U.S.
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-KSB





(Mark
One)





[x]  ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





FOR
THE FISCAL YEAR ENDED JANUARY 1, 2008





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





For
the transition period from _________________ to _______________.








Commission
File Number 0-27689





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





Delaware
            86-0412110(State
      or other jurisdiction of
            (IRS
      Employer Identification No.)Incorporation
            or
      organization)





16106
      HART STREET, VAN NUYS, CALIFORNIA 91406(Address
      of principal executive offices)





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








Securities
registered under Section 12(b) of the Exchange Act:





Title
      of each class
            Name
      of each exchange on whichto
      be so registered
            RegisteredNone
            N/A





Securities
registered under Section 12(g) of the Act:





Common
Stock, $.001 par value


(Title of
class)





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act Yes [__] No [X]





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter
period that the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No
[_]





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





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





The
issuer’s
revenue for the fiscal year ended January 1, 2008 was $2,545,671.





The
market value of the voting stock held by non-affiliates of the issuer as of
March 30, 2008 was approximately $15,800,000.





The
number of shares of the common stock outstanding as of March 30, 2008 was
12,671,534.





DOCUMENTS
INCORPORATED BY REFERENCE





Not
applicable.





Transitional
Small Business Disclosure Format (check one)





Yes
[_] No [X]














TABLE OF
CONTENTS










ITEM
      NUMBER AND CAPTION
            PAGENUMBERPART
      I
            
            2ITEM
      1.
            DESCRIPTION
      OF BUSINESS
            2ITEM
      2.
            DESCRIPTION
      OF PROPERTIES
            13ITEM
      3.
            LEGAL
      PROCEEDINGS
            14ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            14PART
      II
            
            15ITEM
      5.
            MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS  AND SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
            15ITEM
      6.
            MANAGEMENT’S DISCUSSION
      AND ANALYSIS AND PLAN OF OPERATION
            16ITEM
      7.
            FINANCIAL
      STATEMENTS
            37ITEM
      8.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING  AND
      FINANCIAL DISCLOSURE
            65ITEM
      8A(T).
            CONTROLS
      AND PROCEDURES
            65ITEM
      8B.
            OTHER
      INFORMATION
            65PART
      III
            
            66ITEM
      9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS  AND CORPORATE
      GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
    ACT
            66ITEM
      10.
            EXECUTIVE
      COMPENSATION
            69ITEM
      11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
            76ITEM
      12.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS;  DIRECTOR
      INDEPENDENCE
            80ITEM
      13.
            EXHIBITS
            84ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            87











i





NOTE
REGARDING FORWARD-LOOKING STATEMENTS





In this
report we make a number of statements, referred to as “FORWARD-LOOKING
STATEMENTS”
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, 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:





●
                we
      have a limited history in the restaurant industry and have historically
      relied on other segments of our business to generate
    revenue;




●
            we
      currently rely on a single restaurant location for all of our restaurant
      revenue;





●
              our
      operating history is characterized by net losses, and we anticipate
      further losses and may never become
profitable;





●
              we
      operate in a highly competitive industry among competitors who have
      significantly greater resources than we have and we may not be able to
      compete effectively;





●
              we
      may be unable to respond to changing consumer preferences, tastes and
      eating habits, increases in food and labor costs and national and local
      economic conditions;





●
              our
      ability to comply with applicable governmental
  regulations;





●
              our
      management of our intellectual
property;





●
              we
      may not be able to obtain necessary financing to fund our operations,
      generate revenue, or otherwise effectively implement our growth and
      business plans, including expansion of our restaurant
      operations;





●
              we
      may not be able to identify, attract, or retain qualified franchisees;
      and





●
              we
      may not be able to locate a sufficient number of new restaurant
      sites.








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.











1








PART
I





ITEM
1. DESCRIPTION OF BUSINESS





OVERVIEW





We are an
entertainment and hospitality software company.  We also develop and
operate an interactive restaurant concept named “uWink” that incorporates
and showcases our entertainment and hospitality software.





Over the
past three years, we have invested substantial time and capital in the
development of our touch-based interactive digital content operating system and
real-time, multi-player game platform, as well as our uWink Game Library, which
comprises over 70 single and multi-player short-form video games, and our
proprietary “tabletop” touch screen
terminal.  We have incorporated all of these technology elements into
the development of our interactive restaurant concept.





Our
technology is designed to allow users to intuitively and easily use touch to
access and interact with various forms of digital content and custom
applications including menus, games, videos and music.





Our
real-time, multi-player game platform supports restaurant-wide, head-to-head and
team game play, facilitates in-person tournament and multi-player prize games
and is designed to eventually support restaurant-to-restaurant game play and
simultaneous in-restaurant and online game play.  The centerpiece of
our entertainment offering is our uWink Game Library of casual, “social” games aimed at
all ages, particularly women ages 21-35 and families.  We believe
these demographics to be historically neglected, but growing and important,
segments of the video game market.





The uWink
restaurant concept was designed to create a fun, casual atmosphere where
customers can enjoy freshly prepared, reasonably priced meals while interacting
with our media, games and entertainment platform through our tabletop touch
interface.  Our software also allows patrons to take control of many
aspects of the dining experience, including check-in/check-out and food/drink
ordering using our tabletop touch interface.





We
believe we have proven our technology and restaurant concept at our initial
uWink restaurant in Woodland Hills, California, as evidenced by the revenue we
have achieved in Woodland Hills following the grand opening of that restaurant
in late November 2006. For our fiscal year 2007, the revenue in our Woodland
Hills restaurant was approximately $2.5 million.  We have achieved
this level of revenue in what we believe would generally be considered a
difficult restaurant location.





We also
believe that the software platforms and touch screen terminals we have
developed, and are continuing to develop, can be deployed more broadly in the
hospitality and public-space markets including in hotels, casual/fast food
restaurants, bars, apartments, universities, stadiums, theme parks, casinos, and
golf and ski resorts.





As
further described below, going forward, our strategy is to leverage our
technology assets and the uWink brand to:





●
            build
      and operate additional uWink interactive entertainment
      restaurants;





●
            franchise
      the uWink restaurant concept; and





●
            license
      our technology to other hospitality and public-space
      operators.








2


RECENT
COMPANY HISTORY




From 2004
through 2006, we derived our revenue from the sale of our SNAP! countertop video
game platforms (and its predecessor platforms), which enable customers to play
short form video games from our game library, our Bear Shop entertainment
vending platform (also known as Boxter Bear), which dispenses products such as
plush bears and related clothing through our entertainment vending platform, and
software licensing fees. We did not generate material cash flow or profits under
this business model.





Given our
perception of the market opportunity in introducing digital technology and
entertainment into the restaurant and broader hospitality/public-space
environments and our management team’s experience in
the digital entertainment and restaurant industries, in 2005, we began actively
developing our new restaurant concept and the additional technology assets
required to support the concept. As a result of this strategic shift, we wound
down our SNAP! and Bear Shop manufacturing and sales operations, and liquidated
our inventory and product-related receivables. In addition, we have licensed our
SNAP! and Bear Shop intellectual property to third party manufacturers in
exchange for licensing fees. We do not expect material revenues in the future
from these agreements.





We opened
our first uWink restaurant in Woodland Hills, California in the Westfield
Promenade Shopping Center at 6100 Topanga Canyon Boulevard, Woodland Hills,
California 91367 on October 16, 2006.





On
July 23, 2007 we held a special meeting of the holders of our common stock,
at which our stockholders approved our reincorporation in the state of Delaware,
a four-for-one reverse stock split and a net increase in the authorized number
of shares of our common stock that we will have available for issuance in the
future. We believe these changes in our corporate governance will provide us
with greater flexibility and simplicity in our corporate transactions and
increase the marketability of our securities.





We had
undertaken certain of these corporate changes, as well as the changes to the
operation of our board of directors as described in this report, in part to
support our application to list our common stock on the American Stock Exchange,
which was conditionally approved on August 14, 2007, subject to our
compliance with all applicable listing standards including a per-share price for
our common stock of at least $3.00.  The per-share price of our common
stock failed to meet the $3.00 requirement and, as a result, on December 27,
2007, our listing application was withdrawn.




On
November 7, 2007, we completed an approximately $10.4 million registered equity
offering.  Investors purchased approximately 5.2 million units at a
purchase price of $2.00 per unit, each unit consisting of one share of common
stock and a warrant to purchase one share of our common stock at an exercise
price of $2.40. The warrants are immediately separable from the units,
immediately exercisable and will expire on the fifth anniversary of the date of
their issuance. The net proceeds were approximately $9.3 million after deducting
placement agent fees and other offering expenses.  The proceeds of the
raise will be used to fund new restaurant development and general working
capital needs.




Our
November 7, 2007 registered offering triggered the conversion rights in
convertible promissory notes issued in previous debt financing transactions
completed in April 2007 and June 2007.  Effective November 12, 2007,
holders representing an aggregate of $1,497,500 in principal amount of these
notes (including aggregate accrued interest of $85,339 and an aggregate
conversion incentive amount of $316,568) elected to convert their notes into the
same units issued in our November 7, 2007 registered
offering.  Accordingly, we issued an aggregate 949,703 units to these
investors at a purchase price of $2.00 per unit, in full satisfaction of our
obligations under the notes.  Holders representing an aggregate of
$338,885 in principal amount of convertible notes elected not to convert their
notes.  Accordingly, we made an aggregate cash repayment of $459,335
(inclusive of $120,449 of accrued interest thereunder), in full satisfaction of
these notes.  As a result of the conversions and issuances and the
repayments described above, our obligations under our convertible promissory
notes issued in April 2007 and June 2007 are now fully satisfied.





Our
executive offices are located at 16106 Hart Street, Van Nuys, CA 91406, and our
telephone number at that address is 818-909-6030. Our website address is
www.uwink.com. Information included or referred to on our website is not a part
of this report.





3


BUSINESS
OF THE COMPANY





We are a developer and operator of
digital media entertainment and hospitality software and an interactive
restaurant concept named uWink.





Our
software assets include:





●
            Hospitality
      ordering:  we offer a customer-facing, touch-based user
      interface that allows guests to self-order all of their food and drink via
      touch screen terminals at each table.  We have integrated our
      ordering system with a commercial point-of-sale system, providing seamless
      transaction billing, processing and
accounting.





●
            Self check
      in/checkout:  our software allows restaurant customers to
      self-check in at the table using a credit card or pre-paid debit
      card and to self-pay and checkout by swiping a card at the
      table.





●
            uWink Game
      Library:  we feature a library of over 70 single and
      multi-player short-form, casual and “social” video games, including
      Trivia Live, Truth or
      Dare, uWink Scene Investigation (our riff on the popular CSI
      television series), Xingo (a mashup of
      bowling and bingo) and Picture Perfect, a
      “find the differences” game.





●
            Multi-player game
      platform:  allows patrons throughout the restaurant to
      play digital games against one another in real time, including real-time
      scoring, either head-to-head individually or in teams.  The game
      scoring and results are projected on the walls of the restaurant in real
      time.





●
            “Micro-transaction” game play
      monetization software:allows for game “credit”
      purchasing, tracking and redemption, facilitating game/media purchases
      ($0.25 to $1.00 value per play).





●
            Media display
      system:  our system features large wall projections which
      exhibit revolving dynamic imagery that allows the restaurant to change its
      “look and feel” at a moment’s notice.  The projection system is
      also used for restaurant-wide group gaming and for the display of
      customized “special event” digital media, including for corporate
      presentations and meetings as well as birthday
  parties.





Our
software is built using standardized “Web 2.0” technologies, including RESTful
API, Flash, XML, Java, and Linux, which we believe facilitates
resource-efficient internal software development and integration with
third-party software partners and content developers.





Over the
past 18 months we have spent significant time and effort developing and refining
our technology, a process aided greatly by real-time customer feedback and
stress testing in our 200+ seat prototype uWink restaurant.





Based on
this experience, we believe that our hospitality and entertainment
technology:





●
            is
      a differentiator, increasing customer
traffic;





●
            provides
      unique revenue streams;





●
            increases
      transaction speed and order
accuracy;





●
            increases
      customer loyalty;





●
            increases
      average check; and





●
            reduces
      labor.





4


Going
forward, our strategy is to leverage our experience and software assets to
operate and franchise the uWink interactive entertainment restaurant concept, as
well as to license our technology to other hospitality and public-space
operators.





Our
intent is to launch additional restaurants, both company-owned and franchised,
throughout the United States and internationally. We are currently seeking to
open three additional company-owned restaurants within the next six to nine
months.  We intend to use the proceeds of our November 7, 2007
registered equity offering to complete the development of the three new
restaurant sites, and to continue implementing our growth strategy.





On
October 25, 2007, we entered into a definitive agreement to acquire the
leasehold interest and certain other assets of a formerly operating restaurant
in downtown Mountain View, California, which we intend to convert to the uWink
concept and expect to open in June 2008.





On
December 17, 2007, we entered into a definitive lease agreement with CIM/H&H
Retail, L.P. to open a new restaurant location at the Hollywood & Highland
Center in Hollywood, California in a space formerly occupied by Wolfgang Puck’s
Brasserie Vert.  We started construction on this restaurant in early
March 2008 and expect to open the restaurant in May 2008.





We
believe these high-profile, high-visibility locations will greatly increase the
value and recognition of the uWink brand.





We are
currently evaluating a number of potential sites for our third new company-owned
restaurant and our current intention is to open that restaurant late
Summer/early Fall 2008.





We
have also begun to franchise our concept, focusing on multiple-unit area
development agreements. We expect we will also generate additional revenue
through the sale of our proprietary tabletop terminals and related software to
franchisees.





In
connection with the implementation of our growth strategy to franchise the uWink
concept, we have formed a subsidiary, uWink Franchise Corporation, to enter into
agreements with our franchisees. On June 8, 2007, uWink Franchise
Corporation entered into an area development agreement with OCC Partners, LLC
for our first planned franchised restaurants. This agreement contemplates the
opening of three franchised uWink restaurants in Miami-Dade County, Florida over
the next four years. See “Growth
Strategy—uWink
Franchising” below for
more information on this agreement.





In
furtherance of the technology licensing component of our growth strategy, in
December 2007, we announced plans to develop and market self-service technology
solutions for the hospitality industry in conjunction with hospitality software
provider Volanté Systems.  Also, in February 2008, we entered into a
software licensing and development agreement with a California real-estate
developer to provide our touch-based technology for the senior housing
market.  See “Growth
Strategy—Technology
Licensing” below for
more information on these initiatives.





RESTAURANT
INDUSTRY OVERVIEW





Studies
show that, over the past 50 years, people in the United States have
relatively steadily shifted toward purchasing food away from home, instead of
preparing and eating food at home. The National Restaurant Association estimates
that the U.S. industry’s sales in 2008
will reach $558 billion (about 4% of the U.S. gross domestic product) at
945,000 locations nationwide. The National Restaurant Association further
predicts that, by 2010, food purchased away from home will represent more than
half of all consumer food purchases, and that the number of restaurants around
the country will grow to more than a million locations.





5


We believe that there are many reasons
that the restaurant industry is expanding and eating out is becoming
increasingly popular. A growing population means more customers for restaurants
to draw from, higher income levels mean more discretionary income to spend
eating out, and busier lifestyles mean people have less time to prepare food at
home. As a result, more people are willing to pay for the convenience of quality
food made by others. As the restaurant industry adapts to consumer trends,
restaurants have increasingly made available the higher-quality food that people
want, as illustrated by the proliferation of premium coffee shops, specialty
supermarkets and the like.





We
believe that consumer demand for food that’s made to order
with higher-quality ingredients in a comfortable atmosphere, together with
accessibility, value-oriented prices and portions and faster service will
continue and that we are poised to capitalize on these trends.





In
addition, we expect that, going forward, restaurant operators will continue to
face increasing competition for consumer dining dollars as well as increasing
labor costs, as evidenced by the recent increases in the Federal and a number of
State minimum wages.  We believe that these trends will stimulate
demand from hospitality operators to license our technology and concept for its
differentiation, unique revenue stream and labor savings benefits.





uWink
Restaurant Concept





The uWink
restaurant concept is designed to create a fun, casual atmosphere where
customers can enjoy freshly prepared, reasonably priced meals while interacting
with our tabletop media, games and entertainment platform. Our intention is to
define a new segment of the “casual dining” restaurant market
by combining our proprietary tabletop food ordering and game/media delivery
interface with the best elements of the fast-casual and casual full-service
dining segments, including:





●
            Food
      and drink ordering via our tabletop terminals running our proprietary
      ordering software;





●
            A
      suite of engaging, interactive games delivered through our digital media
      interface;





●
            A
      variety of freshly prepared dishes designed to appeal to a broad audience
      at attractive price points, with quick turnaround
  times;





●
            Full
      bar, including wine list;





●
            Delivery,
      catering and take out capabilities, along with full-service private party
      and meeting facilities supported by customized entertainment and
      presentation options; and





●
            Automated
      check in and checkout for restaurant
patrons.





Restaurant
Operations





Our Menu.  Our menu
features a selection of appetizers, entrees, pizzas, burgers, salads, pastas and
desserts. We are targeting menu prices from $4.95 to $9.75 for appetizers and
soups, $6.25 to $11.95 for salads, $8.95 to $11.95 for sandwiches and lunch
entrees and $14.95 to $24.95 for dinner entrees. Our average check in our
Woodland Hills location is approximately $16, including alcoholic
beverages.





Décor and
Atmosphere.  We utilize a combination of warm earth tones, rich
wood finishes and brushed metals to juxtapose the technology features of our
restaurant. We use a variety of lighting to deliver a warm glow throughout our
restaurant and are able to adjust our dining atmosphere throughout the day by
adjusting the lighting, music, and the computer-driven images that are projected
on our walls.





6


Marketing and
Advertising.  We expect that our ongoing marketing strategy
will consist of various public relations activities, direct mail, email
campaigns and word-of-mouth recommendations. We believe that public relations
and word-of-mouth recommendations will likely be key components in driving guest
trial and usage. We implemented a coordinated public relations effort in
conjunction with the opening of the Woodland Hills location and are engaging in
similar efforts to support the openings of our Hollywood and Mountain View
locations. These efforts may be supplemented by radio, print advertisements,
direct mail campaigns, and other marketing efforts. In addition, we will use our
website, www.uwink.com, to help increase our brand awareness.





Restaurant Unit
Economics.  For fiscal year 2007, our revenue in our Woodland
Hills location was approximately $500 per square foot.  We believe
that, over time, our concept has the ability to reach annual revenue of
$3.0 million in the Woodland Hills location, equating to approximately $600
per square foot. Comparable restaurants, such as California Pizza Kitchen,
generate average unit revenues of anywhere between $500 and $700 per square
foot. We also believe that our touch screen ordering feature, which reduces the
need for wait staff, will allow us to achieve labor costs savings, and, together
with high margin per play gaming revenue, will help us generate higher annual
per unit free cash flow than comparable restaurant concepts.





As we
develop additional company-owned restaurants as well as franchised restaurants,
we expect our concept to generate average per square foot unit revenue of $500
to $700, with technology-related labor cost savings and high margin gaming
revenue continuing to result in higher free cash flow than comparable restaurant
concepts.





At the
restaurant unit level, we are targeting cost of sales of 24%-25% of restaurant
revenue; labor cost of 29%-32% of restaurant revenue; and other operating
expense/occupancy costs of 22%-24% of restaurant revenue.





Game/Media
Content and Strategy





We offer
a variety of short form casual video games and other digital media through our
tabletop terminals. Our lineup of games features both single and multi-player
games and includes a selection of trivia games, games of perception, memory
games and puzzles.  In addition, we offer other forms of digital media
including movie trailers, horoscopes and fortunes, and “panoramic
views” of
various well-known cities and places. Some of this content is provided by third
parties at no cost to us in exchange for promotion on our terminals. We do not
currently plan on paying material amounts to third parties for this type of
content.  Our offering also includes a number of “instant win” prize
games, with prizes ranging from small trinkets to portable MP3
players.





Substantially
all of our media offerings are priced per-play through our game “credit”
system.  Our software assigns each game/media play a game credit
“cost” (generally ranging from 1 to 4) and decrements the customer’s credit
account for that credit amount for each play.  Customers earn game
credits for food and non-alcoholic drink purchases and may also purchase credits
(at $0.25 per credit, with bulk purchases discounted to $0.20 per credit), with
game credit purchases appearing on the customer’s bill, along with food, drink
and merchandise purchases.   Currently, customers earn 1 game
credit for every $1 they spend on food and non-alcoholic drinks.





This
1-for-1 relationship is designed to be one of the main drivers of our restaurant
value proposition, as well as a measure of control over the relationship between
the time a customer spends at the table and the average customer check
amount.   Specifically, this system allows us to offer “free”
bundled entertainment with every meal we sell, at relatively the same price
point offered by comparable restaurants without entertainment
options.   Importantly, however, the amount of “free”
entertainment we provide is effectively limited in time.   We
designed the 1-for-1 game credit to dollars spent relationship so that customers
earn an amount of credits that, on average, allows media play time approximately
equal to the table time expectation at comparable
restaurants:  approximately 45-60 minutes at lunch and 60-75 minutes
at dinner.   Consequently, the time at which the customer has
depleted the earned credits marks a natural decision point where the customer
will either end the visit, freeing the table for the next customer, or will
decide to extend the stay by purchasing additional game credits.  In
this way, our system either naturally limits the customer’s table time or
increases the customer’s check amount, with either outcome supporting our
targeted restaurant operating metrics.





7


We plan
to use our tabletop terminals and wall projections to deliver various forms of
advertising, including product placement on our menu and game sponsorship. We
currently have advertising/sponsorship pilot programs with Evian water, Red Bull
energy drinks, Stockholm vodka and Kabillion, the multiplatform kids’
entertainment service. While these pilot programs do not currently generate
material revenue, we believe that advertising will represent a meaningful
revenue stream in the future as we open additional restaurants and,
consequently, can offer scale to advertisers.





Growth
Strategy





uWink
Restaurants.  Our near term strategy is to open three
additional company-owned restaurants within the next six to nine months. We
estimate that we will have to expend between $1,000,000 and $1,500,000 (net of
any landlord tenant improvement allowances) to construct, staff and open each
new restaurant, excluding rent. Our build-out cost of new restaurants will vary
depending on a number of factors, including the size of the location, whether we
are converting an existing restaurant space, as we did with our Woodland Hills
location, or moving into a “build to suit” location
constructed from a building shell, typically with a monetary contribution (also
typically referred to as a tenant improvement allowance) from the
landlord.





The
“conversion” model generally involves lower build costs (because we are making
use of pre-existing restaurant infrastructure) and faster time to open
(“remodel” permit times are generally shorter) but, generally speaking, offers
lesser quality locations (because the former occupant has generally
failed).  The build to suit development model generally involves
greater costs (depending on the level of landlord contribution) and time to open
(because the permitting process is typically significantly longer), but
generally is more likely to offer popular, “marquee” locations (which
typically operate on the build to suit model), which we believe would greatly
increase public awareness and recognition of the uWink brand.





We
believe we are somewhat uniquely positioned to pursue a hybrid development model
whereby we seek restaurant conversions in marquee locations.  This is
so, we believe, because our concept combines characteristics (uniqueness,
ability to draw desired demographics) that are attractive to major landlords
(who typically operate marquee locations) with the flexibility to
capital-efficiently convert a former restaurant space to our concept (because
the “look and feel” of our concept is digitally driven and thus less dependent
on a specific physical layout).





We
believe that our planned Hollywood and Mountain View locations are reflective of
this hybrid model in that we are converting existing restaurants to our concept
in what we believe are marquee locations.  We also expect that in the
near term we will have additional opportunities to find restaurant conversions
in marquee locations.





Our
longer term growth strategy is to open additional company-owned and/or
company-managed restaurants in new markets and to franchise our concept,
focusing on multiple-unit area development agreements with experienced
operators. Going forward, we expect to emphasize franchised locations over
company-owned locations such that, over time, we expect that our uWink
restaurant mix will be relatively heavily skewed toward franchised locations. We
expect we will also seek to generate additional revenue through the sale of our
proprietary tabletop terminals and related software to our
franchisees.





We are targeting 6,000 to 10,000 square
foot locations in high traffic areas as the sites for future
restaurants.





uWink
Franchising.  In addition to our company-owned restaurants, we
believe we can efficiently grow our operations through franchising to qualified
area developers. In order to offer to sell franchises to operate a uWink
restaurant, Federal Trade Commission rules require us to first provide
prospective franchisees with a disclosure document called a Uniform Franchise
Disclosure Document, or UFDD, which includes, among other things, our various
franchise agreements. In addition, before we can offer our franchises in certain
states that have enacted state franchise or business opportunity laws, we must
add certain state-specific disclosures to our UFDD, and register our offer with
a state agency. We have now completed our UFDD for the uWink brand and are
authorized to sell uWink franchises and may engage in discussions with
prospective franchisees in every state in the United States and the District of
Columbia, except in the following states where we must complete the state
registration process: California, Connecticut, Hawaii, Illinois, Indiana, Maine,
Maryland, Minnesota, New York, North Dakota, Rhode Island, South Carolina, South
Dakota, Virginia, Washington and Wisconsin. Many of these states evaluate
franchisor financial condition as part of the registration process. We have
begun the registration process in these states and believe that the proceeds
from our November 7, 2007 registered offering will significantly improve the
likelihood that we will be approved to franchise in these states.





8


At this
point, even though we have received a number of inquiries from potential
franchisees and have entered into our first area development agreement, we
cannot guarantee that we will be able to franchise our concept at all, or that
we will be able to do so on acceptable terms.





We plan to utilize a franchise area
development model for uWink in which we will assign exclusive rights to develop
restaurants within a defined geographic region within a specified period of
time. We are targeting franchise area developers who have the existing
infrastructure, operational experience and financial strength to develop several
restaurants in a designated market. We currently contemplate requiring each of
our franchisees to pay us an up-front fee of $50,000 for the first restaurant in
a development area and $40,000 for each additional restaurant in a development
area, and a 4% basic royalty, together with a 2% software royalty, each based on
gross sales. We expect that these terms will be included in the majority of any
final agreements with franchisees, but we may modify the terms of individual
agreements based on market conditions and franchisee resources and
qualifications.





We intend to enter into franchise area
development agreements in geographic markets where we currently do not have
uWink restaurants or in markets that can be segmented so that a franchised
restaurant does not compete with a company-owned restaurant. In markets where we
have limited market penetration, we may in the future consider selling existing
uWink restaurants to a franchise area developer. In these instances, we plan to
require the franchise area developer to open a minimum number of additional
restaurants in a designated period of time.





In June 2007, our subsidiary, uWink
Franchise Corporation, entered into an area development agreement with OCC
Partners, LLC for our first three planned franchised restaurants, to be built in
Miami-Dade County, Florida over the next four years.





Pursuant to our area development
agreement with OCC Partners, we have granted to OCC Partners the right to
develop three franchised uWink restaurants, each of which will be subject to OCC
Partners’
meeting certain development deadlines and entering into definitive franchise
agreements. OCC Partners has paid us $40,000 to secure the development rights
granted in the area development agreement, $20,000 of which was deposited into
escrow and is refundable until the first franchise agreement is signed, which is
contemplated to occur following the selection of location for the first unit. We
anticipate that these franchise agreements will include terms providing for a
$20,000 upfront franchise fee for the second and third franchised units, after
netting out the $20,000 development fee already paid by OCC Partners in respect
of those units. We have agreed to waive the $50,000 up-front fee for the first
unit. In addition, the form of franchise agreement provides that we will receive
a $100,000 software fee (we have agreed to discount this fee by 50% for the
first unit) and, in exchange for our delivery of our proprietary touch screen
terminals, a hardware fee of $3,125 per restaurant seat (we have agreed to
discount this hardware fee by 20% for the first unit). Recurring royalty fees
are set at a 4% basic royalty, together with a 2% software royalty, each based
on gross sales. We also agreed with OCC Partners that, under certain
circumstances and adjusting for transaction comparability, OCC Partners will get
the benefit of any cost reductions we offer to future franchisees.





Technology
Licensing.  We believe that our technology has broad
applicability in the hospitality and public-space markets including in hotels,
casual/fast food restaurants, bars, apartments, universities, stadiums, theme
parks, casinos, and golf and ski resorts.  We believe that technology
licensing fees can become a meaningful revenue stream for us and are actively
pursuing licensing opportunities.  At this point, however, we cannot
guarantee that we will be able to achieve material revenues and/or cashflow or
profits from technology licensing.




In
support of our licensing initiatives, we recently announced plans with
hospitality technology provider Volanté Systems to co-develop and co-market
technology solutions for the hospitality industry.  Specifically, we
plan to offer the “uV Hospitality Solution”, an end-to-end self-order, self-pay
and at-the-table digital entertainment delivery solution based on the technology
that we believe we have pioneered and proven in our prototype uWink
restaurant.   More particularly, the “uV Hospitality Solution” is
intended to be a seamless integration of our touch screen user interface
software and micro-transaction game credit and redemption system with Volanté’s
point-of-sale (POS) and back office enterprise system.




9


In
addition, in February 2008, we entered into a software licensing and development
agreement with InSite Development, a California real-estate developer, to
provide touch-based technology for the senior housing market.  Under
this agreement, our interactive digital content operating system and real-time,
multi-player game platform will initially be deployed into Arbor Court, a
housing community in Lancaster, California.  In addition, we have
agreed to partner with InSite in developing custom senior-specific applications
based on our technology and plan to license those applications to third parties
in the senior housing market. Under the agreement, we will receive an initial
$50,000 licensing fee and a minimum of $25,000 in custom development fees during
the first year of the agreement.  Any third party licensing revenue
from software applications custom developed under the agreement will be shared
50-50 between InSite and us after appropriate deductions for reasonable sale,
delivery, installation, support and/or maintenance costs.





Company
History





We were originally incorporated as
“Prologue” under the laws of
the State of Utah on October 14, 1982, and were engaged in the petroleum
sales and marketing business until 1994. From 1994 until December 4, 2003,
we had no operations or employees and owned no real estate. In
December 2003, we merged with uWink, Inc., a Delaware corporation (now
our renamed, wholly-owned subsidiary uWink California, Inc.), and changed
our name to “uWink, Inc”. Via the
acquisition of uWink we assumed, and continued to engage in, uWink’s historical
business of developing interactive entertainment software and platforms. From
2004 through 2006, we derived our revenue from the sale of SNAP! countertop
video game platforms (and its predecessor platforms), which enable customers to
play short form video games from our game library, our Bear Shop
entertainment vending platform (also known as Boxter Bear), which dispenses
products such as plush bears and related clothing through our entertainment
vending platform, and software licensing fees. We did not generate material cash
flow or profits under this business model.





As a result of our decision to
reposition ourselves as an entertainment and hospitality software and
interactive restaurant company, we wound down our SNAP! and Bear Shop
manufacturing and sales operations and did not enter the 2006 marketing cycle of
tradeshows and advertising for SNAP! and Bear Shop. In addition, we have
licensed our SNAP! and Bear Shop intellectual property to third party
manufacturers in exchange for licensing fees and largely sold our remaining Bear
Shop inventory. We do not anticipate material revenues to be generated under
these agreements.





On February 3, 2005, we signed a
three-year manufacturing and exclusive distribution agreement with Bell-Fruit
Games, Ltd., the leading designer and manufacturer of gaming and amusement
machines in the United Kingdom, pursuant to which we granted Bell-Fruit Games a
license to manufacture our Bear Shop machine and exclusive marketing and
distribution rights for Bear Shop in the United Kingdom, Germany, Italy and
Spain in exchange for per-unit royalties for each machine sold. However, we did
not perform certain modifications to our software required to initiate the term
of the agreement and as of the date of this report, have not received any
payment or sales reports from Bell-Fruit Games. Therefore, we believe that the
initial term of the agreement did not commence and that the agreement is no
longer effective. We have recorded no revenue under this agreement through the
date of this report.





Effective September 15, 2006, we
entered into a license agreement with SNAP Leisure LLC, a company owned and
operated by our former vice president of marketing pursuant to which we licensed
our SNAP intellectual property, including the games featured on SNAP in the form
they then currently ran on SNAP (we have made significant enhancements to our
games for display in our restaurant and SNAP Leisure LLC has no right to those
enhancements or any future enhancements or new games we develop), to SNAP
Leisure LLC for use in the “pay to play” amusements market
worldwide (the “pay to play” amusements market
is generally considered to be the coin operated video game machine market). The
agreement provides that we are to receive royalties calculated per SNAP machine
sold ($200 royalty per machine for the first 300 machines sold; $80 per machine
royalty for the next 700 machines; and $50 per machine royalty for any
additional machines sold thereafter). The agreement further provides that SNAP
Leisure LLC cannot affix the name “uWink” to any new
product sold under the license following the first anniversary of the agreement
and must remove all references to uWink from all products sold under the
agreement within a five-year period. We have no obligation to provide any
support or software maintenance, upgrades or enhancements under this
agreement.





10


On January 26, 2007, we entered
into an inventory purchase agreement, a license agreement and a non-competition
agreement with Interactive Vending Corporation, or IVC, pursuant to which we
agreed to sell our remaining Bear Shop machine inventory (at $2,000 per complete
machine, payable in two installments) and accessories inventory (at our cost) to
IVC. In addition, we granted IVC an exclusive, worldwide license to our Bear
Shop intellectual property (excluding any intellectual property relating to the
name “uWink” or any derivation
thereof), including US Patent # 6,957,125 (except that we retain the right of
use in the restaurant industry subject to the limitations in the non-competition
agreement) in exchange for royalties based on the revenue generated by IVC from
the licensed intellectual property, ranging from 5% of revenue in the first year
of the agreement to 3% of revenue in years seven, eight, nine and ten,
respectively, of the agreement. We have no obligation to provide any support or
software maintenance, upgrades or enhancements under these agreements. We also
entered into a non-competition agreement with IVC pursuant to which we agreed
not to engage in the business of interactive vending, other than in the
restaurant industry to the extent the interactive vending is integrated into the
operations of the restaurant, for as long as IVC is obligated to make royalty
payments under the license agreement.





In July 2007, we changed our state
of incorporation from Utah to Delaware by merging with a Delaware corporation
that was initially our wholly-owned subsidiary. Also, effective as of
July 26, 2007, we effected a reverse split of our common stock pursuant to
which every four shares of our issued and outstanding common stock was combined
into one share. At the same time, we amended our certificate of incorporation to
increase the amount of common stock we are authorized to issue to from
12,500,000 (post-split) to 25,000,000 (post-split). We believe these changes in
our corporate domicile and capital structure will provide greater flexibility in
corporate transactions, increase the marketability of our securities, and
facilitate the listing of our common stock on a national exchange.





Intellectual
Property and Proprietary Rights





We regard our trademarks, service
marks, copyrights, patents, domain names, trade dress, trade secrets,
proprietary technologies, and similar intellectual property as important to the
implementation of our new business plan, and we rely on trademark, copyright and
patent law, trade-secret protection, and confidentiality and/or license
agreements with our employees, customers, partners, and others to protect our
proprietary rights. We have registered a number of domain names, and have filed
U.S. and international patent applications covering certain of our proprietary
technology.





We generally enter into confidentiality
or license agreements with our employees and consultants, and generally control
access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our services are distributed or made
available through the Internet, and policing unauthorized use of our proprietary
information will be difficult.





Government
Regulation





Our restaurant operations are subject
to licensing and regulation by state and local departments and bureaus of
alcohol control, health, sanitation, zoning and fire, and to periodic review by
the state and municipal authorities for areas in which the restaurants are
located. In addition, we will be subject to local land use, zoning, building,
planning and traffic ordinances and regulations in the selection and acquisition
of suitable sites for developing new restaurants. Delays in obtaining, or
denials of, or revocation or temporary suspension of, necessary licenses or
approvals could have a material adverse impact on our development of
restaurants.





Our restaurant operations are
also subject to regulation under the Fair Labor Standards Act, which
governs such matters as working conditions and minimum wages. An increase in the
minimum wage rate or the cost of workers’ compensation
insurance, or changes in tip-credit provisions, employee benefit costs
(including costs associated with mandated health insurance coverage), or other
costs associated with employees could adversely affect our company.





11


In addition, our restaurant operations
are subject to the Americans with Disabilities Act of 1990. The ADA may require
us to make certain installations in our planned restaurants to meet federally
and state mandated requirements.





In addition, we are subject to various
state and federal laws relating to the offer and sale of franchises and the
franchisor-franchisee relationship.  In general, these laws and
regulations impose specific disclosure and registration requirements prior to
the sale and marketing of franchises and regulate certain aspects of the
relationship between franchisor and franchisee. The Federal Trade
Commission’s
Trade Regulation Rule on Franchising requires us to furnish to prospective
franchisees a franchise disclosure document containing information prescribed by
this rule. We have prepared our Uniform Franchise Disclosure Document and are
authorized to offer and sell franchises in every state and the District of
Columbia, except the following states which require additional state
registrations: California, Connecticut, Hawaii, Illinois, Indiana, Maine,
Maryland, Minnesota, New York, North Dakota, Rhode Island, South Carolina, South
Dakota, Virginia, Washington and Wisconsin. We have begun the registration
process in the states that require registration.





Although certain state laws may
restrict a franchisor in the termination of a franchise agreement by, for
example, requiring “good cause” to exist as a
basis for the termination, advance notice to the franchisee of the termination,
an opportunity to cure a default and a repurchase of inventory or other
compensation, we do not believe these provisions will have a significant effect
on our franchise operations. We are not aware of any pending franchise
legislation which in our view is likely to significantly affect our operations
or franchise marketing plans, and we believe our operations will comply in all
material respects with rules and the applicable state franchise
laws.





Research
and Development





During our fiscal years 2007 and 2006,
we did not have any significant research and development expenses. We do not
anticipate significant research and development expenses going
forward.





Competition





The fast-casual and casual full-service
dining segments of the restaurant industry are highly competitive and
fragmented. In addition, fast-casual and casual full-service restaurants compete
against other segments of the restaurant industry, including quick-service
restaurants. The number, size and strength of competitors vary by region. All of
these restaurants compete based on a number of factors, including taste,
quickness of service, value, name recognition, restaurant location and customer
service. Competition within the fast-casual and casual full-service restaurant
segments, however, focuses primarily on taste, quality and the freshness of the
menu items and the ambience and condition of each restaurant.





We expect to compete with national and
regional fast-casual, quick-service and casual full-service dining restaurants,
as well as a variety of locally owned restaurants and the deli sections and
in-restaurant cafes of several major grocery restaurant chains. Certain of our
menu offerings, price points, restaurant décor and other aspects of our
restaurants may be similar to those of our competitors, including California
Pizza Kitchen and BJ’s Restaurant and
Brewhouse. In addition, there are restaurant companies, such as Dave &
Busters, that offer away-from-the-table electronic games as part of the
experience. Many bars and restaurants also offer some form of trivia game (both
electronic and paper and pencil) and some quick-service restaurants have
experimented with electronic kiosk ordering. We believe, however, our
combination of tabletop self-service touch screen ordering, well-prepared,
reasonably priced meals and at-the-table entertainment, including a large
variety of games, table-to-table interaction, “edutainment”, videos and more
will offer an entertaining dining experience that is unique in the marketplace.
We are aware that many of our competitors have greater financial and other
resources, have been in business longer, have greater name recognition and are
better established in the markets where our first restaurant is located and
where our future restaurants are planned to be located. Although we believe that
our restaurant concept offers features and advantages not currently available
elsewhere, and we have taken reasonable steps to adequately protect our
proprietary concepts and other intellectual property, we cannot assure you that
our competitors will not seek to copy aspects of our restaurant concept, or
develop similar or competing features, in the future. See “Management’s Discussion and
Analysis and Plan of Operation—Risk Factors—Risks
Relating to Our Business”.





12


Employees





As of the date of this report, we
employ 21 people on a full-time basis, 11 of whom are corporate management and
staff, 8 of whom are engineering staff and 2 of whom are operations staff. We
are currently outsourcing, and plan to continue to outsource, certain software
engineering personnel.





In addition, to staff our restaurants,
we employ an executive chef, 3 managers and 55 full-time and part-time
non-managerial restaurant staff.





None of our employees is covered by an
ongoing collective bargaining agreement with us and we believe that our
relationship with our employees is good. Competition for qualified personnel in
our industry is intense, particularly for software engineers, computer
scientists and other technical staff, as well as restaurant management and
operations personnel. We believe that our future success will depend in part on
our continued ability to attract, hire and retain qualified
personnel.





ITEM
2. DESCRIPTION OF PROPERTIES





Effective as of April 10, 2006, we
secured an approximately ten-year lease on the location for our first uWink
restaurant in Woodland Hills, California, located at 6100 Topanga Canyon
Boulevard, Woodland Hills, California 91367. The underlying lease agreement
between Nolan Bushnell, our CEO, in his personal capacity, and Promenade LP, the
landlord, is as of February 3, 2006. Effective as of April 10, 2006,
we, Mr. Bushnell and Promenade L.P. entered into an assignment agreement
pursuant to which Mr. Bushnell assigned his rights under the lease to us
(but without relieving Mr. Bushnell of his liability for the performance of
the lease). In connection with this assignment, we agreed with Mr. Bushnell
that, should we fail to perform under the lease and Mr. Bushnell becomes
obligated under the lease as a result, Mr. Bushnell will have the right to
operate the leased premises in order to satisfy his obligations under the
lease.





This location consists of 5,340 square
feet. The minimum annual rent payment under the lease is $176,220 through
January 31, 2009; increasing in each successive year to $216,728 by the
last year of this lease, which expires on January 31, 2016.





If our gross sales from this location
exceed certain annual thresholds, we are obligated to pay additional percentage
rent over and above the minimum annual rent described above. Our percentage rent
obligation is equal to 5% of gross sales in excess of $3,524,400 through
January 31, 2009, increasing in specified annual increments to $4,334,567
in the last year of this lease.





Effective June 1, 2006, we entered
into a lease agreement relating to our new corporate offices at 16106 Hart
Street, Van Nuys, California 91406. This property consists of approximately
2,200 square feet of office and warehouse space at the base rental rate of
$2,300 per month. Concurrently, we terminated the lease agreement at our former
corporate offices at 12536 Beatrice Street, Los Angeles, California 90066. In
consideration for the early termination of the lease, we agreed to allow the
landlord to retain $20,000 of the security deposit held by the landlord under
the lease.  Effective January 22, 2008, we entered into a lease
agreement relating to an additional 1,650 square feet of office and warehouse
space contiguous to our corporate offices at 16106 Hart Street, Van Nuys,
California 91406 at a base rental rate of $2,442 per month.





On June 4, 2007, we entered into a
lease agreement relating to our planned uWink restaurant location at the
Promenade at Howard Hughes Center located at 6081 Center Drive, Los Angeles,
California 90045. On December 4, 2007, we terminated this definitive lease
agreement as a result of certain permitting delays relating to the Center’s conditional use
permit that prevented the opening of the restaurant within the timelines
provided for in the definitive lease agreement. We incurred no termination
penalties.





13


On
October 25, 2007, we entered into a definitive agreement and sublease to
acquire the leasehold interest of a formerly operating restaurant located at 401
Castro Street, Mountain View, CA 94041.  This location consists of
6,715 square feet. The annual rent payment under the lease is $228,000, subject
to annual adjustment based on increases in the consumer price index capped at
5%.  We are also obligated to pay our pro-rata share of the property’s
operating expenses.  The lease expires on November 30,
2022.





On
December 17, 2007, we entered into a definitive lease agreement with CIM/H&H
Retail, L.P. to open a new restaurant location in the Hollywood & Highland
Center located at 6801 Hollywood Boulevard, Hollywood, California
90028.  This location consists of 7,314 square feet. The minimum
annual rent payment under the lease is $182,850, subject to annual 3%
increases.  The lease expires on July 31, 2018.  If our
gross sales from this location exceed certain annual thresholds, we are
obligated to pay additional percentage rent over and above the minimum annual
rent described above. Our percentage rent obligation is equal to 8% of gross
sales in excess of $5,000,000, with this threshold being subject to 3% annual
increases.  We are also obligated to pay our pro-rata share of the
property’s operating expenses.





ITEM
3. LEGAL PROCEEDINGS





In the
ordinary course of business, we are generally subject to claims, complaints, and
legal actions. Other than as set forth below, we are currently not a party to
any action which would have a material impact on our financial condition,
operations, or cash flows.





Bauer
Industrial Group, Inc. and Thomas Bannister v. uWink, Inc., Case No. 07- C-1001,
filed on November 13, 2007 in the federal district court for the Eastern
District of Wisconsin. Plaintiffs allege that we refused to pay compensation for
services rendered, which we deny. The complaint alleges claims for breach of
contract, breach of the implied covenant of good faith and fair dealing,
promissory estoppel, unjust enrichment, intentional misrepresentation, strict
responsibility misrepresentation, negligent misrepresentation, and fraudulent
representation, and seeks compensatory damages of not less than $500,000,
punitive damages, treble damages under a Wisconsin statute, and costs of
suit.  We have answered the complaint by denying any wrongdoing and
asserting a number of affirmative defenses, including plaintiffs’ breach of
contract, which we believe negates plaintiffs’ right to any compensation under
the agreements. We have also moved to dismiss the complaint for lack of personal
jurisdiction and improper venue or, alternatively, to change venue to the
Central District Court in California.





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





There
have been no matters submitted to a vote of security holders during the fiscal
quarter ended January 1, 2008.








14








PART
II





ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock is listed on the OTC Bulletin Board under the symbol “UWKI” (prior to our
reincorporation and reverse split, “UWNK”). The following
table sets forth the high and low bid information for our common stock, as
reported by the OTC Bulletin Board, for each fiscal quarter of 2007 and 2006 on
an actual and, as applicable, “as adjusted” basis to give
effect to our four-for-one reverse stock split, which was effective as of
July 26, 2007.  These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. We consider our common stock to be thinly-traded and, accordingly,
reported sale prices may not be a true market-based valuation of our common
stock.





Quarter
      ended:
            High
            Low
            High
            Low(as
      adjusted)January
      1, 2008
            $4.05
            $1.30
            $4.05
            $1.30October
      2, 2007
            $5.02
            $0.50
            $5.02
            $2.00July
      3, 2007
            $1.75
            $1.14
            $7.00
            $4.56April
      3, 2007
            $2.33
            $0.97
            $9.32
            $3.88





Quarter
      ended:
            High
            Low
            High
            Low(as
      adjusted)January
      3, 2007
            $2.70
            $1.10
            $10.80
            $4.40September
      30, 2006
            $1.78
            $0.20
            $7.12
            $0.80June
      30, 2006
            $0.30
            $0.18
            $1.20
            $0.72March
      31, 2006
            $0.37
            $0.21
            $1.48
            $0.84





As of
March 30, 2008, there were approximately 600 record holders of our common
stock.





We have not declared or paid any cash
dividends on our common stock during the last two fiscal years and do not
anticipate that we will pay any dividends to holders of our common stock in the
foreseeable future, but instead we currently plan to retain any earnings to
finance the growth of our business. Payment of any cash dividends in the future,
however, is within the discretion of our board of directors and will depend on
our financial condition, results of operations and capital and legal
requirements, as well as other factors deemed relevant by our board of
directors.





The information set forth in response
to Item 201(d) of Regulation S-B in Item 11 of this report is incorporated
herein by reference in partial response to this Item 5.








15








RECENT
SALES OF UNREGISTERED SECURITIES





On
October 26, 2007, we issued an aggregate of 12,310 shares of common stock valued
at $16,988 to 4 accredited individual investors upon the exercise of warrants at
an exercise price of $1.38 per share. These issuances were made pursuant to the
exemption from registration provided by SEC Rule 506 promulgated under
Regulation D of the Securities Act of 1933.





Our
November 7, 2007 registered offering triggered the conversion rights in
convertible promissory notes issued in previous debt financing transactions
completed in April 2007 and June 2007.  Effective November 12, 2007,
21 accredited investors representing an aggregate of $1,497,500 in principal
amount of these notes (including aggregate accrued interest of $85,339 and an
aggregate conversion incentive amount of $316,568) elected to convert their
notes into the same units issued in our November 7, 2007 registered
offering.  Accordingly, we issued an aggregate 949,703 units
(consisting of one share of common stock and a warrant to purchase a share of
common stock at an exercise price of $2.40 per share) to these investors at a
purchase price of $2.00 per unit, in full satisfaction of our obligations under
the notes. These issuances were made pursuant to the exemption from registration
provided by SEC Rule 506 promulgated under Regulation D of the Securities Act of
1933.  These securities were subsequently registered for resale
pursuant to our Form SB2 Registration Statement, File No. 333-147557, declared
effective on December 3, 2007.





ITEM
6. MANAGEMENT’S DISCUSSION AND
ANALYSIS AND PLAN OF OPERATION





Below is a discussion of our plan of
operation for the next twelve months. Following that is our Management’s Discussion and
Analysis of our financial condition and results of operations for the fiscal
years ended January 1, 2008 and January 2, 2007.





PLAN
OF OPERATION





We are
currently operating and continue to develop an entertainment restaurant concept
named uWink. We opened our first uWink restaurant in the Westfield Promenade
Shopping Center in Woodland Hills, California (Los Angeles area) on
October 16, 2006.  As of January 1, 2008, we have generated
$2,764,976 of revenue from the uWink restaurant concept.





Our
growth strategy is to open three additional company-owned and/or managed
restaurants within the next six to nine months and to franchise our
concept, focusing on multiple-unit area development
agreements.   We expect we will also seek to generate additional
revenue through the sale of media equipment to franchisees.





We also
believe that the technology we have developed has broad applicability in the
hospitality and public-space markets including in hotels, casual/fast food
restaurants, bars, apartments, universities, stadiums, theme parks, casinos, and
golf and ski resorts.  We believe that technology licensing fees can
become a meaningful revenue stream for us and are actively pursuing licensing
opportunities.  At this point, however, we cannot guarantee that we
will be able to achieve material revenues and/or cashflow or profits from
technology licensing.





On
June 8, 2007, our subsidiary, uWink Franchise Corporation, entered into an
area development agreement with OCC Partners, LLC for our first three planned
franchised restaurants to be built in Miami-Dade County, Florida, over the next
four years.





On
November 7, 2007, we completed a registered offering of our equity securities
which resulted in net proceeds to us of approximately $9.3
million.  We expect that the net proceeds from this offering will be
sufficient to fund our present level of operations and near-term growth strategy
for the next twelve months, as well as to build out and operate our three new
planned company-owned restaurant locations.


16




Our
November 7, 2007 registered offering triggered the conversion rights in
convertible promissory notes issued in previous debt financing transactions,
described elsewhere in this report.  Effective November 12, 2007,
holders representing an aggregate of $1,497,500 in principal amount of these
notes (including aggregate accrued interest of $85,339 and an aggregate
conversion incentive amount of $316,568) elected to convert their notes into the
same units issued in our November 7, 2007 registered
offering.  Accordingly, we issued an aggregate 949,703 units to these
investors at a purchase price of $2.00 per unit, in full satisfaction of our
obligations under the notes.  Holders representing an aggregate of
$338,885 in principal amount of convertible notes elected not to convert their
notes.  Accordingly, we made an aggregate cash repayment of $459,335
(inclusive of accrued interest), in full satisfaction of these
notes.  As a result of the conversions and issuances and repayments
described above, our obligations under our convertible promissory notes issued
in April 2007 and June 2007 are now fully satisfied.




In
February 2008, we entered into a software licensing and development agreement
with InSite Development, a California real-estate developer, to provide
touch-based technology for the senior housing market.  Under this
agreement, our interactive digital content operating system and real-time,
multi-player game platform will initially be deployed into Arbor Court, a
housing community in Lancaster, California.  In addition, we have
agreed to partner with InSite in developing custom senior-specific applications
based on our technology and plan to license those applications to third parties
in the senior housing market.




As of the
date of this report, we expect to expend approximately $1,000,000 (net of
landlord tenant improvement allowances) per restaurant on the build out and
opening of each of our planned Hollywood, California and Mountain View,
California uWink restaurant locations.





We expect
that we can currently satisfy our cash requirements for the next twelve
months. We intend to use the proceeds from our November 7, 2007 registered
offering to build out and operate our three new planned company-owned locations
and to continue our current level of operations for the next twelve
months.





The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and related footnotes for each of the fiscal
years 2007 and 2006, respectively, included in this report.








17








Critical
Accounting Policies and Estimates





The following discussion is based upon
our consolidated financial 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, 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 our products.





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





Revenue
Recognition





We recognize revenue related to
software licenses in compliance with the American Institute of Certified Public
Accountants Statement of Position No. 97-2, “Software Revenue
Recognition”.
Revenue is recognized when we deliver our touch screen pay-for-play game
terminals to our customer and we believe that persuasive evidence of an
arrangement exists, the fees are fixed or determinable, and collectibility of
payment is probable. Included with the purchase of the touch screen terminals
are licenses to use the games loaded on the terminals. The licenses for the
games are in perpetuity, we have no obligation to provide upgrades or
enhancements to the customer, and the customer has no right to any other future
deliverables. We deliver the requested terminals for a fixed price either under
agreements with customers or pursuant to purchase orders received from
customers.





We do not have any contractual
obligations to provide post sale support of our products. We do provide such
support on a case by case basis and the costs of providing such support are
expensed as incurred. We earned no revenue from post sale support during the
periods presented.





Restaurant revenue from food, beverage
and merchandise sales is recognized when payment is tendered at the point of
sale. Revenue from the sale of gift cards is deferred and recognized upon
redemption.





18


Franchise
revenue is recognized when we have performed substantially all of our
obligations as franchisor. During the fiscal year ended January 1, 2008,
our franchise-related revenue consisted of a $20,000 non-refundable area
development fee and $1,000 of non-refundable franchise application fees. Our
area development fee consists of a one-time payment in consideration for the
services we perform in preparation of executing each area development agreement.
Substantially all of these services which include, but are not limited to,
conducting market and trade area analysis, a meeting with our executive team,
and performing potential franchise background investigation, are completed prior
to our execution of the area development agreement and receipt of the
corresponding area development fee. As a result, we recognize the non-refundable
portion of this fee in full upon receipt. During the fiscal year ended January
1, 2008, we also received a $20,000 refundable area development fee. This
payment is held in escrow and, accordingly, will not be recorded in the
financials until the contingency is resolved and the fees are released from
escrow. During the fiscal year ended January 1, 2008, our franchise application
fee consisted of a one-time $5,000 payment, $1,000 of which is non-refundable,
in consideration of the services we perform in evaluating the franchise
application, which are completed concurrently with receiving the application. As
a result, we recognize the non-refundable portion of this fee in full upon
receipt. Refundable franchise application fees received are recorded as a
short-term liability until such time as the fee becomes
non-refundable.





Basis
of Presentation





In 2006, with the commencement of
restaurant operations, we adopted a 52/53-week fiscal year ending on the Tuesday
closest to December 31st, and fiscal quarters ending on the Tuesday closest
to March 31, June 30 and September 30, as applicable, for
financial reporting purposes. As a result, our 2006 fiscal year ended on
January 2, 2007 and our 2007 fiscal year ended on January 1, 2008. For
purposes of the following discussion, the twelve month periods ended January 1,
2008 and January 2, 2007 are sometimes referred to as fiscal
years.





Results
of Operations





Net sales
for year 2007 increased by $2,095,522 (466%) to $2,545,671, from $450,149 for
the year 2006. In 2006, we wound down our SNAP! and Bear Shop manufacturing and
sales operations and repositioned ourselves as an entertainment restaurant
company. Revenue from our first restaurant, which opened on October 16, 2006,
amounted to $2,475,048 (97% of total revenue) for the fiscal year
2007.  Our entertainment restaurant operations generated $289,929 (64%
of total 2006 revenue) for the period beginning on October 16, 2006 and
ending on January 2, 2007. The other revenue for fiscal 2007 of $70,623 was
generated through $20,000 of non-refundable franchise area development fees paid
to us upon execution of our franchise area development agreement with OCC
Partners; $1,000 of non-refundable franchise application fees; $14,000 of
licensing revenue under our agreement with SNAP Leisure LLC; and the liquidation
of $35,623 of our remaining SNAP! and Bear Shop inventories. 2006 revenue
largely reflects the liquidation of part of our remaining SNAP! and Bear Shop
inventories. In addition, we generated licensing revenue of $46,800 (10.4% of
total revenue) in 2006. Of this, $27,200 was licensing fees from the sale of
SNAP machines by SNAP Leisure LLC under our license agreement with SNAP Leisure
and $19,600 was licensing fees for some of our games from Mondobox
LLC.





Cost of
sales for fiscal 2007 totaled $753,027, compared to $249,248 for 2006,
representing an increase of $503,779 (202%). Cost of sales for our restaurant
amounted to $733,488 (29.6% of restaurant revenue) in fiscal 2007 as compared to
$99,728 (34.4% of restaurant revenue) in 2006.  As our restaurant
continues to mature and we continue to optimize our menu and menu cost structure
and generate a greater percentage of high margin media revenue, we expect that
our restaurant cost of sales will drop to the 24%-26% (of restaurant revenue)
range.





Non-restaurant
cost of sales amounted to $19,539 for of 2007, as compared to $149,520 for 2006.
The decrease in non-restaurant cost of sales is attributable to lower SNAP! and
Bear Shop sales volume resulting from our decision to wind down our SNAP! and
Bear Shop operations. In addition, we sold 27 Bear Shop machines in 2007 for
$27,000. There was no cost of sales associated with these machines, as they had
been fully reserved for in prior periods. As a result, our non-restaurant gross
margin was 72.3% for 2007. During 2006, we wrote off $66,398 of uncollectible
advances to suppliers to cost of good sold, resulting in a non-restaurant gross
margin of 6.8% in 2006.





19


Selling,
general and administrative expenses (“SG&A”) for 2007 totaled
$6,720,974, compared to $3,690,921 for 2006, representing an increase of
$3,030,053 (82%).





The
increase in SG&A for 2007 is attributable to $1,981,597 of restaurant
SG&A in 2007 (including restaurant salary expense of $946,090) versus
$476,238 of restaurant SG&A in 2006 (including restaurant salary expense of
$285,907); higher corporate salary expense ($1,722,040 in 2007 as compared to
$945,678 in 2006); higher depreciation and amortization expense ($312,018 in
2007 versus $94,826 in 2006); and higher nominal stock option expense in 2007
resulting from the continued amortization of fair value expense of options
issued prior to 2007, coupled with the recording of expense relating to the
increased issuance of employee options in 2006 and 2007 ($1,372,549 of expense
for 2007 versus $499,548 of expense for 2006).





As a
result, our loss from operations for fiscal 2007 was $4,928,330, compared to a
loss of $3,490,020 for 2006, representing an increase of $1,438,310
(41%).





Total
other expense for 2007 was $418,265, compared to other expense of $6,871,045 for
2006, representing a decrease in expense for 2007 of $6,452,779 (94%). This
decrease was primarily attributable to the non-recurrence in 2007 of $6,583,902
of expense relating to the issuance of financing warrants in 2006, partially
offset by $408,435 of beneficial debt conversion expense in 2007 relating to
approximately $2 million of convertible promissory notes issued in 2007. The
notes were convertible, at the option of the holder, into the same securities
issued by us in (and on the same terms and conditions pari passu with the
investors in) any offering of our securities that resulted in gross proceeds to
us of at least $3,000,000. Upon conversion, the holder was entitled to receive,
as a conversion incentive, additional securities equal to 20% of the aggregate
principal value plus accrued interest converted. On November 7, 2007, we
completed a financing transaction that triggered the conversion rights in these
notes. Accordingly, we recorded the 20% conversion incentive on the full amount
of the notes plus accrued interest, amounting to $408,435, in the statement of
operations for fiscal 2007.





In
addition, in 2006 we recorded $151,111 of other expense relating to the
conversion of debt and accounts payable into common stock at conversion prices
lower than the market price on the date of conversion. In particular, we
recorded a conversion loss of $111,127 on the conversion of $217,240 in debt,
plus an additional $43,448 reflecting a 20% conversion incentive, into 65,172
shares of common stock at $4.00 per share, when the closing price of our common
stock was $5.04. We also recorded a conversion loss in 2006 of $39,884 on the
conversion of $85,810 accounts payable into 15,108 shares of common stock at
$5.68 per share, when the closing price of our common stock was
$8.32.  Moreover, interest expense was $176,334 in 2006, as compared
to $118,839 in 2007. In 2006, we booked $132,950 of interest expense relating to
our issuance of 50,000 immediately-exercisable, three-year warrants to Bradley
Rotter, a director, at an exercise price of $1.38 in connection with the
repayment of a $200,000 convertible note. The fair value of the warrants of
$132,950 was calculated using the Black-Scholes options pricing model and was
accounted for as interest expense.   In 2007, we booked $118,839
of interest expense on approximately $2 million of convertible notes outstanding
during 2007.  In addition, gain on settlement of debt income was
$42,465 in 2006, compared with $65,576 in 2007.  In 2006, we settled
in our favor a dispute over a $36,000 payable with our former auditors,
Stonefield Josephson.  2007 gain on settlement of debt income resulted
from the settlement at a discount of accounts payable owing to outside law
firms.





As a
result, our net loss for 2007 totaled $5,437,396, compared to a net loss of
$10,361,065 for 2006, representing a decrease of $5,013,669 (48%).





Liquidity
and Capital Resources





As of January 1, 2008, our cash
position was $7,294,019 and we had working capital of $6,275,584. 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.





On
April 3, 2007 and June 8, 2007 we sold $857,000 and $960,500,
respectively, of convertible promissory notes, the proceeds of which were used
for working capital.





20


On
November 7, 2007, we completed the sale, in a registered equity offering, of 5.2
million units at a purchase price of $2.00 per unit, consisting of one share of
common stock and a warrant to purchase one share of our common stock at an
exercise price of $2.40, generating gross proceeds of approximately $10.4
million. The net proceeds from this transaction were approximately $9.3 million
after deducting placement agent fees and offering expenses.





Our
November 7, 2007 registered offering triggered the conversion rights in the
convertible promissory notes issued in April 2007 and June
2007.  Effective November 12, 2007, holders representing an aggregate
of $1,497,500 in principal amount of convertible notes (including aggregate
accrued interest of $85,339 and an aggregate conversion incentive of $316,568)
elected to convert their notes into the same units issued in the November 7,
2007 registered offering (each unit consisting of one share of common stock and
a warrant to purchase one share of our common stock at an exercise price of
$2.40) at a purchase price of $2.00 per unit. Accordingly, we issued an
aggregate 949,703 of units to these investors in full satisfaction of our
obligations under the notes.





Holders
representing an aggregate of $338,885 in principal amount of convertible notes
elected not to convert their notes. Accordingly, we made cash repayment of a
total of $459,335 (inclusive of $120,450 of accrued interest), in full
satisfaction of those notes.





Our
obligations under our 2007 convertible promissory notes are now fully
satisfied.





At
January 1, 2008 we had no material debt obligations and, as of the date of this
report, we are not in default on any material debt obligation.





As of the
date of this report, we expect to expend approximately $1,000,000 (net of
landlord tenant improvement allowances) per restaurant on the build out and
opening of each of our planned Hollywood, California and Mountain View,
California uWink restaurant locations.





We expect
that we can currently satisfy our cash requirements for the next twelve
months. We intend to use the proceeds from our November 7, 2007 registered
offering to build out and operate our three new planned company-owned locations
and to continue our current level of operations for the next twelve
months.





Sources
of cash





Since
January 1, 2006, we have financed our operations principally by issuing
common stock for services, collecting accounts receivable and selling inventory
and through the private and public sale of our common stock and convertible
promissory notes.





On
November 7, 2007, we completed the sale, in a registered equity offering, of 5.2
million units at a purchase price of $2.00 per unit, consisting of one share of
common stock and a warrant to purchase one share of our common stock at an
exercise price of $2.40, generating gross proceeds of approximately $10.4
million. The net proceeds from this transaction were approximately $9.3 million
after deducting placement agent fees and offering expenses.  We are
using the proceeds from this transaction to fund new restaurant development and
for working capital purposes.





On
April 2, 2007, we sold $857,000 of convertible promissory notes to 19
individual accredited investors. On June 8, 2007, we sold $960,500 of
convertible promissory notes to 16 individual accredited investors. We used the
proceeds from these transactions for working capital purposes.





On
September 8, 2005 we issued a $100,000 convertible promissory note to
Dr. William Hines due September 8, 2007. This note included a
provision that entitled Dr. Hines to receive an additional 20% of the
principal and accrued interest on the note in shares of our common stock upon
conversion of the note into any offering of our securities that resulted in
gross proceeds to us of at least $3,000,000. On October 26, 2006, we
entered into a letter agreement with Dr. William Hines in respect of this
note pursuant to which Dr. Hines agreed to convert this note, together with
$11,555 in accrued interest thereon, into shares of our common stock at a
conversion price of $4 per share (post-split).





21


While
Dr. Hines’ note was not yet
due, we believed it advantageous to us to remove this indebtedness from our
balance sheet, particularly as this note was secured by our assets. As a result,
we agreed with Dr. Hines that he would be entitled to receive this
additional 20% upon the conversion of his note into shares of our common stock
even though the conversion was not in connection with the required offering of
our securities. As a result, the total amount converted was $133,866, resulting
in the issuance of 33,467 (post-split) shares of our common stock to
Dr. Hines in satisfaction of his note.





On
October 25, 2006, we entered into a letter agreement with Bradley Rotter, a
member of our board of directors, pursuant to which he agreed to convert our
$100,000 note that matured on October 19, 2006, together with $5,685 in
accrued interest thereon, into shares of our common stock at a conversion price
of $4 per share (post-split). Under the note, Mr. Rotter was further
entitled to receive an additional 20% of the outstanding principal and interest
in shares of our common stock upon conversion of the note into any offering of
our securities that resulted in gross proceeds to us of at least
$3,000,000.





Rather
than repay this note in cash, we agreed with Mr. Rotter that he would be
entitled to receive this additional 20% upon conversion of this note into shares
of our common stock even though the conversion was not in connection with the
required offering of our securities. As a result, the total amount converted was
$126,682, resulting in the issuance of 31,706 (post-split) shares of our common
stock to Mr. Rotter.





In
accordance with the terms of the note, we also agreed to issue Mr. Rotter
three-year, immediately-exercisable warrants to purchase 25,000 (post-split)
shares of our common stock at an exercise price of $1.38 (post-split) per
share.





On
September 18, 2006, we completed the sale of a total of 1,250,333
(post-split) shares of our common stock to 51 investors for cash proceeds of
$1,500,400. These investors also received immediately-exercisable, three-year
warrants to purchase an aggregate of 625,167 (post-split) shares of our common
stock at an exercise price of $1.38 (post-split) per share. In addition, we
converted $70,562 of indebtedness and accrued interest due to Nancy Bushnell,
the wife of Nolan Bushnell, our chief executive officer, and $60,500 of
indebtedness due to Dan Lindquist, our vice president of operations, into shares
of our common stock and warrants on the same terms as the investors in the
transaction. Ms. Bushnell received 58,802 (post-split) shares of our common
stock and warrants to purchase 29,401 (post-split) shares of our common stock at
an exercise price of $1.38 (post-split) per share, and Mr. Lindquist
received 50,417 (post-split) shares of our common stock and warrants to purchase
25,208 (post-split) shares of our common stock at an exercise price of $1.38
(post-split) per share. We used the proceeds from these transactions for working
capital purposes.





On
May 9, 2006 and June 12, 2006, we sold a total of 27,083 (post-split)
shares of our common stock to two investors for gross proceeds of $32,500. These
investors also received immediately-exercisable, three-year warrants to purchase
an aggregate of 13,542 (post-split) shares of common stock at an exercise price
of $1.38 (post-split) per share.  We used the proceeds from these
transactions to fund the build-out and opening of our Woodland Hills restaurant
and for working capital purposes.





On
March 3, 2006, we raised gross proceeds of $1,500,000 from the private
placement of 1,250,000 (post-split) shares of our common stock to 22 investors.
These investors also received immediately-exercisable, three-year warrants to
purchase an aggregate of 625,000 (post-split) shares of our common stock priced
at $1.38 (post-split) per share. Merriman Curhan Ford & Co., which
acted as sole placement agent for this transaction, was paid a commission of
$75,000 (equal to 5% of the aggregate offering price) plus $5,000 in expenses.
Merriman also received an additional 112,500 (post-split)
immediately-exercisable, three-year warrants to purchase shares of our common
stock at an exercise price of $1.38 (post-split) per share. We used the proceeds
from these transactions to fund the build-out and opening of our Woodland Hills
restaurant and for working capital purposes.





22


With the
exception of our November 7, 2007 registered offering, each of these sale
transactions was made pursuant to the exemption from registration provided by
SEC Rule 506 promulgated under Regulation D of the Securities Act of
1933.





Cash
position and sources and use of cash





Our cash and cash equivalents position
as of January 1, 2008 was $7,294,019.





On April 2, 2007, we completed the
sale of $857,000 of convertible promissory notes to 19 accredited individual
investors ($25,000 of these proceeds were received on April 10, 2007). On
June 8, 2007, we completed the sale of $960,500 of convertible promissory
notes to 16 individual accredited investors. We used the proceeds from these
transactions for working capital purposes.  On November 7, 2007 we
raised approximately $9.3 million of net proceeds pursuant to a registered
offering of our equity securities.  We are using the proceeds from
this transaction for new restaurant development and working capital
purposes.





During fiscal 2007, net cash used in
operations was $3,710,793, compared to a use of cash of $1,944,172 for fiscal
2006.





Our major uses of cash in operations in
2007 were to pay cash employee compensation of approximately $2.67 million
($1,722,039 in corporate salary expense and $946,090 in restaurant salary
expense), cash non-salary restaurant operating expenses of $759,057, cash
payments to outside engineering contractors of approximately $280,000 and cash
rent expense of $332,706 (including $56,256 of corporate rent and $276,450 of
restaurant rent). In addition, we used approximately $410,000 in cash to reduce
accounts payable and accrued expenses (including accrued
payroll).  The major source of operating cash was revenue from our
Woodland Hills restaurant. The non-cash transactions that reduced cash used in
operations relative to our net loss included: $1,372,549 of non-cash expense
relating to employee stock options and restricted stock, beneficial debt
conversion expense of $408,435 and $312,018 of depreciation and amortization
expense.





Our net loss for the year 2006 was
$10,361,065, but, due to a number of non-cash transactions reflected largely in
our selling, general and administrative and other expenses, we used $1,944,172
in cash for operations. Our major uses of cash in operations were to pay cash
employee compensation of approximately $1,231,585 (including $945,678 of
corporate salary expense and $285,907 of restaurant salary expense); cash
payments to outside engineering contractors of approximately $315,000; cash rent
expense of approximately $177,028 (including $113,196 of corporate rent and
$63,832 of restaurant rent expense); $180,000 of “pre-opening” expenses for our
first restaurant; and approximately $200,000 of outside auditor, legal counsel
and SEC filing fee cash payments. The major source of operating cash during the
period was the sale of inventory valued at approximately $115,000 and revenue
from our Woodland Hills restaurant. The non-cash transactions that reduced cash
used in operations relative to our net loss included: $6,583,902 of non-cash
expense related to the expensing of the fair value of financing warrants issued
during 2006; $132,950 of non-cash expense reflecting the fair value of warrants
issued in connection with the repayment of debt; $151,111 of non-cash expense
relating to the conversion into stock of debt and accounts payable; $499,548 of
non-cash expense relating to employee stock options, the write off to cost of
goods sold of $66,000 of uncollectible inventory deposits, the use of $481,240
worth of shares of common stock to pay for services and payroll; and an increase
in our accounts payable of $96,934.





During
2007, we used $328,839 in our investing activities, largely related to equipping
the outside patio area of our Woodland Hills, California restaurant, computer
hardware purchases and expense relating to new restaurant construction. During
2006, we used $1,002,864 in our investing activities, largely reflecting capital
expenditures relating to the construction of our Woodland Hills, California
restaurant.





In 2006,
we spent approximately $1,000,000 to build out and equip the Woodland Hills
location for our first restaurant, including approximately $400,000 on leasehold
improvements; $375,000 on technology, furniture and fixtures; $150,000 on
certain “pre-opening” expenses
(including staffing, staff training and menu development costs and initial
inventory); and $75,000 on licenses.





23


During
2007, our financing activities provided cash in the amount of $11,278,645, as
compared to providing cash of $2,978,282 for 2006.   In 2007, we
generated $9,489,300 in net proceeds from the issuance of common stock to
investors (pursuant to our November 7, 2007 registered equity offering described
above), as compared to $2,950,897 in 2006.  In addition, we received
cash proceeds of $347,650 from the exercise of warrants and options in 2007, as
compared to $279,485 in 2006.





In 2007
we sold $1,817,500 of convertible notes to 30 investors (including $175,000 to
the brother-in-law of our CEO, $125,000 to our CEO and $25,000 to our CFO) and
subsequently repaid in cash a total of $459,335 (inclusive of $120,450 of
accrued interest), in full satisfaction of those notes (together with an
additional $18,885 convertible note due to our former Vice President of
Marketing).   Holders representing an aggregate of $1,497,500 in
principal amount of these notes (including aggregate accrued interest of $85,339
and an aggregate conversion incentive of $316,568) elected to convert their
notes into the same units issued in the November 7, 2007 registered offering
(each unit consisting of one share of common stock and a warrant to purchase one
share of our common stock at an exercise price of $2.40) at a purchase price of
$2.00 per unit. Accordingly, we issued an aggregate 949,703 of units to these
investors in full satisfaction of our obligations under the
notes.   Of the $338,885 in cash principal repayments, $175,000
went to repay amounts due to related parties and $163,885 went to repay amounts
due to unrelated parties.  In 2007, we also made cash repayment of an
additional $36,920 on amounts due to unrelated parties.  In 2006, we
repaid $152,100 of loans to unrelated parties and made net repayment of $100,000
on amounts due to related parties.





Off-balance
sheet arrangements





We currently have no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.





Quantitative
and qualitative disclosure about market risk





We believe that we do not have any
material exposure to interest rate or commodity risks. We do not own any
derivative instruments and do not engage in any hedging
transactions.





Comprehensive
income or loss





We have no components of other
comprehensive income or loss, and accordingly, net loss equals comprehensive
loss for all periods presented.








UNCERTAINTIES
AND RISK FACTORS THAT MAY


AFFECT
OUR FUTURE RESULTS AND FINANCIAL CONDITION





In
addition to other matters identified or described by us elsewhere in this
report, there are a number of important uncertainties and risks described below
that may adversely affect our business, operating results and financial
condition. The uncertainties and risks set forth below as well as those
presented elsewhere in this report should be considered carefully in evaluating
our company and our business and the value of our securities.





Risks
Related Our Business





We
have incurred losses since our inception and cannot assure you that we will
achieve profitability.





We have
incurred cumulative losses of approximately $40.5 million from our inception
through January 1, 2008. For the fiscal years ended January 1, 2008 and January
2, 2007, we incurred net losses of approximately $5.3 million and
$10.4 million, respectively. In addition, we have wound down our SNAP! and
Bear Shop manufacturing operations, which have been the source of our revenue
prior to October 2006. Going forward, our strategy is to develop hospitality and
entertainment software and operate an entertainment restaurant concept, but we
do not expect to be cash flow positive based solely on projected revenue less
operating and other costs for the restaurant concept for the foreseeable future.
The extent of our future operating losses and the timing of profitability are
highly uncertain and we may never achieve or sustain profitability. We cannot
assure you that we will ever generate sufficient revenues from our restaurant
operations to achieve profitability. If revenues grow slower than we anticipate,
or if operating expenses exceed our expectations or cannot be adjusted
accordingly, we may not ever achieve profitability and the value of your
investment could decline significantly.





24


We
have recently restated our previously issued financial statements for the fiscal
year ended December 31, 2004 and the first three quarters of our fiscal
years ended December 31, 2005 and 2006, respectively, due to certain
incorrect accounting entries. Our failure to maintain effective internal control
over financial reporting in the future could cause our financial statements to
become materially misleading and adversely affect the trading price of our
common stock.





In March
2006, following an internal investigation, we discovered certain accounting
errors in our financial statements covering the fiscal year ended
December 31, 2004, and continuing into the first three quarters of 2005. As
a result of the errors, we concluded that these financial statements should no
longer be relied upon and restated our consolidated financial statements for the
fiscal year ended December 31, 2004, and for each of the first three
quarters of 2005. In addition, we subsequently restated our financial statements
covering the first three quarters of 2006 to correct accounting entries relating
to the issuance of financing warrants in 2006. Although we have enhanced our
internal controls over financial reporting in order to provide reasonable
assurance with respect to our financial reports and to effectively prevent
fraud, we cannot assure you that the measures we have taken to remediate the
weaknesses in our internal controls over financial reporting will prevent or
detect misstatements because of inherent limitations, including the possibility
of human error, the circumvention or overriding of controls, or fraud. Our
failure to establish appropriate internal controls over financial reporting
could result in misstatements to our financial statements that would not be
prevented or detected.





We
have a limited operating history in the restaurant industry on which to evaluate
our potential and determine if we will be able to execute our business plan, and
currently depend on a single restaurant to generate all of our restaurant
revenues.





We
currently own and operate one uWink restaurant in Woodland Hills, California,
which we opened in October 2006, and, although we are in the process of
identifying and opening new restaurant locations, we currently rely on our
Woodland Hills location for all of our restaurant revenue. In addition, we have
historically relied on revenues from the SNAP! and Bear Shop segments of our
business. Consequently, our historical results of operations may not provide an
accurate indication of our future operations or prospects. Investment in our
securities should be considered in light of the risks and difficulties we will
encounter as we attempt to penetrate the restaurant industry.





In
addition, we cannot guarantee that we will be able to achieve our expansion
goals or that new restaurants will generate sufficient revenues or be operated
profitably. Our ability to expand will depend on a number of factors, many of
which are beyond our control. These risks may include, but are not limited
to:





●
            locating
      suitable restaurant sites in new and existing
  markets;





●
            obtaining
      acceptable financing for construction of new restaurants or negotiating
      acceptable lease terms;





●
            recruiting,
      training and retaining qualified corporate and restaurant personnel and
      management;





●
            attracting
      and retaining qualified
franchisees;





●
            cost
      effective and timely planning, design and build-out of
      restaurants;





●
            obtaining
      and maintaining required local, state and federal governmental approvals
      and permits related to the construction of restaurant sites and the sale
      of food and alcoholic
beverages;


25





●
            creating
      guest awareness of our restaurants in new
  markets;





●
            competition
      in our markets; and





●
            general
      economic conditions.





If
we are unable to expand our restaurant concept, our potential for growth and our
results of operations could be harmed significantly.





A
critical factor in our future viability will be our ability to expand our uWink
restaurant concept. Our growth plans contemplate opening a number of additional
company-owned or managed restaurants in future months and years, in addition to
franchising, as described above. If we do not open and operate new restaurants,
our growth and results of operations could be harmed significantly. Our ability
to open new restaurants in a timely manner and operate them profitably depends
upon a number of factors, many of which are beyond our control, including the
following:





●
            our
      ability to generate or raise the capital necessary to open new
      restaurants;





●
            the
      availability and cost of suitable restaurant locations for development,
      our ability to compete effectively for those locations, and enter into
      purchase or long-term lease agreements for such locations on acceptable
      terms;





●
            the
      timing of delivery of leased premises from our landlords so we can
      commence our build-out construction
activities;





●
            construction
      and development costs;





●
            obtaining
      and maintaining required local, state and federal governmental approvals
      and permits related to the construction of restaurant sites and the sale
      of food and alcoholic beverages;





●
            labor
      shortages or disputes experienced by our landlords or outside contractors;
      and





●
            unforeseen
      engineering or environmental problems with the leased
      premises.





Our growth plans depend in large
part on our ability to identify, attract and retain qualified franchisees and to
manage our proposed franchise business.





We expect to grow our restaurant
concept through the franchising of our restaurant concept. As a result, our
future growth will depend on our ability to attract and retain qualified
franchisees, the franchisees’ ability to
execute our concept and capitalize upon our brand recognition and marketing, and
franchisees’
ability to timely develop restaurants. We may not be able to recruit franchisees
who have the business abilities or financial resources necessary to open
restaurants on schedule, or at all, or who will conduct operations in a manner
consistent with our concept and standards. Also, our franchisees may not be able
to operate restaurants in a profitable manner.





In addition, a Federal Trade Commission
rule requires us to furnish prospective franchisees with a franchise disclosure
document containing prescribed information before entering into a binding
agreement or accepting any payment for the franchise. Sixteen states also have
state franchise sales or business opportunity laws which require us to add to
the federal disclosure document additional state-specific disclosures and to
register our offering with a state agency before we may offer uWink franchises
for locations in the state or to state residents. We have completed our uniform
disclosure documents and are currently authorized to sell uWink franchises in
thirty-four states and the District of Columbia in the United States. We must
complete the state registration process in those sixteen states requiring such
additional registration, which include California, New York and Illinois.
Applicable laws in these states vest state examiners with discretion to
disapprove registration applications based on a number of factors. There can be
no assurance that we will be successful in obtaining registration in all of
these states or be able to continue to comply with these regulations, which
could have a material adverse effect on our business and results of
operations.





26


Finally, our franchise operations will
be dependent upon our ability to:





●
            develop,
      maintain and enhance the “uWink”
      brand;





●
            maintain
      satisfactory relations with our franchisees who may, in certain instances,
      have interests adverse to our
interests;





●
            monitor
      and audit the reports and payments received from franchisees;
      and





●
            comply
      with applicable franchising laws, rules and
  regulations.





The
viability of our new business model is dependent on a number of factors that are
not within our control.





The viability of our company-owned and
potential franchised restaurant operations is, and will continue to be, subject
to a number of factors that are not within our control, including:





●
            changes
      in consumer tastes;





●
            national,
      regional and local economic
conditions;





●
            traffic
      patterns in the venues in which we and our franchisees will
      operate;





●
            discretionary
      spending priorities;





●
            demographic
      trends;





●
            consumer
      confidence in food quality, handling and
safety;





●
            consumer
      confidence in the venues in which we and our franchisees will
      operate;





●
            weather
      conditions; and





●
            the
      type, number and location of competing
  restaurants.





Our
inability to manage our growth could impede our ability to generate revenues and
profits and to otherwise implement our business plan and growth strategies,
which would have a negative impact on our business and the value of your
investment.





Our business plan is to grow very
rapidly by opening new restaurant locations, which will place strains on our
management team and our other resources to both implement more sophisticated
managerial, operational and financial systems, procedures and controls and to
train and manage the personnel necessary to implement those functions. We also
will need to significantly expand our operations to implement our longer-term
business plan and growth strategies.





In particular, we also expect to need
to identify, develop and manage relationships with franchisees as part of our
growth plans. This expansion and these expanded relationships will require us
to:





●
            significantly
      improve or replace our existing managerial, operational and financial
      systems, procedures and
controls;


27





●
            comply
      with complex rules and regulations relating to
  franchising;





●
            manage
      the coordination between our various corporate functions, including
      accounting, legal, accounts payable and receivable, and marketing and
      development;





●
            manage,
      train, motivate and maintain a growing employee base;
  and





●
            manage
      our relationships with franchisees.





In addition, our expansion plans will
likely requires us to:





●
            make
      significant capital investments;





●
            devote
      significant management time and
effort;





●
            develop
      budgets for, and monitor, food, beverage, labor, occupancy and other costs
      at levels that will produce profitable operations;
  and





●
            as
      applicable, budget and monitor the cost of construction of
      restaurants.





The time
and costs to effectuate these steps may place a significant strain on our
management personnel, systems and resources, particularly given the limited
amount of financial resources and skilled employees that may be available at the
time. We cannot assure you that we will institute, in a timely manner or at all,
the improvements to our managerial, operational and financial systems,
procedures and controls necessary to support our anticipated increased levels of
operations and to coordinate our various corporate functions.





Our
ability to grow and generate meaningful revenue and profit will depend on our
ability to locate a sufficient number of suitable new restaurant
sites.





One of
our biggest challenges in meeting our growth objectives will be to secure an
adequate supply of suitable new restaurant sites. We may experience delays in
opening restaurants in the future. There can be no assurance that we will be
able to find sufficient suitable locations for our planned expansion in any
future period. In the case we do find suitable locations, we may need to make
significant investments in the properties so they conform to our specifications.
Delays or failures in opening new restaurants could materially adversely affect
our business, financial condition, operating results and/or cash
flows.





Our
expansion into new markets may present increased risks due to our unfamiliarity
with the geographic area.





As a part of our expansion strategy, we
expect we will be opening restaurants in markets in which we have no prior
operating experience. These new markets may have different competitive
conditions, consumer tastes and discretionary spending patterns. In addition,
any new restaurants may take several months to reach budgeted operating levels
due to problems associated with new restaurants, including lack of market
awareness, inability to hire sufficient staff and other factors. Although we
will attempt to mitigate these factors by paying careful attention to training
and staffing needs, there can be no assurance that we will be able to operate
new restaurants on a profitable basis.





We are highly dependent on our Chief
Executive Officer. Our inability to retain our Chief Executive Officer could
impede our business plan and growth strategies, which could have a negative
impact on our business and the value of your investment.





Our ability to implement our business
plan depends, to a critical extent, on the continued efforts and services of our
Chief Executive Officer, Mr. Nolan Bushnell. Were we to lose the services
of Mr. Bushnell, we would be forced to expend significant time and money in
the pursuit of a replacement, which would result in both a delay in the
implementation of our business plan and the diversion of limited working
capital. We can give you no assurance that we could find a satisfactory
replacement for Mr. Bushnell at all, or on terms that would not be unduly
expensive or burdensome to us. Although Mr. Bushnell has signed an
employment agreement with us, this agreement is terminable by Mr. Bushnell
on 30 days written notice and, in any event, does not preclude
Mr. Bushnell from leaving us. We do not currently carry a key man life
insurance policy on Mr. Bushnell which would assist us in recouping our
costs in the event of the death or disability of Mr. Bushnell.





28


Our
inability to raise additional working capital at all or to raise it in a timely
manner would negatively impact our ability to execute our business plan. Should
this occur, the value of your investment could be adversely affected, and you
could even lose your entire investment.





We will most likely need to raise cash
and additional working capital to cover the anticipated shortfall in our cash
and working capital until such time as we become cash flow positive based solely
on our projections for the sales of our restaurant concept less operating and
other costs. Although we raised approximately $10,383,500 in gross proceeds from
the sale of our equity securities in our November 2007 registered offering,
$1,500,400 from the sale of our equity securities in September 2006,
$857,000 from the sale of convertible promissory notes in April 2007 and
$960,500 from the sale of additional convertible promissory notes in
June 2007, we may require additional working capital in the future beyond
that derived from these offerings to fund our future operations and continue our
growth strategy. We cannot give you any assurance that we will be able to secure
any such additional working capital on favorable terms, if at all.





Even
if we are able to raise additional financing, we might not be able to obtain it
on terms that are not unduly expensive or burdensome to our company, or which do
not adversely affect your rights as a securityholder or the value of your
investment, including substantial dilution of your investment in terms of your
percentage ownership in our company, as well as the book value of your
investment in our securities.





Even if we are able to raise additional
cash or working capital through the public or private sale of debt or equity
securities, the procurement of advances on contracts or licenses for
international franchise rights, funding from joint-venture or strategic
partners, debt financing or short-term loans, or the satisfaction of
indebtedness without any cash outlay through the private issuance of debt or
equity securities, the terms of such transactions may be unduly expensive or
burdensome to us or disadvantageous to our existing stockholders. Any additional
equity funding will dilute the interests of the current stockholders and the
investors who purchase securities in this offering, and any additional debt
funding may be secured by a pledge of our assets, which could be lost in the
event of a default thereon. There is no assurance that we will be successful in
raising additional debt or equity capital that will be required to fund our
operating, development and marketing plans.





For example, our need for additional
financing may require us to sell or issue:





●
            securities
      at significant discounts to market, or pursuant to onerous terms and
      conditions, including the issuance of preferred stock with disadvantageous
      dividend, voting, board membership, conversion, redemption or liquidation
      provisions; the issuance of convertible debt with disadvantageous interest
      rates and conversion features;





●
            warrants
      with cashless exercise features; the issuance of securities with
      anti-dilution provisions; and/or





●
            securities
      with associated registration rights with significant penalties for the
      failure to quickly register and associated imbedded derivative
      liabilities.





In addition, if we raise debt
financing, we may be required to secure the financing with all of our business
assets, which could be sold or retained by the creditor upon our default. We
also might be required to sell or license our products or technologies under
disadvantageous circumstances we would not otherwise consider, including
granting licenses with low royalty rates and exclusivity
provisions.





29


We
may be unable to compete effectively in both our current Woodland Hills,
California location and at those sites where we may establish and operate
additional restaurants. Our inability to compete could adversely affect your
investment.





The restaurant industry is intensely
competitive and fragmented. We believe that we compete primarily with casual,
fast-casual and quick-casual establishments. Many of our direct and indirect
competitors in Woodland Hills, California, where our first restaurant is
located, are well-established national, regional or local chains with a greater
market presence than us. Further, virtually all these competitors have
substantially greater financial, marketing and other resources than us, have
been in business longer, have greater name recognition and are better
established in the markets where our first restaurant is located and in those
markets where our future restaurants are planned to be located.





We
will be dependent on distributors or suppliers to provide our restaurant with
food and beverage. If our distributors or suppliers do not provide food and
beverages to us in a timely fashion, we may experience short-term supply
shortages and increased food and beverage costs.





Our restaurant operations will be
dependent on distributors or suppliers for food and beverage products. We have
entered into standard arrangements with a number of such distributors or
suppliers. If those distributors or suppliers cease doing business with us, we
could experience short-term supply shortages in our restaurant and could be
required to purchase food and beverage products at higher prices until we are
able to secure an alternative supply source. In addition, any delay in replacing
our suppliers or distributors on acceptable terms could, in extreme cases,
require us to remove temporarily items from our menu.





Increases
in the minimum wage may have a material adverse effect on our business and
financial results.





A number of the employees we have hired
and intend to hire will be subject to various minimum wage requirements. The
federal minimum wage was increased to $5.85 per hour as of July 24, 2007.
However, we are located in California where employees receive compensation equal
to the California minimum wage, which rose from $6.25 per hour effective
January 1, 2001 to $7.50 per hour effective January 1, 2007 and to
$8.00 per hour effective January 1, 2008. The possibility exists that the
federal or California state minimum wage will be further increased in the
future. These minimum wage increases may have a material adverse effect on our
business, financial condition, results of operations and/or cash
flows.





We
may have difficulty in attracting and retaining management and outside
independent members of our board of directors as a result of their concerns
relating to their increased personal exposure to lawsuits and stockholder claims
by virtue of holding these positions in a publicly-held company.





The directors and management of
publicly traded corporations are increasingly concerned with the extent of their
personal exposure to lawsuits and stockholder claims, as well as governmental
and creditor claims which may be made against them, particularly in view of
recent changes in securities laws imposing additional duties, obligations and
liabilities on management and directors. Due to these concerns, directors and
management are also becoming increasingly concerned with the availability of
directors and officers’ liability
insurance to pay on a timely basis the costs incurred in defending stockholder
claims. Directors and officers liability insurance has recently become much more
expensive and difficult to obtain than it had been. If we are unable to continue
to maintain our directors and officer’s liability
insurance at affordable rates, it may become increasingly more difficult to
attract and retain qualified outside directors to serve on our board of
directors. The fees of directors are also rising in response to their increased
duties, obligations and liabilities as well as increased exposure to such risks.
As a company with a limited operating history and limited resources, we will
have a more difficult time attracting and retaining management and outside
independent directors than a more established company due to these enhanced
duties, obligations and liabilities.





30


Risks
Relating to the Restaurant Industry





Other
restaurants may copy or duplicate the game-centric design concept of our uWink
restaurants.





Although we believe that we have taken
reasonable steps to protect our proprietary concepts and other intellectual
property, we cannot assure you that third parties will not attempt to copy or
duplicate our restaurant concept, which could have a material adverse affect on
our business, results of operation or financial condition.





Negative
publicity surrounding our restaurant or the consumption of beef, seafood,
poultry, or produce generally, or shifts in consumer tastes, could negatively
impact the popularity of our restaurant and our results of
operations.





We expect that the popularity of our
restaurants in general, and our menu offerings in particular, will be key
factors to the success of our operations. Negative publicity resulting from poor
food quality, illness, injury, or other health concerns, whether related to our
restaurant or to the beef, seafood, poultry, or produce industries in general
(such as negative publicity concerning the accumulation of carcinogens in
seafood, e-coli, Hepatitis A, and outbreaks of “mad cow”, “foot-and-mouth” or “bird flu” disease), or
operating problems related to our restaurant, could make our brand and menu
offerings less appealing to consumers. In addition, other shifts in consumer
preferences away from the kinds of food we offer, whether because of dietary or
other health concerns or otherwise, would make our restaurant less appealing and
adversely affect our sales and results of operations.





Fluctuations
in the cost, availability and quality of our raw ingredients and natural
resources such as energy affect our results of operations.





The cost, availability and quality of
the ingredients that we use to prepare our food are subject to a range of
factors, many of which are beyond our control. Fluctuations in economic and
political conditions, weather and demand could adversely affect the cost of our
ingredients. We have limited control over these changes in the price and quality
of commodities, since we typically do not enter into long-term pricing
agreements for our ingredients. We may not be able to pass through any future
cost increases by increasing menu prices. We and our potential franchisees are
and will be dependent on frequent deliveries of fresh ingredients, thereby
subjecting us to the risk of shortages or interruptions in supply. Additionally,
in the event of massive culling of specific animals such as chickens or turkeys
to prevent the spread of disease, the supply and availability of ingredients may
become limited. This could dramatically increase the price of certain menu items
which could decrease sales of those items or could force us to eliminate those
items from our menus entirely. All of these factors could adversely affect our
business, reputation and financial results.





Government
regulations affecting the operation of our restaurant could increase our
operating costs and restrict our ability to grow.





We must obtain licenses from regulatory
authorities allowing us to sell liquor, beer and wine, and we must obtain a food
service license from local health authorities for our restaurant. Our liquor
license must be renewed annually and may be revoked at any time for cause,
including violation by us or our employees of any laws and regulations relating
to the minimum drinking age, advertising, wholesale purchasing, and inventory
control. In California, for example, where we have our first restaurant and
where we are planning to open additional restaurants, the number of liquor
licenses available is limited and licenses are traded at market prices. We
expect that liquor, beer and wine sales will comprise a significant portion of
our sales. Therefore, obtaining and maintaining licenses will be an important
component of our restaurants’ operations, and
the failure to obtain or maintain food and liquor licenses and other required
licenses, permits and approvals would adversely impact our first restaurant and
our growth strategy.





In addition, we are subject to federal
regulation and state laws that regulate the offer and sale of franchises and
substantive aspects of a franchisor-franchisee relationship. We are also subject
to various other federal, state and local laws, rules and regulations affecting
our business, and our franchisees will be subject to these laws, rules and
regulations as well. Each of our restaurants and those owned by our franchisees
will be subject to a variety of licensing and governmental regulatory provisions
relating to wholesomeness of food, sanitation, health, safety and, in certain
cases, licensing of the sale of alcoholic beverages. Difficulties in obtaining,
or the failure to obtain, required licenses or approvals can delay or prevent
the opening of a new restaurant in any particular area. Furthermore, there can
be no assurance that we will remain in compliance with applicable laws or
licenses that we have or will obtain, the failure of which by a restaurant could
result in our loss of the restaurant’s license and even
the closing of the restaurant.





31


Litigation
concerning our food quality, our employment practices, liquor liability, and
other issues could result in significant expenses to us and could divert
resources from our operations.





Like other restaurants, we expect we
may receive complaints or litigation from, and potential liability to, our
guests involving food-borne illness or injury or other operational issues. We
may also be subject to complaints or allegations from, and potential liability
to, our former, existing, or prospective employees involving our restaurant
employment practices and procedures. In addition, we will be subject to state
“dram
shop” laws
and regulations, which generally provide that a person injured by an intoxicated
person may seek to recover damages from an establishment that wrongfully served
alcoholic beverages to such person. Recent litigation against restaurant chains
has resulted in significant judgments, including punitive damages, under “dram shop” statutes. While
we carry liquor liability coverage as part of our existing comprehensive general
liability insurance, we may still be subject to a judgment in excess of our
insurance coverage and we may not be able to obtain or continue to maintain such
insurance coverage at reasonable costs, if at all. Regardless of whether any
claims against us are valid or whether we are liable, our sales may be adversely
affected by publicity resulting from such claims. Such claims may also be
expensive to defend and may divert time and money away from our operations and
adversely affect our financial condition and results of operations.





Labor
shortages or increases in labor costs could restrict our ability to grow or
adversely affect our results of operations.





We expect that our success will depend
in part on our ability to attract, motivate, and retain a sufficient number of
qualified restaurant employees, including restaurant general managers and
kitchen managers, necessary to build and grow our operations. If we are unable
to identity, and attract a sufficient number of qualified employees, we will be
unable to open and operate the locations called for by our development plans.
Competition for qualified restaurant employees could require us to pay higher
wages and benefits, which could result in higher labor costs. In addition, we
may have hourly employees who are paid the federal or state minimum wage and who
rely on tips for a significant portion of their income. Government-mandated
increases in minimum wages, overtime pay, paid leaves of absence, or health
benefits, or increased tax reporting and tax payment requirements for employees
who receive gratuities, or a reduction in the number of states that allow tips
to be credited toward minimum wage requirements, could increase our labor costs
and reduce our operating margins.





We
may not be able to protect our trademarks and other proprietary
rights.





We believe that our trademarks and
other proprietary rights are important to our brand and our competitive
position. Accordingly, we devote substantial resources to the development and
protection of our trademarks and proprietary rights. However, the actions taken
by us may be inadequate to prevent infringement or other unauthorized use of our
trademarks and other proprietary rights by others, which may thereby dilute our
trademarks in the marketplace and/or diminish the value of such proprietary
rights. We may also be unable to prevent others from claiming infringement or
other unauthorized use of their trademarks and proprietary rights by us. In
addition, others may assert rights in our trademarks and other proprietary
rights. Our rights to our trademarks may in some cases be subject to the common
law rights of any other person who began using the trademark (or a confusingly
similar mark) prior to both the date of our registration and our first use of
such trademarks in the relevant territory. We cannot assure you that third
parties will not assert claims against our trademarks and other proprietary
rights or that we will be able to successfully resolve such claims which could
result in our inability to use certain trademarks or other proprietary rights in
certain jurisdictions or in connection with certain goods or services. Future
actions by third parties may diminish the strength of our trademarks or other
proprietary rights, injure the goodwill associated with our business and
decrease our competitive strength and performance. We could also incur
substantial costs to defend or pursue legal actions relating to the use of our
trademarks and other proprietary rights, which could have a material adverse
affect on our business, results of operation or financial
condition.





32


Risks
Relating to an Investment in Our Securities





The
concentration of ownership of our common stock gives a few individuals
significant control over important policy and operating decisions and could
delay or prevent changes in control.





As of March 30, 2008, our executive
officers and directors beneficially owned approximately 16.3% of the issued and
outstanding shares of our common stock, as calculated pursuant to
Rule 13d-3 of the Securities Exchange Act of 1934. As a result, these
persons have the ability to exert significant control over matters that could
include the election of directors, changes in the size and composition of the
board of directors, mergers and other business combinations involving our
company, and operating decisions affecting us. In addition, through control of
the board of directors and voting power, they may be able to control certain
decisions, including decisions regarding the qualification and appointment of
officers, dividend policy, access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), and the
acquisition or disposition of our assets. In addition, the concentration of
voting power in the hands of those individuals could have the effect of delaying
or preventing a change in control of our company, even if the change in control
would benefit our stockholders. A perception in the investment community of an
anti-takeover environment at our company could cause investors to value our
securities lower than in the absence of such a perception.





Our
shares of common stock are thinly-traded, so you may be unable to sell at or
near ask prices or at all if you need to sell your shares to raise money or
otherwise desire to liquidate your shares.





Our common stock is sporadically or
“thinly” traded on the OTC
Bulletin Board, meaning that the number of persons interested in purchasing our
common stock at or near ask prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to
the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.





The
market price for our common stock is particularly volatile given our status as a
relatively unknown company with a small and thinly-traded public float and
limited operating history. As a result, the price at which you purchase our
securities may not be indicative of the prices that will prevail in the trading
market and you may be unable to sell your shares or warrants at or above your
purchase price, which may result in substantial losses to you.





The market for our common stock is
characterized by significant price volatility when compared to seasoned issuers,
and we expect that our share price will continue to be more volatile than a
seasoned issuer for the indefinite future. The volatility in our share price is
attributable to a number of factors.





First, as noted above, our common stock
is sporadically or thinly traded. As a consequence of this lack of liquidity,
the trading of relatively small quantities of shares by our stockholders may
disproportionately influence the price of those shares in either direction. The
price for our shares could, for example, decline precipitously in the event that
a large number of shares of our common stock are sold on the market without
commensurate demand, as compared to a seasoned issuer which could better absorb
those sales without adverse impact on its share price.





Secondly, we are a speculative or “risky” investment due to
our limited operating history and lack of profits to date, lack of capital to
execute our business plan, and uncertainty of future market acceptance for our
restaurant concept. As a consequence of this enhanced risk, more risk-adverse
investors may, under the fear of losing all or most of their investment in the
event of negative news or lack of progress, be more inclined to sell their
shares on the market more quickly and at greater discounts than would be the
case with the stock of a seasoned issuer.





33


The following factors may add to the
volatility in the price of our common stock:





●
            actual
      or anticipated variations in our quarterly or annual operating
      results;





●
            market
      acceptance of our restaurant
concept;





●
            government
      regulations;





●
            announcements
      of significant acquisitions, strategic partnerships or joint
      ventures;





●
            our
      capital commitments; and





●
            additions
      or departures of our key personnel.





Many of these factors are beyond our
control and may decrease the market price of our common stock, regardless of our
operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common stock will be at any time, including
as to whether our common stock will sustain its current market prices, or as to
what effect, if any, that the sale of shares or the availability of shares of
our common stock for sale at any time will have on the prevailing market
price.





As
a public company, we must implement additional and expensive finance and
accounting systems, procedures and controls as we grow our business and
organization to satisfy new reporting requirements, which will increase our
costs and require additional management resources.





As a public company, we incur
significant additional costs to comply with the Sarbanes-Oxley Act of 2002 and
the related rules and regulations of the Securities and Exchange Commission, or
SEC. In addition, we will be required to comply with the internal controls
evaluation and certification requirements of Section 404 of the
Sarbanes-Oxley Act effective with the end of our 2008 fiscal year. Compliance
with Section 404 of the Sarbanes-Oxley Act relating to our internal
controls over financial reporting, which will require annual management
assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent auditors addressing these assessments,
and other requirements for public companies, requires, and will continue to
require, us to incur significant costs and require significant management
resources.





If we are unable to complete the
required Section 404 assessment as to the adequacy of our internal controls
over financial reporting, or if we fail to maintain or implement adequate
controls resulting in the identification and disclosure of material weaknesses
as of the date of our first Form 10-K for which compliance with
Section 404 is required, our reputation, stock price and ability to obtain
additional financing could be impaired.





During the past several years, various
public companies, when first providing internal control reports, disclosed
significant deficiencies or material weaknesses in their internal control over
financial reporting. When we become subject to SEC requirements under
Section 404, if our internal control reports disclose significant
deficiencies or material weaknesses, our stockholders and third parties could
lose confidence in our financial reporting, which would likely harm the trading
price of our stock, our access to additional capital and our
liquidity.





Anti-takeover
provisions in our charter and by-laws, as well as applicable laws, may
discourage or prevent a change of control, may make it difficult for you to
change our management and may also make a takeover difficult.





As part of our reincorporation in
Delaware effective July 23, 2007, we became subject to the General
Corporation Law of the state of Delaware. In addition, our certificate of
incorporation and bylaws include, among other things, provisions which could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. These provisions will
include:


34





●
            authorizing
      the issuance of “blank
      check”
      preferred stock that could be issued by our board of directors to increase
      the number of outstanding shares or change the balance of voting control
      and resist a takeover attempt;





●
            limiting
      the ability of stockholders to call special meetings of stockholders;
      and





●
            legal
      restrictions pursuant to state law on business combinations with certain
      stockholders.





The
application of the “penny stock” rules could
adversely affect the market price of our common stock and increase your
transaction costs to sell those shares.





So long as the trading price of our
common stock is below $5 per share, the open-market trading of our common stock
will be subject to the “penny stock” rules. From
June 1, 2006 through March 30, 2008 the closing price of our common stock
has ranged between $0.25 (pre-split) and $10.88 (post-split) per share. Although
our four-for-one reverse stock split, effected as of July 26, 2007, has had
the effect of increasing the value of our stock on a per-share basis, there can
be no assurance that such increase will raise the trading price of our shares
above $5 per share on a consistent basis. The closing price of our common stock
since the effective date of our reverse stock split has ranged between $1.16 and
$5.05 per share. The closing price of our common stock on March 30, 2008 was
$1.49 per share.





The “penny stock” rules impose
additional sales practice requirements on broker-dealers who sell securities to
persons other than established customers and accredited investors (generally
those with assets in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 together with their spouse). For transactions covered by these rules,
the broker-dealer must make a special suitability determination for the purchase
of securities and have received the purchaser’s written consent
to the transaction before the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the broker-dealer must deliver, before
the transaction, a disclosure schedule prescribed by the SEC relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information on the limited market in penny stocks. These
additional burdens imposed on broker-dealers may restrict the ability or
decrease the willingness of broker-dealers to sell the common stock, and may
result in decreased liquidity for our common stock and increased transaction
costs for sales and purchases of our common stock as compared to other
securities.





Stockholders should be aware that,
according to SEC Release No. 34-29093, the market for penny stocks has
suffered in recent years from patterns of fraud and abuse. Such patterns
include:





●
            control
      of the market for the security by one or a few broker-dealers that are
      often related to the promoter or
issuer;





●
            manipulation
      of prices through prearranged matching of purchases and sales and false
      and misleading press releases;





●
            “boiler
      room”
      practices involving high-pressure sales tactics and unrealistic price
      projections by inexperienced sales
persons;





●
            excessive
      and undisclosed bid-ask differential and markups by selling
      broker-dealers; and





●
            the
      wholesale dumping of the same securities by promoters and broker-dealers
      after prices have been manipulated to a desired level, along with the
      resulting inevitable collapse of those prices and with consequent investor
      losses.





35


Our management is aware of the abuses
that have occurred historically in the penny stock market. Although we do not
expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being
established with respect to our securities but cannot assure you that our
efforts in this regard will be effective.





Future
sales of our common stock may cause the prevailing market price to decrease and
impair our capital raising abilities.





As of March 30, 2008, we have warrants
outstanding that are exercisable for the purchase of approximately 8.2 million
shares of our common stock (giving effect to our four-for-one reverse stock
split), and as of March 30, 2008, we had outstanding options that are
exercisable for the purchase of approximately 1.1 million shares of our common
stock, as well as 212,500 shares of restricted stock, the restrictions on which
will lapse over the next two to three years.   If, and to the
extent, outstanding options or warrants are exercised or converted, you will
experience dilution to your holdings.





In addition, after giving effect to the
net increase in the number of shares of common stock we may issue pursuant to
the reverse stock split and our amended certificate of incorporation, we will
have approximately 2.5 million shares of our common stock authorized and
not yet issued or reserved against. In general, we may issue all of these
shares, as well as 5,000,000 shares of preferred stock which may have rights and
preferences superior to that of our common stock, without any action or approval
by our securityholders. If a large number of shares of our common stock are sold
in the open market after the date of this prospectus, or if the market perceives
that such sales will occur as a result of any of the foregoing, the trading
price of our common stock could decrease. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional common
stock.





To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.





We do not anticipate paying cash
dividends on our common stock in the foreseeable future, and we cannot assure an
investor that funds will be legally available to pay dividends, or that, even if
the funds are legally available, the dividends will be paid.





We
may be unable to fully utilize the state and federal net operating loss
carryforwards generated by our subsidiary, uWink California, Inc., as a
result of our December 2003 acquisition of uWink
California, Inc.





From its inception in 1999 through
December 31, 2003, our now wholly owned subsidiary, uWink
California, Inc., generated approximately $13,000,000 each of federal and
state net operating loss carryforwards, or NOLs, relating to its operating
losses during that period. We do not believe our acquisition of uWink
California, Inc. in December 2003 constituted a “change in
control” of
uWink California, Inc., because the former stockholders of uWink
California, Inc. became our majority stockholders following the
acquisition. However, despite our belief that we will be able to utilize these
NOLs against income generated by uWink California, Inc. if we comply with
certain Internal Revenue Service regulations, our utilization of these NOLs may
be limited by the IRS under its change in control rules. In addition, a portion
of these NOLs may expire before they can be fully utilized, and our ability to
utilize federal NOLs may vary significantly from our ability to utilize state
NOLs.

















36








ITEM
7. FINANCIAL STATEMENTS





UWINK,
INC. AND SUBSIDIARY


CONSOLIDATED
FINANCIAL STATEMENTS


YEARS
ENDED JANAURY 1, 2008 AND JANUARY 2, 2007






CONTENTS








PageReport
      of Independent Registered Public Accounting Firm
            F-1FINANCIAL
      STATEMENTS:Consolidated
      Balance Sheet as of January 1, 2008
            F-2Consolidated
      Statements of Operations for the years ended January 1, 2008 and January
      2, 2007
            F-3Consolidated
      Statement of Stockholders’ Equity
      (Deficit) for the years ended January 1, 2008 and January 2,
      2007
            F-4Consolidated
      Statements of Cash Flows for the years ended January 1, 2008 and January
      2, 2007
            F-5Notes
      to Consolidated Financial Statements
            F-6











37








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To The
Board of Directors and Stockholders of


uWink,
Inc.


Van Nuys,
California





We have
audited the accompanying consolidated balance sheet of uWink, Inc. and
subsidiary as of January 1, 2008, and the related consolidated statements of
operations, stockholders’ equity (deficit)
and cash flows for the years ended January 1, 2008 and January 2, 2007. These
consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of uWink, Inc. and subsidiary
as of January 1, 2008, and the results of its operations and its cash flows for
the years ended January 1, 2008 and January 2, 2007, in conformity with
accounting principles generally accepted in the United States of
America.








/s/
Kabani & Company, Inc.


CERTIFIED
PUBLIC ACCOUNTANTS





Los
Angeles, California


March 20,
2008














F-1










uWink, Inc. and
      SubsidiaryConsolidated Balance
      SheetAs of January 1,
      2008
  ASSETSCURRENT
    ASSETSCash and cash
      equivalents
              
              $
              7,294,019Account receivable, net of
      allowance for doubtful accounts of $72,265
              
              
              49,481Inventory,
    net
              
              
              19,547Prepaid expenses and other current
      assets
              
              
              38,447TOTAL CURRENT
      ASSETS
              
              
              7,401,493PROPERTY AND EQUIPMENT,
      net
              
              
              943,938LONG TERM
      DEPOSIT
              
              
              40,238TOTAL
ASSETS
              
              $
              8,385,669LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              891,124Accrued
      expenses
              
              
              130,313Accrued payroll and related
      benefits
              
              
              79,492Advance from
      customers
              
              
              24,980TOTAL CURRENT
      LIABILITIES
              
              
              1,125,909STOCKHOLDERS’
      EQUITYCommon stock, $0.001 par value;
      25,000,000 shares authorized;12,671,534 shares issued and
      outstanding
              
              
              12,672Additional paid-in
      capital
              
              
              47,717,957Accumulated
      deficit
              
              
              (40,481,011
              )Shares to be
      issued
              
              
              10,142TOTAL STOCKHOLDERS’
      EQUITY
              
              
              7,259,760TOTAL LIABILITIES AND
      STOCKHOLDERS’
      EQUITY
              
              $
              8,385,669The accompanying notes are an
      integral part of these consolidated financial
      statements





F-2


uWink,
      Inc. and SubsidiaryConsolidated
      Statements of OperationsFor
      the Years Ended January 1, 2008 and January 2, 20072007
              
              
              2006NET
      SALES
              
              $
              2,545,671
              
              
              $
              450,149COST
      OF SALES
              
              
              753,027
              
              
              
              249,248GROSS
      PROFIT
              
              
              1,792,645
              
              
              
              200,901OPERATING
      EXPENSESSelling,
      general and administrative expenses
              
              
              6,720,974
              
              
              
              3,690,921LOSS
      FROM OPERATIONS
              
              
              (4,928,330
              )
              
              
              (3,490,020
              )OTHER
      INCOME (EXPENSE)Other
      income
              
              
              43,433
              
              
              
              14,504Beneficial
      conversion of debt
              
              
              (408,435
              )
              
              
              (16,667
              )Gain
      on settlement of debt
              
              
              65,576
              
              
              
              42,465Interest
      expense
              
              
              (118,839
              )
              
              
              (176,334
              )Fair
      value of warrant liability
              
              
              -
              
              
              
              (6,583,902
              )Loss
      on debt conversion
              
              
              -
              
              
              
              (151,111
              )TOTAL
      OTHER INCOME (EXPENSE)
              
              
              (418,265
              )
              
              
              (6,871,045
              )LOSS
      BEFORE PROVISION FOR INCOME TAXES
              
              
              (5,346,595
              )
              
              
              (10,361,065
              )PROVISION
      FOR INCOME TAXES
              
              
              800
              
              
              
              -NET
      LOSS
              
              $
              (5,347,396
              )
              
              $
              (10,361,065
              )NET
      LOSS PER COMMON SHARE - BASIC AND DILUTED
              
              $
              (0.72
              )
              
              $
              (2.15
              )WEIGHTED
      AVERAGE COMMON SHARESOUTSTANDING
      - BASIC AND DILUTED
              
              
              7,404,805
              
              
              
              4,808,296Weighted
      average number of shares for dilutive securities has not been calculated
      because the effect is anti-dilutiveThe
      accompanying notes are an integral part of these consolidated financial
      statements


F-3





uWink,
      Inc. and SubsidiaryConsolidated
      Statement of Stockholders’ Equity
      (Deficit)For
      the Years Ended January 1, 2008 and January 2, 2007Additional
              
              
              SharesCommon
      Stock
              
              
              Paid-in
              
              
              to
      be
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Issued
              
              
              Deficit
              
              
              TotalBalance,
      December 31, 2005
              
              
              3,118,822
              
              
              
              3,118
              
              
              
              23,040,461
              
              
              
              304,697
              
              
              
              (24,772,550
              )
              
              
              (1,424,275
              )Issuance
      of common stock for conversion ofloan,
      and accrued interest
              
              
              299,393
              
              
              
              299
              
              
              
              498,005
              
              
              
              (150,003
              )
              
              
              -
              
              
              
              348,302Issuance
      of common stock for cash, net
              
              
              2,527,417
              
              
              
              2,527
              
              
              
              2,948,370
              
              
              
              
              
              
              
              -
              
              
              
              2,950,897Issuance
      of common stock for services
              
              
              293,142
              
              
              
              293
              
              
              
              486,997
              
              
              
              (134,550
              )
              
              
              -
              
              
              
              352,740Issuance
      of common stock to employeesfor
      accrued payroll
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              175,000
              
              
              
              -
              
              
              
              175,000Issuance
      of common stock to employeesfor
      exercise of options
              
              
              32,500
              
              
              
              33
              
              
              
              44,967
              
              
              
              -
              
              
              
              -
              
              
              
              45,000Issuance
      of common stockfor
      exercise of warrants
              
              
              33,333
              
              
              
              33
              
              
              
              199,953
              
              
              
              34,500
              
              
              
              -
              
              
              
              234,485Merger
      conversion shares
              
              
              2,697
              
              
              
              3
              
              
              
              10,001
              
              
              
              (10,002
              )
              
              
              -
              
              
              
              2Shares
      cancelled
              
              
              (12,500
              )
              
              
              (13
              )
              
              
              (46,488
              )
              
              
              -
              
              
              
              -
              
              
              
              (46,500
              )Beneficial
      conversion feature related to convertible note
              
              
              -
              
              
              
              -
              
              
              
              (16,500
              )
              
              
              -
              
              
              
              -
              
              
              
              (16,500
              )Nominal
      stock option expense
              
              
              -
              
              
              
              -
              
              
              
              499,548
              
              
              
              -
              
              
              
              -
              
              
              
              499,548Value
      of warrants issued for interest expense
              
              
              -
              
              
              
              -
              
              
              
              132,950
              
              
              
              -
              
              
              
              -
              
              
              
              132,950Reverse
      warrant liability
              
              
              -
              
              
              
              -
              
              
              
              6,583,902
              
              
              
              -
              
              
              
              -
              
              
              
              6,583,902Loss
      on debt conversion
              
              
              
              
              
              
              
              
              
              
              151,111
              
              
              
              
              
              
              
              
              
              
              
              151,111Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,361,065
              )
              
              
              (10,361,065
              )Balance,
      January 2, 2007
              
              
              6,294,804
              
              
              $
              6,295
              
              
              $
              34,533,276
              
              
              $
              219,642
              
              
              $
              (35,133,615
              )
              
              $
              (374,403
              )Issuance
      of common stock for conversion ofdebt,
      and accrued interest
              
              
              949,703
              
              
              
              950
              
              
              
              1,581,889
              
              
              
              
              
              
              
              -
              
              
              
              1,582,839Issuance
      of common stock for cash
              
              
              5,191,750
              
              
              
              5,192
              
              
              
              10,378,308
              
              
              
              
              
              
              
              -
              
              
              
              10,383,500Expenses
      incurred for raising cash
              
              
              
              
              
              
              
              
              
              
              (894,200
              )
              
              
              
              
              
              
              
              
              
              
              (894,200
              )Issuance
      of common stock for services
              
              
              15,049
              
              
              
              15
              
              
              
              106,121
              
              
              
              
              
              
              
              -
              
              
              
              106,136Issuance
      of common stock to employeesfor
      accrued payroll
              
              
              6,250
              
              
              
              6
              
              
              
              54,994
              
              
              
              (175,000
              )
              
              
              -
              
              
              
              (120,000
              )Issuance
      of common stock to employeesfor
      exercise of options
              
              
              77,710
              
              
              
              78
              
              
              
              144,309
              
              
              
              
              
              
              
              -
              
              
              
              144,387Issuance
      of common stockfor
      exercise of warrants
              
              
              182,102
              
              
              
              182
              
              
              
              237,581
              
              
              
              (34,500
              )
              
              
              -
              
              
              
              203,263Shares
      issued to round up reverse split
              
              
              416
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Shares
      issued for services in prior years now returned and
    cancelled
              
              
              (46,250
              )
              
              
              (46
              )
              
              
              (205,304
              )
              
              
              
              
              
              
              -
              
              
              
              (205,350
              )Beneficial
      conversion feature related to convertible notes
              
              
              -
              
              
              
              -
              
              
              
              408,435
              
              
              
              -
              
              
              
              -
              
              
              
              408,435Nominal
      stock option expense
              
              
              -
              
              
              
              -
              
              
              
              1,159,765
              
              
              
              -
              
              
              
              -
              
              
              
              1,159,765Restricted
      stock issued to employees
              
              
              
              
              
              
              
              
              
              
              212,784
              
              
              
              
              
              
              
              
              
              
              
              212,784Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,347,396
              )
              
              
              (5,347,396
              )Balance,
      January 1, 2008
              
              
              12,671,534
              
              
              $
              12,672
              
              
              $
              47,717,957
              
              
              $
              10,142
              
              
              $
              (40,481,011
              )
              
              $
              7,259,760The
      accompanying notes are an integral part of these consolidated financial
      statements


F-4






uWink,
      Inc. and SubsidiaryConsolidated
      Statements of Cash FlowsFor
      the years ended January 1, 2008 and January 2, 20072007
              
              
              2006CASH
      FLOW FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (5,347,396
              )
              
              $
              (10,361,065
              )Adjustment
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of debt discount on convertible note payable
              
              
              408,435
              
              
              
              16,667Employee
      stock option expense
              
              
              1,372,549
              
              
              
              499,548Depreciation
      and amortization expense
              
              
              312,018
              
              
              
              94,826Bad
      debt allowance
              
              
              207
              
              
              
              (3,728
              )Loss
      on debt conversion
              
              
              -
              
              
              
              111,227Gain
      on settlement of debt
              
              
              (65,576
              )
              
              
              (42,465
              )Loss
      on accounts payable conversion
              
              
              -
              
              
              
              39,884Fair
      value of warrant liability
              
              
              -
              
              
              
              6,583,902Issuance
      of warrants for debt
              
              
              -
              
              
              
              132,950Issuance
      of common stock for payroll
              
              
              -
              
              
              
              175,000Issuance
      of common stock for services
              
              
              (99,214
              )
              
              
              306,240Inventory
      obsolescence reserve
              
              
              44,695
              
              
              
              78,276Issuance
      of common stock for interest expense
              
              
              85,339
              
              
              
              13,901Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              29,836
              
              
              
              18,642Inventory
              
              
              12,964
              
              
              
              99,863Deposits
      - inventory
              
              
              -
              
              
              
              66,398Deposits
              
              
              -
              
              
              
              (2,300
              )Prepaid
      expenses and other current assets
              
              
              (54,550
              )
              
              
              19,348Accounts
      payable
              
              
              (108,299
              )
              
              
              96,934Accrued
      expenses
              
              
              (106,604
              )
              
              
              49,338Accrued
      payroll and related benefits
              
              
              (195,198
              )
              
              
              62,444Net
      cash used in operating activities
              
              
              (3,710,793
              )
              
              
              (1,944,172
              )CASH
      FLOW FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
              
              
              (328,839
              )
              
              
              (942,864
              )Payment
      for liquor license
              
              
              -
              
              
              
              (60,000
              )Net
      cash provided by (used in) investing activities
              
              
              (328,839
              )
              
              
              (1,002,864
              )CASH
      FLOW FROM FINANCING ACTIVITIES:Proceeds
      from debt
              
              
              1,492,500
              
              
              
              -Repayment
      of debt
              
              
              (200,805
              )
              
              
              (152,100
              )Proceeds
      from related parties
              
              
              325,000
              
              
              
              -Repayment
      to related parties
              
              
              (175,000
              )
              
              
              (100,000
              )Proceeds
      from sale of common stock
              
              
              10,383,500
              
              
              
              2,950,897Expenses
      incurred for sale of common stock
              
              
              (894,200
              )
              
              
              -Proceeds
      from warrant exercises
              
              
              203,263
              
              
              
              234,485Proceeds
      from option exercise
              
              
              144,387
              
              
              
              45,000Net
      cash provided by financing activities
              
              
              11,278,645
              
              
              
              2,978,282NET
      INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              7,239,013
              
              
              
              31,247CASH
      AND CASH EQUIVALENTS, Beginning of period
              
              
              55,006
              
              
              
              23,759CASH
      AND CASH EQUIVALENTS, End of period
              
              $
              7,294,019
              
              
              $
              55,006SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Interest
      paid
              
              $
              -
              
              
              $
              3,049Income
      taxes paid
              
              $
              -
              
              
              $
              -SUPPLEMENTAL
      DISCLOSURES OF NON-CASH FINANCING ACTIVITIESConversion
      of debt into shares of common stock
              
              $
              1,497,500
              
              
              $
              320,000Conversion
      of accrued payroll into shares of common stock
              
              $
              55,000
              
              
              $
              -The
      accompanying notes are an integral part of these consolidated financial
      statements




F-5





UWINK,
INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED JANUARY 1, 2008 AND JANUARY 2, 2007





NOTE
1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES




ORGANIZATION
AND LINE OF BUSINESS





uWink,
Inc. (formerly Prologue) was incorporated under the laws of the State of Utah on
October 14, 1982. Pursuant to a Securities Purchase Agreement and Plan of
Reorganization dated November 21, 2003 among Prologue, uWink, Inc., a Delaware
corporation (“uWink-DE”) and its
stockholders, Prologue received all the issued and outstanding shares of
uWink-DE’s
capital stock (subsequently, uWink-DE changed its name to uWink California,
Inc.). Prologue issued 1 share of its common stock for every 3.15611 shares of
uWink-DE capital stock. Because the stockholders of uWink-DE received a majority
of the issued and outstanding shares of Prologue and the uWink-DE 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:





●
            uWink-DE
      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.





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




uWink-DE
was incorporated under the laws of the State of Delaware on June 10, 1999.
Subsequent to the transaction described above, uWink-DE changed its name to
uWink California, Inc. (“uWink
California”).  In
July 2007, uWink, Inc. (formerly Prologue) changed its state of incorporation
from Utah to Delaware by merging with a Delaware corporation that was initially
its wholly-owned subsidiary.  uWink, Inc. (formerly Prologue) and its
subsidiary, uWink California, together with uWink California’s subsidiary, uWink
Franchise Corporation, are hereafter referred to as the “Company”, “we”, or “us”.





We are a
developer/operator of digital media entertainment and hospitality software and
an interactive restaurant concept named uWink.





We derive
our revenue from the sale of food, drink and merchandise in our restaurants, the
franchising of our restaurant concept and technology licensing
fees.





BASIS
OF PRESENTATION





The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America.





On
November 7, 2007, the Company completed an approximately $10.4 million
registered equity offering. Investors purchased approximately 5.2 million units
at a purchase price of $2.00 per unit, each unit consisting of one share of
common stock and a warrant to purchase one share of common stock at an exercise
price of $2.40. The warrants are immediately separable from the units,
immediately exercisable and will expire on the fifth anniversary of the date of
their issuance. The net proceeds were approximately $9.3 million after deducting
placement agent fees and other offering expenses. The proceeds of the raise will
be used to fund new restaurant development and general working capital
needs.  Based upon the Company’s cash flow
projections for the next 12 months, the Company requires approximately $3.0
million per annum to fund its operations.  Giving effect to the completion
of the November 2007 registered equity offering, the Company has sufficient
working capital to operate through fiscal year 2008 and, therefore, to remove
the doubt about the Company’s ability to continue as a going concern.
Consequently, at January 1, 2008, there is no longer substantial doubt as to the
Company’s ability to continue as a going concern.





Stock
Split





Effective
July 26, 2007, we effected a four-for-one reverse stock split. All per share
amounts and share numbers presented herein have been retroactively restated for
this adjustment.





Fiscal
Year End





In 2006,
with the commencement of restaurant operations, we adopted a 52/53-week fiscal
year ending on the Tuesday closest to December 31st for financial reporting
purposes. As a result, our 2006 fiscal year ended on January 2, 2007 and our
2007 fiscal year ended on January 1, 2008. For the purposes of the accompanying
financial statements, the years ended January 1, 2008 and January 2, 2007 are
sometimes referred to as fiscal years 2007 and 2006, respectively.





F-6


Principles
of Consolidation





The
accompanying consolidated financial statements include the accounts of uWink,
Inc. and its subsidiary, uWink California, Inc., together with uWink California
Inc.’s subsidiary, uWink Franchise Corporation. 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 a concentration of credit
risk are cash and cash equivalents. The Company currently maintains
substantially all of its day-to-day operating cash balances with major financial
institutions. At times during the year, and at January 1, 2008, cash balances
were in excess of Federal Depository Insurance Corporation insurance
limits.





Inventory





Non-restaurant
inventory consists of finished goods and restaurant inventory consists of food,
beverages and merchandise available for sale in the restaurant. All inventory is
stated at the lower of cost, utilizing the first-in, first-out method, or
market. An obsolescence reserve is estimated for items whose value has been
determined to be impaired or whose future utility appears limited. For the years
ended January 1, 2008 and January 2, 2007, the obsolescence reserve was $291,887
and $295,730, respectively.  The obsolescence reserve relates to
non-restaurant inventory only.





Property
and Equipment





Property
and equipment are stated at cost and are depreciated using the straight-line
method over their estimated useful lives of 5-10 years for machinery and
equipment and 3-5 years for office furniture and equipment. Computer equipment
and related software is depreciated using the straight-line method over its
estimated useful life of 3 years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the lease.





Expenditures
for maintenance and repairs are charged to operations as incurred while renewals
and betterments are capitalized. Gains and losses on disposals are included in
the results of operations.





Revenue
Recognition





Restaurant
revenue from food, beverage and merchandise sales is recognized when payment is
tendered at the point of sale. We record gift card sales as a short term
liability in the period in which a gift card is issued and proceeds are
received. As gift cards are redeemed, this liability is reduced and revenue is
recognized.







F-7




Franchise
revenue is recognized when we have performed substantially all of our
obligations as franchisor. During fiscal 2007, our franchise-related revenue
consisted of a $20,000 non-refundable area development fee and $1,000 of
non-refundable franchise application fees. Our area development fee consists of
a one-time payment in consideration for the services we perform in preparation
of executing each area development agreement.  Substantially all of
these services which include, but are not limited to, conducting market and
trade area analysis, a meeting with our executive team, and performing potential
franchise background investigation, are completed prior to our execution of the
area development agreement and receipt of the corresponding area development
fee. As a result, we recognize the non-refundable portion of this fee in full
upon receipt. During fiscal 2007, we also received a $20,000 refundable area
development fee. This payment is held in escrow and, accordingly, will not be
recorded in the financials until the contingency is resolved and the fees are
released from escrow. In 2007, our franchise application fee consisted of a
one-time $5,000 payment, $1,000 of which is non-refundable, in consideration of
the services we perform in evaluating the franchise application, which are
completed concurrently with receiving the application. As a result, we recognize
the non-refundable portion of this fee in full upon receipt. Refundable
franchise application fees received are recorded as a short-term liability until
such time as the fee becomes non-refundable.





We
recognize 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 we deliver our touch screen pay-for-play game
terminals to our customer and we believe that persuasive evidence of an
arrangement exits, the fees are fixed or determinable and collectibility of
payment is probable. Included with the purchase of the touch screen terminals
are licenses to use the games loaded on the terminals. The licenses for the
games are in perpetuity, we have no obligation to provide upgrades or
enhancements to the customer, and the customer has no right to any other future
deliverables. We deliver the requested terminals for a fixed price either under
agreements with customers or pursuant to purchase orders received from
customers.  We do not have any contractual obligations to provide post
sale support of our products. We provide such support on a case by case basis
and the costs of providing such support are expensed as incurred. We earned no
revenue from post sale support during the periods presented.





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. 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





We record
advances from customers as a liability and recognize these amounts as revenue
over the period of the related agreement. As of January 1, 2008, advances from
customers relating to licensing fees amounted to $24,980.





Advertising
and Marketing Costs





We
expense costs of advertising and marketing as incurred. Advertising and
marketing expense for the years ended January 1, 2008 and January 2, 2007
amounted to $59,816 and $19,931, respectively.





Pre-opening
Expenses





Pre-opening
expenses, consisting primarily of manager salaries, advertising, travel, food
and beverage, employee payroll and related training costs incurred prior to the
opening of a restaurant, are expensed as incurred.  We incurred no
pre-opening expenses in 2007.  In 2006, pre-opening expenses amounted to
$180,000.





Sales
Taxes





Restaurant
revenue is presented net of sales taxes. The obligation is included in accrued
expenses until the taxes are remitted to the appropriate taxing authorities. The
sales tax payable as of January 1, 2008 was $46,018 and as of January 2, 2007
was $23,997.





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.





F-8


Deferred
taxes are provided on the liability method whereby deferred tax assets are
recognized for deductible temporary differences, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.





Earnings
Per Share





The
Company reports earnings (loss) per share in accordance with SFAS No. 128, “Earnings per
Share”. Basic
earnings (loss) per share is computed by dividing income (loss) available to
common shareholders by the weighted average number of common shares available.
Diluted earnings (loss) per share is computed similar to basic earnings (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.
Diluted earnings (loss) per share has not been presented since the effect of the
assumed conversion of options and warrants to purchase common shares would have
an anti-dilutive effect. The following potential common shares have been
excluded from the computation of diluted net loss per share for each of the
fiscal years 2007 and 2006 because the effect would have been
anti-dilutive:





2007
            
            
            2006Stock
      options issued to employees
            
            
            791,630
            
            
            
            90,046Warrants
      granted to consultants and finders
            
            
            5,545
            
            
            
            1,980Warrants
      granted for financing
            
            
            6,883,931
            
            
            
            317,0167,681,106
            
            
            
            409,042





Segment
Reporting





SFAS No.
131, Disclosures about segments of an enterprise and related information, which
superseded statement of financial accounting standards No. 14, Financial
reporting for segments of a business enterprise, establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performances. The Company allocates its resources and assesses the performance
of its sales activities based upon revenue by product line and services (see
Note 11).





Comprehensive
Loss





SFAS No.
130, “Reporting
Comprehensive Loss”, establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. For the years ended January 1, 2008 and
January 2, 2007, the Company does not have items that represented other
comprehensive income and, accordingly, has not included in the statement of
stockholders’
equity the change in comprehensive loss.





Discounts
on Loans





Discounts
on loans are principally the values attributed to the detachable warrants issued
in connection with the loans and the value of the preferential conversion
feature associated with the loans. These discounts are accounted for in
accordance with Emerging Issues Task Force (“EITF”) 00-27 issued by
the American Institute of Certified Public Accountants.





Reclassifications





Certain
comparative amounts have been reclassified to conform to the current period
presentation.





Recently
Issued Accounting Pronouncements





In
September 2006, FASB issued SFAS 157 “Fair Value
Measurements”. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Management believes that this
statement will not have a significant impact on the financial
statements.








F-9


In
September 2006, FASB issued SFAS 158 “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” This Statement
improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. This
Statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. An employer
without publicly traded equity securities is required to recognize the funded
status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after June 15, 2007.
However, an employer without publicly traded equity securities is required to
disclose the following information in the notes to financial statements for a
fiscal year ending after December 15, 2006, but before June 16, 2007, unless it
has applied the recognition provisions of this Statement in preparing those
financial statements:





a.
            A
      brief description of the provisions of this
  Statement;





b.
            The
      date that adoption is required; and





c.
            The
      date the employer plans to adopt the recognition provisions of
      thisStatement,
      if earlier.





The
requirement to measure plan assets and benefit obligations as of the date of the
employer’s
fiscal year-end statement of financial position is effective for fiscal years
ending after December 15, 2008. Management is currently evaluating the effect of
this pronouncement on financial statements.





In
February 2007 the FASB issued SFAS 159, “The Fair Value
Option for Financial Assets and Financial Liabilities--Including an amendment of
FASB Statement No. 115.” The statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The statement is effective
as of the beginning of an entity’s first fiscal
year that begins after November 15, 2007. Management believes that this
statement will not have a significant impact on the financial
statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.”  This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS 141 to
have a significant impact on its results of operations or financial
position.





In March,
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk–related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important. Based on current conditions, the Company does not expect
the adoption of SFAS 161 to have a significant impact on its results of
operations or financial position.





F-10


NOTE
2 - ACCOUNTS RECEIVABLE





Accounts
receivable consist of restaurant credit card payments still in process. No
allowance for doubtful accounts has been recorded for these receivables as
collection is considered probable. The allowance for doubtful accounts of
$72,265 as of January 1, 2008 is to cover the accounts receivable from
non-restaurant activities.





NOTE
3 - INVENTORY





Inventory
has been reviewed for obsolescence and stated at lower of cost or market as of
January 1, 2008 and January 2, 2007, determined on a first-in-first-out basis.
During 2005, the Company made a strategic decision to reposition itself as an
entertainment restaurant company, to wind down its SNAP! and Bear Shop
manufacturing and sales operations and to liquidate its remaining inventory. As
a result, all non-restaurant inventory at January 1, 2008 and January 2, 2007 is
treated as finished goods inventory.





During
fiscal 2007, the Company generated $29,535 in revenue from the sale of obsolete
inventory previously reserved for at a value of $61,340. Accordingly, gross
non-restaurant inventory was written down by $61,340 and a corresponding
reduction was made to the obsolescence reserve.  The obsolescence
reserve at January 1, 2008 relates solely to non-restaurant inventory. During
fiscal 2007, remaining non-restaurant inventory was marked down to its net
realizable value, as reflected by an increase in the obsolescence reserve of
$57,497. Restaurant inventory consists of food, beverages and merchandise
available for sale in the restaurant.











Inventory
      at January 1, 2008:Finished
      Goods
            
            $
            291,887Restaurant
            
            
            19,547Less:  obsolescence
      reserve
            
            
            (291,887
            )$
            19,547





NOTE
4 - PROPERTY AND EQUIPMENT





The cost
of property and equipment at January 1, 2008 consisted of the
following:





Computer
      equipment
            
            $
            670,686Office
      furniture and equipment
            
            
            17,926Restaurant
      furniture and fixtures
            
            
            656,492Leasehold
      improvements
            
            
            84,849Machinery
      and equipment
            
            
            82,603Construction
      in progress
            
            
            64,6891,577,245Less
      accumulated depreciation
            
            
            (633,307
            )$
            943,938





Depreciation
expense for the fiscal years ended January 1, 2008 and January 2, 2007 was
$277,018 and $69,826, respectively.








NOTE
5 - COMPONENTS OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES





The major
components of selling, general and administrative expenses for the fiscal year
ended January 1, 2008 consisted of the following:








Professional
      fees
            
            $
            571,112Rent
      expense
            
            
            332,706Restaurant
      operating expenses
            
            
            759,057Product
      Development
            
            
            340,294Salary
      expense
            
            
            2,668,129Employee
      stock option expense
            
            
            1,372,549Depreciation
      and amortization
            
            
            312,018Other
      expenses
            
            
            365,109$
            6,720,974





F-11


The major
components of selling, general and administrative expenses for the fiscal year
ended January 2, 2007 consisted of the following:








Professional
      fees
            
            $
            489,070Rent
      expense
            
            
            177,028Pre-opening
      expenses
            
            
            180,000Restaurant
      operating expenses
            
            
            190,331Product
      development
            
            
            316,560Salary
      expense
            
            
            1,231,585Employee
      stock option expense
            
            
            499,548Inventory
      reserve expense
            
            
            117,489Other
      expenses
            
            
            489,310$
            3,690,921








NOTE
6 - 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. At each
of January 1, 2008 and January 1, 2007 there were no amounts due to related
parties.











F-12





During
the twelve months ended January 1, 2008, we engaged in the following
transactions relating to amounts due to related parties:





We issued
two convertible notes payable to Mr. Dennis Nino, brother-in-law of our CEO. A
$50,000 note was due August 28, 2007 and a $125,000 note was due December 8,
2007. Each note accrued interest at 10%, was secured by our assets, and was
convertible, at the option of Mr. Nino, into the same securities issued by us in
(and on the same terms and conditions pari passu with the investors in) any
offering of our securities that results in gross proceeds to us of at least
$3,000,000. Upon conversion, Mr. Nino was to receive as a conversion incentive
additional securities equal to 20% of the aggregate principal value plus accrued
interest converted.





On
November 7, 2007 we completed an offering of our securities (units, priced at
$2.00 per unit, consisting of one share of our common stock and a warrant to
purchase one share of our common stock at an exercise price of $2.40 per share)
that resulted in gross proceeds to us of approximately $10.4 million. This
transaction triggered the conversion right in Mr. Nino’s notes. On
November 12, 2007, Mr. Nino elected not to convert these notes. Accordingly, we
made cash repayment to Mr. Nino of an aggregate of $183,897 (inclusive of $8,897
of accrued interest) in full satisfaction of these notes.





We issued
a $125,000 convertible note payable to our CEO, Nolan Bushnell. The note was due
December 8, 2007 and accrued interest at 10%, was secured by our assets, and was
convertible, at the option of Mr. Bushnell, into the same securities issued by
us in (and on the same terms and conditions pari passu with the investors in)
any offering of our securities that results in gross proceeds to us of at least
$3,000,000. Upon conversion, Mr. Bushnell was to receive as a conversion
incentive additional securities equal to 20% of the aggregate principal value
plus accrued interest converted.





On
November 7, 2007 we completed an offering of our securities (units, priced at
$2.00 per unit, consisting of one share of our common stock and a warrant to
purchase one share of our common stock at an exercise price of $2.40 per share)
that resulted in gross proceeds to us of approximately $10.4 million. This
transaction triggered the conversion right in Mr. Bushnell’s note. On
November 12, 2007, Mr. Bushnell elected to convert the principal amount of the
note (together with $5,377 of accrued interest and $26,075 of conversion
incentive), in full satisfaction of our obligations under the note, into 78,226
units (consisting of 78,226 shares of our common stock and 78,226 warrants to
purchase one share of our common stock at an exercise price of $2.40), at a
purchase price of $2.00 per unit.





We issued
a $25,000 convertible note payable to our CFO, Peter Wilkniss. The note was due
October 10, 2007 and accrued interest at 10%, was secured by our assets, and was
convertible, at the option of Mr. Wilkniss, into the same securities issued by
us in (and on the same terms and conditions pari passu with the investors in)
any offering of our securities that results in gross proceeds to us of at least
$3,000,000. Upon conversion, Mr. Wilkniss was receive as a conversion incentive
additional securities equal to 20% of the aggregate principal value plus accrued
interest converted.





On
November 7, 2007 we completed an offering of our securities (units, priced at
$2.00 per unit, consisting of one share of our common stock and a warrant to
purchase one share of our common stock at an exercise price of $2.40 per share)
that resulted in gross proceeds to us of approximately $10.4 million. This
transaction triggered the conversion right in Mr. Wilkniss’ note. On November
12, 2007, Mr. Wilkniss elected to convert the principal amount of the note
(together with $1,479 of accrued interest and $5,296 of conversion incentive),
in full satisfaction of our obligations under the note, into 15,888 units
(consisting of 15,888 shares of our common stock and 15,888 warrants to purchase
one share of our common stock at an exercise price of $2.40), at a purchase
price of $2.00 per unit.





According
to EITF 98-5 paragraph 13, which covers the accounting for (a) a security that
becomes convertible only upon the occurrence of a future event outside the
control of the holder and (b) a security that is convertible from inception but
contains conversion terms that change upon the occurrence of a future event, any
contingent beneficial conversion feature should be measured at the commitment
date but not recognized in earnings until the contingency is
resolved.  On November 7, 2007, we completed an offering of our
securities (units, priced at $2.00 per unit, consisting of one share of our
common stock and a warrant to purchase one share of our common stock at an
exercise price of $2.40 per share) that resulted in gross proceeds to us of
approximately $10.4 million. This transaction triggered the conversion rights in
the above notes. Therefore, $68,150 has been recorded in 2007 as beneficial
conversion feature expense on these notes payable to the related
parties.





During
the twelve months ended January 1, 2008, we accrued $15,753 in interest on
amounts due to related parties and paid $8,897 in interest on amounts due to
related parties.  The balance of the interest was converted into
common stock as stated above.





During
the twelve months ended January 1, 2008, salary amounting to $396,808 (including
$131,250 accrued from prior years and paid in 2007) was paid to employees
related to the CEO.





Due to
related parties outstanding at December 31, 2005 consisted of the
following:





Convertible
note payable to Mr. Bradley Rotter, a member of the Company’s board of
directors. This note was due April 10, 2006, accrued interest at 10%, and was
convertible, at the option of Mr. Rotter, into the same securities issued by the
Company in (and on the same terms and conditions pari passu with the investors
in) any offering of its securities that results in gross proceeds to the Company
of at least $3,000,000. Upon conversion, Mr. Rotter was to receive as a
conversion bonus additional securities equal to 20% of the aggregate principal
value plus accrued interest converted. The note was mandatorily repayable
immediately following the consummation of any offering of securities that
results in gross proceeds to the Company of at least $3,000,000. Upon such
repayment, or upon repayment at maturity, Mr. Rotter was to receive warrants to
purchase 50,000 shares of common stock of the Company at an exercise price of
$2.36. A portion of the value of this note was recorded as a preferential
conversion feature and recorded as discount of $40,000 to be amortized over the
term of the note, 6 months. $20,000 of this discount was amortized in each of
2005 and 2006.


F-13





Principal
      Amount
            
            $
            200,000Less
      Discount
            
            
            (20,000
            )180,000





Loan
      payable to the brother-in-law of the President and CEO issued on August
      10, 2005, 6% interest, unsecured, due upon demand.
            
            
            39,000Loan
      payable to the wife of the President and CEO issued on various dates in
      2004, 8% interest, unsecured, due upon demand.
            
            
            20,500Loan
      payable to the Company’s Vice
      President of Operations issued on various dates in 2004 and 2005, 8%
      interest unsecured, due upon demand.
            
            
            60,500Total
            
            $
            300,000


On April
19, 2006, we entered into a letter agreement (the “April Rotter
Letter Agreement”) with Mr. Rotter,
in respect of the $200,000 Convertible Promissory Note, dated October 10, 2005
and due April 10, 2006, payable to Mr. Rotter (the “2005 Rotter
Note”).
Pursuant to the April Rotter Letter Agreement, effective April 19, 2006,
we:





1.
            Repaid
      $100,000 of the principal amount of, together with $10,356 of accrued
      interest on, the 2005 Rotter Note;





2.
            Issued
      immediately-exercisable, three-year warrants to Mr. Rotter to purchase
      25,000 shares of common stock at an exercise price of $1.38 per share;
      and





3.
            Issued
      a new convertible note (the “2006 Rotter
      Note”)
      payable to Mr. Rotter, in respect of the unpaid balance of $100,000 on the
      2005 Rotter Note. This note was due October 19, 2006, accrued interest at
      10%, and was convertible, at the option of Mr. Rotter, into the same
      securities issued by the Company in (and on the same terms and conditions
      pari passu with the investors in) any offering of its securities that
      results in gross proceeds to the Company of at least $3,000,000. Upon
      conversion, Mr. Rotter was to receive as a conversion bonus additional
      securities equal to 20% of the aggregate principal value plus accrued
      interest converted. The 2006 Rotter Note was mandatorily repayable
      immediately following the consummation of any offering of securities that
      results in gross proceeds to the Company of at least $3,000,000. Upon such
      repayment, or upon repayment at maturity, Mr. Rotter was to receive
      additional warrants to purchase 25,000 shares of common stock of the
      Company at an exercise price of
$1.38.





On
October 25, 2006, we entered into a letter agreement (the “Rotter Letter
Agreement”)
with Mr. Rotter, in respect of this note. Pursuant to the Rotter Letter
Agreement, effective October 25, 2006:











F-14








1.
            Mr.
      Rotter agreed to convert the $100,000 principal amount and $5,685 in
      accrued interest outstanding under the note into shares of common stock at
      a conversion price of $4 per share. In accordance with the terms of the
      note, Mr. Rotter was entitled to receive an additional 20% of such amount
      in shares of common stock upon conversion into any offering of our
      securities that results in gross proceeds to the Company of at least
      $3,000,000. The note was due on October 19, 2006. Rather than repay the
      note in cash, we agreed with Mr. Rotter that he would be entitled to
      receive this additional 20% upon the conversion of the note into shares of
      common stock even though the conversion was not in connection with any
      such offering. As a result, the total amount to be converted was $126,822.
      As such, Mr. Rotter accepted 31,706 shares of common stock of the Company,
      together with the warrants set forth below, in full and final satisfaction
      of the Company’s
      obligations under the note.





2.
            In
      accordance with the terms of the note, the Company also
      issued  to Mr. Rotter three-year immediately exercisable
      warrants to purchase 25,000 shares of common stock at an exercise price
      of  $1.38 per share.





On the
date of conversion the closing price of our common stock was $5.04. Accordingly,
we recorded a $54,111 loss on conversion of this note in the 2006 statement of
operations, reflecting the 5,284 share conversion premium and the difference
between the $4.00 conversion price and the $5.04 market price. Because the loss
on conversion reflects the 20% conversion premium, we also reversed $20,000 of
preferential conversion feature expense previously recorded in 2006 in respect
of this note.





In
connection with a private placement of our equity securities completed on
September 18, 2006, the Company converted $62,500 of debt and $8,062 of accrued
interest due to Nancy Bushnell, the wife of our CEO Nolan Bushnell (including
the assignment to Ms. Bushnell of a $39,000 note (plus $4,485 in accrued
interest) held by the brother-in-law of our CEO), and $60,500 of debt due to Dan
Lindquist, our Vice President of Operations, into shares of common stock and
warrants on the same terms as the third party investors who participated in the
transaction. Ms. Bushnell received 58,802 shares of common stock and warrants to
purchase 29,401 shares of common stock at $1.38 per share, and Mr. Lindquist
received 50,417 shares of common stock and warrants to purchase 25,208 shares of
common stock at $1.38 per share. These issuances were made pursuant to the
exemption from registration provided by SEC Rule 506 promulgated under
Regulation D of the Securities Act of 1933. The common stock and warrants issued
as part of this conversion are on the same terms as the common stock and
warrants issued to the other investors. Because the Company issued securities on
conversion of Ms. Bushnell’s and Mr.
Lindquist’s
debt that have identical terms to the securities issued to the third party
investors for cash in the September 2006 private placement, the securities
issued to Ms. Bushnell and Mr. Lindquist represented the market value equivalent
of the debt. Therefore, there is no gain or loss recognized on conversion of
debt.





During
the fiscal year ended January 2, 2007, we accrued $13,861 in interest on amounts
due to related parties and paid $11,162 in interest on amounts due to related
parties.





NOTE
7 - NOTES PAYABLE





There
were no notes payable outstanding at January 1, 2008.





During
the twelve months ended January 1, 2008, we engaged in the following
transactions relating to notes payable:





We repaid
a loan payable to our former Vice President of Marketing issued on various dates
in 2004 and 2005, 10% interest secured by certain inventory and receivables, due
November 14, 2007. On May 14, 2007, we amended the terms of this note to: reduce
the interest rate from 12% to 10%; extend the term from February 15, 2007 to
November 14, 2007; prohibit prepayments on the note; and make the principal and
accrued interest outstanding under the note convertible, at the option of the
holder, into the same securities issued in (and on the same terms and conditions
pari passu with the investors in) any offering of our securities that resulted
in gross proceeds of at least $3,000,000. Upon conversion, the holder was to
receive as a conversion incentive additional securities equal to 20% of the
aggregate principal value plus accrued interest converted.





This loan
was reclassified from “Due to Related
Parties” to
“Notes
Payable” on
the December 31, 2005 balance sheet following the termination of the holder’s employment.
During fiscal 2007 prior to November 2007, we repaid $14,400 of this note in
cash and credited $14,000 in receivables due from the holder against the
principal balance of the note.  On November 12, 2007, the holder
declined the conversion right triggered by our November 7, 2007
financing.  Accordingly, we repaid in cash a total of $121,595
(inclusive of accrued interest of $102,710) in full satisfaction of the
remaining balance on the note.





In April
2007 and June 2007 we issued an aggregate of $1,492,500 in convertible notes in
favor of 27 accredited investors with maturity dates ranging from August 12,
2007 to December 8, 2007. The notes accrued interest at 10%, were secured by our
assets, and were convertible, at the option of the holder, into the same
securities issued by us in (and on the same terms and conditions pari passu with
the investors in) any offering of our securities that resulted in gross proceeds
of at least $3,000,000. Upon conversion, the holder was to receive as a
conversion incentive additional securities equal to 20% of the aggregate
principal value plus accrued interest converted.





F-15


On
November 7, 2007 we completed an offering of our securities (units, priced at
$2.00 per unit, consisting of one share of our common stock and a warrant to
purchase one share of our common stock at an exercise price of $2.40 per share)
that resulted in gross proceeds to us of approximately $10.4 million. This
transaction triggered the conversion rights in the notes. On November 12, 2007,
21 holders, representing an aggregate of $1,347,500 in principal amount of
notes, an aggregate of $78,483 in accrued interest and an aggregate of $285,197
of conversion incentive, elected to convert their notes, in full satisfaction of
our obligations under the notes, into an aggregate of 855,590 units at $2.00 per
unit (such units collectively consisting of 855,590 shares of our common stock
and 855,590 warrants to purchase one share of our common stock at an exercise
price of $2.40). 6 holders elected not to convert a total of $145,000 in
principal amount of notes. We repaid in cash the $145,000 principal amount plus
an aggregate of $8,842 in accrued interest to those non-converting holders, in
full satisfaction of those notes.





According
to EITF 98-5 paragraph 13, which covers the accounting for (a) a security that
becomes convertible only upon the occurrence of a future event outside the
control of the holder and (b) a security that is convertible from inception but
contains conversion terms that change upon the occurrence of a future event, any
contingent beneficial conversion feature should be measured at the commitment
date but not recognized in earnings until the contingency is resolved. On
November 7, 2007, we completed an offering of our securities (units, priced at
$2.00 per unit, consisting of one share of our common stock and a warrant to
purchase one share of our common stock at an exercise price of $2.40 per share)
that resulted in gross proceeds to us of approximately $10.4 million. This
transaction triggered the conversion rights in all the above notes. Therefore,
$340,285 has been recorded in 2007 as beneficial conversion feature expense on
these notes payable.





During
the twelve months ended January 1, 2008, we accrued $87,625 in interest on the
above notes payable and paid $8,842 in cash interest on these notes
payable.  The balance of the interest was converted into common stock
as stated above.





Notes
payable outstanding at January 2, 2007 consisted of the following:





Loan
      payable to the Company’s former
      Vice President of Marketing issued on various dates in 2004 and 2005, 12%
      interest secured by inventory and receivables of the Company, due February
      15, 2007. The loan payable to the Company’s Vice
      President of Marketing was reclassified from “Due to
      Related Parties” to “Notes
      Payable” on the
      December 31, 2005 balance sheet following the termination of the
      holder’s employment
      with the Company. Accrued interest of $90,521 outstanding on this note as
      of January 2, 2007 was included under accrued expenses on the balance
      sheet as of January 2, 2007. During 2006, we repaid $30,000 of this note
      in cash. In addition, on August 1, 2006, we credited a total of $28,959 in
      receivables owed to the Company by the holder of the note against the
      principal amount of this note. On December 19, 2006, we credited an
      additional $5,600 in receivables owed to the Company by the holder against
      the principal amount of the note.
            
            $
            47,285On
      June 15, 2006, we entered into an amended promissory note with Elite
      Cabinet Corporation (“ECC”) in
      relation to trade payables previously owing to ECC. The principal amount
      of this note was $10,177.75 and the note accrued interest at 8%. We
      were required to pay $300 per month on this note from June 15, 2006 to
      January 15, 2007, at which time the entire unpaid balance plus accrued
      interest was due and payable. During 2006, we repaid in cash $1,658 of
      this note. We repaid this note in cash in full on January 12,
      2007.
            
            
            8,520Total
            
            $
            55,805





NOTE
8 - LONG TERM NOTES PAYABLE





There
were no long term notes payable outstanding at either January 1, 2008 or January
2, 2007.





Long term
convertible notes payable outstanding at December 31, 2005 consisted of the
following:





Convertible
note issued on September 8, 2005. The note was due September 8, 2007, accrued
interest at 10%, and was mandatorily convertible into the same securities issued
by the Company in (and on the same terms and conditions pari passu with the
investors in) any offering of its securities that results in gross proceeds to
the Company of at least $3,000,000. Upon conversion, the holder was to receive
as a conversion bonus additional securities equal to 20% of the aggregate
principal value plus accrued interest converted. A portion of the value of this
note was recorded as a preferential conversion feature and recorded as discount
of $20,000 to be amortized over the term of the note, 2 years. $3,333 of this
discount was amortized in 2005.





Principal
      Amount
            
            $
            100,000Less
      Discount
            
            
            (16,667
            )$
            83,333





On
October 26, 2006, we entered into a letter agreement (the “Hines Letter
Agreement”)
with Dr. William Hines, the holder of this note. Pursuant to the Hines Letter
Agreement, effective October 26, 2006:





F-16


Dr. Hines
agreed to convert the $100,000 principal amount and $11,555 in accrued interest
outstanding under the note into shares of common stock of the Company at a
conversion price of $4 per share. In accordance with the terms of the note, Dr.
Hines was entitled to receive an additional 20% of such amount in shares of
common stock upon conversion into any offering of our securities that results in
gross proceeds to the Company of at least $3,000,000. While the note was not yet
due, we believed it advantageous to the Company to remove the Hines note from
the balance sheet, particularly because the Hines note was secured by assets of
the Company. As such, we agreed with Dr. Hines that he would be entitled to
receive this additional 20% upon the conversion of the Hines note into shares of
common stock even though the conversion was not in connection with any such
offering. As a result, the total amount to be converted was $133,866. As such,
Dr. Hines accepted 33,467 shares of common stock of the Company in full and
final satisfaction of the Company’s obligations
under the note.
 
 On the
date of conversion the closing price of our common stock was $5.04. Accordingly,
we recorded a $57,116 loss on conversion of this note in the fiscal 2006
statement of operations, reflecting the 5,578 share conversion premium and the
difference between the $4.00 conversion price and the $5.04 market price.
Because the loss on conversion reflects the 20% conversion premium, we also
reversed $10,833 of preferential conversion feature expense previously recorded
in 2005 and 2006 in respect of this note.





NOTE
9 - STOCKHOLDERS’
EQUITY




Preferred
Stock





We have
authorized 5,000,000 shares of preferred stock. Our 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 our board of directors, 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
is not liable to any further call or assessment.





Common
Stock





Unless
otherwise indicated below, all common stock issuances were valued at the closing
price of the common stock on the date of the relevant event or
agreement.





Effective
July 26, 2007, we effected a four-for-one reverse stock split. All per share
amounts and share numbers presented herein have been retroactively restated for
this adjustment.





Effective
July 23, 2007, the authorized number of shares of our common stock was increased
from 12,500,000 shares (post-split) to 25,000,000 shares
(post-split).





During
the twelve month period ended January 1, 2008, we issued:





77,710
shares of common stock valued at $144,386 upon the exercise of stock options.
Out of these, 8,750 shares of common stock valued at $17,500 were issued to
employees related to our CEO;





182,102
shares of common stock valued at $237,763 upon the exercise of warrants. Out of
these, 25,000 shares of common stock valued at $34,500 were issued to our CFO
and 25,000 shares of common stock valued at $34,500 were issued to a
director;





an
aggregate of 6,250 shares of common stock valued at $55,000 to five employees in
settlement of accrued compensation. Out of these, 2,500 shares of common stock
valued $22,000 were issued to employees related to our CEO. These 6,250 shares
were included in shares to be issued as of January 2, 2007;





15,049
shares of common stock in exchange for consulting services valued at $106,137;
and





On
November 7, 2007, in a registered equity offering, 5,191,750 units at a purchase
price of $2.00 per unit, each unit consisting of one share of common stock and a
warrant to purchase one share of our common stock at an exercise price of $2.40,
generating gross proceeds of $10,383,500. The net proceeds from this transaction
were $9,484,108 after deducting placement agent fees and expenses of
$894,200.  We also issued 299,700 immediately-exercisable, five-year
warrants with an exercise price of $2.40 per share to the placement agents in
this transaction.  Our November 7, 2007 financing triggered the
conversion rights in the convertible promissory notes issued in April 2007 and
June 2007. Effective November 12, 2007, holders representing an aggregate of
$1,497,500 in principal amount of convertible notes (including aggregate accrued
interest of $85,339 and an aggregate conversion incentive of $316,568) elected
to convert (in full satisfaction of our obligations under the notes) their notes
into the same units issued in the November 7, 2007 financing (each unit
consisting of one share of common stock and a warrant to purchase one share of
our common stock at an exercise price of $2.40) at a purchase price of $2.00 per
unit. Accordingly, we issued an aggregate 949,703 units to these
investors.  The fair value (as calculated using the Black-Scholes
options pricing model) of the warrants issued in these transactions to the
investors and placement agents of $7,200,750 was accounted for as a cost of
raising equity with a corresponding amount debited to additional paid-in
capital.





During
the twelve months ended January 1, 2008, we cancelled 46,250 shares of common
stock valued at $205,350. These shares were returned to us by Redwood
Consultants pursuant to a settlement we entered into with Redwood Consultants
relating to a total of 100,000 shares of common stock valued at $444,000 issued
to Redwood Consultants in 2005 for consulting services rendered in
2005.


F-17


During
the year ended January 2, 2007, the Company:
 
 On
January 10, 2006, issued 125,003 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. These shares were part of shares to be issued as of
December 31, 2005.
 
 On March
31, 2006, issued 28,750 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. These shares were part of shares
to be issued as of December 31, 2005.




On March
31, 2006, issued 12,500 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. These shares were
part of shares to be issued as of December 31, 2005.





On June
8, 2006, issued 108,613 shares of common stock to various service providers
valued at $122,076, based on the closing price of our common stock on the date
of the relevant agreement. 37,500 of these shares were included in shares to be
issued as of December 31, 2005.





On June
8, 2006, issued 8,333 shares of common stock valued at $10,000, based on the
closing price of our common stock on the date of the agreement, to Cody
Management in exchange for financial consulting services rendered.





On August
4, 2006, issued 60,396 shares of common stock to various service providers
valued at $63,134, based on the closing price of our common stock on the date of
the relevant agreement.





On
September 20, 2006, issued 25,000 shares of common stock valued at $36,000 upon
the exercise of stock options.





On March
3, 2006, sold 1,250,000 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 625,000
shares of common stock priced at $1.38 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 112,500 immediately exercisable, three-year warrants to purchase
common stock at $1.38 per share as part of this fee arrangement. The fair value
of the warrants of $590,524 (as calculated as of the issuance date) was
calculated using the Black Scholes option pricing model using the following
assumptions: stock price of $1.20, 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 issued to the investors of $500,444 (as calculated as of the
issuance date) was recognized as an expense at March 31, 2006 with a
corresponding amount booked as a short term liability. The fair value of the
warrants issued to the placement agent of $90,080 was accounted for as a cost of
raising equity with a corresponding amount debited to additional paid-in
capital. In accordance with EITF 00-19, at the end of each reporting period, the
fair value of the warrants is recalculated, and changes to the warrant liability
and related gain or loss are booked appropriately.





As of
June 30, 2006, the fair value of the warrant liability relating to the 625,000
warrants issued to the investors was $338,010, as calculated using the Black
Scholes option pricing model using the following assumptions: stock price of
$1.12, risk free rate of return of 7.5%, volatility of 78.43%, expected life of
2.75 years and dividend yield of 0%. In accordance with EITF 00-19, the Company
reduced the short term warrant liability relating to these warrants as of June
30, 2006 by $162,424 to reflect the fair value as of June 30, 2006 and
recognized fair value of warrant liability income (other income) of $162,434 in
the statement of operations for the six months ended June 30, 2006.





As of
September 30, 2006, the fair value of the warrant liability relating to the
625,000 warrants issued to the investors was $3,104,000, as calculated using the
Black Scholes option pricing model using the following assumptions: stock price
of $5.68, risk free rate of return of 7.5%, volatility of 123%, expected life of
2.5 years and dividend yield of 0%. In accordance with EITF 00-19, the Company
increased the short term warrant liability relating to these warrants as of
September 30, 2006 by $2,765,990 to reflect the fair value as of September 30,
2006 and recognized fair value of warrant liability expense (other expense) of
$2,765,990 in the statement of operations for the nine months ended September
30, 2006.





On May 9,
2006 and June 12, 2006, sold a total of 27,083 shares of common stock to 2
investors for gross proceeds of $32,500. These investors also received
immediately-exercisable, three-year warrants to purchase an aggregate of 13,542
shares of common stock at $1.38 per share. The fair value of the warrants of
$8,920 (as calculated as of the issuance dates) was calculated using the Black
Scholes option pricing model using the following assumptions: stock price of
$1.20 for the May 9 warrants and $1.12 for the June 12 warrants, risk free rate
of return of 7.5%, volatility of 86%, expected life of three years and dividend
yield of 0%. As of June 30, 2006, the fair value of these warrants was $7,674,
as calculated using the Black Scholes option pricing model using the following
assumptions: stock price of $1.12, risk free rate of return of 7.5%, volatility
of 78.43%, expected life of 3 years and dividend yield of 0%. The fair value of
these warrants of $7,674, as calculated as of June 30, 2006, was recognized as a
fair value of warrant liability expense (other expense) with a corresponding
amount booked as a short term warrant liability as of June 30, 2006. The shares
of common stock issued to these investors were reflected as shares to be issued
on the June 30, 2006 balance sheet. We issued these shares on July 24,
2006.






F-18





As of
September 30, 2006, the fair value of the warrant liability relating to the
13,542 warrants issued to the investors was $67,947, as calculated using the
Black Scholes option pricing model using the following assumptions: stock price
of $5.68, risk free rate of return of 7.5%, volatility of 123%, expected life of
2.75 years and dividend yield of 0%. In accordance with EITF 00-19, the Company
increased the short term warrant liability relating to these warrants as of
September 30, 2006 by $60,272 to reflect the fair value as of September 30, 2006
and recognized fair value of warrant liability expense (other expense) of
$60,272 in the statement of operations for the nine months ended September 30,
2006.





On
September 18, 2006, completed the sale of a total of 1,250,333 shares of common
stock to 51 investors for cash proceeds of $1,500,400. These
investors  also received immediately-exercisable, three-year warrants
to purchase an aggregate of 625,167 shares of common stock priced at $1.38 per
share. In addition, we converted $70,562 of debt and accrued interest due to
Nancy Bushnell, the wife of our CEO Nolan Bushnell, and $60,500 of debt due to
Dan Lindquist, our Vice President of Operations, into shares of common stock and
warrants on the same terms as the investors in the transaction. Ms. Bushnell
received 58,802 shares of common stock and warrants to purchase 29,401 shares of
common stock at $1.38 per share, and Mr. Lindquist received 50,417 shares of
common stock and warrants to purchase 25,208 shares of common stock at $1.38 per
share.





The fair
value of the warrants of $2,630,405 (as calculated as of the date of issuance)
was calculated using the Black Scholes option pricing model using the following
assumptions: stock price of $4.48, risk free rate of return of 3.93%, volatility
of 123%; expected life of 3 years and dividend yield of 0%. The fair value of
these warrants, as calculated as of September 30, 2006, was $3,411,955, as
calculated using the Black Scholes option pricing model using the following
assumptions: stock price of $5.68, risk free rate of return of 3.93%, volatility
of 123%; expected life of 3 years and dividend yield of 0%. The September 30,
2006 fair value of the warrants of $3,411,955 was recognized as an expense with
a corresponding amount booked as a short term warrant liability. These issuances
were made pursuant to the exemption from registration provided by SEC Rule 506
promulgated under Regulation D of the Securities Act of 1933.





A
provision in the Securities Purchase Agreements governing the Company’s sales of common
stock and warrants on March 3, 2006, May 9, 2006, June 12, 2006 and September
18, 2006 required the Company to file a registration statement with the
Securities and Exchange Commission covering the resale of the shares of common
stock and shares of common stock underlying the warrants sold as promptly as
possible and that, if the registration statement was not declared effective by
the SEC within 180 days of the closing date of the transaction, or if the
Company fails to keep the registration statement continuously effective until
all the shares (and shares underlying warrants) are either sold or can be sold
without restriction under Rule 144(k), that the Company pay the investors
monthly liquidated damages equal to 1.5% of their investment until the
registration statement is declared and kept effective or all the shares have
been sold or can be sold without restriction under Rule 144(k) (in the case of a
failure to keep the registration statement continuously effective). Because the
warrants are subject to registration rights with liquidated damages for failure
to register, under EITF 00-19, the fair value of the warrants was accounted for
as a liability and, at the end of each reporting period, the fair value of the
warrants was recalculated, and changes to the warrant liability and related gain
or loss were booked appropriately.





On August
25, 2006, the investors in the March 3, 2006 transaction waived this liquidated
damages provision for an additional three-month period, as it related to the
registration statement becoming effective by September 3, 2006. On December 3,
2006, the investors in each of the 2006 transactions agreed, without additional
consideration, to permanently waive their right to registration of the warrants
and shares of common stock underlying the warrants issued in these transactions
as well as their right to liquidated damages for our failure to register the
shares issued or issuable in these transactions. As a result, the warrant
liability of $6,583,902 as of September 30, 2006 was reclassified to equity as
of December 3, 2006.





On
October 25, 2006, issued 24,896 shares of common stock to various service
providers valued at $38,776, based on the closing price of our common stock on
the date of the relevant agreement.





On
October 25, 2006, issued 834 shares of common stock valued at $2,000, based on
the closing price of the common stock on the date of the agreement, to Richard
Strong in exchange for engineering consulting service rendered.





On
October 25, 2006, issued 25,000 shares of common stock valued at $27,000, based
on the closing price of our common stock on the date of the agreement, to S.
Raymond Hibarger, its former Vice President of Marketing, in final settlement of
all compensation due to Mr. Hibarger.





On
October 25, 2006, issued 2,697 shares valued at $10,007 to 2 accredited
individual investors relating to our merger with uWink California in 2003 and
our capital raising transactions in 2004. These shares were included as shares
to be issued on the December 31, 2005 balance sheet and had remained
unissued


for
ministerial reasons.





F-19


On
October 25, 2006, entered into a letter agreement (the “Rotter Letter
Agreement”)
with Mr. Bradley Rotter, a member of its board of directors, in respect of the
$100,000 Convertible Promissory Note, dated April 19, 2006 and due October 19,
2006, from the Company to Mr. Rotter (the “Rotter Note”). Pursuant to the
Rotter Letter Agreement, effective October 25, 2006:
 
 1.
              Mr.
      Rotter agreed to convert the $100,000 principal amount and $5,685 in
      accrued interest outstanding under the Rotter Note into shares of common
      stock at a conversion price of $4 per share. In accordance with the terms
      of the Rotter Note, Mr. Rotter was entitled to receive an additional 20%
      of such amount in shares of common stock upon conversion into any offering
      of least $3,000,000. The note was due on October 19, 2006. Rather than
      repay the note in cash, the Company agreed with Mr. Rotter that he would
      be entitled to receive this additional 20% upon the conversion of the
      Rotter Note into shares of common stock even though the conversion was not
      in connection with any such offering. As a result, the total amount to be
      converted was $126,822. As such, Mr. Rotter accepted 31,706 shares of
      common stock of the Company, together with the warrants set forth below,
      in full and final satisfaction of the Company’s
      obligations under the Rotter Note.
 
 2.
              In
      accordance with the terms of the Rotter Note, the Company also issued to
      Mr. Rotter three-year immediately exercisable warrants to purchase 25,000
      shares of common stock at an exercise price of $1.38 per
      share.
 
 On
October 26, 2006, entered into a letter agreement (the “Hines Letter
Agreement”)
with Dr. William Hines in respect of the $100,000 Convertible Promissory Note,
dated September 8, 2005 and due September 8, 2007, from the Company to Dr. Hines
(the “Hines
Note”).
Pursuant to the Hines Letter Agreement, effective October 26,
2006:




Dr. Hines
agreed to convert the $100,000 principal amount and $11,555 in accrued interest
outstanding under the Hines Note into shares of common stock of the Company at a
conversion price of $4 per share. In accordance with the terms of the Hines
Note, Dr. Hines was entitled to receive an additional 20% of such amount in
shares of common upon conversion into any offering of Company securities that
results in gross proceeds to the Company of at least $3,000,000. While the Hines
Note was not yet due, the Company believed it advantageous to remove the Hines
Note from the balance sheet, particularly because the Hines Note was secured by
assets of the Company. As such, the Company agreed with Dr. Hines that he would
be entitled to receive this additional 20% upon the conversion of the Hines Note
into shares of common stock even though the conversion was not in connection
with any such offering. As a result, the total amount to be converted was
$133,866. As such, Dr. Hines accepted 33,467 shares of common stock of the
Company in full and final satisfaction of the Company’s obligations
under the Hines Note.





On
November 18, 2006, issued 21,475 shares of common stock to various service
providers valued at $119,705, based on the closing price of our common stock on
the date of the relevant agreement.





On
December 6, 2006, issued 33,334 shares of common stock valued at $200,001 on the
exercise of warrants at an exercise price of $6.00 per share.





On
December 6, 2006 issued 7,500 shares of common stock valued at $9,000 on the
exercise of employee stock options at an exercise price of $1.20 per
share.





On
December 31, 2006, issued 2,347 shares of common stock to various service
providers valued at $18,048.





In
November 2006, pursuant to a settlement entered into with Burt Martin Arnold,
cancelled 12,500 shares of common stock originally issued to Burt Martin Arnold
on April 11, 2005 and valued at $46,500.





Shares
to be Issued





At
January 1, 2008, shares to be issued consisted of:





4,159
shares valued at $10,142 that remained unissued in connection with our capital
raising transactions in 2004. These shares remain unissued for ministerial
reasons.





During
the twelve months ended January 1, 2008, we reclassified 13,636 shares of common
stock valued at $120,000 (which were included in shares to be issued as of
January 2, 2007) to accrued compensation. Out of these, 8,523 shares valued at
$75,000 were to be issued to employees related to our CEO.





At
January 2, 2007, shares to be issued consisted of:





19,887
shares valued at $175,000 to be issued in settlement of accrued employee
compensation as of January 2, 2007;





25,000
shares valued at $34,500 to be issued upon exercise of warrants at an exercise
price of $1.38 per share; and





4,159
shares valued at $10,142 remaining unissued in connection with the Company’s capital raising
transactions in 2004. These shares remained unissued at January 2, 2007 for
ministerial reasons.











F-20








NOTE
10 - STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS





Effective
July 26, 2007, we effected a four-for-one reverse stock split. All per share
amounts and share numbers presented herein have been retroactively restated for
this adjustment.





We
adopted SFAS No. 123 (Revised 2004), SHARE BASED PAYMENT (“SFAS No. 123R”), under the
modified-prospective transition method on January 1, 2006. SFAS No. 123R
requires companies to measure and recognize the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value. Share-based compensation recognized under the modified-prospective
transition method of SFAS No. 123R includes share-based compensation based on
the grant-date fair value determined in accordance with the original provisions
of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, for all share-based
payments granted prior to and not yet vested as of January 1, 2006 and
share-based compensation based on the grant-date fair-value determined in
accordance with SFAS No. 123R for all share-based payments granted after January
1, 2006. SFAS No. 123R eliminates the ability to account for the award of these
instruments under the intrinsic value method proscribed by Accounting Principles
Board (“APB”) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and allowed under the original
provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R, we accounted
for our stock option plans using the intrinsic value method in accordance with
the provisions of APB Opinion No. 25 and related interpretations.





Primarily
as a result of adopting SFAS No. 123R, we recognized $1,372,549 in share-based
compensation expense for the twelve months ended January 1, 2008. The impact of
this share-based compensation expense on our basic and diluted earnings per
share was $0.19 per share. The fair value of our stock options was estimated
using the Black-Scholes options pricing model.





We
assumed the uWink.com, Inc. 2000 Employee Stock Option Plan (the “2000
Plan”) pursuant to our acquisition of uWink California. The 2000 Plan provides
for the issuance of up to 170,305 (after giving effect to a 3.15611 reverse
stock split in connection with the acquisition of uWink California and to the
four-for-one reverse stock split effective July 26, 2007) incentive and
non-qualified stock options to our employees, officers, directors and
consultants. 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. As of January 1, 2008 there are
4,200 shares available for issuance under this plan.





In 2004,
our Board of Directors approved the uWink, Inc. 2004 Stock Incentive Plan
(the “2004 Plan”). The 2004 Plan provides for the issuance of up to 300,000
incentive stock options, non-qualified stock options, restricted stock awards
and performance stock awards  to our employees, officers, directors
and consultants. 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. As of January 1, 2008, there are 5,000
shares available for issuance under this plan.





In 2005,
our Board of Directors approved the uWink, Inc. 2005 Stock Incentive Plan (the
“2005
Plan”). The
2005 Plan provides for the issuance of up to 500,000 incentive stock options,
non-qualified stock options, restricted stock awards and performance stock
awards to our employees, officers, directors, and consultants. Awards granted
under the 2005 Plan vest as determined by the Board of Directors, provided that
no option or restricted stock award granted under the 2005 Plan may be
exercisable prior to six months from its date of grant and no option granted
under the 2005 Plan may be exercisable after 10 years from its date of grant. As
of January 1, 2008, there are 63,496 shares available for issuance under this
plan.





On June
8, 2006, our Board of Directors approved the uWink, Inc. 2006 Equity Incentive
Plan (the “2006 Plan”). The 2006 Plan,
as subsequently amended on November 14, 2006, provides for the issuance of up to
625,000 incentive stock options, non-qualified stock options, restricted and
unrestricted stock awards and stock bonuses to our employees, officers,
directors, and consultants. As of January 1, 2008, there are 25,995 shares
available for issuance under this plan.





On June
21, 2007, our Board of Directors approved the uWink, Inc. 2007 Equity Incentive
Plan (the “2007 Plan”). The 2007 Plan
provides for the issuance of up to 250,000 incentive stock options,
non-qualified stock options, restricted and unrestricted stock awards and stock
bonuses to our employees, officers, directors, and consultants. As of January 1,
2008, there are 250,000 shares available for issuance under the 2007
Plan.





Awards
granted under both the 2006 Plan and the 2007 Plan vest as determined by the
Board of Directors, provided that:





●
            no
      option granted under the 2006 Plan or the 2007 Plan may be exercisable
      after ten years from its date of grant and no ISO granted to a person who
      owns more than ten percent of the total combined voting power of all
      classes of stock of the Company will be exercisable after five years from
      the date of grant; and





●
            an
      option granted to a participant who is an officer or director may become
      fully exercisable, subject to reasonable conditions such as continued
      employment, at any time or during any period established by the Board of
      Directors.


F-21





On
February 21, 2007, we issued 2,500 options to an employee at an exercise price
of $7.04 per share.





On March
14, 2007, we issued 1,000 options to 2 employees at an exercise price of $4.76
per share.





On March
19, 2007, we issued 7,500 options to an employee at an exercise price of $4.48
per share.





On April
13, 2007, we issued 3,750 options to an employee at an exercise price of $4.92
per share.





On April
25, 2007, we issued 500 options to an employee at an exercise price of $5.00 per
share.





On April
30, 2007, we issued 10,000 options to an employee at an exercise price of $5.08
per share.





On May 4,
2007, we issued 37,500 options to an employee at an exercise price of $6.20 per
share.





On May
16, 2007, we issued 10,000 options to an employee at an exercise price of $5.60
per share.





On May
31, 2007, we issued 7,500 options to an employee at an exercise price of $6.20
per share.





On
September 20, 2007, we issued 7,500 options to an employee at an exercise price
of $4.05 per share.





On
December 10, 2007, we issued 5,000 options to an employee at an exercise price
of $1.90 per share.





On
December 17, 2007, we issued 3,000 options to an employee at an exercise price
of $1.70 per share.





On
February 10, 2006, we issued 100,000 stock options to an employee, at an
exercise price of $1.20 per share.





On May
12, 2006, we issued 125,000 stock options to our CEO, Nolan Bushnell, at an
exercise price of $1.32 per share.





On July
5, 2006, we issued 31,250 stock options to an employee at an exercise price of
$1.12 per share.





On August
4, 2006, we issued 25,000 stock options to an employee at an exercise price of
$1.04 per share.





On August
10, 2006, we issued 37,500 stock options to an employee at an exercise price of
$1.12 per share.





On August
24, 2006, we issued a total of 25,000 stock options to three employees at an
exercise price of $2.20 per share.





On
September 1, 2006, we issued 17,500 stock options to an employee at an exercise
price of $2.40 per share.





On
October 10, 2006, we issued 6,250 stock options to an employee at an exercise
price of $6.08 per share.





On
October 30, 2006, we issued 50,000 stock options to an employee at an exercise
price of $5.20 per share.





On
November 8, 2006, we issued 6,250 stock options to an employee at an exercise
price of $6.00 per share.





On
November 30, 2006, we issued a total of 150,000 stock options to 2 employees at
an exercise price of $7.80 per share.





On
December 27, 2006, we issued a total of 42,500 stock options to 2 employees at
an exercise price of $8.80 per share.





All these
options listed above vest in 36 equal monthly installments with the initial
one-sixth vesting after 6 months.





On
September 22, 2006, we issued 100,000 stock options to an employee at an
exercise price of $4.68 per share. 12,500 of these options vest in a lump sum
after 3 months. The remaining 87,500 options will vest over a thirty-six month
period, with the initial one-sixth vesting after six months.





F-22


Following
is a summary of the stock option activity for the year ended January 1,
2008:





WeightedAverageOptions
            
            
            Exercise
            
            
            AggregateOutstanding
            
            
            Price
            
            
            Intrinsic
      ValueOutstanding,
      January 2, 2007
            
            
            1,174,933
            
            
            $
            3.76
            
            
            $
            6,461,691Granted
            
            
            95,750
            
            
            $
            5.30Forfeited
            
            
            180,325
            
            
            $
            4.60Exercised
            
            
            77,710
            
            
            $
            1.86Outstanding,
      January 1, 2008
            
            
            1,012,648
            
            
            $
            3.91
            
            
            $
            38,314Exercisable,
      January 1, 2008
            
            
            587,811
            
            
            $
            3.82
            
            
            $
            17,747











Following
is a summary of the status of options outstanding at January 1,
2008:





Exercise
            
            Options
            
            Average
      RemainingPrice
            
            Outstanding
            
            Contractual
      Life
            
            Exercisable$1.00
      - $1.99
            
            479,643
            
            7.96
            
            311,025$2.00
      - $2.99
            
            119,375
            
            8.00
            
            80,098$4.00
      - $4.99
            
            99,750
            
            8.83
            
            31,225$5.00
      - $5.99
            
            27,584
            
            8.70
            
            11,931$6.00
      - $6.99
            
            53,750
            
            9.19
            
            14,652$7.00
      - $7.99
            
            102,500
            
            8.93
            
            36,973$8.00
      - $8.99
            
            42,500
            
            8.99
            
            14,361$9.00
      - $9.99
            
            45,254
            
            6.18
            
            45,254$10.00
      - $10.99
            
            37,500
            
            6.54
            
            37,500$12.00
      - $12.99
            
            4,792
            
            1.97
            
            4,7921,012,648
            
            8.12
            
            587,811








For
options granted during the twelve months ended January 1, 2008, the
weighted-average fair value of such options was $5.30.





During
the twelve months ended January 1, 2008, we received $144,496 from the exercise
of 77,710 stock options at a weighted-average exercise price of $1.86 per
share.





The total
weighted-average remaining contractual term of the options outstanding at
January 1, 2008 is 8.12 years.





The total
weighted-average remaining contractual term of the options exercisable at
January 1, 2008 is 7.74 years.





We
recognized expense of $1,159,765 for the fair value of the options vested during
the twelve months ended January 1, 2008.





The total
compensation expense not yet recognized relating to unvested options at January
1, 2008 is $1,613,942 and the weighted-average period over which this expense
will be recognized is 1.64 years.





The
assumptions used in calculating the fair value of options granted during the
period, using the Black-Scholes options pricing model are as
follows:








Risk-free
      interest rate
            4.29%Expected
      life of the options
            10.00
      yearsExpected
      volatility
            64%-125%Expected
      dividend yield
            0








Restricted Stock
Awards





Restricted
stock awards are grants that entitle the holder to shares of common stock as the
award vests. Our restricted stock awards generally vest in 24 or 36 equal
monthly installments, as noted below. The fair value of our restricted stock
awards is estimated using the Black-Scholes options pricing model.





F-23


On April
3, 2007, we granted restricted stock awards to our executive officers and
directors totaling 125,000 shares, with a fair value of $4.88 per share. 50,000
of these shares vest in 36 equal monthly installments and 75,000 of these shares
vest in 24 equal monthly installments. On June 14, 2007, we granted 12,500
restricted stock awards to an employee that vest in 36 equal monthly
installments, with a fair value of $6.44 per share.





On
January 3, 2008, we granted 25,000 shares of restricted stock, vesting in 24
equal month installments, with a fair value of $33,250 to Mr. Bradley Rotter, as
compensation for serving as the chairman of the audit committee of our board of
directors.  Also on January 3, 2008, we granted 50,000 shares of
restricted stock to an employee that vest in 36 equal monthly installments, with
a fair value of $66,500.





Following
is a summary of the restricted stock award activity for the twelve months ended
January 1, 2008.





Weighted-AverageGrant
      Date
            
            
            AggregateShares
            
            
            Fair
      Value
            
            
            Intrinsic
      valueNon-vested
      balance January 2, 2007
            
            
            --
            
            
            
            --
            
            
            $
            --Granted
            
            
            137,500
            
            
            $
            5.02Vested
            
            
            42,882
            
            
            $
            4.96Forfeited
            
            
            --
            
            
            
            --Non-vested
      balance January 1, 2008
            
            
            94,618
            
            
            $
            5.05
            
            
            $
            132,465








For
awards granted during the twelve months ended January 1, 2008, the
weighted-average fair value of such awards was $5.02.





The total
weighted-average remaining contractual term of the awards outstanding at January
1, 2008 is 1.78 years.





We
recognized expense of $212,784 for the fair value of the awards vested during
the twelve months ended January 1, 2008.





The total
compensation expense not yet recognized relating to unvested awards at January
1, 2008 is $477,215 and the weighted average period over which this expense will
be recognized is 1.78 years.





The
assumptions used in calculating the fair value of awards granted during the
period, using the Black-Scholes options pricing model are as
follows:





Risk-free
      interest rate
            4.29%Expected
      life of the award
            2-3
      yearsExpected
      volatility
            122.9%-125%Expected
      dividend yield
            0








Warrants





Following
is a summary of the warrant activity for the twelve months ended January 1,
2008.





Weighted-AverageExercise
            
            
            AggregateWarrants
            
            
            Price
            
            
            Intrinsic
      ValueBalance
      January 2, 2007
            
            
            1,962,889
            
            
            $
            4.08
            
            
            $
            11,840,814Granted
            
            
            6,441,153
            
            
            $
            2.40Exercised
            
            
            162,708
            
            
            $
            1.38Cancelled
            
            
            58,748
            
            
            $
            9.47Balance
      January 1, 2008
            
            
            8,182,586
            
            
            $
            2.77
            
            
            $
            25,862




During
the twelve months ended January 1, 2008, we issued a total of 6,441,153
immediately-exercisable, five-year warrants with an exercise price of $2.40 per
share and an aggregate fair value of $7,200,750, as detailed
below.  The fair value of the warrants was calculated, as of the date
of issuance, using the Black-Scholes options pricing model using the following
assumptions: stock price of $1.95 for the November 7 warrants and $1.88 for the
November 12 warrants, risk free rate of return of 4.29%, volatility of 71.6%,
expected life of 5 years and dividend yield of 0%.





F-24


On
November 7, 2007, in a registered equity offering, we issued 5,191,750 units at
a purchase price of $2.00 per unit, each unit consisting of one share of common
stock and a warrant to purchase one share of our common stock at an exercise
price of $2.40, generating gross proceeds of $10,383,500.  We also
issued 299,700 immediately-exercisable, five-year warrants with an exercise
price of $2.40 per share to the placement agents in this
transaction.  Our November 7, 2007 financing triggered the conversion
rights in the convertible promissory notes issued in April 2007 and June 2007.
Effective November 12, 2007, holders representing an aggregate of $1,497,500 in
principal amount of convertible notes (including aggregate accrued interest of
$85,339 and an aggregate conversion incentive of $316,568) elected to convert
(in full satisfaction of our obligations under the notes) their notes into the
same units issued in the November 7, 2007 financing (each unit consisting of one
share of common stock and a warrant to purchase one share of our common stock at
an exercise price of $2.40) at a purchase price of $2.00 per unit. Accordingly,
we issued an aggregate 949,703 units to these investors.  The fair
value (as calculated using the Black-Scholes options pricing model) of the
warrants issued in these transactions to the investors and placement agents of
$7,200,750 was accounted for as a cost of raising equity with a corresponding
amount debited to additional paid-in capital.





During
the twelve months ended January 1, 2008, we recognized no expense relating to
warrants.





Following
is a summary of the status of warrants outstanding at January 1,
2008:





Outstanding
Warrants


AverageExercise
            
            
            
            
            
            RemainingPrice
            
            
            Number
            
            
            Contractual
      Life
            
            
            Exercisable$
            1.38
            
            
            
            1,293,110
            
            
            
            1.42
            
            
            
            1,293,110$
            2.40
            
            
            
            6,441,153
            
            
            
            4.86
            
            
            
            6,441,153$
            6.00
            
            
            
            100,031
            
            
            
            2.37
            
            
            
            100,031$
            6.32
            
            
            
            5,545
            
            
            
            0.03
            
            
            
            5,545$
            7.00
            
            
            
            21,250
            
            
            
            1.75
            
            
            
            21,250$
            8.00
            
            
            
            61,250
            
            
            
            1.30
            
            
            
            61,250$
            14.00
            
            
            
            222,747
            
            
            
            2.75
            
            
            
            222,747$
            20.00
            
            
            
            12,500
            
            
            
            1.25
            
            
            
            12,500$
            28.00
            
            
            
            12,500
            
            
            
            1.25
            
            
            
            12,500$
            36.00
            
            
            
            12,500
            
            
            
            1.25
            
            
            
            12,5008,182,586
            
            
            
            
            
            
            
            8,182,586





During
the year ended January 2, 2007, we issued:





on March
3, 2006, 625,000 immediately-exercisable, three-year warrants at an exercise
price of $1.38 to 22 investors and 112,500 immediately-exercisable, three-year
warrants at an exercise price of $1.38 to a placement agent. The fair value of
the warrants of $590,524 was calculated, as of the date of issuance, using the
Black-Scholes options pricing model using the following assumptions: stock price
of $1.20, risk free rate of return of 7.5%, volatility of 109%, expected life of
3 years and dividend yield of 0%;





on May 9,
2006 and June 12, 2006, 13,542 immediately-exercisable, three-year warrants to 2
investors at an exercise price of $1.38. The fair value of the warrants of
$8,920 was calculated, as of the date of issuance, using the Black Scholes
option pricing model using the following assumptions: stock price of $1.20 for
the May 9 warrants and $1.12 for the June 12 warrants, risk free rate of return
of 7.5%, volatility of 86%, expected life of three years and dividend yield of
0%; and





on
September 18, 2006, 679,776 immediately-exercisable, three-year warrants to 51
investors at an exercise price of $1.38. The fair value of the warrants of
$2,630,405 was calculated, as of the date of issuance, using the Black Scholes
option pricing model using the following assumptions: stock price of $4.48, risk
free rate of return of 3.93%, volatility of 123%; expected life of 3 years and
dividend yield of 0%.





A
provision in the Securities Purchase Agreements governing these transactions
required us to file a registration statement with the Securities and Exchange
Commission covering the resale of the shares of common stock and shares of
common stock underlying the warrants purchased by the investors as promptly as
possible and that, if the registration statement was not declared effective by
the SEC within 180 days of the closing date of the transaction, or if we failed
to keep the registration statement continuously effective until all the shares
(and shares underlying warrants) are either sold or can be sold without
restriction under Rule 144(k), that we pay the investors monthly liquidated
damages equal to 1.5% of their investment until the registration statement is
declared and kept effective or all the shares have been sold or can be sold
without restriction under Rule 144(k) (in the case of a failure to keep the
registration statement continuously effective). The warrants issued to the
placement agent are not subject to this registration rights/liquidated damages
for failure to register provision.





Because
the warrants were subject to registration rights with liquidated damages for
failure to register, under EITF 00-19, the fair value of the warrants was
accounted for as a liability and, at the end of each reporting period, the fair
value of the warrants was recalculated, and changes to the warrant liability and
related gain or loss were booked appropriately. On August 25, 2006, the
investors in the March 3, 2006 transaction waived this liquidated damages
provision for an additional three-month period, as it relates to the
registration statement becoming effective by September 3, 2006. On December 3,
2006, the investors in each of the 2006 transactions agreed, without additional
consideration, to permanently waive their right to registration of the warrants
and shares of common stock underlying the warrants issued in these transactions
as well as their right to liquidated damages for our failure to register the
shares issued or issuable in these transactions. As a result, the cumulative
warrant liability of $6,583,902 at September 30, 2006 was reclassified to equity
as of December 3, 2006.





F-25


In
accordance with EITF 00-19, the $500,444 fair value of the 625,000 warrants
issued to the investors in the March 3, 2006 transaction was recognized as an
expense in the March 31, 2006 statement of operations with a corresponding
amount booked as short term warrant liability on the March 31, 2006 balance
sheet. As of June 30, 2006, the fair value of the warrant liability relating to
the 625,000 warrants issued to the investors was $338,010, as calculated using
the Black-Scholes options pricing model using the following assumptions: stock
price of $1.12, risk free rate of return of 7.5%, volatility of 78.43%, expected
life of 2.75 years and dividend yield of 0%. In accordance with EITF 00-19, the
Company reduced the short term warrant liability relating to these warrants as
of June 30, 2006 by $162,424 to reflect the fair value at June 30, 2006 and
recognized fair value of warrant liability income (other income) of $162,434 in
the statement of operations for the six months ended June 30, 2006. As of
September 30, 2006, the fair value of the warrant liability relating to the
625,000 warrants issued to the investors in the March 3, 2006 transaction was
$3,104,000, as calculated using the Black Scholes option pricing model using
the  following assumptions: stock price of $5.68, risk free rate of
return of 7.5%, volatility of 123%, expected life of 2.5 years and dividend
yield of 0%. In accordance with EITF 00-19, the Company increased the short term
warrant liability relating to these warrants as of September 30, 2006 by
$2,765,990 to reflect the fair value as of September 30, 2006 and recognized
fair value of warrant liability expense (other expense) of $2,765,990 in the
statement of operations for the nine months ended September 30, 2006. Because
the warrants issued to the placement agent in the March 3, 2006 transaction are
not subject to registration rights/liquidated damages for failure to register,
the issuance date fair value of the 112,500 warrants issued to the placement
agent of $90,080 (along with the placement agent’s commission and
expenses) was accounted for as a cost of raising equity with a corresponding
amount debited to additional paid-in capital.





As of
June 30, 2006, the fair value of the 13,542 warrants issued in May and June 2006
was $7,674, as calculated using the Black-Scholes options pricing model using
the following assumptions: stock price of $1.12, risk free rate of return of
7.5%, volatility of 78.43%, expected life of 3 years and dividend yield of 0%.
The fair value of these warrants of $7,674, as calculated as of June 30, 2006,
was recognized as fair value of warrant liability expense (other expense) in the
statement of operations for the six month ended June 30, 2006, with a
corresponding amount booked as a short term warrant liability as of June 30,
2006. As of September 30, 2006, the fair value of the warrant liability relating
to the 13,542 warrants issued to the investors was $67,947, as calculated using
the Black Scholes option pricing model using the following assumptions: stock
price of $5.68, risk free rate of return of 7.5%, volatility of 123%, expected
life of 2.75 years and dividend yield of 0%. In accordance with EITF 00-19, the
Company increased the short term warrant liability relating to these warrants as
of September 30, 2006 by $60,272 to reflect the fair value as of September 30,
2006 and recognized fair value of warrant liability expense (other expense) of
$60,272 in the statement of operations for the nine months ended September 30,
2006.





The fair
value of the 679,776 warrants issued in the September 18, 2006 transaction, as
calculated as of September 30, 2006, was $3,411,955, as calculated using the
Black-Scholes options pricing model using the following assumptions: stock price
of $5.68, risk free rate of return of 3.93%, volatility of 123%; expected life
of 3 years and dividend yield of 0%. The September 30, 2006 fair value of these
warrants of $3,411,955 was recognized as fair value of warrant liability expense
(other expense) with a corresponding amount booked as a short term warrant
liability as of September 30, 2006.





As
discussed above, the cumulative warrant liability of $6,583,902 at September 30,
2006 was reclassified to equity as of December 3, 2006.





On April
19, 2006, the Company issued 25,000 immediately-exercisable, three-year warrants
to Mr. Bradley Rotter, a director of the Company, at an exercise price of $1.38
in connection with the partial repayment and partial extension of a $200,000
convertible note. The fair value of the warrants of $16,828 was calculated using
the Black-Scholes options pricing model using the following assumptions: stock
price $1.20, risk free rate of return of 7.5%, volatility of 86%, expected life
of 3 years and dividend yield of 0%. The fair value of the warrants was
accounted for as interest expense with a corresponding amount debited to
additional paid-in capital.





On
October 26, 2006, the Company issued an additional 25,000
immediately-exercisable, three-year warrants at an exercise price of $1.38 to
Mr. Rotter in connection with the conversion into common stock of a $100,000
note issued to Mr. Rotter on April 19, 2006. The fair value of the warrants of
$116,122 was calculated using the Black-Scholes options pricing model using the
following assumptions: stock price $5.32, risk free rate of return of 3.93%,
volatility of 119.24%, expected life of 3 years and dividend yield of 0%. The
fair value of the warrants was accounted for as interest expense with a
corresponding amount debited to additional paid-in capital.





The
Company recognized interest expense for the year ended January 2, 2007 of
$132,950 in respect of the 50,000 warrants issued to Bradley Rotter discussed
above. In addition, the Company recognized $6,583,902 of expense in the
statement of operations relating to the financing warrants issued during the
period. Of this $6,583,902 expense, $3,139,769 reflects expense related to the
issuance date fair value of the warrants and $3,444,133 reflects net expense
related to the change in the fair value of the warrants.





NOTE
11 - SEGMENTS





In 2007,
we operated in one industry segment.





In 2006,
we had two reportable segments consisting of (1) Restaurant operations and (2)
Products, representing the sale of SNAP! and Bear Shop machines and the
licensing of SNAP! and Bear Shop intellectual property. The Company had no
restaurant operations prior to 2006. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
The Company evaluates performance based on sales, gross profit margins and
operating profit (loss) before income taxes. Selling, general and administrative
expenses taken into account in determining operating profit (loss) before income
taxes consist primarily of professional fees, corporate and restaurant rent
expense, salary and engineering consulting expense, restaurant pre-opening and
operating expenses, employee stock option expense, inventory reserve expense and
other expenses. Unallocated operating loss before income taxes reflects the sum
of fair value of warrant liability expense, loss on conversion of debt expense,
interest expense, beneficial conversion feature expense, and gain on settlement
of debt and other income.


F-26





The
following is information for the Company’s reportable
segments for the year ended January 2, 2007:





RESTAURANT
            
            
            PRODUCTS(IN
      THOUSANDS)
            
            SEGMENT
            
            
            SEGMENT
            
            
            OTHER
            
            
            TOTALRevenue
            
            $
            290
            
            
            $
            160
            
            
            $
            --
            
            
            $
            450Gross
      margin
            
            
            190
            
            
            
            11
            
            
            
            --
            
            
            
            201(Loss)
      from operations before tax
            
            
            (3,179
            )
            
            
            (311
            )
            
            
            (6,871
            )
            
            
            (10,361
            )Identifiable
      assets
            
            
            1,044
            
            
            
            59
            
            
            
            --
            
            
            
            1,103Depreciation
      and amortization
            
            
            60
            
            
            
            2
            
            
            
            --
            
            
            
            62Capital
      expenditures
            
            
            1,003
            
            
            
            --
            
            
            
            --
            
            
            
            1,003





NOTE
12 - INCOME TAXES





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
the amounts used for income tax purposes.





Significant
components of the Company’s deferred tax
liabilities and assets as of January 1, 2008 are as follows:











F-27








Deferred
tax assets:





Federal
      net operating loss
            
            $
            8,050,014State
      net operating loss
            
            
            2,259,211Total
      deferred tax assets
            
            
            10,309,225Less
      valuation allowance
            
            
            (10,309,225
            )$
            --





At
January 1, 2008, the Company had federal and state net operating loss (“NOL”) carryforwards of
approximately $25,935,722 and $25,556,687, respectively. Federal NOLs could, if
unused, expire in varying amounts in the years 2019 through 2023. State NOLs, if
unused, could expire in varying amounts from 2008 through 2011.





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
the amounts used for income tax purposes.





Significant
components of the Company’s deferred tax
liabilities and assets as of January 2, 2007 are as follows:








Deferred
      tax assets:Federal
      net operating loss
            
            $
            6,962,511State
      net operating loss
            
            
            1,949,041Total
      deferred tax assets
            
            
            8,911,552Less
      valuation allowance
            
            
            (8,911,552
            )$
            --





At
January 2, 2007, the Company had federal and state net operating loss (“NOL”) carryforwards of
approximately $22,427,014 and $22,047,979, respectively. Federal NOLs could, if
unused, expire in varying amounts in the years 2018 through 2022. State NOLs, if
unused, could expire in varying amounts from 2007 through 2010.





The
reconciliation of the effective income tax rate to the federal statutory rate
for the fiscal years ended January 1, 2008 and January 2, 2007 is as
follows:





2007
            
            2006Federal
      income tax rate
            
            
            (34
            %)
            
            
            (34
            %)State
      tax, net of federal benefit
            
            
            (6
            %)
            
            
            (6
            %)Increase
      in valuation allowance
            
            
            40
            %
            
            
            40
            %Effective
      income tax rate
            
            
            0.0
            %
            
            
            0.0
            %





Utilization
of the net operating loss and tax credit carryforwards is subject to significant
limitations imposed by the change in control rules under I.R.C. 382, limiting
its annual utilization to the value of the Company at the date of change in
control times the federal discount rate. A significant portion of the NOLs may
expire before they can be utilized.




The
components of the income tax provision for the years ended January 1, 2008 and
January 2, 2007, were as follows:


January
      1,
                2008
              
              
              January
      2,
                2007Current
              
              $
              --
              
              
              $
              --Deferred
              
              $
              (1,397,673
              )
              
              $
              (1,140,715
              )$
              (1,397,673
              )
              
              $
              (1,140,715
              )
  NOTE
13 - COMMITMENTS AND CONTINGENCIES





Other
Litigation





In the
ordinary course of business, the Company is generally subject to claims,
complaints, and legal actions. As of January 1, 2008 and January 2, 2007,
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.





Bauer
Industrial Group, Inc. and Thomas Bannister v. uWink, Inc., Case No. 07- C-1001,
was filed against us on November 13, 2007 in the federal district court for the
Eastern District of Wisconsin. Plaintiffs allege that we refused to pay
compensation for services rendered, which we deny. The complaint alleges claims
for breach of contract, breach of the implied covenant of good faith and fair
dealing, promissory estoppel, unjust enrichment, intentional misrepresentation,
strict responsibility misrepresentation, negligent misrepresentation, and
fraudulent representation, and seeks compensatory damages of not less than
$500,000, punitive damages, treble damages under a Wisconsin statute, and costs
of suit.  We have answered the complaint by denying any wrongdoing and
asserting a number of affirmative defenses, including plaintiffs’ breach of
contract, which we believe negates plaintiffs’ right to any compensation under
the agreements. We have also moved to dismiss the complaint for lack of personal
jurisdiction and improper venue or, alternatively, to change venue to the
Central District Court in California.






F-28





Leases





Effective
May 31, 2006, we terminated the lease agreement at our former corporate offices
at 12536 Beatrice Street, Los Angeles, California 90066. In consideration for
the early termination of the lease, we agreed to allow the landlord to retain
$20,000 of the security deposit held by the landlord under the
lease.





Effective
June 1, 2006, we entered into a lease agreement relating to our new corporate
offices at 16106 Hart Street, Van Nuys, California 91406. This property consists
of approximately 2,200 square feet of office and warehouse space at the base
rental rate of $2,300 per month. Effective January 22, 2008, we entered into a
lease agreement relating to an additional 1,650 square feet of office and
warehouse space contiguous to our corporate offices at 16106 Hart Street, Van
Nuys, California 91406 at a base rental rate of $2,442 per
month.





Effective
as of April 10, 2006, we secured an approximately 10 year lease on the planned
location for our first uWink restaurant in Woodland Hills, California, located
at 6100 Topanga Canyon Boulevard, Woodland Hills, California 91367. The underlying
lease agreement between Nolan Bushnell, our CEO, in his personal capacity,
and Promenade LP, the landlord, is as of February 3, 2006. Effective as of
April 10, 2006, the Company, Mr. Bushnell and Promenade L.P. entered into an
assignment agreement pursuant to which Mr. Bushnell assigned his rights under the lease
to the Company (but without relieving Mr. Bushnell of his liability for the
performance of the lease). In connection with this assignment, we agreed with Mr.
Bushnell that, should we fail to perform under the lease and Mr. Bushnell
become obligated under the lease as a result, Mr. Bushnell will have the right
to operate the leased premises in order to satisfy his obligations under the
lease.





This
location consists of 5,340 square feet. The minimum annual rent payments under the
lease are $176,220 from rental commencement through January 31, 2009; $181,507
from February 1, 2009 to January 31, 2010; $186,952 from February 1, 2010 to
January 31, 2011; $192,560 from February 1, 2011 to January 31, 2012; $198,337
from February 1, 2012 to January 31, 2013; $204,287 from February 1, 2013 to
January 31, 2014; $210,416 from February 1, 2014 to January 31, 2015; and
$216,728 from February 1, 2015 to January 31, 2016.





If our
gross sales from this location exceed certain annual thresholds, we are obligated
to pay additional percentage rent over and above the minimum annual rent
described above. Our percentage rent obligation is equal to 5% of gross sales in
excess of the following thresholds:





Rental
commencement to January 31, 2009: $3,524,400;


February
1, 2009 to January 31, 2010: $3,630,132;


February
1, 2010 to January 31, 2011: $3,739,036;


February
1, 2011 to January 31, 2012: $3,851,207;


February
1, 2012 to January 31, 2013: $3,966,743;


February
1, 2013 to January 31, 2014: $4,085,745;


February
1, 2014 to January 31, 2015: $4,208,318; and


February
1, 2015 to January 31, 2016: $4,334,567.





Our
obligation to pay rent under this lease commenced on October 5,
2006.





On
June 4, 2007, we entered into a lease agreement relating to our planned
uWink restaurant location at the Promenade at Howard Hughes Center located at
6081 Center Drive, Los Angeles, California 90045. On December 4, 2007, we
terminated this definitive lease agreement as a result of certain permitting
delays relating to the Center’s conditional use
permit that prevented the opening of the restaurant within the timelines
provided for in the definitive lease agreement. We incurred no termination
penalties.





On
October 25, 2007, we entered into a definitive agreement and sublease to
acquire the leasehold interest of a formerly operating restaurant located at 401
Castro Street, Mountain View, CA 94041.  This location consists of
6,715 square feet. The annual rent payment under the lease is $228,000, subject
to annual adjustment based on increases in the consumer price index capped at
5%.  We are also obligated pay our pro-rata share of the property’s
operating expenses.  The lease expires on November 30,
2022.  Our obligation to make operating expense payments under this
lease commenced on February 1, 2008 and our obligation to make base rent
payments is expected to commence on May 1, 2008.





F-29


On
December 17, 2007, we entered into a definitive lease agreement with CIM/H&H
Retail, L.P. to open a new restaurant location in the Hollywood & Highland
Center located at 6801 Hollywood Boulevard, Hollywood, California
90028.  This location consists of 7,314 square feet. The minimum
annual rent payment under the lease is $182,850, subject to annual 3%
increases.  The lease expires on July 31, 2018.  If our
gross sales from this location exceed certain annual thresholds, we are
obligated to pay additional percentage rent over and above the minimum annual
rent described above. Our percentage rent obligation is equal to 8% of gross
sales in excess of $5,000,000, with this threshold being subject to 3% annual
increases.  We are also obligated pay our pro-rata share of the
property’s operating expenses.  We expect that our obligation to pay
rent under this lease will commence in May 2008.





Total
rent expense for the year ended January 1, 2008 was $332,706. Total rent expense
for the year ended January 2, 2007 was $177,028.





Licensing
Agreements





Effective
September 15, 2006, we entered into a license agreement with SNAP Leisure LLC, a
company owned and operated by our former Vice President of Marketing. Pursuant
to this agreement, we licensed our SNAP! Intellectual property, including the
games featured on SNAP! in the form they currently run on SNAP! (we have made
significant enhancements to our games for display in our restaurant and SNAP
Leisure LLC has no right to those enhancements or any future enhancements or new
games we develop), to SNAP Leisure LLC for use in the “pay to play” amusements market
worldwide (the “pay to play” amusements market
is generally considered to be the coin operated video game machine market). The
agreement provides that we are to receive royalties calculated per SNAP! Machine
sold ($200 royalty per machine for the first 300 machines sold; $80 per machine
royalty for the next 700 machines sold; and $50 per machine royalty for any
additional machines sold thereafter). We have no obligation to provide any
support or software maintenance, upgrades or enhancements under this
agreement.





On
January 26, 2007, we entered into an Inventory Purchase Agreement, a License
Agreement and a Non-Competition Agreement with Interactive Vending Corporation
(“IVC”). Pursuant to
these agreements, we agreed to sell our remaining Bear Shop machine inventory
(at $2,000 per complete machine, payable in 2 installments) and accessories
inventory (at our cost) to IVC. In addition, we granted IVC an exclusive,
worldwide license to our Bear Shop intellectual property (excluding any
intellectual property relating to the name “uWink” or any
derivation  thereof), including US Patent # 6,957,125,(except that we
retain the right of use in the restaurant industry subject to the limitations in
the Non-Competition Agreement) in exchange for royalties based on the revenue
generated by IVC from the licensed intellectual property, ranging from 5% of
revenue in the first year of the agreement to 3% of revenue in years seven,
eight, nine and ten of the agreement. We have no obligation to provide any
support or software maintenance, upgrades or enhancements under these
agreements. We also entered into a Non-Competition Agreement with IVC, pursuant
to which we agreed not to engage in the business of interactive vending, other
than in the restaurant industry to the extent the interactive vending is
integrated into the operations of the restaurant, for as long as IVC is
obligated to make royalty payments under the License Agreement.





NOTE
14 - SUBSEQUENT EVENTS





None.





F-30








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





None.





ITEM
8A(T). CONTROLS AND PROCEDURES





(a)
Evaluation of Disclosure Controls and Procedures





The
management of uWink, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). uWink’s internal control over
financial reporting was designed to provide reasonable assurance to the
Company’s management and Board of Directors regarding the preparation and fair
presentation of published financial statements.





All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.





Under the
supervision and participation of the Company’s Chairman and Chief Executive
Officer and the Chief Operating Officer, management conducted an evaluation of
the effectiveness of the Company’s internal control over financial reporting as
of January 1, 2008, based on the framework established by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated
Framework(commonly referred to as the COSO framework). Based on its
evaluation, management concluded that the Company’s internal control over
financial reporting was effective as of January 1, 2008, based on the criteria
outlined in the COSO framework.





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





(b)
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.





There has
not been any change in our internal control over financing reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during the quarter ended January 1,
2008 that has materially affected, or is likely to materially affect, our
internal control over financial reporting.








ITEM
8B.  OTHER INFORMATION





None.





65


PART
III





ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATEGOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.





EXECUTIVE
OFFICERS, SIGNIFICANT EMPLOYEES AND DIRECTORS





Set forth
below is certain information as of March 30, 2008 concerning each of our
directors and executive officers and certain significant employees. Each of the
individuals listed below as a director shall serve as a director until the next
annual meeting of our stockholders and until their successors have been elected
and qualified, or until their resignation, death or removal.





Name
            Age
            Position or CapacityNolan
      K. Bushnell
            65
            Chief
      Executive Officer and Chairman of the Board of
DirectorsPeter
      F. Wilkniss
            42
            President,
      Chief Operating Officer, Chief Financial Officer and
    SecretaryJohn
      S. Kaufman
            46
            Chief
      Restaurant and Development OfficerBrent
      N. Bushnell
            29
            Chief
      Technology OfficerJon
      P. Boucher
            31
            Vice
      President, Restaurant Operations and FranchisingElizabeth
      J. Heller
            50
            DirectorKevin
      W. McLeod
            52
            DirectorBradley
      N. Rotter
            52
            Director





Nolan K.
Bushnell has been the Chairman of our Board of Directors, and Chief
Executive Officer since December 4, 2003 following our acquisition of uWink
California. Mr. Bushnell founded uWink California and has acted as its
Chairman, Chief Executive Officer and President since 1999. Mr. Bushnell is
best known as the founder of Atari Corporation and Chuck E. Cheese Pizza Time
Theater. In 1980, Mr. Bushnell founded Catalyst Technologies, an incubator
which spawned more than 20 companies, including Etak, ACTV, Androbot, Axlon,
Magnum Microwave, Irata and ByVideo. Mr. Bushnell holds several patents on
some of the basic technologies for many of the early video games developed and
is also the inventor or co-inventor of numerous patents in various other fields
and industries. Mr. Bushnell received his B.S. in Electrical Engineering
from the University of Utah, where he is a “Distinguished
Fellow”, and
later attended Stanford University Graduate School. Mr. Bushnell is also
currently a director of Wave Systems Corp and is chairman of the board of
NeoEdge Networks.





Peter F.
Wilkniss became our Chief Financial Officer and Secretary on
August 29, 2005 and was named our President and Chief Operating Officer in
February 2008. Mr. Wilkniss has over 14 years experience in
operational and financial leadership in entrepreneurial technology-driven
arenas. His areas of expertise include corporate finance and financial
reporting, M&A, business development and strategic planning. From
June 2004 to April 2005, Mr. Wilkniss was Chief Operating Officer
of Juriscape, Inc., an early stage ecommerce company. From
January 2003 to May 2004, Mr. Wilkniss was a private investor and
business consultant. From 2000 to 2002, Mr. Wilkniss was Managing Director
and CFO of the Helfant Group, Inc. (now Jefferies Execution
Services, Inc.) subsidiary of Jefferies Group, Inc. (NYSE: JEF). From
1998 to 2000, Mr. Wilkniss was a corporate attorney at Wachtell, Lipton,
Rosen & Katz. Mr. Wilkniss holds an MBA from Columbia Business
School and a JD from Columbia Law School (with highest honors). He received his
BA from the University of Virginia.





John S.
Kaufman became employed by us as our Director of Restaurant Operations on
September 22, 2006 and was promoted to Chief Restaurant and Development
Officer in May 2007. Prior to joining our company as an officer,
Mr. Kaufman acted as our Director of Restaurant Operations on a consulting
basis. Mr. Kaufman has over 20 years of restaurant experience,
specializing in operations. For the past four years, Mr. Kaufman has been
principal of JSK Management, LLC, a restaurant operations and strategic planning
consultancy. From 1999 to 2002, Mr. Kaufman was principal of Concepts
Etc., Inc., a restaurant management and consultancy specializing in joint
ventures, franchise and operating contracts with new and existing restaurants.
From 1996 to 1998, Mr. Kaufman was President and Chief Operating Officer of
Koo Koo Roo, Inc., where he was responsible for reversing company losses
into gains, opening 34 new locations in multiple states, and assisted in a
merger with Family Restaurants. From 1995 to 1996, Mr. Kaufman was Chief
Operating Officer of Rosti, where he helped develop the prototype restaurant
concept, participated in raising $5,000,000 for expansion, and managed the
opening of three new restaurants in the Los Angeles market. In 1986,
Mr. Kaufman joined California Pizza Kitchen, where he stayed until 1994, as
he helped build the company from a single location to more than 68 locations. At
California Pizza Kitchen, Mr. Kaufman eventually supervised more than 3,000
employees including 250 managers and 12 area supervisors and two regional
vice-presidents of operations.





66


Brent N. Bushnellbecame employed by us in November 2006 after having been a consultant to
our company from March 2006 to November 2006.  Mr. Bushnell was
formally named our Chief Technology Officer in January 2008.  Mr.
Bushnell has 12 years of software engineering and systems
experience.  Mr. Bushnell has extensive knowledge of web applications
authoring, scaling and maintenance. Mr. Bushnell also has Internet
infrastructure and networking experience, as well as hardware systems design,
testing and assembly capabilities.  Prior to joining our company he
held the Chief Technology Officer position with Interlincx, an Internet
applications and marketing company from 2004 to 2006.  From 2002 to
2004, Mr. Bushnell was founder and Chief Executive Officer of Izolo, a
technology service provider with products ranging from web applications to
web/DNS/email services.  Mr. Bushnell has attended University of
Colorado, Boulder and University of California, Los Angeles.  Mr.
Bushnell is the son of our Chairman and Chief Executive Officer, Nolan
Bushnell.





Jon P.
Boucher became employed by us as a Vice President in February 2008. Mr.
Boucher comes to us with over 10 years of operations and franchise experience.
Prior to joining our company he held the Vice President of Operations position
with the $35 million (revenue) Landmark Restaurant Group, an IHOP franchisee,
from 2006-2008. With LRG, Mr. Boucher lead a team of two Regional Directors, one
Director of Training, one District Manager, one Director of Facilities and over
1,000 employees.  While at LRG, Mr. Boucher opened 11 restaurants in
17 months while maintaining the highest level of operating status at all 17
locations.  Prior to that, from 2003 to 2006, Mr. Boucher served as
the Vice President of Operations for the $60 million (revenue) Huntington
Restaurant Group, one of 14 Chili’s franchisees in
the United States and, at one time, the largest Denny’s franchisee in
the world.  During this period, Mr. Boucher managed various groups of
restaurants from Oregon to Florida and was actively involved in the management
of Huntington’s franchising affiliate, which was the franchisor for a number of
concepts, including Central Park Hamburgers and Gators Dockside
Restaurant.





Elizabeth J.
Heller has been a director since April 2007 and serves on our Audit
Committee, our Compensation Committee, and our Nominating and Corporate
Governance Committee. Ms. Heller is the founder of and has served as CEO of
Buzztone, Inc., a marketing company that combines online and offline
word-of-mouth marketing techniques, since 1999. Prior to founding Buzztone,
Ms. Heller served as Executive Vice President of Capitol Records from 1994
to 1999, where she developed such award winning websites as Hollywoodandvine.com
and Bluenote.com, and oversaw Capitol’s soundtrack
department, executive producing several hit records. Ms. Heller has also
served as VP of Artist Development for MCA Records after starting her career at
Epic Records. Ms. Heller currently resides in Los Angeles. She received her
B.A. from University of California, Los Angeles.





Kevin W.
McLeod has been a director since March 2004 and serves on our Audit
Committee, our Compensation Committee, and our Nominating and Corporate
Governance Committee. Since 1998, Mr. McLeod has been the Managing Director
of Aircool Engineering, Ltd. of Somerset England. Aircool Engineering is
one of the United Kingdom’s largest
mechanical and electrical contractors. Mr. McLeod is a native of New
Zealand currently residing in London.





Bradley N.
Rotter has been a director since November 11, 2005 and serves as the
chair of our Audit Committee, and as a member of our Compensation Committee and
our Nominating and Corporate Governance Committee. From 1988 to the present
Mr. Rotter has served as Managing Member of the Echelon Group, a private
specialty finance company. From 2003 to 2004 Mr. Rotter was Chief Executive
Officer of MR3 Systems, Inc. (OTCBB: MRMR), an SEC reporting company. From
1985 to 2004, Mr. Rotter served as President of Presage Corporation, a
private investment company. From 1993 to 2003, Mr. Rotter was Chairman of
Point West Capital Corporation (OTCBB: PWCC). From 1999 to 2001, Mr. Rotter
served on the board of directors of Homeseekers.com Inc., at the time an
SEC reporting company and now called Realigent, a private company.
Mr. Rotter currently serves on the boards of directors of
Sequella, Inc., AirPatrol Corporation and Authentisure, all private
companies. Mr. Rotter attended the United States Military Academy at West
Point and holds an MBA from the University of Chicago.





Board
Committees





Our Board of Directors has established
three committees: the Audit Committee, the Compensation Committee, and the
Nominating and Corporate Governance Committee. Bradley Rotter is the chair of
our Audit Committee, with Kevin McLeod and Elizabeth Heller serving as the
additional members. Bradley Rotter, Kevin McLeod and Elizabeth Heller serve as
the members of our Compensation Committee and Nominating and Corporate
Governance Committee. The Board has adopted written charters for each of the
Board committees.





67


Audit
Committee.  Our Audit Committee consists of three directors,
each of whom meet the independence standards set forth in SEC regulations.
Pursuant to the terms of the Audit Committee charter, adopted by our Board on
July 20, 2007, our Audit Committee is required to consist of at least three
“independent” directors, as
defined by the rules and regulations promulgated by the SEC, and each of whom
are able to read and understand fundamental financial statements, including a
balance sheet, income statement and cash flow statement. The primary duties and
responsibilities of the Audit Committee consist of, among
other things:





●
            overseeing
      the integrity of our financial statements and systems of internal controls
      regarding finance, accounting, and legal
  compliance;





●
            exercising
      primary responsibility for the appointment, compensation, and retention of
      our independent auditor for the purpose of preparing or issuing an audit
      report or performing other audit, review or attest services for us and our
      subsidiaries and assistance in oversight of such auditor’s
      qualifications, independence, and
performance;





●
            assisting
      the Board in oversight of the performance of our internal
      audit function;





●
            assisting
      the Board in oversight of our compliance with legal and regulatory
      requirements;





●
            preparing
      the reports required by the rules of the SEC to be included in our annual
      report and proxy statement, for so long we remain subject to the reporting
      requirements under the Securities Exchange Act of 1934, as
      amended; and





●
            establishing
      procedures for the receipt, retention and treatment of complaints
      regarding accounting internal accounting control, or auditing matters, and
      the confidential, anonymous submission by our employees regarding and
      questionable accounting or auditing
matters.





A copy of the charter of our Audit
Committee is available on our website at www.uwink.com.





Compensation
Committee.  Our Compensation Committee consists of three
directors, each of whom meet the independence standards set forth in SEC
regulations. Pursuant to the Compensation Committee Charter, adopted by our
Board on July 20, 2007, the primary duties and responsibilities of the
Compensation Committee consist of, among other things:





●
            exercising
      primary responsibility for the structure, award and public disclosure of
      all elements of the compensation paid to our chief executive and other
      executive officers;





●
            establishing
      the goals and objectives of our executive compensation program and each
      element of executive compensation;





●
            establishing
      policies and procedures for the evaluation, award and public disclosure of
      executive compensation;





●
            administering
      and/or overseeing the administration of our stock plans and our other
      material employee benefit plans, including the granting of stock options,
      restricted stock and other
equity awards;





●
            preparing
      an annual Compensation Committee report for inclusion in our annual report
      and meeting proxy
statement; and





●
            exercising,
      in its discretion, the powers granted to it in our
  bylaws.





A copy of the charter of our
Compensation Committee is available on our website at
www.uwink.com.





68


Nominating and
Corporate Governance Committee.  Our Nominating and Corporate
Governance Committee consists of three directors, each of whom meet the
independence standards set forth in SEC regulations. Pursuant to the Nominating
and Corporate Governance Committee Charter, adopted by our Board on
July 20, 2007, the primary duties and responsibilities of the Nominating
and Corporate Governance Committee consist of, among
other things:





●
            identifying
      individuals qualified to become Board
members;





●
            advising
      the Board on Board committee appointments and
  removals;





●
            recommending
      nominees for election to the Board at annual shareholder meetings and when
      otherwise required;





●
            developing
      and recommending to the Board corporate governance and ethics principles
      applicable to the company; and





●
            overseeing
      the evaluation of the Board and
management.





A copy of the charter of our Nominating
and Corporate Governance Committee is available on our website at
www.uwink.com.





Code of
Ethics.  Our board of directors has adopted a code of ethics
applicable to all of our employees, including our chief executive officer, chief
operating officer and our directors. A copy of our Code of Ethics is available
on our website at www.uwink.com. We also filed a copy of our Code of Ethics as
an exhibit to our Annual Report on Form 10-KSB for the year ended
December 31, 2005, which we filed with the SEC on
April 17, 2006.





We did not pay any compensation or
issue any options or other equity incentive awards to our non-employee directors
in 2006. We issued 25,000 shares (100,000 pre-reverse split) of restricted
common stock to each of Mr. McLeod, Mr. Rotter and Ms. Heller on
April 3, 2007, pursuant to the 2006 Equity Incentive Plan, which vest in
equal monthly installments over a two year period, subject to the other terms
and conditions of the 2006 Equity Incentive Plan. We do not currently have any
standard or annual arrangements regarding director compensation. On January 3,
2008 we awarded Mr. Rotter 25,000 shares of restricted common stock,
vesting in equal monthly installments over a two-year period, as compensation
for serving as the chair of our Audit Committee. All directors receive
reimbursement for out-of-pocket expenses in attending board of directors
meetings.





SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section
16(a) of the Securities and Exchange Act of 1934 requires any person who is a
director or executive officer of our company, or who beneficially holds more
than 10% of any class of our securities which have been registered with the SEC,
to file reports of initial ownership and changes in ownership with the SEC.
These persons are also required under SEC regulations to furnish us with copies
of all Section 16(a) reports they file. To our knowledge based solely on our
review of the copies of the Section 16(a) reports furnished to us and
representations to us that no other reports were required, none of our directors
and executive officers were late or deficient with respect to filings under
Section 16(a) during 2007 and to date in 2008.








ITEM
10. EXECUTIVE COMPENSATION





Executive
Compensation





The following table sets forth
compensation information for services rendered to us by our executive officers
in all capacities, other than as directors, during each of the prior two fiscal
years. The following table summarizes all compensation for fiscal years 2007 and
2006 received by our Chief Executive Officer and President, Chief Operating
Officer, our only executive officers. The following information includes the
dollar value of base salaries, bonus awards, stock options granted and certain
other compensation, if any, whether paid or deferred, and, except as indicated,
gives effect to our four-for-one reverse stock split.


69





Summary
Compensation Table





Name and Principal
      Position
            Year
            
            Salary ($)
            
            
            Bonus ($)
            
            
            Stock
              Awards
              $(5)
            
            
            Option
              Awards
              ($)(5)
            
            
            Total ($)Nolan
      K. Bushnell,
            2007
            
            $
            187,500
            (3)
            
            
            —
            
            
            $
            30,500
            
            
            $
            132,272
            
            
            $
            350,272Chief
      Executive Officer(1)
            2006
            
            $
            120,000
            
            
            
            —
            
            
            
            —
            
            
            $
            119,022
            
            
            $
            239,022Peter
      F. Wilkniss,
            2007
            
            $
            187,500
            (4)
            
            
            —
            
            
            $
            30,500
            
            
            $
            62,000
            
            
            $
            280,000President,
      Chief Operating Officer(2)
            2006
            
            $
            120,000
            
            
            
            —
            
            
            
            —
            
            
            $
            62,000
            
            
            $
            182,000






(1)           The
aggregate number of stock awards and option awards issued to Mr. Bushnell
and outstanding as of March 30, 2008 is 25,000 and 167,500, respectively. The
25,000 stock awards held by Mr. Bushnell were granted on April 3,
2007; accordingly, no amount in respect of these awards is reflected in
Mr. Bushnell’s compensation for
2006.





(2)           The
aggregate number of stock awards and option awards issued to Mr. Wilkniss
and outstanding as of April 3, 2007 is 25,000 and 100,000, respectively.
The 25,000 stock awards held by Mr. Wilkniss were granted on April 3,
2007; accordingly, no amount in respect of these awards is reflected in
Mr. Wilkniss’ compensation for
2006.





(3)           Includes
an aggregate of $45,000 of Mr. Bushnell’s salary accrued for 2005 and 2006
and paid in 2007.  Mr. Bushnell’s base salary was increased from
$120,000 to $225,000 in November 2007.





(4)           Includes
an aggregate of $45,000 of Mr. Wilkniss’ salary accrued
for 2005 and 2006 and paid in 2007.  Mr. Wilkniss’ base salary was
increased from $120,000 to $225,000 in November 2007.





(5)           Reflects
dollar amounts expensed by the Company during 2007 and 2006 for financial
statement reporting purposes pursuant to FAS 123R. FAS 123R requires
the Company to determine the overall value of the options and other equity
incentive awards as of the date of grant based upon the Black-Scholes method of
valuation, and to then expense that value over the service period over which the
options or other awards become exercisable (vest). As a general rule, for time
in service based options/awards, we will immediately expense any option or
portion thereof which is vested upon grant, while expensing the balance on a pro
rata basis over the remaining vesting term of the option.






70





The following tables summarize the
amount of our executive officers’ equity-based
compensation outstanding at the fiscal year ended January 1, 2008, and,
except as indicated, give effect to our four-for-one reverse stock
split:





Option
Awards





Name
            
            Number
      of
              securities
              underlying
              unexercised
              options
              exercisable
            
            
            Number
      of
              securities
              underlying
              unexercised
              options
              unexercisable
            
            
            Equity
              Incentive
              Plan
      Awards;
              number
      of
              securities
              underlying
              unexercised
              unearned
              options
            
            
            Option
              Exercise
              Price
            
            Option
              Expiration
              DateNolan
      K. Bushnell
            
            
            37,500
            
            
            
            —
            
            
            
            —
            
            
            $
            10.56
            
            7/16/20142,500
            
            
            
            —
            
            
            
            —
            
            
            $
            6.40
            
            12/14/20142,500
            
            
            
            —
            
            
            
            —
            
            
            $
            5.52
            
            12/29/201468,379
            
            
            
            56,621
            
            
            
            —
            
            
            $
            1.32
            
            5/12/2016Peter
      F. Wilkniss
            
            
            39,041
            
            
            
            10,959
            
            
            
            —
            
            
            $
            1.72
            
            8/27/201538,265
            
            
            
            11,735
            
            
            
            —
            
            
            $
            2.28
            
            9/13/2015





71


Stock
Awards





Name
            
            Number
      of
              shares
      or units
              of
      stock that
              have not vested
            
            
            Market
      value of
              shares
      or units that
              have not vested
            
            
            Equity
      Incentive Plan
              Awards:
      Number of
              unearned
      shares,
              units
      or other rights
              that have not vested
            
            
            Equity
      Incentive Plan
              Awards:
      Market or
              payout
      value of
              unearned
      shares
              units,
      or other rights
              that have not vestedNolan
      K. Bushnell(1)
            
            
            18,750
            
            
            $
            27,938
            
            
            
            —
            
            
            
            —Peter
      F. Wilkniss(2)
            
            
            18,750
            
            
            $
            27,938
            
            
            
            —
            
            
            
            —






(1)           25,000
restricted stock awards, were granted on April 3, 2007 pursuant to our 2006
Equity Incentive Plan and vest pro-rata over 36 months. The market value of
these stock awards at March 30, 2008 is equal to the number of unvested shares
multiplied by $1.49, the closing price of our common stock at March 30, 2008.
The value of unvested stock awards at March 30, 2008 may never be realized by
the stock award holders.





(2)           25,000
restricted stock awards, were granted on April 3, 2007 pursuant to our 2006
Equity Incentive Plan and vest pro-rata over 36 months. The market value of
these stock awards at March 30, 2008 is equal to the number of unvested shares
multiplied by $1.49, the closing price of our common stock at March 30, 2008.
The value of unvested stock awards at March 30, 2008 may never be realized by
the stock award holders.





The following table summarizes
information regarding stock options exercised by our executive officers named in
the preceding tables in 2007 and the value of unexercised “in-the-money” options they held
at January 1, 2008, and, except as indicated, gives effect to our
four-for-one reverse stock split:





Number
      of securities
              underlying unexercised options
      at
              January 1, 2008
            
            
            Value
      of unexercised
              “in-the-money”
      options
              at January 1, 2008(3)Name
            
            Shares
      of
              common
      stock
              acquired
      on
              exercise
            
            
            Value
              realized
            
            
            Exercisable
            
            
            Unexercisable
            
            
            Exercisable
            
            
            UnexercisableNolan
      K. Bushnell(1)
            
            
            —
            
            
            
            —
            
            
            
            110,879
            
            
            
            56,621
            
            
            $
            5,470
            
            
            $
            4,530Peter
      F. Wilkniss(2)
            
            
            —
            
            
            
            —
            
            
            
            77,306
            
            
            
            22,694
            
            
            
            —
            
            
            
            —








(1)           37,500
options were issued on July 15, 2004; 2,500 options were issued on
December 16, 2004; 2,500 options were issued on December 31, 2004; and
125,000 options were issued on May 12, 2006. All options vest pro-rata over
36 months with the initial one-sixth vesting after six months.





(2)           50,000
options were issued on August 29, 2005 and 50,000 options were issued on
September 15, 2005. All options vest pro-rata over 36 months with the
initial one-sixth vesting after six months.





(3)           In-the-money
options represent unexercised options having a per-share exercise price below
$1.40, the closing price of our common stock at January 1, 2008. The value of
unexercised in-the-money options equals the number of in-the-money options
multiplied by the excess of $1.40 over the per-share exercise prices of the
options. The value of unexercised in-the-money options at January 1, 2008
may never be realized by the option holders.





Employment
Agreements





Nolan
K. Bushnell





On March 3, 2006, we entered into
an employment agreement with our Chairman and Chief Executive Officer, Nolan K.
Bushnell. Prior to March 3, 2006, we did not have an employment agreement
with Mr. Bushnell.  On November 15, 2007, we entered into a
letter agreement amending the terms of Mr. Bushnell’s employment agreement to
increase his base salary to $225,000.


72





Mr. Bushnell
is eligible to participate in a bonus program to be established by the board of
directors. On May 12, 2006, Mr. Bushnell was granted options to
purchase 500,000 (125,000 post-split) shares of our common stock at an exercise
price of $0.33 ($1.32 post-split) per share. These options vest pro rata over a
thirty-six month period, with the initial one-sixth vesting after six months.
Mr. Bushnell was issued 100,000 (25,000 post-split) shares of restricted
common stock on April 3, 2007, pursuant to the 2006 Equity Incentive Plan,
which vest in equal monthly installments over a three year period, subject to
the other terms and conditions of the 2006 Equity Incentive Plan.





Mr. Bushnell’s employment
agreement may be terminated by either party with or without Cause at any time
upon thirty (30) days prior written notice. If the agreement is terminated
by us without Cause or by Mr. Bushnell for Good Reason, Mr. Bushnell
will be entitled to receive a severance payment equal to 12 months base
salary, a pro rata portion of his annual bonus, immediate vesting of all stock
options, and payment of any COBRA amount due for the provision of any and all
health benefits provided to him and his family immediately prior to his
termination for a period of up to 18 months.





Peter F. Wilkniss





On August 29, 2005, we entered
into an employment agreement with our Chief Financial Officer, Peter F.
Wilkniss.  On November 15, 2007, we entered into a letter agreement
amending the terms of Mr. Wilkniss’ employment agreement.  In February
2008, Mr. Wilkniss was also named our President and Chief Operating
Officer.  As amended, Mr. Wilkniss’ base salary is
$225,000.  Mr. Wilkniss is also eligible to participate in a
bonus program to be established by the board of directors.





On August 29, 2005, Mr. Wilkniss
was granted options to purchase 200,000 (50,000 post-split) shares of our common
stock at an exercise price of $0.43 ($1.72 post-split) and was granted options
to purchase an additional 200,000 (50,000 post-split) shares of our common stock
at an exercise price equal to the closing price of our common stock on
September 9, 2005, $0.57 ($2.28 post-split). These options vest pro rata
over a thirty-six month period, with the initial one-sixth vesting after six
months. Mr. Wilkniss was issued 100,000 (25,000 post-split) shares of
restricted common stock on April 3, 2007, pursuant to the 2006 Equity
Incentive Plan, which vest in equal monthly installments over a three year
period, subject to the other terms and conditions of the 2006 Equity Incentive
Plan.





Mr. Wilkniss’
employment agreement may be terminated by either party with or without Cause at
any time upon thirty (30) days prior written notice. If the agreement is
terminated by us without Cause or by Mr. Wilkniss for Good Reason,
Mr. Wilkniss will be entitled to receive a severance payment equal to
12 months base salary, a pro rata portion of his annual bonus, immediate
vesting of all stock options and restricted stock, and payment of any COBRA
amount due for the provision of any and all health benefits provided to him and
his family immediately prior to his termination for a period of up to
18 months.





In each of the employment agreements
described above, “Cause” is defined as
(i) an action or omission which constitutes a material breach of, or
material failure or refusal to perform his duties, (ii) fraud, embezzlement
or misappropriation of funds, or (iii) a conviction of any crime which
involves dishonesty or a breach of trust or involves us or our
executives.





“Good Reason” is defined as
(i) a reduction by us in the executive’s base salary to a
rate less than the initial base salary rate; (ii) a change in the
eligibility requirements or performance criteria under any employee benefit plan
or incentive compensation arrangement under which the executive is covered, and
which materially adversely affects the executive; (iii) our requiring the
executive to be based anywhere other than our headquarters or the relocation of
our headquarters more than 20 miles from its current location, except for
required travel on our business; (iv) the assignment to the executive of
any duties or responsibilities which are materially inconsistent with his status
or position as a member of our executive management group; or (v) the
executive’s
good faith and reasonable determination, after consultation with
nationally-recognized counsel, that he is being unduly pressured or required by
our board of directors or a senior executive to directly or indirectly engage in
criminal activity.





73


Equity
Compensation Plans





We have adopted equity compensation
plans which permit us to grant options and other equity incentive awards to our
employees, officers, directors, consultants and independent contractors. As of
January 1, 2008, after giving effect to our four-for-one reverse stock split, we
may issue an aggregate of 348,691 (1,394,764 pre-split) shares of common stock
pursuant to our equity compensation plans.





We assumed the uWink.com, Inc.
2000 Employee Stock Option Plan pursuant to our acquisition of uWink California.
The 2000 Plan provided for the issuance of up to 170,304 (after giving effect to
a 3.15611 reverse stock split in connection with the acquisition of uWink
California and to the four-for-one reverse stock split effective July 26,
2007) incentive and non-qualified stock options to our employees, officers,
directors and consultants. 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. As of
January 1, 2008, giving effect to the four-for-one reverse stock split, there
were 4,200 (16,800 pre-split) shares available for issuance under this
plan.





In 2004, our board of directors
approved the uWink, Inc. 2004 Stock Incentive Plan. The 2004 Plan provides
for the issuance of up to 300,000 incentive stock options, non-qualified stock
options, restricted stock awards and performance stock awards (giving effect to
the four-for-one reverse stock split) to our employees, officers, directors and
consultants. 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. As of January 1, 2008, giving effect to the four-for-one
reverse stock split, there were 5,000 (20,000 pre-split) shares available for
issuance under this plan.





In 2005, our board of directors
approved the uWink, Inc. 2005 Stock Incentive Plan. The 2005 Plan provides
for the issuance of up to 500,000 (post-split) incentive stock options,
non-qualified stock options, restricted stock awards and performance stock
awards to our employees, officers, directors and consultants. Awards granted
under the 2005 Plan vest as determined by the board of directors, provided that
no option or restricted stock award granted under the 2005 Plan may be
exercisable prior to six months from its date of grant and no option granted
under the 2005 Plan may be exercisable after 10 years from its date of
grant. As of January 1, 2008, after giving effect to our four-for-one reverse
stock split, there were 63,496 (253,984 pre-split) shares available for issuance
under this plan.





On
June 8, 2006, our board of directors approved the uWink, Inc. 2006
Equity Incentive Plan, and subsequently amended the 2006 Plan on
November 4, 2006. The 2006 Plan, as amended, provides for the issuance of
up to 625,000 (post-split) incentive stock options, non-qualified stock options,
restricted and unrestricted stock awards and stock bonuses to our employees,
officers, directors and consultants. As of January 1, 2008, after giving effect
to the four-for-one reverse stock split, there were 25,995 (103,980 pre-split)
shares available for issuance under the 2006 Plan, which vest as determined by
the board of directors, provided that:





●
            No
      option granted under the 2006 Plan may be exercisable after ten years from
      its date of grant and no ISO granted to a person who owns more than ten
      percent of the total combined voting power of all classes of our stock
      will be exercisable after five years from the date of grant;
      and





●
            An
      option granted to a participant who is an officer or director may become
      fully exercisable, subject to reasonable conditions such as continued
      employment, at any time or during any period established by the board of
      directors.





On June 21, 2007, our board of
directors approved the uWink, Inc. 2007 Equity Incentive Plan. The 2007
Plan provides for the issuance of up to 250,000 (post-split) incentive stock
options, non-qualified stock options, restricted and unrestricted stock awards
and stock bonuses to our employees, officers, directors and consultants. As of
January 1, 2008, after giving effect to the four-for-one reverse stock split,
there were 250,000 (1,000,000 pre-split) shares available for issuance under the
2007 Plan, which vest as determined by the board of directors, provided
that:


74





●
            No
      option granted under the 2007 Plan may be exercisable after ten years from
      its date of grant and no ISO granted to a person who owns more than ten
      percent of the total combined voting power of all classes of our stock
      will be exercisable after five years from the date of grant;
      and





●
            An
      option granted to a participant who is an officer or director may become
      fully exercisable, subject to reasonable conditions such as continued
      employment, at any time or during any period established by the board of
      directors.





As of January 1, 2008, after giving
effect to the four-for-one reverse stock split, we had outstanding under our
equity compensation plans options to purchase an aggregate of 1,012,648
(4,050,592 pre-split) shares of common stock, at exercise prices ranging from
$1.04 to $12.64 ($0.26 to $3.16 pre-split) per share, and restricted stock
grants totaling 137,500 (550,000 pre-split) shares, issued to our employees,
officers and directors.





Director
Compensation





We did not pay any cash compensation to
our non-employee directors in 2007. We do not currently have any standard or
annual arrangements regarding director compensation. All directors receive
reimbursement for out-of-pocket expenses in attending board of directors
meetings. We issued no options to our non-employee directors in 2007, but did
issue each non-employee director shares of restricted stock as set forth in the
footnotes to the table below.





The following table sets forth the
dollar amount of the compensation expense incurred by us for financial statement
reporting purposes during the fiscal year ended January 1, 2008 for
services rendered by our non-employee directors, giving effect to our
four-for-one reverse stock split, except as otherwise indicated:





Name
            
            Stock
              Awards ($)
            
            
            Option
              Awards ($)
            
            
            Total ($)Kevin
      W. McLeod
            
            $
            45,750
            (1)
            
            $
            11,000
            (4)
            
            $
            56,750Bradley
      N. Rotter
            
            $
            45,750
            (2)
            
            $
            14,000
            (5)
            
            $
            59,750Elizabeth
      J. Heller
            
            $
            45,750
            (3)
            
            
            —
            
            
            $
            45,750Total
            
            
            —
            
            
            
            —
            
            
            $
            162,250




(1)           Represents
the compensation expense incurred by us in the fiscal year ended January 1,
2008 in connection with 25,000 post-split shares of restricted stock, with a
grant date market value of $122,000, vesting over a two-year
period,  issued to Mr. McLeod under our Equity Incentive Plans on
April 3, 2007.





(2)           Represents
the compensation expense incurred by us in the fiscal year ended January 1,
2008 in connection with 25,000 post-split shares of restricted stock, with a
grant date market value of $122,000, vesting over a two-year period, issued to
Mr. Rotter under our Equity Incentive Plans on April 3,
2007.





(3)           Represents
the compensation expense incurred by us in the fiscal year ended January 1,
2008 in connection with 25,000 post-split shares of restricted stock, with a
grant date market value of $122,000, vesting over a two-year period, issued to
Ms. Heller under our Equity Incentive Plans on April 3, 2007.





(4)           Represents
the compensation expense incurred by us in the fiscal year ended January 1,
2008 in connection with 25,000 post-split shares of common stock issuable upon
exercise of stock options granted to Mr. McLeod under our Equity Incentive
Plans.





(5)           Represents
the compensation expense incurred by us in the fiscal year ended January 1,
2008 in connection with 25,000 post-split shares of common stock issuable upon
exercise of stock options granted to Mr. Rotter under our Equity Incentive
Plans.





75


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





The
following table sets forth, as of March 30, 2008, and giving effect to our
four-for-one reverse stock split as of July 26, 2007: (a) the names of
each beneficial owner of more than five percent (5%) of our common stock known
to us, the number of shares of common stock beneficially owned by each such
person, and the percent of our common stock so owned; and (b) the names of
each director and executive officer, the number of shares of common stock
beneficially owned and the percentage of our common stock so owned, by each such
person, and by all directors and executive officers as a group. Each person has
sole voting and investment power with respect to the shares of our common stock,
except as otherwise indicated.





As of March 30, 2008, we had a total of
12,671,534 shares of common stock issued and outstanding (after giving effect to
our four-for-one reverse stock split as of July 26, 2007), which is the
only issued and outstanding voting equity security of our company.





As used in this section, the term
beneficial ownership with respect to a security is defined by Rule 13d-3
under the Securities Exchange Act of 1934, as amended, as consisting of sole or
shared voting power (including the power to vote or direct the vote) and/or sole
or shared investment power (including the power to dispose of or direct the
disposition of) with respect of security through any contract, arrangement,
understanding, or relationship or otherwise, subject to community property laws
where applicable.





Name
      and address of
              beneficial
      owner
            
            Number of shares
            
            Percent of class(1)Nolan
      K. Bushnell(2)(3)
            
            1,002,907
            
            7.7%Peter
      F. Wilkniss(2)(4)
            
            294,971
            
            2.3Kevin
      W. McLeod(2)(5)
            
            439,220
            
            3.4Bradley
      N. Rotter(2)(6)
            
            300,802
            
            2.4Elizabeth
      J. Heller(2)(7)
            
            30,210
            
            **Special
      Situations Fund III QP, L.P.(8)(9)
            
            2,000,000
            
            14.6Steven
      R. Becker(10)(11)
            
            348,375
            
            2.7WSV
      Management, L.L.C. (10)(11)
            
            870,938
            
            6.7SF
      Capital Partners Ltd. (12)(13)
            
            1,000,000
            
            7.6Whitebox
      Intermarket Partners, L.P. (14)(15)
            
            1,000,000
            
            7.6All
      officers and directors as a group (5 persons)
            
            2,068,110
            
            16.3%






Pursuant
to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership includes
any shares as to which a stockholder has sole or shared voting power or
investment power, and also any shares which the stockholder has the right to
acquire within 60 days, including upon exercise of options or warrants or
other convertible securities.





**           Less
than one percent





(1)           The
determination of percentage ownerships is based on a total of 12,671,534 shares
of common stock issued and outstanding (after giving effect to our four-for-one
reverse stock split as of July 26, 2007), and does not include shares
issuable upon the exercise of stock options and shares of restricted stock that
have been or may be granted under our equity incentive plans or shares that may
be issued upon exercise of outstanding warrants





(2)           Address
is 16106 Hart Street, Van Nuys, California 91406.





(3)           Includes
601,057 shares held by the Bushnell Living Trust, 44,359 shares held by the
Nolan K. Bushnell Insurance Trust, 160,210 shares issuable upon exercise of
warrants held by the Bushnell Living Trust, 122,360 shares issuable upon
exercise of stock options held by Mr. Bushnell, 67,283 shares issuable
upon exercise of stock options held by Nancy Bushnell, wife of
Mr. Bushnell, and 7,638 shares of restricted stock held by
Mr. Bushnell.





76


(4)           Includes
140,888 shares held by Mr. Wilkniss, 65,888 shares issuable upon exercise
of warrants held by Mr. Wilkniss, 80,557 shares issuable upon exercise of
stock options held by Mr. Wilkniss, and 7,638 shares of restricted stock
held by Mr. Wilkniss.





(5)           Includes
283,320 shares held by Mr. McLeod, 122,914 shares issuable upon exercise of
warrants held by Mr. McLeod, 21,526 shares issuable upon exercise of
stock options held by Mr. McLeod, and 11,460 shares of restricted stock
held by Mr. McLeod.





(6)           Includes
181,706 shares held by Mr. Rotter, 87,500 shares issuable upon exercise of
warrants held by Mr. Rotter, 20,136 shares issuable upon exercise of
stock options held by Mr. Rotter, and 11,460 shares of restricted stock
held by Mr. Rotter.





(7)           Includes
12,500 shares held by Ms. Heller, 6,250 shares issuable upon exercise of
warrants held by Ms. Heller and 11,460 shares of restricted stock held by
Ms. Heller.





(8)           Address
is 527 Madison Avenue, Suite 2600, New York, New York 10022.





(9)           Based
upon information regarding uWink, Inc. holdings reported on a Schedule 13G filed
with the SEC on December 10, 2007.  Includes 1,000,000 shares of
common stock and 1,000,000 warrants to purchase shares of common
stock.  Austin W. Marxe and David M. Greenhouse share sole voting and
investment power over the 1,000,000 shares and 1,000,000 warrants to purchase
shares owned by Special Situations Fund III QP, L.P.





(10)          Address
is 300 Crescent Court, Suite 1111, Dallas, Texas 75201.





(11)          Based
upon information regarding uWink, Inc. holdings reported on a Schedule 13G filed
with the SEC on November 16, 2007. As of November 7, 2007 (the “Reporting
Date”), WS Opportunity Fund, L.P. (“WSO”), WS Opportunity Fund (Q.P.), L.P.
(“WSOQP”), and WS Opportunity Fund International, Ltd. (“WSO International” and
collectively with WSO and WSOQP, the “WSO Funds”) owned in the
aggregate (i) 500,000 Shares and (ii) 500,000 warrants, each exercisable to
purchase one Share as of the Reporting Date (the “Warrants”). WS Ventures
Management, L.P. (“WSVM”) is the general partner of WSO and WSOQP and the agent
and attorney-in-fact for WSO International. WSV Management, L.L.C. (“WSV”) is
the general partner of WSVM. Reid S. Walker, G. Stacy Smith and Patrick P.
Walker are principals of WSV. As a result, WSVM, WSV, and Messrs. Reid S.
Walker, Patrick P. Walker and G. Stacy Smith possess shared power to vote and to
direct the disposition of the securities held by the WSO Funds. In addition, as
of the Reporting Date, SRB Greenway Capital, L.P. (“SRBGC”), SRB Greenway
Capital (Q.P.), L.P. (“SRBQP”), and SRB Greenway Offshore Operating Fund, L.P.
(“SRB Offshore” and collectively with SRBGC and SRBQP, the “Greenway
Funds”) owned
in the aggregate (i) 200,000 Shares, and (ii) 200,000 Warrants. SRB Management,
L.P. (“SRB Management”) is the general partner of SRBGC and SRBQP and the
general partner and investment manager of SRB Offshore. BC Advisors, LLC (“BCA”)
is the general partner of SRB Management. Steven R. Becker is the sole principal
of BCA. As a result, Mr. Becker possesses the sole power to vote and to direct
the disposition of the securities held by the Greenway Funds.  The
Warrants contain an issuance limitation prohibiting the warrantholder from
exercising those securities to the extent that such exercise would result in
beneficial ownership by the warrantholder and its affiliates and any other
persons whose beneficial ownership of Shares would be aggregated with the
warrantholders for purposes of Section 13(d) of the Securities Exchange Act of
1934 of more than 9.999% of the Shares then issued and outstanding (including
for such purpose the Shares issuable upon exercise) (the “9.999% Issuance
Limitation”).
The 9.999% Issuance Limitation may be not waived. Thus, as of the Reporting
Date, for the purposes of Reg. Section 240.13d-3, (i) WSVM, WSV, and Messrs.
Reid S. Walker, Patrick P. Walker and G. Stacy Smith are deemed to beneficially
own 870,938 Shares, or approximately 7.2% of the Shares deemed issued and
outstanding as of the Reporting Date, consisting of (a) 500,000 Shares and (b)
370,938 Warrants; and (ii) Mr. Becker is deemed to beneficially own 348,375
Shares, or approximately 2.9% of the Shares deemed issued and outstanding as of
the Reporting Date, consisting of (a) 200,000 Shares and (b) 148,375
Warrants.





77


(12)           Address
is 3600 South Lake Drive, St. Francis, WI 53235.





(13)           Based
upon information regarding uWink, Inc. holdings reported on a Schedule 13G filed
with the SEC on November 16, 2007. Represents an aggregate of 1,000,000 shares
of common stock held directly by SF Capital Partners Ltd., consisting of 500,000
shares of common stock and 500,000 warrants to purchase a share of common stock.
Michael A. Roth and Brian J. Stark jointly direct the management of Stark
Offshore Management LLC (“Stark Offshore”), which acts as the investment manager
and has sole power to direct the management of SF Capital. As Managing Members
of Stark Offshore, Michael A. Roth and Brian J. Stark jointly possess voting and
dispositive power over all of the foregoing shares.





(14)           Address
is Trident Chambers, P.O. Box 146, Waterfront Drive, Wickhams Cay, Road Town,
Tortola, British Virgin Islands.





(15)           Based
upon information regarding uWink, Inc. holdings reported on a Schedule 13G filed
with the SEC on February 14, 2008.  Includes 500,000 shares of common
stock and 500,000 warrants to purchase shares of common
stock.  Whitebox Advisors, LLC (WA), acting as investment adviser to
its clients, is deemed to beneficially own 1,000,000 shares of Common Stock of
the Company.  Whitebox Intermarket Advisors, LLC (WIA), acting as
investment adviser to its clients, is deemed to beneficially own 1,000,000
shares of Common Stock of the Company.  Whitebox Intermarket Partners,
L.P. (WIP) is deemed to beneficially own 1,000,000 shares of Common Stock of the
Company as a result of its direct ownership of common stock of the
Company.  Whitebox Intermarket Fund, L.P. (WIFLP) is deemed to
beneficially own 1,000,000 shares of Common Stock of the Company as a result of
its indirect ownership of common stock of the Company.  Whitebox
Intermarket Fund, Ltd. (WIFLTD) is deemed to beneficially own 1,000,000 shares
of Common Stock of the Company as a result of its indirect ownership of common
stock of the Company.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
following provides information concerning compensation plans under which our
equity securities are authorized for issuance at January 1, 2008 and, unless
otherwise indicated, gives effect to our four-for-one reverse stock
split.


(a)
            
            
            (b)
            
            
            (c)Number
      of securitiesremaining
      availableWeighted-average
            
            
            for
      future issuancesNumber
      of securities
            
            
            exercise
      price of
            
            
            under
      equityto
      be issued upon
            
            
            outstanding
            
            
            compensation
      plansexercise
      of
            
            
            options,
      warrants
            
            
            (excluding
      securitiesoutstanding
      options,
            
            
            and
      rights
            
            
            reflected
      inPlan
      Category
            
            warrants
      and rights
            
            
            
            
            
            column
      (a))Equity
      compensation plans approved by security holders
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Equity
      compensation plans not approved by security holders (1)
            
            
            1,687,893
            (2)
            
            $
            4.23
            
            
            
            348,691Total
            
            
            1,687,893
            
            
            $
            4.23
            
            
            
            348,691





( 1) In
connection with our acquisition of uWink California, we assumed the uWink.com,
Inc. 2000 Employee Stock Option Plan (the “2000 Plan”) and 584,917
(pre-four-for-one reverse split) options previously issued under the 2000 Plan.
The 2000 Plan provides for the issuance of up to 170,304 (after giving effect to
a 3.15611 reverse stock split in connection with the uWink California
Acquisition and to our recent four-for-one reverse split) incentive and
non-qualified stock options to our employees, officers, directors and
consultants. Options granted under the 2000 Plan vest as determined by the board
of directors, provided that any unexercised options will automatically terminate
on the tenth anniversary of the date of grant. On June 24, 2004, we filed a
registration statement of Form S-8 to register 584,917 (pre-split) of these
shares. As of January 1, 2008, there are 4,200 shares (16,800 pre-split)
available for issuance under this plan and there were 146,519 shares (586,078
pre-split) to be issued upon the exercise of options under this
plan.








78





In 2004,
our Board of Directors approved the uWink, Inc. 2004 Stock Incentive Plan (the
“2004
Plan”). The
2004 Plan provides for the issuance of up to 300,000 (post-split) incentive
stock options, non-qualified stock options, restricted stock awards and
performance stock awards to our employees, officers, directors, and consultants.
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. On June 24, 2004, we filed a registration statement of Form S-8 to
register 1,200,000 (pre-split) of these shares. As of January 1, 2008, there are
5,000 shares (20,000 pre-split) available for issuance under this plan and there
were 265,625 shares (1,062,500 pre-split) to be issued upon the exercise of
options under this plan.





In
2005, our Board of Directors approved the uWink, Inc. 2005 Stock Incentive Plan
(the “2005
Plan”). The
2005 Plan provides for the issuance of up to 500,000 (post-split) incentive
stock options, non-qualified stock options, restricted stock awards and
performance stock awards to our employees, officers, directors, and consultants.
Awards granted under the 2005 Plan vest as determined by the Board of Directors,
provided that no option or restricted stock award granted under the 2005 Plan
may be exercisable prior to six months from its date of grant and no option
granted under the 2005 Plan may be exercisable after 10 years from its date of
grant. On June 19, 2006, we filed a registration statement of Form S-8 to
register 2,000,000 (pre-split) of these shares. As of January 1, 2008, there are
63,496 shares (253,986 pre-split) available for issuance under this plan and
there were 387,754 shares (1,551,014 pre-split) to be issued upon the exercise
of options under this plan.





On
June 8, 2006, our Board of Directors approved the uWink, Inc. 2006 Equity
Incentive Plan (the “2006 Plan”). The 2006 Plan
provides for the issuance of up to 250,000 (pre-split) incentive stock options,
non-qualified stock options, restricted and unrestricted stock awards and stock
bonuses to employees, officers, directors, and consultants of the Company. On
June 19, 2006, we filed a registration statement on Form S-8 to register 250,000
(pre-split) of these shares. On November, 14, 2006, the Company’s Board of
Directors approved an amendment to the 2006 Plan to increase the number of
shares available under the plan by 375,000 to a total of 625,000 (post-split)
and on November 17, 2006 we amended the registration statement on Form S-8 to
register these additional shares. As of January 1, 2008, there are 25,995 shares
(103,980 pre-split) available for issuance under this plan and there were
212,750 shares (851,000 pre-split) to be issued upon the exercise of options
under this plan.





Awards
granted under the 2006 Plan vest as determined by the Board of Directors,
provided that:





●
            no
      option granted under the 2006 Plan may be exercisable after ten years from
      its date of grant and no ISO granted to a person who owns more than ten
      percent of the total combined voting power of all classes of our stock
      will be exercisable after five years from the date of grant;
      and





●
            an
      option granted to a participant who is an officer or director may become
      fully exercisable, subject to reasonable conditions such as continued
      employment, at any time or during any period established by the Board of
      Directors.





On
June 21, 2007, our Board of Directors approved the uWink, Inc. 2007
Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the issuance
of up to 250,000 (post-split) incentive stock options, non-qualified stock
options, restricted and unrestricted stock awards and stock bonuses to our
employees, officers, directors and consultants. As of January 1, 2008, after
giving effect to the four-for-one reverse stock split, there were 250,000
(1,000,000 pre-split) shares available for issuance under the 2007 Plan and no
shares to be issued upon the exercise of options under this plan.





Awards
granted under the 2007 Plan vest as determined by the Board of Directors,
provided that:





●
              no
      option granted under the 2007 Plan may be exercisable after ten years from
      its date of grant and no ISO granted to a person who owns more than ten
      percent of the total combined voting power of all classes of our stock
      will be exercisable after five years from the date of grant;
      and





●
              an
      option granted to a participant who is an officer or director may become
      fully exercisable, subject to reasonable conditions such as continued
      employment, at any time or during any period established by the board of
      directors.





( 2) Includes
537,745 (post-split) shares of common stock underlying warrants outstanding at
January 1, 2008 issued to consultants for services provided to us and 137,500
(post-split) shares of restricted stock outstanding at January 1, 2008 issued to
employees.





During the calendar year 2007, we
issued 12,280 (post-split) shares in lieu of payment for services rendered on
Form S-8. None of these payments were in connection with any fund raising
activity.





79


ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; DIRECTOR
INDEPENDENCE





Except as
otherwise indicated, the information set forth in this section does not give
effect to the four-for-one reverse stock split effected as of July 26,
2007.





On November 7, 2007, we completed the
sale, in a registered equity offering, of 5.2 million units at a purchase price
of $2.00 per unit, each unit consisting of one share of common stock and a
warrant to purchase one share of common stock at an exercise price of $2.40,
generating net proceeds to us of approximately $9.3 million.  Among
those participating in our registered offering were, Nolan Bushnell, our Chief
Executive Officer, who purchased 31,750 units for an aggregate purchase price of
$63,500, Peter Wilkniss, our Chief Financial Officer, who purchased 50,000 units
for an aggregate purchase price of $100,000, Kevin McLeod, a director, who
purchased 50,000 units for an aggregate purchase price of $100,000, Alissa
Bushnell, our vice president of public relations and marketing and the daughter
of Nolan Bushnell, who purchased 25,000 units for an aggregrate purchase price
of $50,000 and Dan Lindquist, our vice president of operations, who purchased
15,000 units for an aggregate purchase price of $30,000.





Effective
as of November 12, 2007 holders representing an aggregate of $1,497,500 in
principal amount of convertible notes (including aggregate accrued interest of
$85,339 and an aggregate conversion incentive of $316,568) elected to exercise
their right to convert such notes triggered by our November 2007 registered
offering into the same units offered in such
transaction.  Accordingly, we issued an aggregate 949,703 units to
these noteholders in full satisfaction of our obligations under the notes. Among
those holders electing to convert their promissory notes into units were Nolan
and Nancy Bushnell, our Chief Executive Officer and his wife, who converted an
aggregate $156,452 (including accrued interest and conversion incentive) into
78,226 units, and Peter Wilkniss, our Chief Financial Officer, who converted an
aggregate $31,776 (including accrued interest and conversion incentive) into
15,888 units.





On
June 8, 2007, we sold $960,500 of convertible promissory notes to 16
accredited investors. Among those participating in the transaction were Nolan
Bushnell, our Chief Executive Officer, who invested $125,000 and Dennis Nino,
the brother-in-law of Nolan Bushnell, who invested $125,000. The conversion
rights in these notes were triggered by our November 2007 registered offering,
and on November 12, 2007, Mr. Bushnell converted his promissory note as
described above.  Mr. Nino declined to convert his note and
accordingly we made cash repayment to Mr. Nino in full satisfaction of his
note.





On April 2, 2007, we sold $857,000
of convertible promissory notes to 19 individual accredited investors. Among
those participating in the transaction were Peter Wilkniss, our Chief Financial
Officer, who invested $25,000, and Dennis Nino, who invested
$50,000.  The conversion rights in these notes were triggered by our
November 2007 registered offering, and on November 12, 2007, Mr. Wilkniss
converted his promissory note as described above.  Mr. Nino declined
to convert his note and accordingly we made cash repayment to Mr. Nino in full
satisfaction of his note.





On October 25, 2006, we entered
into a letter agreement with Bradley Rotter, a member of our board of directors,
in respect of a promissory note dated April 19, 2006, pursuant to
which:





●
            Mr. Rotter
      agreed to convert the $100,000 principal amount and $5,685 in accrued
      interest outstanding under our April 19, 2006 note into shares of our
      common stock at a conversion price of $1 ($4 post-split) per share. Rather
      than repay this note in cash, we agreed with Mr. Rotter that he would
      be entitled to receive an additional 20% upon conversion of this note into
      shares of our common stock. As a result, Mr. Rotter accepted 126,822
      (31,706 post-split) shares of our common stock, together with the warrants
      set forth below, in full and final satisfaction of our obligations under
      the note; and





●
            in
      accordance with the terms of our April 19, 2006 note, we also issued
      to Mr. Rotter three-year immediately exercisable warrants to purchase
      100,000 (25,000 post-split) shares of our common stock at an exercise
      price of $0.345 ($1.38 post-split) per
share.





80


At the time we converted this note, the
market price of our common stock was $1.26. At the time we agreed to issue these
warrants, the exercise price was at 15% premium to the $0.30 market price. At
the time we issued these warrants, the exercise price was at a 73% discount to
the $1.26 market price.





Certain of our officers and directors,
and family members of officers and directors, participated in a private
placement transaction we completed on September 18, 2006 on the same terms
as the third party investors who participated in the transaction. Peter
Wilkniss, our Chief Financial Officer, invested $30,000 in the transaction and
received 100,000 (25,000 post-split) shares of our common stock and
immediately-exercisable, three-year warrants to purchase 50,000 (12,500
post-split) shares of our common stock at an exercise price of $0.345 ($1.38
post-split) per share.





Kevin McLeod, a director, invested
$45,000 in the transaction and received 150,000 (37,500 post-split) shares of
our common stock and immediately-exercisable, three-year warrants to purchase
75,000 (18,750 post-split) shares of our common stock at an exercise price of
$0.345 ($1.38 post-split) per share. Robert Nino, the brother-in-law of Nolan
Bushnell, invested $25,000 in the transaction and received 83,333 (20,834
post-split) shares of our common stock and immediately-exercisable, three-year
warrants to purchase 41,667 (10,417 post-split) shares of our common stock at an
exercise price of $0.345 ($1.38 post-split) per share. Dan Lindquist, our vice
president of operations, invested $55,500 in the transaction and received
185,000 (46,250 post-split) shares of our common stock and
immediately-exercisable, three-year warrants to purchase 92,500 (23,125
post-split) shares of our common stock at an exercise price of $0.345 ($1.38
post-split) per share. Bradley Rotter, a director, invested $150,000 in the
transaction and received 500,000 (125,000 post-split) shares of our common stock
and immediately-exercisable, three-year warrants to purchase 250,000 (62,500
post-split) shares of our common stock at an exercise price of $0.345 ($1.38
post-split) per share. Brent Bushnell, the son of Nolan Bushnell, invested
$50,000 in the transaction and received 166,667 (41,667 post-split) shares of
our common stock and immediately-exercisable, three-year warrants to purchase
83,333 (20,834 post-split) shares of our common stock at an exercise price of
$0.345 ($1.38 post-split) per share. Nancy Bushnell, the wife of Nolan Bushnell,
as trustee for the Bushnell Living Trust, invested $50,000 in the transaction
and received 166,667 (41,667 post-split) shares of our common stock and
immediately-exercisable, three-year warrants to purchase 83,333 (20,834
post-split) shares of our common stock at an exercise price of $0.345 ($1.38
post-split) per share. John Kaufman, our director of restaurant operations,
invested $12,500 in the transaction and received 41,666 (10,417 post-split)
shares of our common stock and immediately-exercisable, three-year warrants to
purchase 20,833 (5,209 post-split) shares of our common stock at an exercise
price of $0.345 ($1.38 post-split) per share. Jeffrey Tappan, the husband of
Alissa Bushnell, our vice president of public relations and marketing and the
daughter of Nolan Bushnell, invested $25,000 in the transaction and received
83,333 (20,834 post-split) shares of our common stock and
immediately-exercisable, three-year warrants to purchase 41,667 (10,417
post-split) shares of our common stock at an exercise price of $0.345 ($1.38
post-split) per share.





In connection with the private
placement of our equity securities completed on September 18, 2006, we
converted $70,562 of debt and accrued interest due to Nancy Bushnell, the wife
of Nolan Bushnell, and $60,500 of debt due to Dan Lindquist, our vice president
of operations, on the same terms as the third party investors who participated
in the transaction. Ms. Bushnell received 235,207 (58,802 post-split)
shares of our common stock and warrants to purchase 117,603 (29,401 post-split)
shares of our common stock at $0.345 ($1.38 post-split) per share, and
Mr. Lindquist received 201,667 (50,417 post-split) shares of our common
stock and warrants to purchase 100,833 (25,209 post-split) shares of our common
stock at $0.345 ($1.38 post-split) per share.





At the time we initiated the
September 18, 2006 private placement transaction (and the related debt
conversion) in the beginning of August 2006, the market price of our common
stock had consistently been below $0.30 per share since March 2006, and had
been as low as $0.21 per share, and continued in that range until
August 16, 2006. In the three weeks leading up to the September 8,
2006 closing of the first $804,000 of cash proceeds under this transaction and
the Bushnell and Lindquist debt conversions, as discussed above, the closing
price of our stock rose from $0.27 to $0.55. On September 8, 2006, when
Messrs. Wilkniss, Rotter, Tappan and Lindquist became committed to the
transaction, and the Bushnell and Lindquist debt conversions became committed,
the $0.345 exercise price of the warrants was at a 37% discount to the $0.55
closing price. On September 18, 2006, when we completed the remainder of
this transaction and when the Bushnells, and Messrs. Kaufman, Nino and
McLeod became committed to the transaction, the $0.345 exercise price of the
warrants was at a 70% discount to the $1.12 closing price.





81


On April 19, 2006, we entered into
a letter agreement with Mr. Rotter pursuant to which we:





●
            repaid
      $100,000 of the principal amount of, together with $10,356 of accrued
      interest on a $200,000 promissory note dated October 10,
      2005;





●
            issued
      immediately-exercisable, three-year warrants to Mr. Rotter to
      purchase 100,000 (25,000 post-split) shares of common stock at an exercise
      price of $0.345 ($1.38 post-split) per share;
  and





●
            issued
      a new convertible note payable to Mr. Rotter in the amount of
      $100,000, the unpaid balance of our October 10, 2005 note with
      Mr. Rotter. This note was due October 19, 2006, accrued interest
      at 10%, and was convertible, at the option of Mr. Rotter, into the
      same securities issued by us in (and on the same terms and conditions
      pari passu with
      the investors in) any offering of our securities that results in gross
      proceeds to us of at least $3,000,000. Upon conversion, Mr. Rotter
      was to receive as a conversion bonus additional securities equal to 20% of
      the aggregate principal value plus accrued interest converted. The note
      was mandatorily repayable immediately following the consummation of any
      offering of securities that results in gross proceeds to us of at least
      $3,000,000. Upon such repayment, or upon repayment at maturity,
      Mr. Rotter was to receive additional warrants to purchase 100,000
      (25,000 post-split) shares of our common stock at an exercise price of
      $0.345 ($1.38 post-split).





The market price of our common stock on
April 19, 2006, was $0.30. Consequently, the exercise price of the warrants
issued to Mr. Rotter on that date was at a 15% premium to the market
price.





On March 31, 2006, we issued
115,000 (28,750 post-split) shares of common stock, valued at $65,550, based on
the closing price of the common stock on the date our board of directors
authorized such issuance, to Alissa Bushnell, in payment for public relations
services provided to us during 2005.





Certain of our officers and directors,
and family members of officers and directors, participated in a private
placement transaction we completed on March 3, 2006 on the same terms as
the third party investors who participated in the transaction. Peter Wilkniss,
our Chief Financial Officer, invested $30,000 in the transaction and received
100,000 (25,000 post-split) shares of our common stock and
immediately-exercisable, three-year warrants to purchase 50,000 (12,500
post-split) shares of our common stock at an exercise price of $0.345 ($1.38
post-split) per share. Kevin McLeod, a director, invested $100,000 in the
transaction and received 333,333 (83,334 post-split) shares of our common stock
and immediately-exercisable, three-year warrants to purchase 166,667 (41,667
post-split) shares of our common stock at an exercise price of $0.345 ($1.38
post-split) per share. Dennis Nino, the brother-in-law of Nolan Bushnell,
invested $75,000 in the transaction and received 250,000 (62,500 post-split)
shares of our common stock and immediately-exercisable, three-year warrants to
purchase 125,000 (31,250 post-split) shares of our common stock at an exercise
price of $0.345 ($1.38 post-split) per share. Robert Nino, the brother-in-law of
Nolan Bushnell, invested $100,000 in the transaction and received 333,333
(83,334 post-split) shares of our common stock and immediately-exercisable,
three-year warrants to purchase 166,667 (41,667 post-split) shares of our common
stock at an exercise price of $0.345 ($1.38 post-split) per share. In addition,
Tallac Corp. invested $500,000 in this transaction and received 1,666,667
(416,667 post-split) shares of our common stock and immediately-exercisable,
three-year warrants to purchase 833,334 (208,334 post-split) shares of our
common stock at an exercise price of $0.345 ($1.38 post-split) per share; by
virtue of this investment, Tallac Corp. became a greater than 10% stockholder of
our company. There is no relationship between us and Tallac Corp. or John E.
Lee, its principal, other than as a stockholder. As of the date of this report,
Tallac Corp. is no longer a 10% stockholder.





At the time we entered into this
transaction, the market price of our common stock was $0.21, although the market
price had fluctuated between $0.21 and $0.30 in the three weeks prior to the
consummation of the transaction, and the exercise price of the warrants was at a
64% premium to the market price.





We secured an approximately ten-year
lease on the location for our first uWink restaurant in Woodland Hills,
California. The underlying lease agreement between Nolan Bushnell, in his
personal capacity, and Promenade LP, the landlord, is as of February 3,
2006. Effective as of April 10, 2006, we, Mr. Bushnell and Promenade
LP entered into an assignment agreement pursuant to which Mr. Bushnell
assigned his rights under the lease to us (but without relieving
Mr. Bushnell of his liability for the performance of the lease). In
connection with this assignment, we agreed with Mr. Bushnell that, should
we fail to perform under the lease and Mr. Bushnell becomes obligated under
the lease as a result, Mr. Bushnell will have the right to operate the
leased premises in order to satisfy his obligations under the
lease.





82


On October 10, 2005, we issued a
$200,000 convertible note payable to Bradley Rotter, a member of our board of
directors. The proceeds of this note were used to fund operations. This note was
due April 10, 2006, accrued interest at 10% per annum, and was convertible,
at the option of Mr. Rotter, into the same securities issued by us in (and
on the same terms and conditions pari passu with the investors
in) any offering of our securities that resulted in gross proceeds to us of at
least $3,000,000. Upon conversion, Mr. Rotter was to receive as a
conversion bonus additional securities equal to 20% of the aggregate principal
value and accrued interest so converted. The note was mandatorily repayable
immediately following the consummation of any offering of securities that
resulted in gross proceeds to us of at least $3,000,000. Upon such repayment, or
upon repayment at maturity, Mr. Rotter was to receive warrants to purchase
200,000 (50,000 post-split) shares of our common stock at an exercise price of
$0.59 per share.





On April 19, 2005, Dennis Nino,
the brother-in-law of Nolan Bushnell, loaned us an additional $39,000 to be used
for operations. This loan, which accrued interest at 6% and was due on demand,
was assigned by Mr. Nino to Nancy Bushnell, the wife of Nolan Bushnell, on
August 1, 2006, and was converted into shares of our common stock and
warrants in connection with our September 18, 2006 equity financing,
described below.





On December 6, 2004, we issued a
convertible note to Kevin McLeod, one of our directors, in the amount of
$50,000. The proceeds of this note were used to fund operations. This note,
which accrued interest at 20%, was converted at $0.30 per share into 200,000
(50,000 post-split) shares of our common stock in December 2005. At the
time of conversion, the market price of our common stock was $0.30.





In December 2004, Dennis Nino, the
brother-in-law of Nolan Bushnell, loaned us $117,000 related to the manufacture
of SNAP! units in China. In consideration of Mr. Nino’s extension of
this loan, we paid Mr. Nino an additional $5,000 upon final payment of the
note in 2005.





At various dates in 2004 and 2005, Dan
Lindquist, our vice president of operations, loaned us an aggregate of $60,500
to be used for operations. This indebtedness, inclusive of accrued interest of
8% per annum thereon, was converted into shares of our common stock and warrants
to purchase our common stock at an exercise price of $0.345 per share in
connection with our September 18, 2006 equity financing, as described in
more detail above.





At various dates in 2004, Nancy
Bushnell loaned us an aggregate of $47,000 for our operations. Our note
evidencing this indebtedness accrued interest at 8% per annum and was due on
demand. $26,500 of this note was repaid in 2005. Ms. Bushnell loaned us an
additional $3,000 in January and February of 2006. This indebtedness was
converted into shares of our common stock and warrants to purchase our common
stock at an exercise price of $0.345 per share in connection with our
September 18, 2006 equity financing, as described in more detail
above.




Brent
Bushnell, son of Nolan Bushnell, is one of our employees. In 2007, he earned
approximately $125,000 in annual salary and bonus. He also participates in our
employee benefit plans on the same basis as other similarly situated employees.
Mr. Bushnell currently holds the position of Chief Technology
Officer.




Alissa
Tappan, daughter of Nolan Bushnell, is one of our employees. In 2007, she earned
approximately $120,000 in annual salary and bonus. She also participates in our
employee benefit plans on the same basis as other similarly situated employees.
Ms. Tappan currently holds the position of Vice President, Marketing and Public
Relations.







83


ITEM
13. EXHIBITS





EXHIBIT
LIST








Exhibit
    No.
            Description
            Method of Filing1.1
            Form
      of Placement Agent Agreement
            Incorporated
      by reference to Amendment No. 2 to our Registration Statement on
      Form SB-2 filed on August 10, 2007.2.1
            Securities
      Purchase Agreement and Plan of Reorganization among Prologue, uWink, Inc.
      and the stockholders of uWink listed on the signature pages thereto, dated
      as of November 21, 2003
            Incorporated
      by reference to our Current Report on Form 8-K filed December 18,
      2003.3.1
            Restated
      Certificate of Incorporation of uWink, Inc., a Utah
      corporation.
            Incorporated
      by reference to Annual Report for the year ended December 31,
      2003.3.2
            Certificate
      of Incorporation of uWink, Inc., a Delaware corporation
            Incorporated
      by reference to Amendment No. 2 to our Registration Statement on
      Form SB-2 filed on July 23, 2007.3.3
            Bylaws
      of uWink, Inc., a Utah corporation
            Incorporated
      by reference to our Quarterly Report on Form 10-QSB for the quarter ended
      June 30, 2004.3.4
            Bylaws
      of uWink, Inc., a Delaware corporation
            Incorporated
      by reference to Amendment No. 1 to our Registration Statement on
      Form SB-2 filed on July 23, 2007.3.5
            Amendment
      to Certificate of Incorporation of uWink, Inc., a Delaware
      corporation
            Incorporated
      by reference to Amendment No. 1 to our Registration Statement on
      Form SB-2 filed on July 23, 2007.4.1
            Form
      of uWink, Inc. Warrant, dated March 3, 2006
            Incorporated
      by reference to our Current Report on Form 8-K on March 9,
      2006.4.2
            Form
      of uWink, Inc. Warrant, dated May 15, 2006
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.3
            Form
      of uWink, Inc. Warrant, dated 2004
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.4
            Convertible
      Promissory Note, dated September 8, 2005
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.5
            Convertible
      Promissory Note, dated October 10, 2005
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.6
            Promissory
      Note in favor of S. Raymond and Victoria Hibarger and related Financing
      Agreement, dated July 23, 2001
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.7
            Form
      of Convertible Promissory Note, dated November 2004
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.8
            Line
      of Credit between uWink, Inc. and Nancy Bushnell, dated December 23,
      2004
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.9
            Line
      of Credit between uWink, Inc. and Dan Lindquist, dated December 23,
      2004
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.10
            Demand
      Note, dated August 10 2005, in favor of Dennis Nino
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.4.11
            Letter
      Agreement , dated April 19, 2006, between uWink, Inc. and Bradley
      Rotter
            Incorporated
      by reference to our Current Report on Form 8-K filed April 19,
      2006.4.12
            Form
      of uWink, Inc. Warrant issued to Bradley Rotter
            Incorporated
      by reference to our Current Report on Form 8-K filed April 19,
      2006.


84





4.13
            $100,000
      Convertible Promissory Note, dated April 19, 2006
            Incorporated
      by reference to our Current Report on Form 8-K filed April 19,
      2006.4.14
            Form
      of uWink, Inc. Warrant, dated March 3, 2006
            Incorporated
      by reference to our Current Report on Form 8-K filed March 9,
      2006.4.15
            Form
      of uWink, Inc. Warrant, dated September, 2006
            Incorporated
      by reference to our Current Report on Form 8-K filed September 11,
      2006.4.16
            Form
      of Waiver from March 2006 Investors
            Incorporated
      by reference to Amendment No. to our Registration Statement on Form SB-2
      filed January 18, 2006.4.17
            Form
      of Waiver from September 2006 Investors
            Incorporated
      by reference to Amendment No. to our Registration Statement on Form SB-2
      filed January 18, 2006.4.18
            Form
      of Convertible Promissory Note, dated March 2007
            Incorporated
      by reference to our Current Report on Form 8-K filed April 2,
      2007.4.19
            Final
      Form of uWink, Inc. Warrant, dated November 7, 2007
            Incorporated
      by reference to our Registration Statement on Form SB-2 filed November 21,
      2007.10.1*
            2005
      Stock Incentive Plan
            Incorporated
      by reference to our Current Report on Form 8-K filed September 15,
      2005.10.2*
            2004
      Stock Incentive Plan
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.10.3*
            2000
      Stock Incentive Plan
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.10.4*
            Amended
      and Restated 2006 Equity Incentive Plan
            Incorporated
      by reference to our Registration Statement on Form S-8 filed on November
      17, 2006.10.5*
            Employment
      Agreement between uWink, Inc. and Nolan K. Bushnell
            Incorporated
      by reference to our Current Report on Form 8-K filed March 9,
      2006.10.6*
            Employment
      Agreement between uWink, Inc. and Peter F. Wilkniss
            Incorporated
      by reference to our Quarterly Report on Form 10-QSB for the quarter ended
      September 30, 2005.10.8
            Lease
      Agreement between uWink, Inc. and Patco Properties, L.P., dated April 21,
      2006
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.10.9
            Lease
      Agreement between Nolan Bushnell and Promenade, LP, dated February 3,
      2006
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.10.10
            Assignment,
      Assumption and Consent Agreement among Nolan Bushnell, uWink, Inc. and
      Promenade, LP, dated April 10, 2006
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.10.11
            Letter
      Agreement between uWink, Inc. and Nolan Bushnell, dated April 10,
      2006
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.10.12
            Lease
      Termination Agreement, dated May 10, 2006 between uWink, Inc., Patco
      Properties LP and Nolan Bushnell
            Incorporated
      by reference to our Current Report on Form 8-K filed June 5,
      2006.10.13
            Lease
      Agreement dated May 22, 2006 between uWink, Inc. and Clyde C.
      Berkus
            Incorporated
      by reference to our Current Report on Form 8-K filed June 5,
      2006.10.14
            Securities
      Purchase Agreement dated March 3, 2006 between uWink, Inc. and the
      investors named therein
            Incorporated
      by reference to our Current Report on Form 8-K filed March 9,
      2006.10.15
            Securities
      Purchase Agreement dated September 8, 2006 between uWink, Inc. and the
      investors named therein
            Incorporated
      by reference to our Current Report on Form 8-K filed September 11,
      2006.


85





10.16
            Licensing
      and Distribution Agreement dated September 15, 2006 between uWink, Inc.
      and SNAP Leisure LLC
            Incorporated
      by reference to Amendment No. 1 to our Registration Statement on Form SB-2
      filed on December 8, 2006.10.17
            License
      Agreement between uWink, Inc. and Bell-Fruit Games
            Incorporated
      by reference to Amendment No. 2 to our Registration Statement on Form SB-2
      filed on January 18, 2007.10.18
            Inventory
      Purchase Agreement between uWink, Inc. and Interactive Vending
      Corporation
            Incorporated
      by reference to Amendment No. 3 to our Registration Statement on Form SB-2
      filed on February 5, 2007.10.19
            License
      Agreement between uWink, Inc. and Interactive Vending
      Corporation
            Incorporated
      by reference to Amendment No. 3 to our Registration Statement on Form SB-2
      filed on February 5, 2007.10.20
            Non-Competition
      Agreement between uWink, Inc. and Interactive Vending
      Corporation
            Incorporated
      by reference to Amendment No. 3 to our Registration Statement on Form SB-2
      filed on February 5, 2007.10.21
            Area
      Development Agreement dated June 8, 2007 between uWink, Inc. and OCC
      Partners, LLC
            Incorporated
      by reference to our Registration Statement on Form SB-2 filed on June 25,
      2007.10.22
            Form
      of Subscription Agreement
            Incorporated
      by reference to Amendment No. 2 to our Registration Statement on
      Form SB-2 filed on August 10, 2007.10.23*
            2007
      Equity Incentive Plan
            Incorporated
      by reference to our Registration Statement on Form SB-2 filed on June 25,
      2007.10.24
            Form
      of Lock-Up Agreement
            Incorporated
      by reference to Amendment No. 2 to our Registration Statement on
      Form SB-2 filed on August 10, 2007.10.25
            Form
      of Escrow Agent Agreement
            Incorporated
      by reference to Amendment No. 2 to our Registration Statement on
      Form SB-2 filed on August 10, 2007.10.26
            Merger
      Agreement dated July 23, 2007 between uWink, Inc., a Utah corporation, and
      uWink, Inc., a Delaware corporation
            Incorporated
      by reference to Amendment No. 1 to our Registration Statement on
      Form SB-2 filed on July 23, 2007.10.27
            Purchase
      and Sale Agreement between Miyake Foods, Inc. and uWink
      California, Inc.
            Incorporated
      by reference to Post-Effective Amendment No. 2 to our Registration
      Statement on Form SB-2 filed on November 2, 2007.10.28
            Alcoholic
      Beverage Asset Sales Agreement between Miyake Foods, Inc. and uWink
      California, Inc.
            Incorporated
      by reference to Post-Effective Amendment No. 2 to our Registration
      Statement on Form SB-2 filed on November 2, 2007.10.29
            Sublease
      Agreement between Miyake Foods, Inc. and uWink
      California, Inc.
            Incorporated
      by reference to Post-Effective Amendment No. 2 to our Registration
      Statement on Form SB-2 filed on November 2, 2007.10.30*
            Letter
      Agreement dated November 15, 2007 amending the terms of the Employment
      Agreement dated March 13, 2006 between uWink, Inc. and Nolan
      Bushnell
            Incorporated
      by reference to our Registration Statement on Form SB-2 filed November 21,
      2007.10.31*
            Letter
      Agreement dated November 15, 2007 amending the terms of the Employment
      Agreement dated August 15, 2005 between uWink, Inc. and Peter
      Wilkniss
            Incorporated
      by reference to our Registration Statement on Form SB-2 filed November 21,
      2007.10.32
            Lease
      Agreement dated January 22, 2008 between uWink, Inc. and CCB,
      Inc.
            Filed
      herewith.10.33
            Lease
      Agreement dated December 17, 2007 between uWink California, Inc. and
      CIM/H&H Retail, L.P.
            Filed
      herewith.10.34
            Asset
      Purchase Agreement between H&H Restaurant, LLC and uWink
      California, Inc.
            Filed
      herewith.14.1
            Code
      of Ethics and Conduct
            Incorporated
      by reference to our Annual Report on Form 10-KSB filed April 17,
      2006.16.1
            Letter
      from Stonefield Josephson, Inc., dated September 1, 2005
            Incorporated
      by reference to our Current Report on Form 8-K filed September 9,
      2005.


86





21.1
            Subsidiaries
      of the Company
            Incorporated
      by reference to our Registration Statement on Form SB-2 filed on June 25,
      2007.23.1
            Consent
      of Kabani & Company, Inc., Certified Public
Accountants
            Filed
      herewith.31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
            Filed
      herewith.31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
            Filed
      herewith.32.1
            Certification
      Pursuant to 18 U.S.C.ss.1350 of Chief Executive Officer
            Filed
      herewith.32.2
            Certification
      Pursuant to 18 U.S.C.ss.1350 of Chief Financial Officer
            Filed
      herewith.





*Management
contract or compensatory plan or arrangement.








ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Kabani
& Company, Inc., is our independent auditor. Kabani & Company audited
our financial statements for the fiscal years ended January 1, 2008 and January
2, 2007.





AUDIT
AND NON-AUDIT FEES





Aggregate
fees for professional services rendered to us by Kabani & Company for our
2007 audit and our 2006 audit and reviews of our interim statements for the
fiscal quarters ended April 3, 2007, July 3, 2007, October 2, 2007, March 31,
2006, June 30, 2006, and September 30, 2006 were as follows:





Services
      Provided
            
            2007
            
            
            2006Audit
      Fees
            
            $
            59,500
            
            
            $
            84,600Audit
      Related Fees
            
            $
            -
            
            
            $
            -Tax
      Fees
            
            $
            -
            
            
            $
            -All
      Other Fees
            
            $
            16,000
            
            
            $
            -Total
            
            $
            75,500
            
            
            $
            84,600





AUDIT
FEES. The aggregate fees billed for the fiscal years ended January 1, 2008 and
January 2, 2007 were for the audits of our financial statements and reviews of
our interim financial statements included in our annual
and quarterly reports.





AUDIT
RELATED FEES.  There were no fees billed for the years ended January
1, 2008 or January 2, 2007 for the audit or review of our financial statements
that are not reported under Audit Fees.





TAX FEES.
There were no fees billed for the years ended January 1, 2008 or January 2, 2007
for professional services by Kabani & Company for tax compliance, tax advice
and tax planning.





ALL OTHER
FEES. Fees were billed for services related to the review of documents prepared
by us which incorporated the audited financial statements for the years ended
January 2, 2007 and December 31, 2005 prepared by Kabani &
Company.





PRE-APPROVAL
POLICIES AND PROCEDURES. We have implemented pre-approval policies and
procedures related to the provision of audit and non-audit services. Under these
procedures, our board of directors pre-approves both the type of services to be
provided by our auditors and the estimated fees related to these services. The
percentage of services set forth in the table above that were approved by our
board of directors was 100%.


87











SIGNATURES





In
accordance with Section 13(a) or 15(d) of the Exchange Act, we have caused this
report to be signed on our behalf by the undersigned, thereunto duly
authorized.





uWINK,
      INC.Dated
      March 31, 2008
            By: /s/ Nolan K.
      BushnellNolan
      K. BushnellChairman
      of the Board and Chief Executive
Officer





In
accordance with the Exchange Act, this report has been signed by the following
persons on behalf of the Company and in the capacities and on the dates
indicated.








Signatures
            Title
            Date/s/
      Nolan K. Bushnell
            Chief
      Executive Officer
            March
      31, 2008Nolan
      K. Bushnell/s/
      Peter F. Wilkniss
            President,
      Chief Operating Officer,Peter
      F. Wilkniss
            Chief
      Financial and Accounting Officer
              and
      Secretary
            March
      31, 2008/s/
      Elizabeth J. Heller
            Director
            March
      31, 2008Elizabeth
      J. Heller/s/
      Bradley N. Rotter
            Director
            March
      31, 2008Bradley
      N. Rotter/s/
      Kevin W. McLeod
            Director
            March
      31, 2008Kevin
      W. McLeod




















88