**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





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





For
      the
      quarterly period ended **June
      30, 2008**





OR


o
              
              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  001-32985





**ZVUE
      CORPORATION**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            
            **98-0430675**(State
                or other jurisdiction
                of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)**612
                HOWARD STREET, SUITE 600, SAN
                FRANCISCO, CA**
            
            **94105**(Address
                of principal executive
                offices)
            
            (Zip
                Code)




**(415)
      495-6470**


(Registrant’s
      telephone number, including area code)




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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes
xNo
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer ” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting company
x





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


Yes
oNo
x





As
      of
      August 13, **** 2008,
      there were 36,770,979 shares of Issuer’s common stock, par value $0.0001 per
      share, outstanding.









**ZVUE
      CORPORATION**


**Table
      of Contents**


**PART
                  I - FINANCIAL INFORMATION****ITEM
                  1: Financial Statements**Condensed
                  Consolidated Balance Sheets as of June 30, 2008
                  (unaudited)and
                  December 31, 2007
              
              3Condensed
                  Consolidated Statements of Operations for the three months and
                  six
                  monthsended
                  June 30, 2008 and 2007 (unaudited)
              
              4Condensed
                  Consolidated Statements of Cash Flows for the three months and
                  six
                  monthsended
                  June 30, 2008 and 2007 (unaudited)
              
              5Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              
              6**ITEM
                  2: Management's Discussion and Analysis of Financial Condition
                  and****Results
                  of Operations**
              
              18**ITEM
                  4T: Controls and Procedures**
              
              26**PART
                  II - OTHER INFORMATION****ITEM
                  1: Legal Proceedings**
              
              27**ITEM
                  6: Exhibits**
              
              27**Signatures**
              
              28
  2


**PART
      I. FINANCIAL INFORMATION**




**ITEM
      1.**  **FINANCIAL
      STATEMENTS**




**ZVUE
      Corporation**


**Condensed
      Consolidated Balance Sheets**


**(in
      thousands, except share and per share amounts)**




June
                30,
            
            December
                31,2008
            
            2007(unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            1,023
            
            $
            4,766Accounts
                receivable, net
            
            
            2,135
            
            
            3,928Deferred
                income taxes, current
            
            
            481
            
            
            483Inventory,
                net
            
            
            887
            
            
            360Prepaid
                expenses and other current assets
            
            
            476
            
            
            624**Total
                current assets**
            
            
            5,002
            
            
            10,161Fixed
                assets, net
            
            
            383
            
            
            466Restricted
                cash
            
            
            1,528
            
            
            1,510Intangible
                web site assets, net
            
            
            18,585
            
            
            23,243Goodwill
            
            
            4,423
            
            
            3,973Deferred
                income taxes, non-current
            
            
            149
            
            
            461Other
                non-current assets
            
            
            595
            
            
            659**Total
                assets**
            
            $
            30,665
            
            $
            40,473**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Accounts
                payable and accrued liabilities
            
            $
            3,715
            
            $
            5,432Accounts
                payable, related parties
            
            
            124
            
            
            83Line
                of credit, related party
            
            
            1,327
            
            
            1,327Deferred
                income tax liability, current
            
            
            481
            
            
            483Junior
                secured convertible debentures (net of debt discount of
                $1,482and
                $1,304 as of June 30, 2008 & December 31, 2007,
                respectively)
            
            
            217
            
            
            79Senior
                secured convertible debenture (net of debt discount of
                $6,759and
                $6,034 as of June 30, 2008 & December 31, 2007,
                respectively)
            
            
            992
            
            
            355**Total
                current liabilities**
            
            
            6,856
            
            
            7,759Long-term
                convertible note
            
            
            800
            
            
            800Junior
                secured convertible debentures (net of debt discount of
                $2,484and
                $3,495 as of June 30, 2008 & December 31, 2007,
                respectively)
            
            
            348
            
            
            205Senior
                secured convertible debenture (net of debt discount of
                $11,130and
                $15,688 as of June 30, 2008 & December 31, 2007
                respectively)
            
            
            1,648
            
            
            923Total
                long-term debt, net of current portion
            
            
            2,796
            
            
            1,928Deferred
                income tax liability, non-current
            
            
            149
            
            
            461**Total
                liabilities**
            
            
            9,801
            
            
            10,148**Commitments
                and contingencies (Note 6)****Shareholders’
                Equity**Preferred
                stock, $0.0001 par value; 1,000,000 authorized; noneissued
                and outstanding
            
            
            -
            
            
            -Common
                stock, $0.0001 par value; 75,000,000 authorized,31,013,656
                issued and outstanding at June 30, 2008 and20,190,262
                issued and outstanding at December 31, 2007
            
            
            3
            
            
            2Additional
                paid-in capital
            
            
            77,758
            
            
            71,541Accumulated
                deficit
            
            
            (56,897
            )
            
            (41,218
            )**Total
                shareholders’ equity**
            
            
            20,864
            
            
            30,325**Total
                liabilities and shareholders’ equity**
            
            $
            30,665
            
            $
            40,473




See
      Notes
      to Unaudited Condensed Consolidated Financial Statements




3




**ZVUE
                Corporation****Condensed
                Consolidated Statements of Operations****(in
                thousands, except share and per share amounts)****(unaudited)**




Three
                months ended
            
            Six
                months endedJune
                30,
            
            June
                30,2008
            
            2007
            
            2008
            
            2007Revenues,
                netProduct
                sales, net
            
            $
            861
            
            $
            249
            
            $
            882
            
            $
            564Advertising
            
            
            876
            
            
            70
            
            
            1,717
            
            
            145Total
                revenue, net
            
            
            1,737
            
            
            319
            
            
            2,599
            
            
            709Cost
                of revenuesProduct
                sales
            
            
            1,199
            
            
            283
            
            
            1,200
            
            
            525Advertising
            
            
            255
            
            
            89
            
            
            449
            
            
            184Total
                cost of revenues
            
            
            1,454
            
            
            372
            
            
            1,649
            
            
            709Gross
                profit (loss)
            
            
            283
            
            
            (53
            )
            
            950
            
            
            -Operating
                expensesResearch
                and development
            
            
            121
            
            
            168
            
            
            309
            
            
            340Sales
                and marketing
            
            
            908
            
            
            803
            
            
            1,734
            
            
            1,453General
                and administrative (1)
            
            
            2,152
            
            
            1,099
            
            
            4,179
            
            
            2,588Amortization
                of intangible website costs
            
            
            2,329
            
            
            989
            
            
            4,659
            
            
            1,668Total
                operating expenses
            
            
            5,510
            
            
            3,059
            
            
            10,881
            
            
            6,049Operating
                loss
            
            
            (5,227
            )
            
            (3,112
            )
            
            (9,931
            )
            
            (6,049
            )Non-operating
                income (expense)Interest
                income
            
            
            13
            
            
            20
            
            
            50
            
            
            60Interest
                expense
            
            
            (2,906
            )
            
            (19
            )
            
            (5,798
            )
            
            (42
            )Total
                non-operating income (expense)
            
            
            (2,893
            )
            
            1
            
            
            (5,748
            )
            
            18Net
                loss
            
            $
            (8,120
            )
            $
            (3,111
            )
            $
            (15,679
            )
            $
            (6,031
            )Net
                loss per share, basic and diluted
            
            $
            (0.30
            )
            $
            (0.18
            )
            $
            (0.65
            )
            $
            (0.38
            )Weighted
                average shares used in computingbasic
                and diluted net loss per share
            
            
            27,234,375
            
            
            16,869,770
            
            
            23,981,586
            
            
            15,809,275(1)
                Includes stock-based compensation as follows:General
                and administrative
            
            
            529
            
            
            188
            
            
            1,179
            
            
            583




See
                Notes to Unaudited Condensed Consolidated Financial
                Statements




4




**ZVUE
                Corporation****Condensed
                Consolidated Statements of Cash Flows****(in
                thousands, except share and per share amounts)****(unaudited)**




Six
                months endedJune
                30,2008
            
            2007Cash
                flows from operating activities:Net
                loss
            
            $
            (15,679
            )
            $
            (6,031
            )Adjustments
                to reconcile net loss to net cash used by operating
                activitiesDepreciation
                and amortization
            
            
            4,909
            
            
            1,743Debenture
                debt discount amortization
            
            
            4,681
            
            
            -Bad
                debt expense
            
            
            64
            
            
            (9
            )Write-down
                of inventory
            
            
            453
            
            
            (5
            )Non-cash
                expense related to stock issued for services
            
            
            394
            
            
            277Share-based
                compensation
            
            
            785
            
            
            306Changes
                in operating assets and liabilitiesAccounts
                receivable, trade
            
            
            1,729
            
            
            222Accounts
                receivable from escrow account
            
            
            -
            
            
            90Prepaid
                expenses and other current assets
            
            
            153
            
            
            73Inventories
            
            
            (980
            )
            
            (8
            )Accounts
                payable and accrued liabilities
            
            
            470
            
            
            (2,882
            )Accounts
                payable due related parties
            
            
            41
            
            
            33Net
                cash used by operating activities
            
            
            (2,980
            )
            
            (6,191
            )Cash
                flows from investing activities:Cash
                paid for acquisitions
            
            
            (450
            )
            
            (933
            )Change
                in restricted cash
            
            
            32
            
            
            -Deferred
                acquisition costs
            
            
            (239
            )
            
            (481
            )Purchases
                of property and equipment
            
            
            (67
            )
            
            (130
            )Net
                cash used by investing activities
            
            
            (724
            )
            
            (1,544
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            -
            
            
            4,080Offering
                costs
            
            
            -
            
            
            (89
            )Short-term
                borrowing
            
            
            -
            
            
            1,425Debt
                issue costs
            
            
            (118
            )
            
            (82
            )Proceeds
                from exercise of stock options
            
            
            79
            
            
            158Net
                cash provided (used) by financing activities
            
            
            (39
            )
            
            5,492Net
                decrease in cash and cash equivalents
            
            
            (3,743
            )
            
            (2,243
            )Cash
                and cash equivalents at beginning of period
            
            
            4,766
            
            
            3,653Cash
                and cash equivalents at end of period
            
            $
            1,023
            
            $
            1,410Supplemental
                cash flow disclosure:Conversion
                of notes payable to common stock
            
            $
            -
            
            $
            1,618Common
                stock issued for acquisitions
            
            $
            -
            
            $
            6,900Installment
                payments due from acquisitions
            
            $
            417
            
            $
            975Common
                stock issued in lieu of cash payments for principal and interest
                on
                debentures
            
            $
            4,111
            
            
            -




See
      Notes
      to Unaudited Condensed Consolidated Financial Statements




5




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





**1.
      The Company, Basis of Presentation and Significant Accounting
      Policies**





The
      Company :





Handheld
      Entertainment, Inc., was formed in February 2003 as a California corporation.
      On
      February 10, 2006 we merged with a wholly-owned subsidiary of Vika Corp., a
      Delaware inactive publicly held corporation, with Handheld Entertainment, Inc.
      (the “Subsidiary”) as the surviving entity and wholly-owned subsidiary of Vika
      Corp. We then changed the name of Vika Corp. to Handheld Entertainment, Inc.
      and
      the name of the subsidiary to HHE Corp. On April 12, 2006 we merged the
      Subsidiary into Handheld Entertainment, Inc. The above transactions were
      accounted for as a recapitalization of Handheld Entertainment, Inc., the
      California corporation. All references to “us”, “we” “our” or “the Company”
refer to the recapitalized entity, Handheld Entertainment Inc. and all
      historical operations in the accompanying financial statements are those of
      Handheld Entertainment, Inc., as recapitalized.





On
      August
      14, 2006 we affected a 1.45 for 1 reverse split of our issued and outstanding
      common stock. All share and per share data in the accompanying financial
      statements have been retroactively changed to account for the recapitalization
      and reverse split.





On
      October 31, 2007, we changed our name to “ZVUE Corporation” from “Handheld
      Entertainment, Inc.”





Basis
      of Presentation :





These
      interim condensed consolidated financial statements are unaudited and have
      been
      prepared on the same basis as the annual financial statements and, in the
      opinion of management, reflect all adjustments, which include normal recurring
      adjustments and other adjustments as necessary to present fairly the Company’s
      consolidated financial position, consolidated results of operations and
      consolidated cash flows for the periods presented. The condensed consolidated
      balance sheet data as of December 31, 2007 is derived from and should be read
      in
      conjunction with the audited financial statements, which are included in the
      Company’s Annual Report for the year ended December 31, 2007 on Form 10-KSB
      filed with the Securities and Exchange Commission. Pursuant to the rules of
      the
      Securities and Exchange Commission, these financial statements do not include
      all disclosures required by generally accepted accounting principles. The
      results for the three and six months ended June 30, 2008 are not necessarily
      indicative of the expected results for any other interim period or for the
      year
      ending December 31, 2008.





Going
      Concern :





These
      unaudited consolidated financial statements contemplate the realization of
      assets and the satisfaction of liabilities in the normal course of business.
      The
      Company has incurred losses and negative cash flows from operations and has
      an
      accumulated deficit at June 30, 2008 of $56,897. Because of past losses, and
      a
      history of negative cash flows from operations, the Company’s independent
      registered public accounting firm for the year ended December 31, 2007 included
      a paragraph in their report indicating substantial doubt as to the Company’s
      ability to continue as a going concern.




With
        our
        cash on hand, recent cost savings measures, projected future cash flows
        including management of working capital, purchase order financing including
        an
        agreement with a related party finalized in July 2008, and importantly assuming
        were are able to service our convertible debt obligations which will likely
        require us to modify or extend the current standstill agreement on our
        convertible debt obligations, we believe that we have sufficient funds and
        anticipated future cash flows to continue in operation at least through the
        end
        of 2008 On July 1, 2008, the Company modified its senior secured debt with
        a
        short-term standstill agreement that expires September 30, 2008. The Company
        will seek further revisions to its senior secured debt or extensions of the
        standstill agreement with its senior secured lender to avoid potential default
        under its senior secured notes and other obligations. There can be no assurance
        we will be able to make the necessary payments on such current obligations
        when
        due or succeed in getting further modifications or extensions of the standstill
        agreement. The Company may need to issue additional equity or debt securities.
        The issuance of equity securities would likely be dilutive to existing
        shareholders and may involve preferential rights over common shareholders.
        Debt
        financing, with or without equity conversion features, may involve restrictive
        covenants. The forecast that our financial resources will last through that
        period is a forward-looking statement that involves significant risks and
        uncertainties.


6





**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





Principles
      of Consolidation :




The
      unaudited consolidated financial statements include the accounts of the Company
      and its wholly-owned subsidiaries. All inter-company balances 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
      in
      the Company’s consolidated financial statements and notes thereto.





Significant
      estimates and assumptions made by management include the allowance on accounts
      receivable, inventory reserves, the valuation and useful life of acquired web
      sites, the valuation of goodwill, the fair value of stock-based awards issued,
      and estimates of allowances for product sales returns. Actual results could
      differ.





Inventories :





Inventories
      consist primarily of finished goods and goods in transit, are valued at the
      lower of cost or market and are accounted for on the first-in, first-out basis.
      Inventories were valued at $887 as of June 30, 2008 and $360 as of December
      31,
      2007.





Foreign
      Currency :





The
      accompanying financial statements are presented under accounting principles
      generally accepted in the United States of America and in U.S. dollars. The
      functional currency of the Company’s United Kingdom subsidiary, Putfile Limited,
      is the U.S. dollar. Gains and losses resulting from foreign currency
      transactions are recognized in operations in the period incurred.





Segment
      information :





The
      Company operates in a single segment - Media Distribution.





Fair
      Value of Financial Instruments :





The
      fair
      value of cash and cash equivalents, trade receivables, trade payables and debt
      approximates carrying value due to the short maturity of such instruments.





Reclassifications :




Certain
      amounts in the accompanying 2007 financial statements have been reclassified
      to
      conform to the 2008 presentation.





Revenue
      Recognition :





Product
      Sales :





Revenue
      from product sales is recognized when persuasive evidence of an arrangement
      exists (generally a purchase order), product has been shipped, the sale price
      is
      fixed and determinable, and collection of the resulting account is reasonably
      assured. The Company records the associated revenue at the time of the sale
      net
      of estimated returns. In addition, the Company follows the guidance of Emerging
      Issues Task Force (EITF) Issue 01-9 "Accounting for Consideration Given by
      a
      Vendor to a Customer" and (EITF) Issue 02-16 "Accounting By a Customer
      (Including a Reseller)
      for Certain Considerations Received from Vendors." Accordingly, any incentives
      received from vendors are recognized as a reduction of the cost of products.
      Promotional products given to customers or potential customers are recognized
      as
      a cost of sales. Cash incentives provided to our customers are recognized as
      a
      reduction of the related sale price, and, therefore, are a reduction in
      sales.




7




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




Advertising
      Revenue :





Advertising
      revenue includes amounts charged to customers for advertisements placed on
      our
      web sites and is recognized in the period when the advertisements are placed
      on
      our web sites. In accordance with EITF Issue No. 99-19, “Reporting Revenue
      Gross as a Principal Versus Net as an Agent,” the revenue derived from these
      arrangements that involve the use of third party advertising agencies where
      the
      Company is the primary obligor and has the risks and rewards of ownership are
      reported at the gross amount of the advertising revenue, with agency commissions
      and ad serving fees being reported as cost of revenues. For arrangements where
      the Company sells direct to advertisers or sells through third parties that
      have
      significant control over the sales process, the Company recognizes as revenue
      only the net proceeds it receives.





Concentrations
      of Credit Risk and Significant Customers and Suppliers :





At
      June
      30, 2008, three customers accounted for 47%, 24% and 10% of gross accounts
      receivable before the allowance for doubtful accounts. At June 30, 2007, one
      customer accounted for 82% of gross accounts receivable before the allowance
      for
      doubtful accounts.





For
      the
      six months ended June 30, 2008, two customers accounted for 32% and 27% of
      net
      revenues. For the six months ended June 30, 2007, one customer accounted for
      61%
      of net revenues. The Company is therefore materially dependent upon certain
      customers. Due to the nature of our business and the relative size of the
      contracts, which are entered into in the ordinary course of business, the loss
      of any single significant customer, including the above customers, would have
      a
      material adverse effect on our results.





The
      Company currently outsources the manufacturing of its products to two factories
      in China. Purchases from these factories during the six months ended June 30,
      2008 amounted to $871. Any disruption of the manufacturing process as a result
      of political, economic, foreign exchange or other reasons could be disruptive
      to
      our operations. The Company has no reason to expect such a disruption but
      believes that, if necessary, production could be reestablished in other
      territories in a reasonable period of time at reasonable terms. This is,
      however, a forward-looking statement that involves significant risks and
      uncertainties. It is possible that relocation of production, if it were to
      become necessary, would take longer and be more expensive than anticipated.





Stock-Based
      Compensation :





The
      Company accounts for stock-based compensation expenses pursuant to the
      provisions of Statement of Financial Accounting Standards No. 123 (revised
      2004), Share-Based Payment, or SFAS 123R, which requires that all share-based
      payments, including grants of employee stock options, be recognized as an
      expense in the statement of operations based on their grant date fair values
      and
      vesting periods.




8




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**


Recent
        Accounting Pronouncements :
 
 ***FASB
        Statement No. 141(R),"Business Combinations", (“SFAS
        141(R)”)*** :
        In
        December 2007, the Financial Accounting Standards Board (FASB) issued No.
        141R
        which will change the accounting for and reporting of business combination
        transactions. The most significant changes in the accounting for business
        combinations under SFAS 141(R) include: (1) valuation of any acquirer shares
        issued as purchase consideration will be measured at fair value
        as
        of the acquisition date; (2) contingent purchase consideration, if any, will
        generally be measured and recorded at the acquisition date, at fair value,
        with
        any subsequent change in fair value reflected in earnings rather than through
        an
        adjustment to the purchase price allocation; (3) acquired in-process research
        and development costs, which have historically been expensed immediately
        upon
        acquisition, will now be capitalized at their acquisition date fair values,
        measured for impairment over the remaining development period and, upon
        completion of a successful development project, amortized to expense over
        the
        asset's estimated useful life; (4) acquisition related costs will be expensed
        as
        incurred rather than capitalized as part of the purchase price allocation;
        and
        (5) acquisition related restructuring cost accruals will be reflected within
        the
        acquisition accounting only if certain specific criteria are met as of the
        acquisition date; the prior accounting convention, which permitted an acquirer
        to record restructuring accruals within the purchase price allocation as
        long as
        certain, broad criteria had been met, generally around formulating, finalizing
        and communicating certain exit activities, will no longer be permitted. SFAS
        141(R) is effective for reporting periods beginning on or after December
        15,
        2008. Earlier adoption is not permitted. The Company anticipates that adoption
        of this pronouncement will significantly impact how the Company accounts
        for
        business combination transactions consummated after the effective date, in
        the
        various areas outlined above.





***SFAS
      No. 160,*** **“Non-Controlling
      Interests in Consolidated Financial Statements” (“SFAS
      160”):** In
      December 2007, the FASB issued SFAS No. 160, this Statement amends Accounting
      Research Bulletin No. 51, “Consolidated Financial Statements” to establish
      accounting and reporting standards for the non-controlling interest in a
      subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is required
      to
      be adopted simultaneously with SFAS 141R and is effective for reporting periods
      on or after December 15, 2008. An earlier adoption is not permitted. Currently,
      the Company does not have any non-controlling interest in our subsidiaries
      and
      accordingly, the adoption of SFAS 160 is not expected to have a material impact
      on our consolidated financial position, cash flows or results of operations.





***SFAS No. 159,
      The Fair Value Option for Financial Assets and Financial Liabilities
      (“SFAS 159”):*** In
      February 2007, the FASB issued SFAS 159 which permits entities to choose to
      measure many financial instruments and certain other items at fair value that
      are not currently required to be measured at fair value. The adoption of
      SFAS 159 on January 1, 2008 did not impact our financial position,
      cash flows, and results of operations.





***Statement
      No. 157, “Fair Value Measurements” (“SFAS No. 157”):*** In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value, and enhances fair value measurement disclosure. In February 2008,
      the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement
      No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
      Address Fair Value Measurements for Purposes of Lease Classification or
      Measurement under Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of
      FASB Statement No. 157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove
      certain leasing transactions from its scope. FSP 157-2 delays the effective
      date
      of SFAS No. 157 for all non-financial assets and non-financial liabilities,
      except for items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis (at least annually), until the beginning of
      the
      first quarter of fiscal 2010. The measurement and disclosure requirements
      related to financial assets and financial liabilities are effective for the
      Company beginning in the first quarter of 2009. The adoption of SFAS No. 157
      for
      financial assets and financial liabilities will not have a significant impact
      on
      the Company’s consolidated financial statements. However, the resulting fair
      values calculated under SFAS No. 157 after adoption may be different from the
      fair values that would have been calculated under previous guidance. The Company
      is currently evaluating the impact that SFAS No. 157 will have on the Company’s
      consolidated financial statements when it is applied to non-financial assets
      and
      non-financial liabilities beginning in the first quarter of 2010.




9


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




**2.
      Accounts Receivable**





Accounts
      receivable, net consists of the following:





June
                30,
            
            December
                31,2008
            
            2007(unaudited)Accounts
                receivable
            
            $
            2,217
            
            $
            4,031Less:
                allowance for doubtful accounts
            
            
            (82
            )
            
            (103
            )Accounts
                receivable, net
            
            $
            2,135
            
            $
            3,928





The
      Company recorded bad debt expense of $64 for the six months ended June 30,
      2008
      and $9 for the six months ended June 30, 2007.





**3.
      Intangible Web Site Assets, net**





The
      Company amortizes its intangible website costs on a straight-line basis over
      an
      estimated useful life of three years, recapped as follows:




June
                30,
            
            December
                31,2008
            
            2007(unaudited)Intangible
                assets
            
            $
            27,942
            
            $
            27,942Accumulated
                amortization
            
            
            (9,357
            )
            
            (4,699
            )Intangible
                assets, net
            
            $
            18,585
            
            $
            23,243





Amortization
      for the six months ended June 30, 2008 and 2007 was $4,658 and $1,668. Additions
      during the six months ended June 30, 2007 included the acquisition of Putfile,
      Ltd. ($7,072), HolyLemon.com ($900) and UnOriginal.co.uk ($502).





**4.
      Accounts Payable and Accrued Liabilities**





Accounts
      payable and accrued liabilities consist of the following:




June
                30,
            
            December
                31,2008
            
            2007(unaudited)Trade
                accounts payable
            
            $
            849
            
            $
            979Factories
                and content providers
            
            
            1,968
            
            
            1,238Payroll
                and benefits
            
            
            164
            
            
            679Acquisition
                related accruals
            
            
            94
            
            
            1,637Reserve
                for sales returns
            
            
            88
            
            
            206Accrued
                interest
            
            
            299
            
            
            321Accrued
                commissions and ad server fees
            
            
            -
            
            
            177All
                other
            
            
            253
            
            
            195Accounts
                payables and accrued liabilities
            
            $
            3,715
            
            $
            5,432





10


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





**5.
      Debt**





The
      following table details our convertible notes as of June 30, 2008:





AccumulatedAmortization
                of
            
            ConvertibleDebt
            
            Debt
            
            Debt,
                net ofPrincipal
            
            Discount
            
            Discount
            
            DiscountsConvertible
                4.9% note payable
            
            $
            800
            
            $
            0
            
            $
            0
            
            $
            800Senior
                secured convertible debenture
            
            
            20,529
            
            
            (23,000
            )
            
            5,111
            
            
            2,640Junior
                secured convertible debentures
            
            
            4,532
            
            
            (5,099
            )
            
            1,132
            
            
            565Total
            
            $
            25,861
            
            $
            (28,099
            )
            $
            6,243
            
            $
            4,005Less:
                current portionSenior
                secured convertible debenture
            
            $
            7,751
            
            $
            (6,759
            )
            
            
            
            $
            992Junior
                secured convertible debentures
            
            
            1,699
            
            
            (1,482
            )
            
            
            
            
            217$
            9,450
            
            $
            (8,241
            )
            
            
            
            $
            1,209Convertible
                debt, net of current portion
            
            $
            16,411
            
            
            
            
            
            
            
            $
            2,796




Convertible
      Debentures :





Per
      the
      terms of the senior secured convertible debenture, and as more fully disclosed
      in Note 6, “Convertible Debt” of the Company’s Annual Report on Form 10-KSB for
      the year ended December 31, 2007, the Company issued to the holder of our senior
      secured convertible debenture, 4,968,381 shares for scheduled installment
      payments through May 1, 2008. For the installment due June 2, 2008, the senior
      secured convertible debenture holder requested of the Company to only issue
      2,453,193 shares instead of the aggregate total due on that day of 3,441,872.
      The aggregate issuance of the shares was in lieu of cash payments of $2,471
      for
      principal and $853 for accrued interest. The shares withheld represented $85
      for
      principal and $139 for interest which was repaid as described
      below.





Subsequent
      to June 30, 2008, the Company entered into a standstill agreement with its
      senior secured convertible debenture holder and released $1,500 of cash then
      held in a restricted escrow account. In consideration of such payment, the
      security holder agreed to defer monthly installment payments that were scheduled
      for July, August and September 2008 until the security's maturity. The Company’s
      $1,500 payment under the standstill agreement will be applied to the payment
      of
      accrued interest of $257, payment of $113 of the outstanding principal and
      payment of a $113 redemption premium. The security holder also agreed that
      during the standstill period, neither it nor its affiliates will sell shares
      of
      the Company’s common stock (1) at prices less than $0.30 per share, or (2) in
      excess of 18% of the aggregate daily trading volume of the common stock, at
      prices of between $0.30 and $0.50. The agreement provides no limitation on
      sales
      of common stock at prices of greater than $0.50 per share. Should the security
      holder breach the trading limitations, then the trading restriction and payment
      deferral would be extended for an additional period of one or more months,
      depending on the extent of such breach. In addition, the senior secured
      convertible debenture holder agreed to: (1) increase the limit for separate
      asset-based financing related to the Company’s product business to $2.5 million
      from $0.5 million and (2) consent to the sale of no less than $2.0 million
      of
      certain assets or businesses of the Company to occur no later than September
      30,
      2008.





During
      the six months ended June 30, 2008, the holders of our junior secured
      convertible debentures received a total 1,935,284 shares of our common stock
      in
      lieu of a cash payment due of $567 for principal and $220 for accrued interest.
      Of the 1,935,284 shares issued, 341,621 were issued to our Chief Technology
      Officer (CTO) and board member.
      In addition, in July 2008 the Company subsequently issued to the holders of
      our
      Junior secured convertible debentures 1,113,303 shares of our common stock
      that
      represented payment of $142 of principal and $27 of accrued interest and in
      August 2008, the Company issued an additional 1,201,012 shares of common stock
      that represented payment of $142 of principal and $28 of accrued interest.
      Of
      these shares, our CTO received 196,521 shares in July 2008 and 212,001 in August
      2008.




11




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




The
      results of our operations for the six months ended June 30, 2008 includes as
      a
      component of interest expense, non-cash charges related to amortized debt
      discount of $4,682 and $101 of debt issue costs.





Convertible
      Note :





On
      December 15, 2006, the Company issued an $800 convertible note to John Paul
      Worsnop for the purchase of YourDailyMedia.com at a rate of 4.9% that is due
      on
      December 31, 2011. The note is convertible into 186,306 shares of our common
      stock at a conversion price of $4.29. The Company can force the conversion
      of
      the note into common stock under certain conditions including if the Company
      trades more than 50,000 shares of common stock per day and the trading price
      of
      the stock for five days is twice the conversion price of the shares. As of
      June
      30, 2008, the conditions to force a conversion have not been met. As of June
      30,
      2008, $21 of interest is due on the note.





6%
      Related Party Promissory Notes :





On
      August
      13, 2007, the Company entered into an agreement with its CTO and a member of
      its
      board of directors, in which the CTO agreed to purchase from the Company, from
      time to time, up to $5 million aggregate principal amount of promissory notes
      at
      a 6% interest rate. As of June 30, 2008, $1,327 is outstanding and $72 of
      interest is due under this agreement. Amounts borrowed under the agreement
      are
      due by March 1, 2009.





The
      following table details the repayments of the debt detailed through the year
      ending December 31, 2011:





Year
                ending December 31,Remaining
                2008
            
            2009
            
            2010
            
            2011
            
            TotalRelated
                party notes
            
            
            
            
            
            1,327
            
            
            
            
            
            
            
            
            1,327Other
                term debt
            
            
            
            
            
            
            
            
            
            
            
            800
            
            
            800Senior
                convertible debentures
            
            
            3,918
            
            
            7,667
            
            
            8,944
            
            
            
            
            
            20,529Junior
                convertible debentures
            
            
            850
            
            
            1,700
            
            
            1,982
            
            
            
            
            
            4,5324,768
            
            
            10,694
            
            
            10,926
            
            
            800
            
            
            27,188





Total
      interest expense was $2,906 and $19 for the three months ended June 30, 2008
      and
      2007, respectively, and was $5,798 and $42 for the six months ended June 30,
      2008 and 2007, respectively.





**6.
      Commitments and Contingencies**





Legal
      Matters :




On
      December 21, 2007, Edward John Kowal filed a complaint in the United States
      District Court, Western District of Washington, against the Company seeking
      to
      enforce the bonus provisions of his employment contract and receive bonus
      compensation of approximately $2.6 million plus legal fees based on the
      projected value of the eBaum’s World, Inc. acquisition completed in October
      2007  (Edward
      John Kowal v. ZVUE Corporation, Case No. 07-2-40332-9) .
      The
      Company disputes the
      facts of the case and intends
      to vigorously defend itself. On April 28, 2008 the Company issued 303,398 shares
      of restricted stock to Edward John Kowal that represented what management
      believes is the earned bonus compensation of $875 pursuant to the
      employment agreement that was accrued for at the time of the eBaum’s World,
      Inc. acquisition. In addition, no reserve has been established as an amount
      of
      loss, if any, cannot be reasonably estimated at this time and management
      believes it is not probable that the plaintiff will prevail. A trial date of
      March 2, 2009 has been set.




12




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




Other
      Contingencies :




The
      Company has several non-cancelable operating lease agreements primarily for
      office space and to host some of its servers in New York. Future minimum
      payments under the non-cancelable operating leases are as follows:




OperatingLeasesRemaining
                fiscal year 2008
            
            $
            170Fiscal
                year 2009
            
            
            379Fiscal
                year 2010
            
            
            260$
            809





Although
      there are no rights of return arrangements with our retail customers other
      than
      the normal 90-day consumer product return policy, major retailers may require
      manufacturers and distributors to provide them various inventory and price
      protections and incentives. Major retailers may require a variety of
      protections, including holdbacks on payment, reducing the price paid if the
      retailer cannot sell the product or the product requires discounting, or
      requiring the manufacturer to buy back unsold goods. If our products do not
      sell
      as well as we or retail distributors anticipate, such protections could lead
      to
      excess inventory and costs, and our becoming subject to significant holdback
      and
      repayment obligations, which may be arbitrary and difficult or impossible to
      contest without jeopardizing our relationship with a retailer. We may be unable
      to recover from our manufacturers any amounts that we will be required to pay
      or
      allow to our retailers. Accordingly, these obligations could significantly
      impair our cash flow, revenues and financial condition.




The
      Company may, as a result of its acquisition of eBaum’s World, Inc., as amended
      on July 20, 2008, be required to pay as much as $33,717 in earn outs through
      December 31, 2012. In addition, the Company may be required to buy back certain
      common shares issued to the sellers of eBaum’s World, Inc. if certain defaults
      were to occur.




13




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





**7.
      Net Loss per Share**





Basic
      loss per share is computed using the weighted average number of shares of common
      stock outstanding during the period. Diluted loss per share is computed using
      the weighted average number of common stock and common stock equivalents
      outstanding during the period. Basic and diluted loss per share was calculated
      as follows:





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2008
            
            2007
            
            2008
            
            2007Numerator:Net
                loss
            
            
            (8,120
            )
            
            (3,111
            )
            
            (15,679
            )
            
            (6,031
            )Denominator:Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            
            27,234,375
            
            
            16,869,770
            
            
            23,981,586
            
            
            15,809,275Basic
                and diluted net loss per share
            
            
            (0.30
            )
            
            (0.18
            )
            
            (0.65
            )
            
            (0.38
            )Antidilutive
                securities including options, warrants, and convertible debt not
                included
                in net loss per share calculationConvertible
                debt
            
            
            186,306
            
            
            186,306
            
            
            186,306
            
            
            186,306Convertible
                debentures
            
            
            163,798,833
            
            
            -
            
            
            163,798,833
            
            
            -Stock
                options outstanding
            
            
            1,430,612
            
            
            1,608,234
            
            
            1,430,612
            
            
            1,608,234Warrants
                outstanding
            
            
            11,384,963
            
            
            3,515,689
            
            
            11,384,963
            
            
            3,515,689176,800,714
            
            
            5,310,229
            
            
            176,800,714
            
            
            5,310,229





The
      computation of 163,798,833 common shares underlying the convertible debentures
      is based on the lower of the lenders’ fixed conversion price of $1.90 or our
      optional variable conversion price for purposes of paying the monthly principal
      and interest payments in common stock. The assumed conversion price used in
      the
      above computation was $0.153.





**8.
      Shareholders’ Equity**





Preferred
      Stock :





The
      Company has authorized 1,000,000 shares of preferred stock at a par value of
      $0.0001 per share. No shares are issued and outstanding as of June 30,
      2008.





Common
      Stock :





The
      Company has authorized 75,000,000 shares of common stock at a par value of
      $0.0001 per share. As of June 30, 2008, the Company had 31,013,656 shares issued
      and outstanding. As of December 31, 2007, the Company had 20,190,262 shares
      issued and outstanding.




14


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





Common
      Stock Issued as Payment of Debt




During
      the six months ended June 30, 2008, we issued a total of 7,420,574 shares of
      common stock to our senior secured convertible debenture in lieu of cash payment
      of principal and interest. In addition, we issued a total of 1,935,284 shares
      of
      common stock to the holders of our junior secured convertible debentures in
      lieu
      of cash payment of principal and interest. For further details, refer to Note
      5.
“Debt.”





Common
      Stock Grants - Employees :





During
      the six months ended June 30, 2008, the Company granted 379,398 shares of common
      stock to five employees for services. The shares granted (except 303,398),
      which
      immediately vested, were valued at the quoted trading price of the common stock
      on the respective grant dates, or $37. The 303,398 share grant was issued in
      conjunction with an employment agreement and related to the acquisition of
      eBaums World, Inc. in 2007, and was valued at $875 (see Note 6). Subsequent
      to
      their issuance, 150,090 shares were cancelled due to the employees not
      completing the vesting requirements associated with the grant.





During
      the six months ended June 30, 2008, grants totaling 433,862 shares that were
      issued during the current and prior periods vested. The total expense charged
      to
      operations during the six months ended June 30, 2008 related to current and
      prior grants was $633. In addition, the grant for 303,398 was applied against
      a
      previously established reserve. Based on currently issued stock grants,
      approximately $2.9 million is anticipated to be charged to operations in future
      periods related to stock grants made to employees.





Common
      Stock Grants - Non Employees :





During
      the six months ended June 30, 2008, the Company granted 755,168 shares of common
      stock to non-employees for services. The shares granted were valued at the
      quoted trading price of the common stock on the respective grant dates for
      a
      total value of $383. Subsequent to their issuance, 14,400 shares were cancelled
      due to another non-employee not completing the vesting requirement associated
      with the grant.





During
      the six months ended June 30, 2008, grants totaling 599,414 shares that were
      issued during the current and prior periods vested. The total expense charged
      to
      operations during the six months ended June 30, 2008 related to current and
      prior grants was $375. Based on currently issued stock grants, approximately
      $209 is anticipated to be charged to operations in future periods related to
      stock grants made to non-employees.





Stock
      Option Plans:





The
      Company has adopted certain equity incentive plans as described in Note 11,
      "Employee Stock Incentive Plans and Options and Warrants," of the notes to
      the
      consolidated financial statements in our Annual Report on Form 10-KSB for the
      year ended December 31, 2007. The following table summarizes activity under
      our
      stock option plans for the six months ended June 30, 2008:





WeightedOutstanding
            
            Average
            
            AggregateStock
            
            Exercise
            
            IntrinsicOptions
            
            Price
            
            ValueBalance
                as of December 31, 2007
            
            
            1,728,109
            
            $
            1.35Options
                granted under all plans
            
            
            220,000
            
            $
            0.43Exercised
            
            
            (229,794
            )
            $
            0.34Cancelled
            
            
            (237,704
            )
            $
            2.29Outstanding
                as of June 30, 2008
            
            
            1,480,611
            
            $
            1.22
            
            $
            0





15




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





The
      fair
      value of each option grant was estimated on the date of grant using the
      Black-Scholes option pricing model with the following assumptions and fair
      value
      per share:





Three
                Months Ended
            
            Six
                Months EndedJune
                30, 2008
            
            June
                30, 20082008
            
            2007
            
            2008
            
            2007Risk-free
                interest rates
            2.78%
            
            5.19%
            
            1.97%
                - 2.78%
            
            5.19%
                - 5.26%Expected
                term (in years)
            3
            
            5
            
            3
                -
                5
            
            5Expected
                volatility
            99%
            
            183%
            
            99%
                - 108%
            
            183%Dividend
                yield
            0%
            
            0%
            
            0%
            
            0%





The
      expected term of the options granted up to March 31, 2008 of five years was
      based on utilizing the simplified method under SAB 107. The expected term of
      options granted after March 31, 2008 of three years is based on expectations
      of
      future employee behavior. The expected stock price volatility is based on
      historical volatility of the Company’s stock. The risk-free interest rate is
      based on the implied yield available on U.S. Treasury securities with a term
      equivalent to the expected term of the stock options. The Company has not paid
      dividends in the past.





Stock-based
      compensation expense from the issuance of stock options recognized under SFAS
      123R for the three months ended June 30, 2008 and June 30, 2007 was $27 and
      $71,
      respectively. Stock-based compensation expense from the issuance of stock
      options recognized under SFAS 123R for the six months ended June 30, 2008 and
      June 30, 2007 was $152 and $176, respectively. As of June 30, 2008, the
      aggregate stock compensation remaining to be amortized to expenses was $210.
      The
      Company expects this stock compensation balance to be amortized as follows:
      $55
      during the remainder of 2008; $82 during 2009; $71 during 2010 and $2 during
      2011. The expected amortization reflects only outstanding stock awards as of
      June 30, 2008.





The
      weighted average fair value per share of the stock option awards in the six
      months ended June 30, 2008 and 2007 was $0.30 and $2.96, respectively. During
      the six months ended June 30, 2008, the Company received proceeds of $79 from
      the exercise of options for 229,794 shares of common stock with exercise prices
      ranging from $0.145 to $0.537 per share. The intrinsic value of all the options
      exercised was $96.





As
      of
      June 30, 2008, the Company has remaining approximately 1,410,000 shares
      authorized to be issued under the 2003 and 2007 plans.





Warrants:





The
      following reflects activity related to our warrants:




AverageNumber
                of
            
            ExerciseWarrants
            
            PriceOutstanding
                at December 31, 2007
            
            
            11,298,750
            
            $
            2.71Granted
            
            
            100,000
            
            $
            0.31Exercised
            
            
            -
            
            
            -Expired
            
            
            (13,793
            )
            $
            3.63Outstanding
                at June 30, 2008
            
            
            11,384,957
            
            $
            2.69




The
      warrants to acquire 100,000 shares of common stock were issued in conjunction
      with consulting agreements and were
      valued based on an exercise price of $0.31 per share, a risk free interest
      rate
      of 2.78%, a three year life, and a volatility of 98.53%.




16


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




**9.
      Subsequent Events**




In
      addition to shares issued subsequent to June 30, 2008 to the holders of the
      Company’s debentures as more fully disclosed in Note 5, the Company issued
      restricted stock grants to employees totaling 228,986 shares of common stock
      that were valued at $39 and to a non-employee for services totaling 294,118
      shares of common stock that were valued at $50.





See
      also
      Note 6 regarding release of restricted cash.





On
      July
      15, 2008, the Company completed a $1.0 million secured financing for its
      hardware business. The financing allows for the Company to draw up to $1.0
      million to finance purchase order commitments associated with the sale of MP3
      and Video MP3 players with mass market retailers. The Company’s CTO, who is also
      a director and the beneficial owner of more than 10% of the Company’s common
      stock, is the lender. The financing carries a prime plus seven percent interest
      rate and matures on September 30, 2008. As part of the financing the Company
      also issued to its CTO 350,000 fully vested warrants with an exercise price
      of
      $0.17 per share.





On
      July
      22, 2008, the Company amended its asset purchase agreement with Eric’s Universe,
      and certain other agreements related to the purchase of EbaumsWorld, Inc. 
Under the amended agreements, the parties primarily agreed to: (1) change the
      performance earn out whereby potential cash earn-outs of up to $1.67 million
      in
      cash upon completion of projects have been replaced by payments of a total
      of
      $0.4 million in cash over five months and a potential payments of $1.01 million
      in cash or stock upon attainment of business and financial targets, and (2)
      change the Financial Earnout  - whereby potential earn out payments of up
      to $27.5 million in cash and stock based primarily on website traffic metrics
      for ebaumsworld.com through 2009 have been replaced to potential earn out
      payments of up to $32.7 million in cash and stock based on growing cash flows
      of
      the all the managed websites over certain levels for the years ended
      2012.





17




ITEM
      2-
      Management's Discussion and Analysis of
      Financial Condition and Results of Operations





Forward-looking
      statements in this Quarterly Report on Form 10-Q, including without limitation,
      statements related to our plans, strategies, objectives, expectations,
      intentions and adequacy of resources, are made pursuant to the safe harbor
      provisions of the Private Securities Litigation Reform Act of 1995. Investors
      are cautioned that such forward-looking statements involve risks and
      uncertainties including without limitation the following: (i) our plans,
      strategies, objectives, expectations and intentions are subject to change at
      any
      time at our discretion; (ii) our plans and results of operations will be
      affected by our ability to manage growth; and (iii) other risks and
      uncertainties indicated from time to time in our filings with the Securities
      and
      Exchange Commission.




In
      some
      cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” or ‘‘continue’’ or the
      negative of such terms or other comparable terminology. Although we believe
      that
      the expectations reflected in the forward-looking statements are reasonable,
      we
      cannot guarantee future results, levels of activity, performance, or
      achievements. Moreover, neither we nor any other person assumes responsibility
      for the accuracy and completeness of such statements. Readers are cautioned
      not
      to place undue reliance on these forward-looking statements, which speak only
      as
      of the date hereof. We are under no duty to update any of the forward-looking
      statements after the date of this Report.




**Corporate
      History**





Handheld
      Entertainment, Inc., was formed in February 2003 as a California corporation.
      On
      February 10, 2006 we merged with a wholly-owned subsidiary of Vika Corp., a
      Delaware inactive publicly held corporation, with Handheld Entertainment, Inc.
      (the “Subsidiary”) as the surviving entity and wholly-owned subsidiary of Vika
      Corp. We then changed the name of Vika Corp. to Handheld Entertainment, Inc.
      and
      the name of the subsidiary to HHE Corp. On April 12, 2006 we merged the
      Subsidiary into Handheld Entertainment, Inc. The above transactions were
      accounted for as a recapitalization of Handheld Entertainment, Inc., the
      California corporation. All references to “us”, “we” “our” or “the Company”
refer to the recapitalized entity, Handheld Entertainment Inc. and all
      historical operations in the accompanying financial statements are those of
      Handheld Entertainment, Inc., as recapitalized.





On
      August
      14, 2006 we affected a 1.45 for 1 reverse split of our issued and outstanding
      common stock. All share and per share data in the accompanying financial
      statements have been retroactively changed to account for the recapitalization
      and reverse split.





On
      October 31, 2007, we changed our name to “ZVUE Corporation” from “Handheld
      Entertainment, Inc.”





**Overview**




Our
      mission is to provide 18-35 year olds with digital entertainment both online
      and
      offline. The ZVUE Popsauce Network of websites provides our demographic with
      compelling online entertainment, such as commercial and user generated video,
      games, images and other forms of online entertainment. Our ZVUE Popsauce
      Network group works with content partners to bundle consumer electronics
      products with desirable content and then sell them in retail distribution.
      Our
      library of video content comes to us from both our network of user-generated
      video sites, which house many hundreds of thousands of videos that are created
      by users, and our commercial content providers who have contracted with us
      to
      provide us with commercially produced videos. We have acquired eBaumsWorld.com,
      PutFile.com, Dorks.com, HolyLemon.com, FunMansion.com, YourDailyMedia.com,
      and
      UnOriginal.co.uk and we have built ZVUE.com, our commercial web site. Our
      commercial content is supplied by many commercial content providers, including
      Sony BMG Music Entertainment, Warner Music Group, Showtime, International
      Marketing Group, National Lampoon, Comedy Time, Canadian Broadcasting
      Corporation and others. Our business model is to aggregate both commercial
      and
      user-generated content with a focus on humor, extreme sports and music videos
      and monetize the resulting traffic to our websites by selling pre & post
      roll, video overlay, skyscraper and banner ads.




18





In
      addition to our on-line media business, our ZVUE Products group sources, bundles
      and sells portable media devices which are sold in mass market distribution
      under our ZVUE brand. We manufacture products that are value priced and focus
      on
      price points below $99 per unit with the bulk of our units selling at retail
      prices below $50 per unit. We source our products through select OEM
      manufacturers, bundle them with top-tier content from our content providers
      and
      sell them through established retail distribution channels, creating a scalable
      and relatively low-risk model for our product business. We believe that this
      product business, together with the professional and user-generated content
      available online on the ZVUE Network, gives us an established and diversified
      platform from which we may continue to grow and capture new
      opportunities.





During
      the six months ended June 30, 2008, we launched our ZVUE Spirit player, a
      patriotic-themed mp3 player pre-loaded with classic, popular patriotic-themed
      songs from leading popular artists. The ZVUE Spirit was the first in a series
      of
      planned value-based handheld players featuring the latest in product design
      pre-packaged with compelling special-themed digital content from leading content
      providers. Subsequent to June 30, 2008, the
      Spirit player was followed by our Journey, preloaded with their new album
“Revelation” that reached the retail market place in July 2008. The Journey
      player is to be followed by our Elvis player, an MP4 video player with video
      clips of Elvis Presley and the Solonge player, preloaded with her album
“Sol-Angel & the Haldley Street Dreams.” These players are slated to hit the
      retail market in August 2008 and are being sourced entirely through OEM
      manufacturing relationships while being designed and marketed by the ZVUE
      Products team.




Our
      ZVUE
      devices have been designed to be compatible with virtually all formats of
      content ranging from “digital rights management” protected commercial content to
      our user-generated content from our network of web sites.





**Critical
      Accounting Policies and Estimates:**





Those
      material accounting policies that we believe are the most critical to an
      investor’s understanding of our financial results and condition are discussed
      below. Five of these policies, discussed immediately below, are particularly
      important to the portrayal of our financial position and results of operations
      and require the application of significant judgment by our management to
      determine the appropriate assumptions to be used in the determination of certain
      estimates.





**Impairment
      of Long-Lived Assets**





We
      evaluate our long-lived assets and intangible assets for impairment whenever
      events or change in circumstances indicate that the carrying amount of such
      assets may not be recoverable. Recoverability of assets to be held and used
      is
      measured by a comparison of the carrying amount of the asset to the future
      net
      undiscounted cash flows expected to be generated by the asset. If such assets
      are considered to be impaired, the impairment to be recognized is the excess
      of
      the carrying amount over the fair value of the asset.





**Goodwill
      and Intangibles**





We
      account for goodwill in a purchase business combination as the excess of the
      cost over the fair value of net assets acquired. Amortization of intangible
      assets, if applicable, occurs over their estimated useful lives. Statement
      of
      Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
      ("SFAS 142") requires testing goodwill for impairment on an annual basis (or
      interim basis if an event occurs that might reduce the fair value of a reporting
      unit below its carrying value). We conduct the annual review during the fourth
      quarter of the calendar year unless we become aware of a triggering event which
      would cause us to perform the analysis at an earlier date.




19


**Revenue
      Recognition**





**Product
      Sales**





Revenue
      is recognized when persuasive evidence of an arrangement exists (generally
      a
      purchase order), product has been shipped, the sale price is fixed and
      determinable, and collection of the resulting account is reasonably assured.
      Our
      revenue is primarily derived from sales of personal media players to retailers.
      We record the associated revenue at the time of the sale net of estimated
      returns.





We
      follow
      the guidance of Emerging Issues Task Force (EITF) Issue 01-9 "Accounting for
      Consideration Given by a Vendor to a Customer" and (EITF) Issue 02-16
      "Accounting By a Customer (Including a Reseller) for Certain Considerations
      Received from Vendors." Accordingly, any incentives received from vendors are
      recognized as a reduction of the cost of products. Promotional products given
      to
      customers or potential customers are recognized as a cost of sales. Cash
      incentives provided to our customers are recognized as a reduction of the
      related sale price, and, therefore, are a reduction in sales.





**Advertising
      Revenue**





Revenue
      from advertisement sales (“ad sales”) includes amounts charged to customers for
      advertisements placed on our web sites. Advertising revenues are recognized
      in
      the period when the advertisements are placed on the web site. In accordance
      with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus
      Net as an Agent,” the revenue derived from these arrangements that involve the
      use of third party advertising agencies where the Company is the primary obligor
      and has the risks and rewards of ownership are reported at the gross amount
      of
      the advertising revenue, with agency commissions and ad serving fees being
      reported as cost of revenues. For arrangements where the Company sells direct
      to
      advertisers or sells through third parties that have significant control over
      the sales process, the Company recognizes as revenue only the net proceeds
      it
      receives.





**Reserve
      for Sales Returns**





Our
      return policy generally allows our end users and retailers to return purchased
      products for refund or in exchange for new products within 90 days of end user
      purchase. We estimate a reserve for sales returns and record that reserve amount
      as a reduction of sales and as a sales return reserve liability.





**Stock
      Based Awards**





The
      Company accounts for share-based compensation under SFAS 123R and recognizes
      the
      fair value of stock awards on a straight-line basis over the requisite service
      period of the award.





Stock-based
      compensation expense from the issuance of stock options recognized under SFAS
      123R for the three months ended June 30, 2008 and 2007 was $27,000 and $71,000,
      respectively, and was $152,000 and $176,000 for the six months ended June 30,
      2008 and 2007, respectively.





As
      of
      June 30, 2008, the aggregate stock compensation remaining to be amortized to
      expenses was $210,000. The Company expects this stock compensation balance
      to be
      amortized as follows: $55,000 during the remainder of 2008; $82,000 during
      2009;
      $71,000 during 2010, and $2,000 during 2011. The expected amortization reflects
      only outstanding stock awards as of June 30, 2008. In addition, we recognized
      $483,000 and $117,000 of share based expense from the current and past issuance
      of restricted stock to employees and non-employees for the three months ended
      June 30, 2008 and 2007, respectively, and $1,008,000 and $407,000 for the six
      months ended June 30, 2008 and 2007, respectively. The Company expects to
      continue to issue share-based awards to our employees and non-employees in
      future periods.





The
      full
      impact of SFAS 123R in the future is dependent upon, among other things, the
      timing of when the Company hires additional employees, the effect of new
      long-term incentive strategies involving stock awards in order to continue
      to
      attract and retain employees, the total number of stock awards granted, the
      fair
      value of the stock awards at the time of grant and the tax benefit that we
      may
      or may not receive from stock-based expenses. Additionally, the application
      of
      SFAS 123R requires the use of an option-pricing model to determine the fair
      value of stock option awards. This determination of fair value is affected
      by
      our stock price as well as assumptions regarding a number of highly complex
      and
      subjective variables. These variables include, but are not limited to, our
      expected stock price volatility over the term of the awards.




20





The
      following tables set forth selected data for each of the periods indicated
      and
      is in
      thousands .
      All
      data is unaudited.




Three
                Months Ended
            
            Three
                Months EndedJune
                30, 2008
            
            June
                30, 2007%
                of
            
            
            
            %
                of
            
            ChangeAmount
            
            Revenue
            
            Amount
            
            Revenue
            
            Amount
            
            PercentRevenues,
                netProduct
                sales, net
            
            $
            861
            
            
            50
            %
            $
            249
            
            
            78
            %
            $
            612
            
            
            246
            %Advertising
            
            
            876
            
            
            50
            %
            
            70
            
            
            22
            %
            
            806
            
            
            1,151
            %Total
                revenue, net
            
            
            1,737
            
            
            100
            %
            
            319
            
            
            100
            %
            
            1,418
            
            
            445
            %Cost
                of revenuesProduct
                sales
            
            
            1,199
            
            
            69
            %
            
            283
            
            
            89
            %
            
            (916
            )
            
            -324
            %Advertising
            
            
            255
            
            
            15
            %
            
            89
            
            
            28
            %
            
            (166
            )
            
            -187
            %Total
                cost of revenues
            
            
            1,454
            
            
            84
            %
            
            372
            
            
            117
            %
            
            (1,082
            )
            
            -291
            %Gross
                profit (loss)
            
            
            283
            
            
            16
            %
            
            (53
            )
            
            -17
            %
            
            336
            
            
            -634
            %Operating
                expensesResearch
                and development
            
            
            121
            
            
            7
            %
            
            168
            
            
            53
            %
            
            47
            
            
            28
            %Sales
                and marketing
            
            
            908
            
            
            52
            %
            
            803
            
            
            252
            %
            
            (105
            )
            
            -13
            %General
                and administrative
            
            
            2,152
            
            
            124
            %
            
            1,099
            
            
            345
            %
            
            (1,053
            )
            
            -96
            %Amortization
                of intangible website costs
            
            
            2,329
            
            
            134
            %
            
            989
            
            
            310
            %
            
            (1,340
            )
            
            -135
            %Total
                operating expenses
            
            
            5,510
            
            
            317
            %
            
            3,059
            
            
            959
            %
            
            (2,451
            )
            
            -80
            %Operating
                loss
            
            
            (5,227
            )
            
            -301
            %
            
            (3,112
            )
            
            -976
            %
            
            (2,115
            )
            
            -68
            %Non-operating
                income (expense)Interest
                income
            
            
            13
            
            
            1
            %
            
            20
            
            
            6
            %
            
            (7
            )
            
            -35
            %Interest
                expense
            
            
            (2,906
            )
            
            -167
            %
            
            (19
            )
            
            -6
            %
            
            (2,887
            )
            
            n/aTotal
                non-operating income (expense)
            
            
            (2,893
            )
            
            -166
            %
            
            1
            
            
            0
            %
            
            (2,894
            )
            
            n/aNet
                loss
            
            $
            (8,120
            )
            
            -467
            %
            $
            (3,111
            )
            
            -975
            %
            $
            (5,009
            )
            
            -161
            %





21




Six
                Months Ended
            
            Six
                Months EndedJune
                30, 2008
            
            June
                30, 2007%
                of
            
            
            
            %
                of
            
            ChangeAmount
            
            Revenue
            
            Amount
            
            Revenue
            
            Amount
            
            PercentRevenues,
                netProduct
                sales, net
            
            $
            882
            
            
            34
            %
            $
            564
            
            
            80
            %
            $
            318
            
            
            56
            %Advertising
            
            
            1,717
            
            
            66
            %
            
            145
            
            
            20
            %
            
            1,572
            
            
            1084
            %Total
                revenue, net
            
            
            2,599
            
            
            100
            %
            
            709
            
            
            100
            %
            
            1,890
            
            
            267
            %Cost
                of revenuesProduct
                sales
            
            
            1,200
            
            
            46
            %
            
            525
            
            
            74
            %
            
            (675
            )
            
            -129
            %Advertising
            
            
            449
            
            
            17
            %
            
            184
            
            
            26
            %
            
            (265
            )
            
            -144
            %Total
                cost of revenues
            
            
            1,649
            
            
            63
            %
            
            709
            
            
            100
            %
            
            (940
            )
            
            -133
            %Gross
                profit
            
            
            950
            
            
            37
            %
            
            -
            
            
            0
            %
            
            950
            
            
            n/aOperating
                expensesResearch
                and development
            
            
            309
            
            
            12
            %
            
            340
            
            
            48
            %
            
            31
            
            
            9
            %Sales
                and marketing
            
            
            1,734
            
            
            67
            %
            
            1,453
            
            
            205
            %
            
            (281
            )
            
            -19
            %General
                and administrative
            
            
            4,179
            
            
            161
            %
            
            2,588
            
            
            365
            %
            
            (1,591
            )
            
            -61
            %Amortization
                of intangible website costs
            
            
            4,659
            
            
            179
            %
            
            1,668
            
            
            235
            %
            
            (2,991
            )
            
            -179
            %Total
                operating expenses
            
            
            10,881
            
            
            419
            %
            
            6,049
            
            
            853
            %
            
            (4,832
            )
            
            -80
            %Operating
                loss
            
            
            (9,931
            )
            
            -382
            %
            
            (6,049
            )
            
            -853
            %
            
            (3,882
            )
            
            -64
            %Non-operating
                income (expense)Interest
                income
            
            
            50
            
            
            2
            %
            
            60
            
            
            8
            %
            
            (10
            )
            
            -17
            %Interest
                expense
            
            
            (5,798
            )
            
            -223
            %
            
            (42
            )
            
            -6
            %
            
            (5,756
            )
            
            n/aTotal
                non-operating income (expense)
            
            
            (5,748
            )
            
            -221
            %
            
            18
            
            
            2
            %
            
            (5,766
            )
            
            n/aNet
                loss
            
            $
            (15,679
            )
            
            -603
            %
            $
            (6,031
            )
            
            -851
            %
            $
            (9,648
            )
            
            -160
            %




**Results
      of Operations for the Three and Six Months Ended June 30, 2008 Compared to
      the
      Three and Six Months Ended June 30, 2007**





**Revenues**





Total
      net
      revenue increased from $0.3 million for the three months ended June 30, 2007
      to
      $1.7 million for the three months ended June 30, 2008. In addition net revenue
      increased from $0.7 million for the six months ended June 30, 2007 to $2.6
      million for the six months ended June 30, 2008.





Net
      revenue from product sales increased from $0.2 million for the three months
      ended June 30, 2007 to approximately $0.8 million for the three months ended
      June 30, 2008. Revenue for both the three and six month periods ended June
      30,
      2008 was primarily driven by the sale of approximately 39,000 Spirit players
      to
      Wal-Mart and 1,000 players to other customers, offset by $0.1 million of return
      allowances. Revenue for the six months ended June 30, 2007 was primarily from
      the sale of our Model 250 also to Wal-Mart of $0.8 million, offset by return
      allowances of $0.2 million. Wal-Mart therefore represents our single most
      important customer, the loss of which would have a material adverse effect
      on
      future results.




22





Advertising
      revenues increased from $0.1 million for the three months ended June 30, 2007
      to
      $0.9 million for the three months ended June 30, 2008 and increased from $0.1
      million for the six months ended June 30, 2007 to $1.7 million for the six
      months ended June 30, 2008. The increase in revenue was primarily derived from
      advertisements served on our eBaumsworld.com web site that was acquired in
      October 2007.





**Cost
      of Revenues**





Cost
      of
      revenues increased from a total of $0.4 million for the three months ended
      June
      30, 2007 to $1.5 million for the three months ended June 30, 2008 and from
      $0.7
      million for the six months ended June 30, 2007 to $1.6 million for the six
      months ended June 30, 2008.





Cost
      of
      revenues associated with product sales increased from $0.3 million for the
      three
      months ended June 30, 2007 to $1.2 million for the three months ended June
      30,
      2008 and from $0.5 million for the six months ended June 30, 2007 to $1.2
      million for the six months ended June 30, 2008. The increase in cost of revenues
      reflects the sale of a total of approximately 41,200 players during the current
      year. Of these players, approximately 40,000 were comprised of our Zvue Spirit
      player. The results of the three and six months ended June 30, 2008 reflect
      an
      inventory write-down of $0.4 million for prior players produced. All of the
      Spirit players were manufactured for us by a single factory in China. Production
      scheduled for delivery in the U.S. during our quarter ending September 30,
      2008
      will also include this factory plus one other of an approximate 59,800 players.
      The Company is therefore dependent on two factories to produce its players.
      The
      cost of revenue for the prior year period was all related to the sale of our
      Model 250 player that was manufactured by a single factory in China. The Company
      no longer sources its manufacturing to this factory.





Cost
      of
      revenue associated with advertising increased from $89,000 for the three months
      ended June 30, 2007 to $255,000 for the three months ended June 30, 2008 and
      from $184,000 for the six months ended June 30, 2007 to $449,000 for the six
      months ended June 30, 2008. The increase between years reflects commissions
      earned by our contract sales agent.





**Research
      and Development**





Research
      and development expenses were comparable at $121,000 for the three months ended
      June 30, 2008 and $168,000 for the three months ended June 30, 2007. These
      costs
      were also comparable for the six months ended June 30, 2008 of $309,000 and
      $340,000 for the six months ended June 30, 2007.





**Sales
      and Marketing**





Sales
      and
      marketing expenses, which include marketing and sales efforts, as well as all
      efforts related to our content business, increased from $803,000 for the three
      months ended June 30, 2007 to $908,000 for the three months ended June 30,
      2008
      and increased from $1,453,000 for the six months ended June 30, 2007 to
      $1,734,000 for the six months ended June 30, 2008. The increase between periods
      is primarily attributable to an increase in costs to maintain and promote the
      websites acquired during 2007.





**General
      and Administrative**





General
      and administrative costs, which consist primarily of salaries and benefits
      for
      employees, professional advisor fees, rent, web hosting fees, and other general
      operating expenses, increased from $1,099,000 for the three months ended June
      30, 2007 to $2,152,000 for the three months ended June 30, 2008 and from
      $2,588,000 for the six months ended June 30, 2007 to $4,179,000 for the six
      months ended June 30, 2008. The increase for the six months ended June 30,
      2007
      compared to the six months ended June 30, 2008 reflect cash related expenses
      of
      $525,000 related to managing our eBaumsworld.com web site that was purchased
      in
      October 2007. In addition, non-cash expenses attributable to share-based
      compensation increased from $583,000 for the six months ended June 30, 2007
      to
      $1,179,000 for the six months ended June 30, 2008.




23





**Amortization
      of Intangible Website Cost**





Amortization
      of non-cash intangible website costs increased from $989,000 for the three
      months ended June 30, 2007 to $2,329,000 for the three months ended June 30,
      2008 and from $1,668,000 for the six months ended June 30, 2007 to $4,659,000
      for the six months ended June 30, 2008. The increase between years is primarily
      attributable to amortizing the value of our eBaumsworld.com web site of
      $1,309,000 for the three months ended June 30, 2008 and $2,618,000 for the
      six
      months ended June 30, 2008. No comparable amounts were recorded in the prior
      year as this website was purchased in October 2007. In addition, the increase
      was attributable to the February 2007 acquisition of Putfile.com for which
      we
      incurred amortization expenses of $589,000 and $954,000 for the three and six
      months ended June 30, 2007 and $589,000 and $1,179,000 for the three and six
      months ended June 30, 2008.





**Interest
      Expense**





Interest
      expense increased from essentially none during the three and six month periods
      ended June 30, 2007 to $2,906,000 and $5,798,000 for the three and six month
      periods ended June 30, 2008. The current year results include the non-cash
      amortization of debt discount associated with the issuance of convertible
      debentures in October 2007 of $2,342,000 and $4,682,000 for the three and six
      month periods ended June 30, 2008. During the six months ended June 30, 2008,
      no
      cash payments for interest were made.




Restricted
      Cash





Subsequent
      to June 30, 2008, the Company entered into a standstill agreement with its
      senior secured convertible debenture holder and released $1,500,000 of cash
      then
      held in a restricted escrow account. In consideration of such payment, the
      security holder agreed to defer monthly installment payments that were scheduled
      for July, August and September 2008 until the securities maturity. The Company’s
      $1,500,000 payment under the standstill agreement will be applied to the payment
      of accrued interest of $257,000, payment of $1,130,000 of the outstanding
      principal and payment of a $113,000 of redemption premium. The security holder
      also agreed that during the standstill period, neither it nor its affiliates
      will sell shares of the Company’s common stock (1) at prices less than $0.30 per
      share, or (2) in excess of 18% of the aggregate daily trading volume of the
      common stock, at prices of between $0.30 and $0.50. The agreement provides
      no
      limitation on sales of common stock at prices of greater than $0.50 per share.
      Should the security holder breach the trading limitations, then the trading
      restriction and payment deferral would be extended for an additional period
      of
      one or more months, depending on the extent of such breach. In addition, the
      senior secured convertible debenture holder agreed to: (1) increase the limit
      for separate asset-based financing related to the Company’s product business to
      $2.5 million from $0.5 million and (2) consent to the sale of no less than
      $2.0
      million of certain assets or businesses of the Company to occur no later than
      September 30, 2008.




Liquidity
      and Capital Resources





At
      June
      30, 2008, we had a cash balance of $1,023,000. Net cash used by operations
      was
      $2,980,000 for the six months ended June 30, 2008 and $6,191,000 for the six
      months ended June 30, 2007. The net cash used by operations for the six months
      ended June 30, 2008 was used to fund the net loss of $15,679,000 and the
      increase in inventories of $980,000, offset by $11,286,000 of non-cash charges
      and a $1,729,000 reduction in accounts receivable. The reduction in our
      receivables was primarily attributable to an approximate $2,400,000 payment
      from
      Wal-Mart. The net cash used in operations for the six months ended June 30,
      2007
      was to fund the net loss of $6,031,000 and a decrease of accounts payable and
      accrued liabilities of $2,882,000, offset by non-cash charges of
      $2,312,000.





Net
      cash
      used by investing activities was $724,000 for the six months ended June 30,
      2008
      and $1,544,000 for the six months ended June 30, 2007. The current year amounts
      include an earn-out payment of $417,000 related to the purchase of the
      eBaumsworld.com web site and approximately $239,000 of installment payments
      for
      the purchase of other websites. The amounts for the prior year include $611,000
      for the purchase of equipment, and $583,000 related to the purchase of Putfile,
      Ltd and the UnOriginal.co.uk website as well as a $350,000 deposit related
      to
      the eventual acquisition of eBaumsworld.com.




24





Net
      cash
      provided/(used) by financing activities was ($39,000) for the six months ended
      June 30, 2008 compared to $5,492,000 for the six months ended June 30, 2007.
      The
      net cash used by financing activities during the current period included $79,000
      received from the exercise of stock options, offset by $103,000 of costs
      associated with the 2007 issuance of convertible debentures. The net cash
      provided by financing activities during the six months ended June 30, 2007
      of
      $5,492,000 include $3,830,000 from the January 2007 private placement of common
      stock, offset by $89,000 of offering costs and approximately $250,000 from
      the
      additional sale of common stock to the Company’s CTO. The sale of unsecured
      notes in June 2007 resulted in cash proceeds of $1,425,000, offset by $82,000
      of
      offering costs. In addition, the Company received $158,000 from the exercise
      of
      stock options.




With
        our
        cash on hand, recent cost savings measures, projected future cash flows
        including management of working capital, purchase order financing including
        an
        agreement with a related party finalized in July 2008, and importantly assuming
        were are able to service our convertible debt obligations which will likely
        require us to modify or extend the current standstill agreement on our
        convertible debt obligations, we believe that we have sufficient funds and
        anticipated future cash flows to continue in operation at least through the
        end
        of 2008 On July 1, 2008, the Company modified its senior secured debt with
        a
        short-term standstill agreement that expires September 30, 2008. The Company
        will seek further revisions to its senior secured debt or extensions of the
        standstill agreement with its senior secured lender to avoid potential default
        under its senior secured notes and other obligations. There can be no assurance
        we will be able to make the necessary payments on such current obligations
        when
        due or succeed in getting further modifications or extensions of the standstill
        agreement. The Company may need to issue additional equity or debt securities.
        The issuance of equity securities would likely be dilutive to existing
        shareholders and may involve preferential rights over common shareholders.
        Debt
        financing, with or without equity conversion features, may involve restrictive
        covenants. The forecast that our financial resources will last through that
        period is a forward-looking statement that involves significant risks and
        uncertainties.


**Recent
      Accounting Pronouncements**





***FASB
      Statement No. 141(R),"Business Combinations", (“SFAS
      141(R)”)*** :
      In
      December 2007, the Financial Accounting Standards Board (FASB) issued No. 141R
      which will change the accounting for and reporting of business combination
      transactions. The most significant changes in the accounting for business
      combinations under SFAS 141(R) include: (1) valuation of any acquirer shares
      issued as purchase consideration will be measured at fair value as of the
      acquisition date; (2) contingent purchase consideration, if any, will generally
      be measured and recorded at the acquisition date, at fair value, with any
      subsequent change in fair value reflected in earnings rather than through an
      adjustment to the purchase price allocation; (3) acquired in-process research
      and development costs, which have historically been expensed immediately upon
      acquisition, will now be capitalized at their acquisition date fair values,
      measured for impairment over the remaining development period and, upon
      completion of a successful development project, amortized to expense over the
      asset's estimated useful life; (4) acquisition related costs will be expensed
      as
      incurred rather than capitalized as part of the purchase price allocation;
      and
      (5) acquisition related restructuring cost accruals will be reflected within
      the
      acquisition accounting only if certain specific criteria are met as of the
      acquisition date; the prior accounting convention, which permitted an acquirer
      to record restructuring accruals within the purchase price allocation as long
      as
      certain, broad criteria had been met, generally around formulating, finalizing
      and communicating certain exit activities, will no longer be permitted. SFAS
      141(R) is effective for reporting periods beginning on or after December 15,
      2008. Earlier adoption is not permitted. The Company anticipates that adoption
      of this pronouncement will significantly impact how the Company accounts for
      business combination transactions consummated after the effective date, in
      the
      various areas outlined above.





***SFAS
      No. 160,*** **“Non-Controlling
      Interests in Consolidated Financial Statements” (“SFAS
      160”):** In
      December 2007, the FASB issued SFAS No. 160, this Statement amends Accounting
      Research Bulletin No. 51, “Consolidated Financial Statements” to establish
      accounting and reporting standards for the non-controlling interest in a
      subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is required
      to
      be adopted simultaneously with SFAS 141R and is effective for reporting periods
      on or after December 15, 2008. An earlier adoption is not permitted. Currently,
      the Company does not have any non-controlling interest in our subsidiary and
      accordingly, the adoption of SFAS 160 is not expected to have a material impact
      on our consolidated financial position, cash flows or results of operations.





***SFAS No. 159,
      The Fair Value Option for Financial Assets and Financial Liabilities
      (“SFAS 159”):*** In
      February 2007, the FASB issued SFAS 159 which permits entities to choose to
      measure many financial instruments and certain other items at fair value that
      are not currently required to be measured at fair value. The adoption of
      SFAS 159 on January 1, 2008 did not impact our financial position,
      cash flows, and results of operations.




25





***Statement
      No. 157, “Fair Value Measurements” (“SFAS No. 157”):*** In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value, and enhances fair value measurement disclosure. In February 2008,
      the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement
      No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
      Address Fair Value Measurements for Purposes of Lease Classification or
      Measurement under Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of
      FASB Statement No. 157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove
      certain leasing transactions from its scope. FSP 157-2 delays the effective
      date
      of SFAS No. 157 for all non-financial assets and non-financial liabilities,
      except for items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis (at least annually), until the beginning of
      the
      first quarter of fiscal 2010. The measurement and disclosure requirements
      related to financial assets and financial liabilities are effective for the
      Company beginning in the first quarter of 2009. The adoption of SFAS No. 157
      for
      financial assets and financial liabilities will not have a significant impact
      on
      the Company’s consolidated financial statements. However, the resulting fair
      values calculated under SFAS No. 157 after adoption may be different from the
      fair values that would have been calculated under previous guidance. The Company
      is currently evaluating the impact that SFAS No. 157 will have on the Company’s
      consolidated financial statements when it is applied to non-financial assets
      and
      non-financial liabilities beginning in the first quarter of 2010.





**ITEM
      4T - Controls and Procedures**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our chief executive officer and interim chief
      financial officer, of the effectiveness of the design and operation of our
      disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’).
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      an
      issuer in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the issuer’s management, including its principal
      executive and principal financial officers, or persons performing similar
      functions, as appropriate to allow timely decisions regarding required
      disclosure. Based upon our evaluation, our chief executive officer and interim
      chief financial officer concluded that our disclosure controls and procedures
      are effective, as of the period ended June 30, 2008, in ensuring that material
      information that we are required to disclose in reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the Securities and Exchange Commission rules
      and
      forms.





There
      were no changes in our internal control over financial reporting during the
      six
      months ended June 30, 2008 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.




26


**PART
      II - OTHER INFORMATION**





**ITEM
      1 - Legal Proceedings**




On
      December 21, 2007, Edward John Kowal filed a complaint in the United States
      District Court, Western District of Washington, against us seeking to
      enforce the bonus provisions of his employment contract and receive bonus
      compensation based on the projected value of the eBaums World, Inc. acquisition
      completed in October 2007 in the amount of approximately $2.6 million plus
      legal
      fees (Edward
      John Kowal v. ZVUE Corporation, Case No. 07-2-40332-9) . We
      dispute the
      facts of the case and  intend
      to
      vigorously defend ourselves. A
      trial
      date has been set for March 2, 2009.





**ITEM
      6 - Exhibits**




The
      following exhibits are filed as part of, or incorporated by reference into
      this
      Report:




**Number**
            
            **Exhibit
                Title****31.1**
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002**31.2**
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002**32.1**
            
            Certification
                of Chief Executive Officer & Chief Financial Officer Pursuant to
                Section 906 of the Sarbanes-Oxley Act of
                2002





27





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.


**ZVUE
              CORPORATION****Date:
              August 14, 2008**
            **By:**
            **/s/
              Jeff
              Oscodar**Jeff
                Oscodar
              Chief
                Executive Officer & President
              (Principal
                Executive Officer) **Date:
              August 14, 2008**
            **By:**
            **/s/
              Thomas
              Hillman**Thomas
                Hillman
              Interim
                Chief Financial Officer
              (Principal
                Financial and Accounting
                Officer)


28




**INDEX
      TO EXHIBITS:**




**Number**
            
            **Exhibit
                Title****31.1**
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002**31.2**
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002**32.1**
            
            Certification
                of Chief Executive Officer & Chief Financial Officer Pursuant to
                Section 906 of the Sarbanes-Oxley Act of
                2002





29