**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 **September
      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 incorporation or organization)
              
              (I.R.S.
                  Employer 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 x No 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 o No x





As
      of
      November 11, **** 2008,
      there were 44,550,705 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 September 30, 2008 (unaudited)
                    and
                    December 31, 2007
                3Condensed
                    Consolidated Statements of Operations for the three months and
                    nine months
                    ended September 30, 2008 and 2007 (unaudited)
                4Condensed
                    Consolidated Statements of Cash Flows for the three months and
                    nine months
                    ended September 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**
                19**ITEM
                    4T: Controls and Procedures**
                29**PART
                    II - OTHER INFORMATION****ITEM
                    1: Legal Proceedings**
                29**ITEM
                    6: Exhibits**
                30**Signatures**
                31




2


**PART
      I. FINANCIAL INFORMATION**


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


**ZVUE
      Corporation**


**Condensed
      Consolidated Balance Sheets**


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


September
                30,
            
            December
                31,2008
            
            2007(unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            1,623
            
            $
            4,766Accounts
                receivable, net
            
            
            468
            
            
            3,928Deferred
                income taxes, current
            
            
            481
            
            
            483Inventory,
                net
            
            
            -
            
            
            360Prepaid
                expenses and other current assets
            
            
            89
            
            
            624**Total
                current assets**
            
            
            2,661
            
            
            10,161Fixed
                assets, net
            
            
            305
            
            
            466Restricted
                cash
            
            
            -
            
            
            1,510Intangible
                web site assets, net
            
            
            14,768
            
            
            23,243Goodwill
            
            
            4,733
            
            
            3,973Deferred
                income taxes, non-current
            
            
            149
            
            
            461Other
                non-current assets
            
            
            520
            
            
            659**Total
                assets**
            
            $
            23,136
            
            $
            40,473**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Accounts
                payable and accrued liabilities
            
            $
            3,112
            
            $
            5,432Accounts
                payable, related parties
            
            
            143
            
            
            83Line
                of credit, related party
            
            
            1,327
            
            
            1,327Deferred
                income tax liability, current
            
            
            481
            
            
            483Junior
                secured convertible debentures (net of debt discount of
                $1,465and
                $1,304 as of September 30, 2008 & December 31, 2007,
                respectively)
            
            
            234
            
            
            79Senior
                secured convertible debenture (net of debt discount of
                $5,787and
                $6,034 as of September 30, 2008 & December 31, 2007,
                respectively)
            
            
            1,241
            
            
            355**Total
                current liabilities**
            
            
            6,538
            
            
            7,759Long-term
                convertible note
            
            
            800
            
            
            800Junior
                secured convertible debentures (net of debt discount of
                $2,076and
                $3,495 as of September 30, 2008 & December 31, 2007,
                respectively)
            
            
            331
            
            
            205Senior
                secured convertible debenture (net of debt discount of
                $10,186and
                $15,688 as of September 30, 2008 & December 31, 2007
                respectively)
            
            
            2,185
            
            
            923Total
                long-term debt, net of current portion
            
            
            3,316
            
            
            1,928Deferred
                income tax liability, non-current
            
            
            149
            
            
            461**Total
                liabilities**
            
            
            10,003
            
            
            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,37,503,825
                issued and outstanding at September 30, 2008 and20,190,262
                issued and outstanding at December 31, 2007
            
            
            4
            
            
            2Additional
                paid-in capital
            
            
            78,786
            
            
            71,541Accumulated
                deficit
            
            
            (65,657
            )
            
            (41,218
            )**Total
                shareholders’ equity**
            
            
            13,133
            
            
            30,325**Total
                liabilities and shareholders’ equity**
            
            $
            23,136
            
            $
            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
            
            Nine
                months endedSeptember
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007Revenues,
                netProduct
                sales, net
            
            $
            2,010
            
            $
            510
            
            $
            2,892
            
            $
            1,079Advertising
            
            
            1,044
            
            
            106
            
            
            2,761
            
            
            246Total
                revenue, net
            
            
            3,054
            
            
            616
            
            
            5,653
            
            
            1,325Cost
                of revenuesProduct
                sales
            
            
            2,140
            
            
            831
            
            
            3,340
            
            
            1,540Advertising
            
            
            231
            
            
            19
            
            
            680
            
            
            19Total
                cost of revenues
            
            
            2,371
            
            
            850
            
            
            4,020
            
            
            1,559Gross
                profit (loss)
            
            
            683
            
            
            (234
            )
            
            1,633
            
            
            (234
            )Operating
                expensesSales
                and marketing
            
            
            506
            
            
            789
            
            
            2,240
            
            
            2,242General
                and administrative (1)
            
            
            2,050
            
            
            1,915
            
            
            6,538
            
            
            4,843Amortization
                & impairment of intangible website costs
            
            
            3,818
            
            
            1,024
            
            
            8,477
            
            
            2,692Total
                operating expenses
            
            
            6,374
            
            
            3,728
            
            
            17,255
            
            
            9,777Operating
                loss
            
            
            (5,691
            )
            
            (3,962
            )
            
            (15,622
            )
            
            (10,011
            )Non-operating
                income (expense)Interest
                income
            
            
            2
            
            
            5
            
            
            52
            
            
            65Interest
                expense (1)
            
            
            (3,071
            )
            
            (231
            )
            
            (8,869
            )
            
            (273
            )Total
                non-operating income (expense)
            
            
            (3,069
            )
            
            (226
            )
            
            (8,817
            )
            
            (208
            )Net
                loss
            
            $
            (8,760
            )
            $
            (4,188
            )
            $
            (24,439
            )
            $
            (10,219
            )Net
                loss per share, basic and diluted
            
            $
            (0.25
            )
            $
            (0.24
            )
            $
            (0.88
            )
            $
            (0.62
            )Weighted
                average shares used in computingbasic
                and diluted net loss per share
            
            
            35,015,831
            
            
            17,584,600
            
            
            27,675,741
            
            
            16,481,502(1)Includes
                share-based awards as follows:General
                and administrative
            
            $
            458
            
            $
            885
            
            $
            1,636
            
            $
            1,469Interest
                expense
            
            
            52
            
            
            181
            
            
            52
            
            
            181$
            510
            
            $
            1,066
            
            $
            1,688
            
            $
            1,650See
                Notes to Unaudited Condensed Consolidated Financial
                Statements


4


**ZVUE
                Corporation****Condensed
                Consolidated Statements of Cash Flows****(in
                thousands)****(unaudited)**




Nine
                months endedSeptember
                30,2008
            
            2007Cash
                flows from operating activities:Net
                loss
            
            $
            (24,439
            )
            $
            (10,219
            )Adjustments
                to reconcile net loss to net cash used by operating
                activitiesDepreciation
                and amortization
            
            
            8,833
            
            
            2,853Debenture
                debt discount amortization
            
            
            7,023
            
            
            -Loss
                on disposal of fixed assets
            
            
            30
            
            
            9Bad
                debt expense
            
            
            99
            
            
            22Write-down
                of inventory
            
            
            459
            
            
            223Non-cash
                share-based awards
            
            
            1,688
            
            
            1,650Changes
                in operating assets and liabilitiesAccounts
                receivable, trade
            
            
            3,451
            
            
            (136
            )Accounts
                receivable from escrow account
            
            
            -
            
            
            90Prepaid
                expenses and other current assets
            
            
            573
            
            
            (211
            )Inventories
            
            
            (99
            )
            
            145Accounts
                payable and accrued liabilities
            
            
            (113
            )
            
            (2,479
            )Accounts
                payable due related parties
            
            
            60
            
            
            29Net
                cash used by operating activities
            
            
            (2,435
            )
            
            (8,024
            )Cash
                flows from investing activities:Cash
                paid for acquisitions
            
            
            (761
            )
            
            (1,227
            )Change
                in restricted cash
            
            
            1,560
            
            
            -Deferred
                acquisition costs
            
            
            (267
            )
            
            (869
            )Purchases
                of property and equipment
            
            
            (70
            )
            
            (153
            )Net
                cash provided (used) by investing activities
            
            
            462
            
            
            (2,249
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            -
            
            
            4,080Offering
                costs
            
            
            -
            
            
            (125
            )Short-term
                borrowing
            
            
            -
            
            
            1,425Short-term
                borrowings related parties
            
            
            750
            
            
            1,327Repayment
                short-term borrowings related parties
            
            
            (750
            )
            
            -Principal
                payment on debentures
            
            
            (1,131
            )
            
            -Debt
                issue costs
            
            
            (118
            )
            
            (171
            )Proceeds
                from exercise of stock options
            
            
            79
            
            
            250Net
                cash provided (used) by financing activities
            
            
            (1,170
            )
            
            6,786Net
                decrease in cash and cash equivalents
            
            
            (3,143
            )
            
            (3,487
            )Cash
                and cash equivalents at beginning of period
            
            
            4,766
            
            
            3,653Cash
                and cash equivalents at end of period
            
            $
            1,623
            
            $
            166Supplemental
                disclosure of cash flow information: Cash paid for
                interest
            
            $
            168
            
            $
            -Supplemental
                disclosure of non-cash investing and financing activities:Conversion
                of notes payable to common stock
            
            $
            -
            
            $
            1,618Common
                stock issued for acquisitions
            
            $
            -
            
            $
            6,900Installment
                payments due from acquisitions
            
            $
            -
            
            $
            975Value
                of common stock issued in lieu of cash payments for principal and
                interest
                on debentures
            
            $
            3,462
            
            
            -





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements


5




**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


**(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 interim financial statements do not
      include all disclosures required by generally accepted accounting principles.
      The results for the three and nine months ended September 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 September 30, 2008 of $65,657. 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.


6


**ZVUE
        Corporation**
 **Notes
        to Condensed Consolidated Financial Statements**
 September
        30, 2008
 **(in
        thousands, except per share amounts)**
 **(unaudited)**


With
        our
        cash on hand, recent cost savings measures, projected future cash flows
        including management of working capital, and assuming we are able to service
        our
        convertible debt obligations which will require us to seek a further
        modification to the current expired standstill agreement on our senior secured
        convertible debt, we believe that we have sufficient funds with anticipated
        future cash flows to continue in operation through the end of 2008. We have
        been
        able to modify our senior secured convertible debt with short-term standstill
        agreements, the most recent of which expired on October 31, 2008. We intend
        to
        seek further revisions to our senior secured convertible debt or extensions
        of
        the standstill agreement in order to avoid defaults, although without such
        we
        are in payment default under such loan, having not made the installment payment
        that was due on November 3, 2008.  There can be no assurance we will be
        able to make the necessary payments on our indebtedness obligations or succeed
        in obtaining further modifications or extensions. There can be no assurance
        that
        the holder of our senior secured convertible debt will not exercise its default
        remedies, including accelerating such debt and/or converting some portion
        thereof into our common stock at the default conversion price. In order to
        meet
        expected cash requirements to continue our operations in 2009, we will likely
        need to secure additional equity or debt financing and/or enter into strategic
        alliances with other companies or consider sales of assets or similar
        transactions.  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. Strategic alliances may also be dilutive
        to
        existing shareholders. In order to preserve our capital, we recently ceased
        efforts related to our digital media device business and terminated seven
        employees associated with such business and intend to focus our efforts on
        our
        web-related business. There can be no assurance that our efforts will be
        successful or that our financial resources will be adequate for us to continue
        in operation for the foreseeable future.


7


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


**(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.
      The Company had no inventory as of September 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


8





**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





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 :





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
      September 30, 2008, one customer accounted for 47% of gross accounts receivable
      before the allowance for doubtful accounts. As of September 30, 2008, the
      Company has no receivables from Wal-Mart, its largest customer.





For
      the
      nine months ended September 30, 2008, two customers accounted for 49% and 24%
      of
      net revenues. For the nine months ended September 30, 2007, two customers
      accounted for 49% and 29% of net revenues. In both time periods Wal-Mart was
      the
      primary customer. With the discontinuance of producing MP3 and related players,
      Wal-Mart will no longer be our significant customer which will have a material
      adverse effect on our revenues.





Through
      the quarter ended September 30, 2008, the Company
      outsourced the manufacturing of its products to two factories in China. As
      the
      Company has now ceased producing MP3 and related players, the Company is no
      longer dependent on these factories or other factories to produce its
      products.





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.




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


9


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





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.





**2.
      Accounts Receivable**





Accounts
      receivable, net consists of the following:





September
                30,
            
            December
                31,2008
            
            2007(unaudited)Accounts
                receivable
            
            $
            477
            
            $
            4,031Less:
                allowance for doubtful accounts
            
            
            (9
            )
            
            (103
            )Accounts
                receivable, net
            
            $
            468
            
            $
            3,928


The
        Company recorded bad debt expense of $99 for the nine months ended September
        30,
        2008 and $22 for the nine months ended September 30,
        2007.


10


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**


**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:


September
                30,
            
            December
                31,2008
            
            2007(unaudited)Intangible
                assets
            
            $
            27,942
            
            $
            27,942Accumulated
                amortization
            
            
            (13,174
            )
            
            (4,699
            )Intangible
                assets, net
            
            $
            14,768
            
            $
            23,243





Amortization
      for the nine months ended September 30, 2008 and 2007 was $8,476 and $2,692.
      The
      amortization for the period ending September 30, 2008 includes the write-off
      of
      $1,489 related to the Company’s Holylemon, Funmansion and Dorks websites as the
      Company has determined that these assets are impaired and plans on redirecting
      web traffic from those websites to one or more of its other websites during
      the
      remainder of its 2008 fiscal year.





Additions
      to intangible assets during the nine months ended September 30, 2007 of $7,071,
      $917 and $521 resulted from the acquisition of Putfile, Ltd., HolyLemon.com
      and
      UnOriginal.co.uk , respectively.





**4.
      Accounts Payable and Accrued Liabilities**





Accounts
      payable and accrued liabilities consist of the following:


September
                30,
            
            December
                31,2008
            
            2007(unaudited)Trade
                accounts payable
            
            $
            942
            
            $
            979Factories
                and content providers
            
            
            1,056
            
            
            1,238Payroll
                and benefits
            
            
            130
            
            
            679Acquisition
                related accruals
            
            
            66
            
            
            1,637Reserve
                for sales returns
            
            
            160
            
            
            206Accrued
                interest
            
            
            418
            
            
            321Accrued
                commissions and ad server fees
            
            
            -
            
            
            177All
                other
            
            
            340
            
            
            195Accounts
                payables and accrued liabilities
            
            $
            3,112
            
            $
            5,432







11


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





**5.
      Debt**





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





Accumulated
            
            ConvertibleDebt
            
            Amortization
                of
            
            Debt,
                net ofPrincipal
            
            Discount
            
            Debt
                Discount
            
            DiscountsConvertible
                4.9% note payable
            
            $
            800
            
            $
            0
            
            $
            0
            
            $
            800Senior
                secured convertible debenture
            
            
            19,399
            
            
            (23,000
            )
            
            7,027
            
            
            3,426Junior
                secured convertible debentures
            
            
            4,106
            
            
            (5,099
            )
            
            1,558
            
            
            565Total
            
            $
            24,305
            
            $
            (28,099
            )
            $
            8,585
            
            $
            4,791Less:
                current portionSenior
                secured convertible debenture
            
            $
            7,028
            
            $
            (5,787
            )
            
            
            
            $
            1,241Junior
                secured convertible debentures
            
            
            1,699
            
            
            (1,465
            )
            
            
            
            
            234$
            8,727
            
            $
            (7,252
            )
            
            
            
            $
            1,475Convertible
                debt, net of current portion
            
            $
            15,578
            
            
            
            
            
            
            
            $
            3,316





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 its 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
      so
      as not to own 10% or more of the Company’s issued and outstanding common stock.
      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.





On
      July
      1, 2008, the Company entered into a standstill agreement with its senior secured
      convertible debenture holder with both parties mutually agreeing to release
      $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 was
      applied to the payment of accrued interest of $257, payment of $1,130 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 would 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
      provided 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 quarter ended September
      30,
      2008, no businesses or assets of the Company were sold. On September 29, 2008,
      the agreement was amended to defer the October 2008 payment until the
      debenture’s maturity date and expired on October 31, 2008 without being renewed.
      The Company has made no further payments in cash or in stock to this


12





**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





security
      holder, nor has the security holder made demands for additional payments. Both
      parties are discussing further amendments to the underlying agreement as of
      this
      filing.





During
      the nine months ended September 30, 2008, the holders of our junior secured
      convertible debentures received a total 5,929,136 shares of our common stock
      in
      lieu of a cash payment due of $991 for principal and $302 for accrued interest.
      Of the 5,929,136 shares issued, 1,532,421 were issued to our Chief Technology
      Officer (CTO). In addition, in October 2008 the Company subsequently issued
      to
      the holders of our Junior secured convertible debentures 2,752,161 shares of
      our
      common stock that represented payment of $142 of principal and $25 of accrued
      interest and in November 2008, the Company issued an additional 2,480,024 shares
      of common stock that represented payment of $142 of principal and $27 of accrued
      interest. Of these shares, our CTO received 485,810 shares in October 2008
      and
      437,772 in November 2008.





The
      results of our operations for the nine months ended September 30, 2008 includes
      as a component of interest expense, non-cash charges related to amortized debt
      discount of $7,023 and $156 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
      September 30, 2008, the conditions to force a conversion have not been met.
      As
      of September 30, 2008, $31 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 September 30, 2008, $1,327 is outstanding and $92
      of
      interest is due under this agreement. Amounts borrowed under the agreement
      are
      due by March 1, 2009.





Secured
      Financing :





On
      July
      15, 2008, the Company completed a $1.0 million secured financing for its
      hardware business with an interest rate of 12%. The lender of the financing
      was
      the Company’s CTO, who is also a director and the beneficial owner of more than
      10% of the Company’s common stock. The Company borrowed and repaid $750 under
      the agreement and incurred interest and transaction charges of $35. The
      agreement expired on September 30, 2008 with no amounts owed. As part of the
      financing the Company also issued to its CTO 350,000 fully vested warrants
      with
      an exercise price of $0.1621 per share that were valued at $51 and charged
      to
      interest expense using the Black-Scholes model with an interest rate of 3.2%,
      a
      life of five years and volatility of 152%.





13


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





Debt
      Repayments :





The
      following table details the repayments of the debt detailed through the year
      ending December 31, 2011 as of September 30, 2008:





Year
                ending December 31,Remaining
                2008
            
            2009
            
            2010
            
            2011
            
            TotalRelated
                party notes
            
            
            
            
            
            1,327
            
            
            
            
            
            
            
            
            1,327Other
                term debt
            
            
            
            
            
            
            
            
            
            
            
            800
            
            
            800Senior
                convertible debentures
            
            
            1,278
            
            
            7,667
            
            
            10,454
            
            
            
            
            
            19,399Junior
                convertible debentures
            
            
            425
            
            
            1,700
            
            
            1,981
            
            
            
            
            
            4,1061,703
            
            
            10,694
            
            
            12,435
            
            
            800
            
            
            25,632





Total
      interest expense was $3,018 and $231 for the three months ended September 30,
      2008 and 2007, respectively, and was $8,816 and $273 for the nine months ended
      September 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
      bonus compensation he alleges is owed from the October 2007 acquisition
      of eBaum’s World, Inc. (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. On September 18, 2008 the claim was amended under Case No.
      C08-108RSL alleging that Mr. Kowal is owed compensation based on the aggregate
      value of consideration paid by the Company for its purchase of eBaum’s World,
      Inc. and adding our CTO, our former CEO and our former CFO as defendants. No
      reserve has been established as an amount of loss, if any, cannot be reasonably
      estimated at this time. A trial date of March 2, 2009 has been set.





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
            
            $
            95Fiscal
                year 2009
            
            
            379Fiscal
                year 2010
            
            
            260$
            734





During
      the quarter ended September 30, 2008, the Company ceased producing and selling
      digital media players. Players sold prior to the curtailment of these operations
      carried a 90-day consumer product return policy, which is in excess of the
      return policy of Wal-Mart, our primary customer for these products. Even though
      a contingency reserve has been established for future returns from Wal-Mart,
      no
      contingency reserve has been established for


14


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





returns
      that may not be honored by Wal-Mart, but subject to the 90-day return policy
      as
      this amount cannot be accurately determined.




The
      Company may, as a result of its acquisition of eBaum’s World, Inc., as amended
      on July 22, 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.





**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
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007Numerator:Net
                loss
            
            $
            (8,760
            )
            $
            (4,188
            )
            $
            (24,439
            )
            $
            (10,219
            )Denominator:Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            
            35,015,831
            
            
            17,584,600
            
            
            27,675,741
            
            
            16,481,502Basic
                and diluted net loss per share
            
            $
            (0.25
            )
            $
            (0.24
            )
            $
            (0.88
            )
            $
            (0.62
            )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
            
            
            217,649,143
            
            
            -
            
            
            217,649,143
            
            
            -Stock
                options outstanding
            
            
            1,340,781
            
            
            1,639,811
            
            
            1,340,781
            
            
            1,639,811Warrants
                outstanding
            
            
            11,982,199
            
            
            4,197,139
            
            
            11,982,199
            
            
            4,197,139231,158,429
            
            
            6,023,256
            
            
            231,158,429
            
            
            6,023,256





The
      computation of 217,649,143 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 $0.12 which was the closing price of the Company’s common
      stock on September 30, 2008.





**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 September 30,
      2008.


15





**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





Common
      Stock :


The
      Company has authorized 75,000,000 shares of common stock at a par value of
      $0.0001 per share. As of September 30, 2008, the Company had 37,503,825 shares
      issued and outstanding. As of December 31, 2007, the Company had 20,190,262
      shares issued and outstanding.


****


Common
      Stock Issued as Payment of Debt


During
      the nine months ended September 30, 2008, the Company 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, the Company issued
      a total of 5,929,136 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





Activity
      related to common stock grants for the nine months ended September 30, 2008
      is
      summarized as follows:





Non-Vested
            
            
            
            
            
            
            
            Shares
                ExpectedShares
                at
              January
                1,
            
            Shares
            
            Shares
            
            Shares
                Vested
            
            to
                Vest at
              September
                30,2008
            
            Granted
            
            Forfeited
            
            During
                Year
            
            20082007
                Plan
            
            
            485,447
            
            
            1,727,050
            
            
            323,559
            
            
            1,832,287
            
            
            56,651Non
                Plan
            
            
            1,708,417
            
            
            940,000
            
            
            2,396
            
            
            887,977
            
            
            1,758,0442,193,864
            
            
            2,667,050
            
            
            325,955
            
            
            2,720,264
            
            
            1,814,695





The
      shares granted (except 303,398 shares) were valued at the quoted trading price
      of the common stock on the date of the grant that ranged from $0.12 to $1.65
      per
      share. The 303,398 share grant was issued in conjunction with an employment
      agreement and related to the acquisition of eBaums World, Inc. in 2007 that
      was
      valued at $875 (see Note 6) and was applied against a previously established
      reserve. Forfeited shares represent awards cancelled due to the recipient not
      completing the vesting requirements associated with the grant. Net expense
      associated with common stock grants for the nine months ended September 30,
      2008
      and September 30, 2007 was $1,461 and $978. Based on currently issued stock
      grants, approximately $2.7 million is anticipated to be charged to operations
      in
      future periods.





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 nine months ended September 30, 2008:





WeightedOutstanding
            
            AverageStock
            
            ExerciseOptions
            
            PriceBalance
                as of December 31, 2007
            
            
            1,728,109
            
            $
            1.18Options
                granted under all plans
            
            
            495,000
            
            $
            0.26Exercised
            
            
            (229,794
            )
            $
            0.34Cancelled
            
            
            (652,534
            )
            $
            1.87Outstanding
                as of September 30, 2008
            
            
            1,340,781
            
            $
            0.65





16





**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





The
      weighted average exercise price of the balance as of December 31, 2007 has
      been
      restated to reflect the re-pricing of options to purchase an aggregate of
      645,179 shares of common stock issued to the Company’s former CEO from $0.537
      per share to $0.07 per share. The financial impact of the re-pricing of the
      shares was immaterial.





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
            
            Nine
                Months EndedSeptember
                30, 2008
            
            September
                30, 20082008
            
            2007
            
            2008
            
            2007Risk-free
                interest rates
            2.18%
            
            5.19%
            
            1.97%
                - 2.78%
            
            5.19%
                - 5.26%Expected
                term (in years)
            3
            
            5
            
            3
                -
                5
            
            5Expected
                volatility
            153%
            
            183%
            
            99%
                - 153%
            
            183%Dividend
                yield
            0%
            
            0%
            
            0%
            
            0%





The
      expected term of 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 September 30, 2008 and September 30, 2007 was
      $8
      and $314, respectively. Stock-based compensation expense from the issuance
      of
      stock options recognized under SFAS 123R for the nine months ended September
      30,
      2008 and September 30, 2007 was $142 and $491, respectively. As of September
      30,
      2008, the aggregate stock compensation remaining to be amortized to expenses
      was
      $148. The Company expects this stock compensation balance to be amortized as
      follows: $26 during the remainder of 2008; $71 during 2009 and $51 during 2010.
      The expected amortization reflects only outstanding stock awards as of September
      30, 2008.





The
      weighted average fair value per share of the stock option awards in the nine
      months ended September 30, 2008 and 2007 was $0.21 and $1.98, respectively.
      During the nine months ended September 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
      September 30, 2008, the Company has remaining approximately 678,000 shares
      authorized to be issued under the 2003 and 2007 plans.





17


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


September
      30, 2008


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


**(unaudited)**





Warrants:





The
      following reflects activity related to our warrants:


Number
                of Shares Underlying
            
            Weighted
                Average ExerciseWarrants
            
            PriceOutstanding
                at December 31, 2007
            
            
            11,298,750
            
            $
            2.71Granted
            
            
            700,000
            
            $
            0.17Exercised
            
            
            -
            
            
            -Expired
            
            
            (16,551
            )
            $
            3.24Outstanding
                at September 30, 2008
            
            
            11,982,198
            
            $
            2.56







Warrants
      to acquire 350,000 shares of common stock were issued in conjunction with
      consulting agreements and a warrant to acquire 350,000 shares of common stock
      were issued to the Company’s CTO and Director in conjunction with purchase order
      financing. Warrant expense recorded for the nine months ended September 30,
      2008
      was $85, of which $51 was recorded as a component of interest expense. Warrant
      expense recorded for the nine months ended September 30 ,2007 was $181 of which
      all was recorded as a component of interest expense. The warrants were issued
      using the Black-Scholes model and the following variables:





Issue
            Warrant
            Exercise
            InterestDate
            Shares
            Price
            Rate
            Life
            Volatility5/23/2008
            100,000
            $0.31
            2.78%
            3
            98.53%7/15/2008
            350,000
            $0.16
            2.91%
            5
            152.00%9/5/2008
            250,000
            $0.11
            2.91%
            5
            152.00%700,000





**9.
      Subsequent Events**





Refer
      to
      Note 5 in regards to shares of common stock issued to the holders of the
      Company’s junior debentures in October and November 2008.


On
        September 29, 2008, the Company entered into an agreement with its senior
        secured secured convertible debt holder, amending prior agreements entered
        into
        by the parties (see Note 5 - Debt), which deferred the October 2008 amount
        of
        monthly principal and interest payment until the debenture’s maturity date. The
        amendment expired on October 31, 2008 without being renewed. The Company
        has
        made no further payments in cash or in stock to this security holder, nor
        has
        the security holder made demands for additional payments. The Company did
        not
        make the installment payment which became due under its senior secured
        convertible debt on November 3, 2008. There
        can
        be no assurance that the holder of the Company’s senior
        secured convertible debt will
        not
        exercise its default remedies, including accelerating such debt and/or
        converting some portion thereof into the Company’s common stock at the default
        conversion price. The
        Company and the holder of its senior secured convertible debt are discussing
        further modifications and/or extensions as of this filing. However, there
        can be
        no assurance that any such further amendment will occur or that such security
        holder will continue to forbear from exercising its rights under the senior
        secured convertible debt.  18




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
        websites seek to provide our demographic target of 18-35 year olds with
        compelling online entertainment, such as commercial and user generated video,
        games, images and other forms of online entertainment. 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 acquired eBaumsWorld.com, PutFile.com,
        Dorks.com, HolyLemon.com, FunMansion.com, YourDailyMedia.com, and
        UnOriginal.co.uk in order 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 advertising space. We presently
        are
        evaluating the value of our strategy to bundle each of these websites into
        a
        consolidated network strategy and as a result may determine to disaggregate,
        dispose of or terminate any or all of these websites, other than
        eBaumsWorld.com.
  Prior
        to
        our acquisition of eBaumsWorld in October 2007, the Company business was
        the
        consumer electronics MP3 audio and video players. The Company recently
        reevaluated this business and has determined that this line of business is
        too
        capital intensive, and that the competition for high and low end players
        from
        significant well capitalized companies was disadvantageous for for the Company.
        As the Company has determined that it should focus on its web related business,
        it has ceased all activity related to players and has disposed of its
        inventory.


19





**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. Such accounting policies 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.





**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.





**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.





20


**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. 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 the Company 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.





21


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




Three
                Months Ended
            
            Three
                Months EndedSeptember
                30, 2008
            
            September
                30, 2007%
                of
            
            
            
            %
                of
            
            ChangeAmount
            
            Revenue
            
            Amount
            
            Revenue
            
            Amount
            
            PercentRevenues,
                netProduct
                sales, net
            
            $
            2,010
            
            
            66
            %
            $
            510
            
            
            84
            %
            $
            1,500
            
            
            290
            %Advertising
            
            
            1,044
            
            
            34
            %
            
            106
            
            
            16
            %
            
            938
            
            
            934
            %Total
                revenue, net
            
            
            3,054
            
            
            100
            %
            
            616
            
            
            100
            %
            
            2,438
            
            
            396
            %Cost
                of revenuesProduct
                sales
            
            
            2,140
            
            
            70
            %
            
            831
            
            
            135
            %
            
            (1,309
            )
            
            -157
            %Advertising
            
            
            231
            
            
            8
            %
            
            19
            
            
            3
            %
            
            (212
            )
            
            -1183
            %Total
                cost of revenues
            
            
            2,371
            
            
            78
            %
            
            850
            
            
            138
            %
            
            (1,521
            )
            
            -179
            %Gross
                profit (loss)
            
            
            683
            
            
            22
            %
            
            (234
            )
            
            -38
            %
            
            917
            
            
            -392
            %Operating
                expensesSales
                and marketing
            
            
            506
            
            
            17
            %
            
            789
            
            
            128
            %
            
            283
            
            
            -36
            %General
                and administrative
            
            
            2,050
            
            
            67
            %
            
            1,915
            
            
            311
            %
            
            (135
            )
            
            -7
            %Amortization
                and impairment of intangible website costs
            
            
            3,818
            
            
            125
            %
            
            1,024
            
            
            166
            %
            
            (2,794
            )
            
            -273
            %Total
                operating expenses
            
            
            6,374
            
            
            209
            %
            
            3,728
            
            
            605
            %
            
            (2,646
            )
            
            -71
            %Operating
                loss
            
            
            (5,691
            )
            
            -186
            %
            
            (3,962
            )
            
            -643
            %
            
            (1,729
            )
            
            -44
            %Non-operating
                income (expense)Interest
                income
            
            
            2
            
            
            -
            
            
            5
            
            
            1
            %
            
            (3
            )
            
            -60
            %Interest
                expense
            
            
            (3,071
            )
            
            -101
            %
            
            (231
            )
            
            -38
            %
            
            (2,840
            )
            
            n/aTotal
                non-operating expense
            
            
            (3,069
            )
            
            -101
            %
            
            (226
            )
            
            -37
            %
            
            (2,843
            )
            
            n/aNet
                loss
            
            $
            (8,760
            )
            
            -287
            %
            $
            (4,188
            )
            
            -680
            %
            $
            (4,572
            )
            
            -109
            %








22








Nine
                Months Ended
            
            Nine
                Months EndedSeptember
                30, 2008
            
            September
                30, 2007%
                of
            
            
            
            %
                of
            
            ChangeAmount
            
            Revenue
            
            Amount
            
            Revenue
            
            Amount
            
            PercentRevenues,
                netProduct
                sales, net
            
            $
            2,892
            
            
            51
            %
            $
            1,079
            
            
            81
            %
            $
            1,813
            
            
            168
            %Advertising
            
            
            2,761
            
            
            49
            %
            
            246
            
            
            19
            %
            
            2,515
            
            
            1022
            %Total
                revenue, net
            
            
            5,653
            
            
            100
            %
            
            1,325
            
            
            100
            %
            
            4,328
            
            
            327
            %Cost
                of revenuesProduct
                sales
            
            
            3,340
            
            
            59
            %
            
            1,540
            
            
            116
            %
            
            (1,800
            )
            
            -117
            %Advertising
            
            
            680
            
            
            12
            %
            
            19
            
            
            1
            %
            
            (661
            )
            
            -3479
            %Total
                cost of revenues
            
            
            4,020
            
            
            71
            %
            
            1,559
            
            
            118
            %
            
            (2,461
            )
            
            -158
            %Gross
                profit (loss)
            
            
            1,633
            
            
            29
            %
            
            (234
            )
            
            -18
            %
            
            1,867
            
            
            -798
            %Operating
                expensesSales
                and marketing
            
            
            2,240
            
            
            40
            %
            
            2,242
            
            
            169
            %
            
            2
            
            
            0
            %General
                and administrative
            
            
            6,538
            
            
            116
            %
            
            4,843
            
            
            365
            %
            
            (1,695
            )
            
            -35
            %Amortization
                and impairment of intangible website costs
            
            
            8,477
            
            
            150
            %
            
            2,692
            
            
            203
            %
            
            (5,785
            )
            
            -215
            %Total
                operating expenses
            
            
            17,255
            
            
            305
            %
            
            9,777
            
            
            738
            %
            
            (7,478
            )
            
            -76
            %Operating
                loss
            
            
            (15,622
            )
            
            -276
            %
            
            (10,011
            )
            
            -756
            %
            
            (5,611
            )
            
            -56
            %Non-operating
                income (expense)Interest
                income
            
            
            52
            
            
            1
            %
            
            65
            
            
            5
            %
            
            (13
            )
            
            -20
            %Interest
                expense
            
            
            (8,869
            )
            
            -157
            %
            
            (273
            )
            
            -21
            %
            
            (8,596
            )
            
            n/aTotal
                non-operating income (expense)
            
            
            (8,817
            )
            
            -156
            %
            
            (208
            )
            
            -16
            %
            
            (8,609
            )
            
            n/aNet
                loss
            
            $
            (24,439
            )
            
            -432
            %
            $
            (10,219
            )
            
            -771
            %
            $
            (14,220
            )
            
            -169
            %




23


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





**Revenues**





Total
      net
      revenue increased from $0.6 million for the three months ended September 30,
      2007 to $3.1 million for the three months ended September 30, 2008. In addition
      net revenue increased from $1.3 million for the nine months ended September
      30,
      2007 to $5.7 million for the nine months ended September 30, 2008.





Net
      revenue from product sales increased from $0.5 million for the three months
      ended September 30, 2007 to approximately $2.0 million for the three months
      ended September 30, 2008. Revenue for the three months ended September 30,
      2008
      primarily resulted from the sale to Wal-Mart of the Company’s Solange, Elvis
      players and Journey players. Revenue for the nine months ended September 30,
      2008 also included the sale to Wal-Mart of the Company’s Spirit players.
      Allowances for returns reduced net revenue by $0.2 million and $0.3 million
      for
      the three and nine months ended September 30, 2008, respectively. Revenue for
      the three months ended September 30, 2008 was reduced by $0.2 million of return
      allowances and by $0.3 million for the nine months ended September 30, 2008.
      Revenue for the three months ended September 30, 2007 was primarily from the
      sale of Model 250 players to a customer other than Wal-Mart who used the players
      as part of a rewards program for a major credit card issuer. Revenue for the
      nine months ended September 30, 2007 also included approximately $0.9 million
      of
      sales to Wal-Mart of our Model 250. Wal-Mart has therefore been the Company’s
      single most important customer. With the curtailment in producing products,
      the
      Company expects revenues to decrease substantially for the remainder of the
      year.





Advertising
      revenues increased from $0.1 million for the three months ended September 30,
      2007 to $1.0 million for the three months ended September 30, 2008 and increased
      from $0.2 million for the nine months ended September 30, 2007 to $2.8 million
      for the nine months ended September 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 $0.9 million for the three months ended
      September 30, 2007 to $2.4 million for the three months ended September 30,
      2008
      and from $1.6 million for the nine months ended September 30, 2007 to $4.0
      million for the nine months ended September 30, 2008.





Cost
      of
      revenues associated with product sales increased from $0.8 million for the
      three
      months ended September 30, 2007 to $2.4 million for the three months ended
      September 30, 2008 and from $1.6 million for the nine months ended September
      30,
      2007 to $4.0 million for the nine months ended September 30, 2008. The increase
      in cost of revenues reflects the sale of a total of approximately 110,000
      players during the current year. The results of the three and nine months ended
      September 30, 2008 reflect an inventory write-down of $0.5 million for prior
      players produced. No further production of players is planned due to the
      curtailment of this business activity. The cost of revenue for the prior year
      period was all related to the sale of the Model 250 player.





Cost
      of
      revenue associated with advertising increased from $18,000 for the three months
      ended September 30, 2007 to $231,000 for the three months ended September 30,
      2008 and from $19,000 for the nine months ended September 30, 2007 to $680,000
      for the nine months ended September 30, 2008. The current period amounts
      primarily reflect commissions earned by our contract sales agent. During the
      prior year period, the Company did not utilize the services of a contract sales
      agent.




**Sales
      and Marketing**





Sales
      and
      marketing expenses, which include marketing and sales efforts, as well as all
      efforts related to our content business, decreased from $0.8 million for the
      three months ended September 30, 2007 to $0.5 million for the three months
      ended
      September 30, 2008 and was $2.2 million for both the nine months ended September
      30, 2008 and 2007. The decrease for the three months ended September 30, 2008
      compared to the prior period amounts reflects a reduction of payroll related
      costs as various positions were eliminated between the periods. Sales and
      marketing expenses for the nine months ended September 30, 2008 and 2007 were
      both $2.2 million, with the 2008 results reflecting a $0.3 million reduction
      in
      payroll related costs, offset by a like increase in consulting
      fees.


24





**General
      and Administrative**





General
      and administrative costs, which consist primarily of salaries and benefits
      for
      employees, professional advisor fees, rent, web hosting fees, research and
      development, and other general operating expenses, increased from $1.9 million
      for the three months ended September 30, 2007 to $2.1 million for the three
      months ended September 30, 2008 and from $4.8 million for the nine months ended
      September 30, 2007 to $6.3 million for the nine months ended September 30,
      2008.
      The increase for the nine months ended September 30, 2007 compared to the nine
      months ended September 30, 2008 primarily reflects cash related expenses of
      $1.0
      million related to managing our eBaumsworld.com web site that was purchased
      in
      October 2007. In addition, non-cash expenses attributable to share-based awards
      increased from $1.5 million for the nine months ended September 30, 2007 to
      $1.6
      million for the nine months ended September 30, 2008. The remaining variance
      primarily relates to an increase in consulting, legal fees and other
      expenses.





**Amortization
      and Impairment of Intangible Website Cost**





Amortization
      of intangible website costs increased from $1.0 million for the three months
      ended September 30, 2007 to $3.8 million for the three months ended September
      30, 2008 and from $2.7 million for the nine months ended September 30, 2007
      to
      $8.5 million for the nine months ended September 30, 2008.





The
      increase between years is primarily attributable to amortizing the value of
      the
      eBaumsworld.com web site of $1.3 million for the three months ended September
      30, 2008 and $3.9 million for the six months ended September 30, 2008 with
      no
      comparable amounts the prior year as this website was purchased in October
      2007.
      In addition, the Company has decided that it is no longer cost effective to
      continue to operate its Holylemon, Funmansion and Dork’s web sites and will
      re-direct web traffic from those sites to other Company web sites by the end
      of
      the year. As a result, the Company incurred a non-cash impairment charge of
      $1.5
      million to write-off the remaining value of those web sites.





**Interest
      Expense**





Interest
      expense increased from $0.2 million for the three month period ended September
      30, 2007 to $3.1 million for the three month period ended September 30, 2008.
      In
      addition, interest expense increased from $0.3 million for the nine month period
      ended September 30, 2007 to $8.9 million for the nine month period ended
      September 30, 2008





The
      current year results include the non-cash amortization of debt discount and
      debt
      issue costs associated with the issuance of convertible debentures in October
      2007 of $2.4 million and $7.2 million for the three and nine month periods
      ended
      September 30, 2008. During the three months ended September 30, 2008,
      approximately $0.2 million cash payments for interest were made. Interest
      expense for the three and nine months ended September 30, 2007 includes $0.2
      million for the value of warrants issued in conjunction with a
      financing.




Restricted
      Cash





In
      July
      2008, the Company entered into a standstill agreement with its senior secured
      convertible debenture holder and released $1.5 million 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 $1.5
      million payment under the standstill agreement was applied to the payment of
      accrued interest of approximately $0.3 million, payment of $1.1 million of
      the
      outstanding principal and payment of a $0.1 million of redemption premium
      classified as a component of interest expense. 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 provided 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 were to 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.


25




Liquidity
      and Capital Resources





At
      September 30, 2008, the Company had a cash balance of $1.6 million. Net cash
      used by operations was $2.4 million for the nine months ended September 30,
      2008
      and $8.0 million for the nine months ended September 30, 2007. The net cash
      used
      by operations for the nine months ended September 30, 2008 was used to fund
      the
      net loss of $24.4 million, offset by $18.1 million of non-cash charges and
      a
      $3.5 million reduction in accounts receivable. The reduction in our receivables
      was primarily attributable to payments received from Wal-Mart. As of September
      30, 2008 the Company has no remaining receivables from Wal-Mart. The net cash
      used in operations for the nine months ended September 30, 2007 was to fund
      the
      net loss of $10.2 million and a decrease of accounts payable and accrued
      liabilities of $2.5 million, offset by non-cash charges of $4.8
      million.





Net
      cash
      provided by investing activities was $0.5 million for the nine months ended
      September 30, 2008 and net cash used by investing activities was $2.2 million
      for the nine months ended September 30, 2007. The current year amounts include
      the use of $1.6 million of previously restricted cash, offset by earn-out
      related payments of $0.7 million related to the purchase of the eBaumsworld.com
      web site and approximately $0.3 million of installment payments for the purchase
      of other websites. The amounts for the prior year include $0.2 million for
      the
      purchase of equipment, and $2.0 million for the purchase of various web sies
      as
      well as a $0.4 million deposit related to the eventual acquisition of
      eBaumsworld.com.





Net
      cash
      provided (used) by financing activities was ($1.2 million) for the nine months
      ended September 30, 2008 compared to $6.8 million for the nine months ended
      September 30, 2007. The net cash used by financing activities during the current
      period included $0.7 million received from short term borrowing from the
      Company’s CTO, who is also a Director, and $0.1 million received from the
      exercise of stock options, offset by a $1.1 million payment of principal on
      the
      senior secured convertible debenture and $0.1 million of costs associated with
      the 2007 issuance of convertible debentures. The $1.1 million payment on the
      principal of the senior secured convertible debenture was facilitated by the
      lifting of restrictions on $1.5 million of cash.





The
      net
      cash provided by financing activities during the nine months ended September
      30,
      2007 of $5.5 million include $3.8 million from the January 2007 private
      placement of common stock, offset by $0.1 million of offering costs and
      approximately $0.3 million 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 $1.4 million, offset by $0.1 million of offering costs. During
      this
      time period, the Company’s CTO purchased notes under a line of credit in which
      the Company received $1.3 million. The Company also received $0.3 million from
      the exercise of stock options.


With
        our
        cash on hand, recent cost savings measures, projected future cash flows
        including management of working capital, and assuming we are able to service
        our
        convertible debt obligations which will require us to seek a further
        modification to the current expired standstill agreement on our senior secured
        convertible debt, we believe that we have sufficient funds with anticipated
        future cash flows to continue in operation through the end of 2008. We have
        been
        able to modify our senior secured convertible debt with short-term standstill
        agreements, the most recent of which expired on October 31, 2008. We intend
        to
        seek further revisions to our senior secured convertible debt or extensions
        of
        the standstill agreement in order to avoid defaults, although without such
        we
        are in payment default under such loan, having not made the installment payment
        that was due on November 3, 2008.  There can be no assurance we will be
        able to make the necessary payments on our indebtedness obligations or succeed
        in obtaining further modifications or extensions. There can be no assurance
        that
        the holder of our senior secured convertible debt will not exercise its default
        remedies, including accelerating such debt and/or converting some portion
        thereof into our common stock at the default conversion price. In order to
        meet
        expected cash requirements to continue our operations in 2009, we will likely
        need to secure additional equity or debt financing and/or enter into strategic
        alliances with other companies or consider sales of assets or similar
        transactions.  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. Strategic alliances may also be dilutive
        to
        existing shareholders. In order to preserve our capital, we recently ceased
        efforts related to our digital media device business and terminated seven
        employees associated with such business and intend to focus our efforts on
        our
        web-related business. There can be no assurance that our efforts will be
        successful or that our financial resources will be adequate for us to continue
        in operation for the foreseeable future.


26





**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.






27





***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.





28


**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 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’’) as of the end of the period covered by this
      Quarterly Report on Form 10-Q. 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 interim
      chief executive officer concluded that our disclosure controls and procedures
      are effective, as of the period ended September 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
      nine
      months ended September 30, 2008 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





**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 bonus
      compensation he alleges is owed under his employment contract based on the
      potential value of the eBaums World, Inc. acquisition completed in October
      2007 (Edward
      John Kowal v. ZVUE Corporation, Case No. 07-2-40332-9) . On
      September 18, 2008 the claim was amended under Case No. C08-108RSL alleging
      that
      Mr. Kowal is owed compensation based on the aggregate value of consideration
      paid by the Company of its purchase of eBaum’s World, Inc. A trial date of March
      2, 2009 has been set. The Company dispute s the facts of the case and  intends
      to vigorously defend itself.


29


**ITEM
      6 - Exhibits**




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




**Number**
            **Exhibit
                Title****10.1**
            Agreement,
                dated as of July 1, 2008, between ZVUE Corporation and YA Global
                Investments, L.P. (Incorporated herein by reference to Exhibit 99.2
                to the
                Company’s Current Report on Form 8-K dated July 1,
                2008)**10.2**
            Loan
                Agreement, dated as of July 15, 2008, between Carl Page and ZVUE
                Corporation (Incorporated herein by reference to Exhibit 10.1 to
                the
                Company’s Current Report on Form 8-K dated July 15,
                2008)**10.3**
            Security
                Agreement, dated as of July 15, 2008, between Carl Page and ZVUE
                Corporation (Incorporated herein by reference to Exhibit 10.2 to
                the
                Company’s Current Report on Form 8-K dated July 15,
                2008)**10.4**
            Amendment
                No.1 to Asset Purchase Agreement, dated as of July 20, 2008, among
                ZVUE
                Corporation, eBaum’s World, Inc. and Eric’s Universe, Inc. (Incorporated
                herein by reference to Exhibit 10.1 to the Company’s Current Report on
                Form 8-K dated July 20, 2008)**10.5**
            Amendment
                No.1 to Employment Agreement, dated as of July 20, 2008, between
                ZVUE
                Corporation and Eric Bauman (Incorporated herein by reference to
                Exhibit
                10.2 to the Company’s Current Report on Form 8-K dated July 20,
                2008)**10.6**
            Amendment
                No.1 to Employment Agreement, dated as of July 20, 2008, between
                ZVUE
                Corporation and Neil Bauman (Incorporated herein by reference to
                Exhibit
                10.3 to the Company’s Current Report on Form 8-K dated July 20,
                2008)**10.7**
            Separation
                and Release Agreement, dated as of September 19, 2008, between Jeffrey
                Oscodar and ZVUE Corporation, and its parents, subsidiaries and affiliates
                (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current
                Report on Form 8-K dated September 19, 2008)**10.8**
            Letter
                Agreement, dated as of September 29, 2008, between YA Global Investments,
                L.P. and ZVUE Corporation (Incorporated herein by reference to Exhibit
                99.2 to the Company’s Current Report on Form 8-K dated September 29,
                2008)**10.9**
            Letter
                Agreement, dated as of October 6, 2008, among ZVUE Corporation, eBaum’s
                World, Inc. and Eric’s Universe, Inc. (Incorporated herein by reference to
                Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 6,
                2008)**31.1**
            Certification
                of Interim Chief Executive Officer (Principal Executive, Financial
                and
                Accounting Officer) Pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002**32.1**
            Certification
                of Interim Chief Executive Officer (Principal Executive, Financial
                and
                Accounting Officer) Pursuant to Section 906 of the Sarbanes-Oxley
                Act of
                2002







30


**SIGNATURE**





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
              :
              November 14, 2008**
            **By:**
            **/s/
              Ulysses Curry**Ulysses
                Curry
              Chairman
                and Interim Chief Executive Officer (Principal Executive, Financial
                and
                Accounting Officer)


31




**INDEX
      TO EXHIBITS:**





**Number**
            **Exhibit
                Title****10.1**
            Agreement,
                dated as of July 1, 2008, between ZVUE Corporation and YA Global
                Investments, L.P. (Incorporated herein by reference to Exhibit 99.2
                to the
                Company’s Current Report on Form 8-K dated July 1,
                2008)**10.2**
            Loan
                Agreement, dated as of July 15, 2008, between Carl Page and ZVUE
                Corporation (Incorporated herein by reference to Exhibit 10.1 to
                the
                Company’s Current Report on Form 8-K dated July 15,
                2008)**10.3**
            Security
                Agreement, dated as of July 15, 2008, between Carl Page and ZVUE
                Corporation (Incorporated herein by reference to Exhibit 10.2 to
                the
                Company’s Current Report on Form 8-K dated July 15,
                2008)**10.4**
            Amendment
                No.1 to Asset Purchase Agreement, dated as of July 20, 2008, among
                ZVUE
                Corporation, eBaum’s World, Inc. and Eric’s Universe, Inc. (Incorporated
                herein by reference to Exhibit 10.1 to the Company’s Current Report on
                Form 8-K dated July 20, 2008)**10.5**
            Amendment
                No.1 to Employment Agreement, dated as of July 20, 2008, between
                ZVUE
                Corporation and Eric Bauman (Incorporated herein by reference to
                Exhibit
                10.2 to the Company’s Current Report on Form 8-K dated July 20,
                2008)**10.6**
            Amendment
                No.1 to Employment Agreement, dated as of July 20, 2008, between
                ZVUE
                Corporation and Neil Bauman (Incorporated herein by reference to
                Exhibit
                10.3 to the Company’s Current Report on Form 8-K dated July 20,
                2008)**10.7**
            Separation
                and Release Agreement, dated as of September 19, 2008, between Jeffrey
                Oscodar and ZVUE Corporation, and its parents, subsidiaries and affiliates
                (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current
                Report on Form 8-K dated September 19, 2008)**10.8**
            Letter
                Agreement, dated as of September 29, 2008, between YA Global Investments,
                L.P. and ZVUE Corporation (Incorporated herein by reference to Exhibit
                99.2 to the Company’s Current Report on Form 8-K dated September 29,
                2008)**10.9**
            Letter
                Agreement, dated as of October 6, 2008, among ZVUE Corporation, eBaum’s
                World, Inc. and Eric’s Universe, Inc. (Incorporated herein by reference to
                Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 6,
                2008)**31.1**
            Certification
                of Interim Chief Executive Officer (Principal Executive, Financial
                and
                Accounting Officer) Pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002**32.1**
            Certification
                of Interim Chief Executive Officer (Principal Executive, Financial
                and
                Accounting Officer) Pursuant to Section 906 of the Sarbanes-Oxley
                Act of
                2002




32