercisable
for five years. These warrants were issued on October 1, 2004. Falcon Capital
acted as a placement agent for this offering and received a finder's fee of
$117,590 and also received 43,850 shares of the Company's common stock in
payment for services related to the sales of the Company's securities in prior
periods. 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.


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<PAGE>

On April 1, 2004, we issued 30,000 shares of common stock to CCRI, Inc. in
exchange for investor relation services valued at $150,000 rendered on behalf of
the Company. The issuance was made pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act.

On April 1, 2004, we issued 5,000 shares of common stock to Jaffoni & Collins
for public relations services valued at $10,000 rendered on behalf of the
Company. The issuance was made pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act.

On April 1, 2004, we issued 43,850 shares of common stock valued at $87,700
(based on the stock price on the date of the agreement) to Falcon Capital for
selling shares of common stock in the Company's private placement offering in
the first quarter of 2004. These shares are reflected as shares to be issued on
the March 31, 2004 balance sheet. The issuance was made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

     REGULATION
     S-B NUMBER                        EXHIBIT

         4.1      Form of uWink, Inc. Warrant, dated 2004. (1)

         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

(1)   Incorporated  by  reference  to Exhibit 4.3 of our Annual  Report on Form
      10-KSB filed on April 17, 2006.


(b)   Reports on Form 8-K

On June 13, 2004, we filed a Current Report on Form 8-K under Item 5 announcing
the appointment of Lawrence C. Early as Chief Financial Officer of the Company
effective June 6, 2004.

On June 24, 2004, we filed a Current Report on Form 8-K under Item 5 announcing
that the Company appointed Messrs. Nimish Patel, JD MBA CPA and Kevin McLeod to
its board of directors for two-year terms beginning March 24, 2004.


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                                   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.


July 19, 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


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